Wednesday, July 9, 2008 | After years of having to sit idly by while the city of San Diego’s pension system imploded, city voters this fall might finally have the opportunity to approve what is being billed as meaningful pension reform.
But if voters do end up approving a proposed pension reform ballot measure, they will have to wait a generation for the savings to come to full fruition.
The compromise ballot proposal was struck late last month by Mayor Jerry Sanders and City Council President Scott Peters after several months of negotiations between Sanders and the city’s non-public safety employee unions ended in impasse.
The proposed plan which, among other things, reduces city employees’ retirement age and significantly cuts the city’s contributions to employee retirement savings, would eventually save taxpayers an estimated $22.5 million annually.
The key word is eventually. Because federal laws prevent the rolling back of already-negotiated benefits, the proposed reforms would only apply to new employees hired after July 1, 2009.
So the city wouldn’t realize the full savings until all of its current non-public safety employees are out of the system — about 30 years from now. In 2010, the city projects a savings of $582,000 in today’s dollars when factoring in an inflation rate of 3 percent.
By 2019, the city estimates an annual savings of $7.3 million in today’s dollars and a cumulative savings of $36.6 million. Ultimately, the city’s payments into the pension system will drop by 25 percent, said Joseph Esuchanko, the city’s actuary.
“I’m concerned that the public will see the reports coming out in the next few years and say ‘Where is the savings?’” said Esuchanko. “Well, [it won’t] be there.”
Sanders spokesman Fred Sainz also acknowledged that the bulk of the savings will be a long time in coming.
“This applies to a very, very small portion of city employees,” Sainz said. “So the cost savings will be relatively infinitesimal at first.”
Since his election in 2005, Sanders has promised to implement a less expensive pension plan. This fiscal year pension obligations will cost the city $162 million, with nearly half of that amount going to cover the more-than $1 billion pension deficit.
The compromise with Peters, announced June 25, came after several months of fruitless negotiations between Sanders and the unions, which include the white-collar Municipal Employees Association, the blue-collar employees union and the Deputy City Attorney’s Association. The proposal requires full City Council approval in order to be put on the November ballot. That vote will likely happen on Tuesday.
Both Esuchanko and Andrea Tevlin, the city’s independent budget analyst, say the proposal is sound.
“I think this is a very good compromise,” Tevlin said. “It is pretty aggressive in scaling back benefits if you look at the public sector.”
The city’s current retirement program is a blend of a traditional, or “defined benefit,” pension and a “defined contribution” program, which resembles a corporate 401(k) plan. It is a generous program that has allowed some employees to claim a pension that is 119 percent of their final year’s pay.
Throughout his negotiations with the unions, Sanders demanded that workers accept a hybrid plan that put more emphasis on the 401(k) portion. The unions, meanwhile, refused to budge on the defined benefit.
In the end, Sanders compromised by making significant cuts in the defined contribution program, but leaving the defined benefit plan — albeit scaled down — in place.
“A negotiation is successful if neither party is completely happy,” Sainz said.
Most of the savings in the early years would come from the defined contribution portion.
The proposal cuts the city’s payments to the defined contribution program from 6.05 percent of an employee’s salary to 1.25 percent. Meanwhile, city contributions to the traditional pension plan drops from nearly 10 percent of an employee’s salary to 7.5 percent.
All of the savings through 2011, a total of $1.6 million, would come from the drop in the defined contribution payments. Beginning in 2012, savings from the defined benefit portion will kick in.
Through the first 10 years, $27.7 million in inflation-adjusted savings will come from the defined contribution program and $8.8 million from the defined benefit program. Ultimately, $15.4 million in annual savings will come from reductions in the defined contribution portion and $8.2 million from the defined benefit portion.
Savings via the defined benefit program will be realized by reducing the defined benefit cap to 80 percent of the average of an employee’s final three years’ salary. The current cap is 90 percent of an employee’s final year salary.
Other savings will come from a reduction in the defined benefit multiplier, which is used to calculate an employee’s pension payment and an increase in the minimum retirement age to 60 from 55.
All in all, Esuchanko called the proposal a “good beginning.”
“But more has to happen,” he said.