The Morning Report
Subscribe now. Get smarter tomorrow.
When someone at City Hall tells you that nothing can (or should) be done about the city’s unsustainable pension burden, remember this: They’re assuming that city employees will continue to get 4 percent across-the-board wage increases every year from now on.
It looks like that’s no longer a safe assumption at all.
Step back for a minute and remember why San Diego is in the dilemma that it is. Years ago, City Hall promised its employees pension benefits for which it never raised money. Now, in order to pay for those pensions, we have to send over hundreds of millions of dollars every year to the pension fund. Even though City Hall’s spending per resident has risen, we suffer because of how much more of that is actually just going to the pension fund.
How much money we have to set aside is determined by complex calculations. Those formulas factor in a variety of assumptions. The three main ones are:
- How long people are expected to live.
- How much the pension fund believes it will earn through investments every year (right now, that stands at the ridiculously high 7.75 percent).
- How much city wages are supposed to rise.
Yes, they assume wages will go up, across the board, an average of 4 percent every year.
That’s significant because an employee’s pension is calculated using a basic system: The number of years an employee works is multiplied by the promised benefit (between 2 and 3 percent) and multiplied by the top salary earned over his or her career.
Most people are coming to the conclusion that, despite years of controversy, the promised benefit can’t be rolled back to what it was in 2002 or 1996.
And you obviously can’t change the number of years an employee has worked.
But the city is perfectly able to change the top salaries its employees are going to earn. It could, tomorrow, lower wages across the board.
In fact, because the system assumes that yearly salary increase, just simply freezing them would immediately give the city relief from its pension burdens.
He proposes that the city focus on salaries. “I told my team, let’s go ahead and assume the pensions are vested and we can’t change them. So what can we do?” he told me.
They hatched a plan to not only freeze or lower salaries but to offer employees a deal. Perhaps some of the incentive pay that some employees get — extra pay for things like being bilingual — should not be factored into their pensions. Maybe the city could still offer this extra pay but not have it count toward their pensions.
In any case, if you freeze all pensionable pay for several years as we recover from this crisis, the pension burden is relieved slightly. It doesn’t fix the city. But if you freeze salaries, exclude extra pay from pensions and add in the reforms that made up Proposition D, then you can envision a time when taxpayers have regained confidence in city government.
The idea seemed like a good one. But when I first floated it in a post, I received immediate blowback that it couldn’t be legal.
That’s why City Attorney Jan Goldsmith’s just-released opinion that it was legal is such a big deal. Obviously Goldsmith doesn’t get to decide if something is legal. But he does get to decide if the city thinks it’s legal and is willing to fight for it.
Basically, the city attorney declared that the City Council can just say, every year, what part of a person’s pay counts toward their pensions and what doesn’t.
“We’re ecstatic,” DeMaio told me Tuesday. “I would like for the labor unions, now, to take the next steps with us.”
I think you’ll see in coming days his idea gathering support at City Hall.
That’s music to Mike Conger’s ears. The lawyer, who has done well suing pension funds and municipalities on behalf of beneficiaries, told me the city would only waste money trying to defend the idea.
“As the city deals with its budget problems the only place it can’t possibly cut is the pension but for some reason that’s the only place they keep trying to. It’s great for lawyers like me but bad for taxpayers,” he said.
To be sure, he acknowledged he hadn’t read Goldsmith’s opinion.
The fact is labor unions have gone to battle to protect their pension benefits. And, mostly, they won.
This now uncomfortable focus on their salaries is what they win.