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It seems that the move toward a DC plan has generated the most interest in the morning responses so let me elaborate a bit.

First, there is no reason that the city could not go to system in which new public safety hires continued to be offered traditional defined benefit plan while the remainder of new city employees moved to a 401(k) plan. Indeed, that is one of the reasons why I pointed to the DCAs as a possible place to start the discussion since there are attributes of that workforce which would seem particularly suited to making the transition. Reforms would still need to be considered, but there are several aspects of public safety work which could lead reasonable people to conclude that retaining a traditional pension plan makes sense. I will try to elaborate on those aspects (and JF’s query about hybrid plans) in an afternoon post.

A second point raised was about disability benefits. As a couple of posters noted, nothing would preclude the city from either purchasing or self funding a disability insurance program so that officers or firefighters injured in the course of their duties were protected. Indeed that would seem necessary if employees were moved to DC plan. One model could be to add additional city funded coverage on top of the existing State Disability Insurance program that most private sector employees pay into through monthly mandatory deductions.

In respect to the costs of traditional pensions versus 401(k) plans, it seems less clear than the poster suggests. One study, by the professional association for State Retiree Plan Administrators, noted about one half to 1 percent cost advantage for the cost of traditional plans. A more detailed study by a member of the association noted on page seven that the costs of the DC and DB plans were a direct function of the number of participants. Big plans did particularly well in keeping the “per dollar” cost low while small plans had a high per dollar cost. The city’s situation, being smaller than most states but still being a fairly large municipal plan, would seem to be one in which it is premature to conclude whether or not costs would be lower, higher, or about the same.

Moreover, since SDCERS would continue to function long into the future to administer the pensions for existing employees and retirees, one could imagine a short and medium term strategy of asking SDCERS to administer a fund for 401(k) participants. If the system really is efficient and a good performing group of investment professionals it would seem likely that the net performance of that fund option would be spectacular and the 401(k) participants would flock to it.

Finally, there is an important point noted by one poster about the issue of risk. We need to be clear, the risk under the current plan is not nearly as clear as a couple of posters seem to believe it is. One common misconception is that because these benefits are “guaranteed,” plan participants bear little to no risk. But the stark reality is that because of the inherent restrictions in the California constitution on raising revenues, it is not likely that taxpayers would pick up the financial tab if the UUAL grows. Instead, it would be city workers that would face real layoffs (rather than this year’s elimination of unfilled jobs), increased contribution demands, and salary freezes. Keep this in mind, those were the solutions to growing retiree costs in years in which general fund revenues GREW by an average of 10 percent. What happens if the city experiences the kind of recession and flat lining of general fund revenues seen between 1992 and 1994? In those years when the region’s economy was in serious trouble because of General Dynamic’s decline and the collapse of the S&L industry, it would have been not only political suicide to ask the voters for a tax increase, it would have been horrible economics.

As promised, the next post will talk about hybrid systems, why public safety might be different, and what are some simple steps to avoid corruption issues when looking at managed competition.


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