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Tuesday, Nov. 13, 2007 | I have been working since April 2007, to bring to light a little known pension problem that is brewing and will soon reach a boiling point. The problem is the Preservation of Benefits Plan, but most San Diego taxpayers have no idea that the city of San Diego and the San Diego City Employees’ Retirement System (SDCERS) Board are attempting to fund a second retirement plan to pay current and future retirees excess retirement benefits.
I first learned about this by accident during an April 16, 2007 City Council meeting. Item 202 on the docket was supposed to be an update from the SDCERS actuary on the 2006 actuarial valuation. No one from SDCERS showed up to present the information about how the unfunded liability was reduced by over $390 million because the SDCERS attorney advised them against it.
However, written information was provided that included a power point presentation showing a $22.8 million reduction in SDCERS pension liability due to “proper treatment of IRS benefit limitations.”
I asked what happened to the $22.8 million liability and learned from questioning then- City Auditor/ CFO, Jay Goldstone, that the debt was transferred from SDCERS to the City of San Diego. Even though Goldstone said that there was $500,000 in the budget to make an annual payment on the debt incurred from proper treatment of IRS benefit limitations, neither the mayor nor his staff were forthcoming with all the information. (This, despite the fact that one of his senior staffers sits on the SDCERS board of administration and Goldstone has been briefed about it by SDCERS.) In fact, it took over four months for me to even receive a reply from Goldstone to my April memo about this issue.
So what’s the big deal? In simplest terms, the Preservation of Benefits Plan is a separate and second retirement plan that is intended to allow some city retirees to receive amounts over the maximum allowed by the IRS. I say intended because to the best of my knowledge, SDCERS has not yet received approval for this approach from the IRS, even though they have applied for a Private Letter Ruling on this issue.
The Internal Revenue Code (IRC) section 415 establishes annual allowable benefits that can be paid from a 401 (a) pension plan such as ours. The IRC places that can be legally paid out of a retirement plan when a person retires.
According to the SDCERS actuary, we have retirees whose retirement benefits exceed the amount that can be legally paid from the SDCERS’ 401 (a) retirement plan.
And despite Goldstone’s April 16, 2007 estimate of $500,000 to fund the city’s first annual payment for this second pension plan, a February 7, 2007 staff report from SDCERS Chief Financial Officer, Bob Wilson, states that SDCERS “staff has met with the chief fiscal staff of each of the three plan sponsors to inform them on the POB plans and funding arrangements for their fiscal year 2008 budget planning.” The memo requests “the City of San Diego to fund its Preservation of Benefits Plan in the amount of $639,962” to pay for retirees who have exceeded or will exceed the IRS 415 limit during fiscal year 2007/2008.
Goldstone never mentioned that memo or that amount.
Plus, that amount does not include other retirees — those who have already received benefits in excess of IRS limits that were paid for out of the SDCERS 401 (a) retirement plan, in violation of the IRC. Very soon, more money will be requested from the city by SDCERS, likely in the millions, to fund those excess benefits. Add to that the annual amount that will be requested by SDCERS in the future as more people retire and it boggles the mind.
Finally, after writing numerous memos and making repeated requests to the City Council urging action, Council President Scott Peters agreed to docket a discussion on this at the December 6 Rules Committee meeting. I am concerned, however, that this may not be soon enough.
So what are the next steps?
First, the City Council cannot wait until the December 6, Rules Committee meeting to discuss this. Instead, we must hold public hearings this month and require that the mayor, his staff and SDCERS staff appear to discuss this. The public has a right to know and be kept informed.
Second, the City Council must take an active role in working with the IRS to ensure compliance with the IRC.
Third, the costs of the Purchase of Service Credit and DROP programs must be made revenue neutral to the city. This may help to reduce the benefit amounts that exceed IRS limits.
Fourth, even though the Preservation of Benefits Plan was adopted by ordinance in March 2001, no money has ever been paid from it, nor has SDCERS requested the city do so until this year. There needs to be a legal determination made as to whether this second retirement plan is allowed by the City Charter or whether it requires a vote of the public before the City Treasurer makes any payments.
Finally, the City Council must ensure that all this information is properly disclosed in the city’s financial reports and to the secondary markets.
Donna Frye represents District 6 on the San Diego City Council. Agree? Disagree? Send a letter to the editor.