Lawsuit Could Bring Radical Shift to City’s Pension Payments

In most years, San Diego City Attorney Jan Goldsmith figures the deal he’s offering city employees would be embraced: Share in the city’s investment returns from the stock market and reap the benefits by paying less to the city’s pension system.

“Over a long period of time, these investments make money,” Goldsmith said. “I think over a long period of time if I had my druthers I’d rather be a partner in this.”

But Goldsmith is pushing it in a year where city employees would lose. Big time. Possibly to the tune of $4,000 per employee.

After five months of increasingly loud talk and two months before the city faces a budget busting pension bill, Goldsmith landed the first formal blow in what’s expected to be a protracted legal drama. Through a lawsuit filed this week, he seeks to force the retirement system to heed his interpretation of the city charter — one where the city and its employees become equal partners to the stock market’s whims.

He wants a decision by July 1, before the city’s record $231.7 million pension payment comes due.

The legal issues are cloudy and esoteric enough. Goldsmith sought an opinion from an out-of-state pension lawyer and dredged up a 56-year-old city document to support his position. The retirement system has produced numerous legal opinions that combat Goldsmith’s view.

But the practical effects of a Goldsmith victory loom larger. It would mean no less than a radical shift in how the city and its employees pay pension bills. And it would happen in a way that contrasts with the generally accepted view of how pension plans like San Diego’s operate.

Goldsmith downplayed the impact of his position. A victory, he said, merely would provide Mayor Jerry Sanders and City Council with more power to decide how much employees would pay toward their retirements, a tool that Goldsmith believes the charter requires them to have. It could lead, he added, to negotiations to mitigate the effects of market swings on both the city and its employees. In most years, Goldsmith believed city employees could make out better than they would otherwise.

But this year city workers could feel the pain. Goldsmith’s supporters have estimated employees would face an immediate $40 million bill should Goldsmith win. Divide by roughly 10,000 city workers and that’s a $4,000 bill per employee.

Numbers like these have labor union leaders vowing to fight.

“There’s just no way that $4,000 or any other thousands of dollars are going to come out of any city employee’s paycheck,” said Ann Smith, longtime attorney for the city’s white-collar labor union. “Over my dead body.”

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Pension plans like San Diego’s receive funding in a way that we’ve compared to a stew. Each year, employees contribute a portion of their paycheck to the plan and the city makes an annual payment. Those contributions go into a giant pool of money that the pension system invests. That pool, along with investment gains, is used to pay retiree checks every month.

The retirement system has estimated the city’s current pension obligations at $6.3 billion. But the system is running a $2.1 billion deficit.

Past pension underfunding scandals — where city officials guaranteed greater employee benefits in exchange for lower immediate contributions to the pension system — contributed a major part of that debt. But investment gains and losses play a role, too.

Goldsmith’s supporters have attributed $80 million of this year’s $231.7 million pension bill to investment and other shortfalls.

The city always has paid all that amount. It should only have to pay half, Goldsmith said.

The city’s charter says that the city and its employees should pay “substantially equal” shares of retirement costs. That provision always has been interpreted, by previous city attorneys and the retirement system, as excluding investment gains and losses. Recent legal opinions from the city’s retirement system affirm that view. As does the generally accepted meaning of how pension plans like San Diego’s operate.

The U.S. Supreme Court said in a 1999 ruling involving a private pension plan that an employer “typically bears the entire investment risk” in a pension system like San Diego’s and “must cover any underfunding as the result of a shortfall that may occur from the plan’s investments.”

To Goldsmith and his supporters, the key word in that decision is “typically.” San Diego’s charter defines its contribution methods as unique, they argue. Goldsmith and April Boling, an accountant who first advocated the city address this issue as part of the 2004 Pension Reform Committee, freely admitted they were unaware of any other municipal pension system that would operate how Goldsmith is proposing.

“I am not aware of any other plan that has the wording our charter does,” Boling said, “which is why it’s wrong to compare this plan to other plans.”

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Goldsmith’s lawsuit essentially seeks to force the retirement system to recalculate the city’s required payment this year based on his interpretation of the charter. That calculation would set how much the city and its workers should pay.

Then it goes to the mayor and City Council to decide how much more, if any, city workers would pay of their new pension costs.

Goldsmith believes that decision would spur negotiations between the city and its unions, rather than force a direct hit to city workers’ pocketbooks.

“I’m not necessarily saying that the employees have to come up and dig into their pocket right now,” Goldsmith said. “I’m just saying that the pension board … needs to go by the charter. Let the parties come up with some options for how to mitigate this for both the city and its employees.”

Goldsmith took pains to emphasize that in years where investment returns are stronger than expected, city workers could pay less than they do now under his interpretation. In other words, the investment risk goes both ways. Negotiations could specify how much the city and its employees would benefit from investment gains.

But if those negotiations happened this year, city employees start with an obvious disadvantage: The prospect of a $4,000 payment if an agreement isn’t reached.

Smith, the union attorney, said Goldsmith is just looking for another way to attack employee benefits after other legal attempts to do so have failed. She called it a “scare tactic.”

“This is now designed to be the latest newfangled club — if they can turn it into a club — to beat city employees into giving up their pension benefits,” Smith said.

At its April 16 meeting, the retirement system spent two hours debating the issue on two separate opinions from its attorneys as well as Goldsmith’s opinion. It has another discussion scheduled later this month.

Please contact Liam Dillon directly at liam.dillon@voiceofsandiego.org and follow him on Twitter: twitter.com/dillonliam.