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So why are public safety workers “different” and why might reasonable people who favor 401(k) plans think that keeping these employees in a traditional plan could make sense?
To begin, one of the key benefits of 401(k) is increased portability. That is particularly important in recruiting individuals who have private sector experience and who want to spend a few years working for the city. But that attractiveness seems to be to be less important in recruiting in fields, like police and fire, which are largely specialized municipal professions. Moreover, the literature on community policing suggests that an argument could be made that the city benefits, especially in respect to police, of having a force which has worked the same geography and neighborhood for several years. The one thing that well constructed defined benefit plans do is encourage employees to stay with the same employer and that could be beneficial. There are also issues in respect to labor competitiveness — as several posted note — it would be hard and difficult for San Diego to put such a plan in place for public safety employees if other jurisdictions were not also making similar changes.
But as I touched on in the first two postings, there are attractive qualities of 401(k) plans. So to JF’s point, what might a hybrid look like? Two forms — the defined benefit plan as foundation and a “cash value” plan for rank and file seem to me to be worth examining. As a caveat, before I would advocate for either of these much more analysis needs to be done as to cost and the impacts on individual employees. The first would be a basic traditional pension plan with an accelerating vesting schedule (for example, 1 percent for the first 10 years; 1.5 percent for the next 10) that would serve as a base plan with an employer matching 401(k) on top. Among the attractive features of such a plan would be to reduce the incentive to “spike” one’s salaries also give the city greater predictability in its year-to-year pension costs. By increasing the formula in the second 10 years the plan acts to the taxpayers benefit as a set of “golden handcuffs,” encouraging folks to stay when their experience starts to really pay off for the city. The second hybrid could offer a defined benefit plan to the rank and file (for instance say sergeants and below in the police department captains and below for San Diego Fire and Rescue. Above that pay grade, a 401(k) would be offered. For individuals being promoted from captain to battalion chief or from sergeant to lieutenant one could either freeze benefits or provide for a “cash equivalent” transfer to a defined contribution plan. Again, such a structure deters spiking and would cap pension payments to an individual at a politically sustainable level (see below). The matching would have to be lucrative enough so that these managers who have worked their way up have reason to stay. That said, this plan would be an attractive recruiting tool — encouraging firefighters from other departments who have either maxed out or are close to retirement to come to San Diego for “supervisor” jobs so that taxpayers could benefit from their experiences in seeing how other departments operate.
If (and not conceding that point) new public safety hires are to remain in a traditional pension plan, what reforms would be needed? Critically, these are not reforms which derive not from a focus on “saving money” or imposing greater costs on the employees. I personally would find it acceptable to raise wages for new public safety hires accepting these rules so that from an employee standpoint the reforms were cost neutral. That could mean that the city’s overall costs modestly increase. Instead, the idea is that if the present realities of running a modern police and fire department necessitate offering a traditional pension plan, it is critical that San Diego have a fairer, more transparent plan and one which better aligns with the experiences and situations of the taxpayers that are ultimately the ones who fund municipal operations.
First, it would seem to make sense that to base pension payments on an average of the highest three years of compensation rather than the current system that bases it on a single year. The status quo provides strong incentives for employee nearing retirement to look for a 12 month assignment which results in a “spike” in compensation so as to increase total pension payments. Articles about this are commonplace — here is one I think fairly lays out the problem. Even though the vast majority of public employees do not game the system, the ethical temptation that exists is corrosive of morale. San Diego’s recent experiment with basing pensions on the single highest year, I think we can safely conclude, didn’t produce benefits compensate with the real costs and the cost in taxpayer confidence.
It would also seem reasonable to start thinking about the right age to fully vest public safety members. This on-line news source has seen nearly a year of debate on this subject. But for all the sound and fury most agree — workers in the private sector must reach the ages of between 62 and 67 to qualify for Social Security payments and 59 and a half before they can start tapping their defined contribution plans. Moreover, there is consensus among labor economists that the age when private sector workers are likely to stop working is going to increase. JF is not taking into account everything that is being written about the squeeze private sector workers find themselves in and the likelihood of an increase in social security age that will be needed to keep the trust fund solvent. We can not forget these are the taxpayers that pay for city services. It is not realistic to believe that, over the long term, taxpayers are going to fund public sector retirement plans that are much more lucrative and which offer much earlier retirement than their own.
Finally it seems time to rethink “the pick-up.” As some readers may know, the “normal” cost of the traditional city’s pension plan is supposed to be apportioned equally among the employee and employer. Then, as part of collective bargaining agreements with workers, the city “picks up” some (or all) of the employee’s share. I acknowledge that, through a fairly convoluted but compelling logic, picking up the employee’s contribution, under some circumstances, can makes financial sense for the city. But I personally think that it is worth forgoing these advantages if what that does is vastly increase transparency and confidence among the voters that half of the normal cost of the pension is coming from employee and half is coming from the employers. Again, wages could be increased to keep this change generally cost neutral but vastly increase transparency and increase citizen confidence.
Finally to Basic Civics’ point, I agree with many of your points but three issues should be clarified:
1) Our extremely untransparent budget seems to indicate that retiree costs are running around 12-17 percent of the general fund. These costs are slotted to grow substantially if we want to start paying down the unfunded liability in retiree health care. It really is the main cost issue that the city has to get its arms around if we don’t want to live for 20+ years of diminished expectations about what San Diego can become.
2) Regarding the call for a focus on productivity over longevity — tenure and length of service are things that a defined benefit plan creates tremendous incentives to protect and enhance. If you don’t change the incentive structure created by the plan, you really don’t change anything.
3) Probably important to break police and fire out and to think harder about overtime (on which pensions are not calculated). It is true that several members of SDF&R make over $100,000. Much of that is overtime. If you exclude that, a perusal through the budget finds many individuals in other departments making over 100,000. Indeed, in an upcoming policy brief from SDI we hope to identify the total number of “project managers” and “deputy assistant somethings” scattered in relatively small departments of the city and how this has changed (or not changed) since 2004.
That is really all for today. I am sorry if I missed responding back to a point you thought key and if I didn’t get to a topic (like contracting) which I previously mentioned. As always, we can carry on these conversations if you drop me a line at email@example.com