Proposition D won’t solve the city of San Diego’s pension problems, but it could provide a means for the city to do it, City Attorney Jan Goldsmith said.
Goldsmith offered details of a three-part plan that he said could drastically reduce the city’s pension liability and save city employees money, too.
The process is this: The city wins a Goldsmith-initiated lawsuit that opens the door to forcing employees to share in last year’s investment losses to the pension fund. The city uses leverage gained by winning the suit — a potential immediate $4,000 hit to each city worker’s wallets — and other incentives to induce existing employees to opt into a new 401(k)-style pension plan. Creating a voluntary 401(k) plan for existing employees is one of the reforms mandated by Prop. D. The city would then lobby the IRS to approve the 401(k) plan.
Goldsmith said he thinks the maneuver is “the solution.”
The 401(k) plan, Goldsmith said, helps both sides because the city and employees could save money by contributing less to the pension system.
To be sure, a lot would need to happen before Goldsmith’s idea could be feasible. The city needs to win a lawsuit, win the holy war union officials already have declared against forcing employees to pay any of the retirement system’s investment losses and develop an actuarially sound and attractive 401(k) system.
But it does provide a window into Goldsmith’s legal strategy for addressing pensions. The city, Goldsmith said, has more control over what it forces existing employees to contribute toward their pensions than changing the actual benefits employees have.
Previously, the legal strategy spearheaded by former City Attorney Mike Aguirre attacked benefits granted to employees when the city shorted its pension system. Years of court battles, Goldsmith said, have shown that most of those benefits are guaranteed.
“The area that’s ripe is contributions,” Goldsmith said.
Goldsmith didn’t know how much this strategy would save the city. It depends on the 401(k)-plan’s structure among other things. Details, he said, should be left to actuaries and other financial experts, not him.
But that Goldsmith is discussing the idea, which he’s mentioning at debates on Prop D, showcases a much more assertive role he’s taken in the last few months. By choice, he released a plan to privatize city trash services. By necessity, he developed complicated language for Prop. D in a matter of weeks and then defended the ballot measure against legal attacks.
Goldsmith’s pension solutions aren’t reactions to direction from the City Council or Mayor Jerry Sanders, but instead his own financial strategies. This enhanced public profile runs up against his pledge that he would remain apolitical in office.
Goldsmith said his opinions weren’t new or political advocacy. He cited spring editorials in the Union-Tribune as a source for his pension reduction ideas. City Council, he noted, has authorized his pension lawsuit and put Prop. D on the ballot.
Goldsmith said a significant hearing in the pension lawsuit will happen on Friday, and he expected to have an indication on how the court ultimately would rule afterward.
The third prong of Goldsmith’s idea involves the IRS approving any potential city 401(k) plan for existing employees. Right now, a plan like the one mandated by Prop. D could jeopardize the retirement system’s tax-exempt status. Federal rules bar employees already in a pension system from choosing a different plan without making all retirement contributions taxable. Orange County, which is further along in creating a similar 401(k) plan, is lobbying Congress for federal legislation to allow voluntary 401(k) plans to be tax exempt.
In late July, Goldsmith and Sanders sent a letter to the IRS supporting Orange County. Earlier this month, the IRS told the city the service couldn’t discuss Orange County’s situation, but was aware of local governments’ pension plights.