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In December, I called the plan from San Diego Mayor Jerry Sanders and Councilman Kevin Faulconer to switch the city’s future non-public safety workers to a 401(k)-type plan “deferred austerity.”
A worker’s pension is sometimes called deferred compensation. Switching future employees to a plan that doesn’t guarantee them a certain pension benefit doesn’t do anything to address the city’s current crisis so I thought deferred austerity was a good descriptor.
Since future employees can’t stand up for themselves because they don’t exist, it was really a matter of deferring the consequences of a tough choice onto people who wouldn’t complain.
But it turns out, it might not be such an attack on these future employees after all.
Last week, I moderated two panel discussions featuring Michael Zucchet, the general manager of the city’s largest employee union. The second one, Thursday at the San Diego County Taxpayers Association, was about this topic.
Zucchet is not all that worried about future members of his union being switched to a defined contribution or 401(k)-type plan. I don’t have his exact quotes, but he made it clear that the way it’s been presented to him, it will not be that much of a change from what new employees already get.
You see, decades ago, Mayor Pete Wilson and city leaders persuaded city employees to drop their claims to Social Security. In exchange, it earned them health care for life and it was one of many in a long line of decisions that have led us to this crisis. Finally, Zucchet’s union agreed in 2008 to a new pension plan for future employees. It is much less generous than the benefits employees secured after deals with the city in 1996 and 2002.
If the city scraps it, and switches all to a straight 401(k) plan, it looks likely that the city will also have to re-enroll its workers in Social Security or provide a, yes, defined benefit plan of about the same worth.
Hence the “meh” from Zucchet. He was still defensive about employee pensions and he still, obviously, believes the city needs to fund them and move on. He was particularly encouraged by conversations with financial advisers from TIAA-CREF, one of whom was on the panel. They laid out ways in which a 401(k)-type system might not be that bad of a deal for city employees after all.
There’s more. Zucchet’s fellow panelist, Bill Sheffler, an actuary supportive of the switch to 401(k) plans for new city employees, pointed out that not only would the switch not help the city’s budget in the short term, but it would most likely immediately increase costs significantly. After several years, the city would realize savings from the plan.
Yes, you read that right, a switch to a supposedly more austere plan will likely increase costs at a time it’s scrambling to cut this year’s deficit. It’s a deficit the mayor has said threatens nearly all recreation center and swimming pools, along with library, fire and police services.
Later on Twitter I wondered how that would sell politically. After all, wouldn’t it be awkward to say: “We’ve got a massive budget deficit. Here’s a plan that actually makes it worse?”
Tony Manolatos, the spokesman for Faulconer, jumped in pleading for patience:
@vosdscott Try and give us the benefit of the doubt, at least until the details are released.
My point all along was that at the time when we need a laser-like focus on the city’s current unbalance, this plan was a distraction. Future employees have been dealt with. Now, it will be even more difficult for the mayor and Faulconer to argue that their plan is not a distraction if it not only does not deal with the current short-term crisis at City Hall but actually makes it worse. But OK, the benefit of the doubt is hereby granted. I’ll leave this point alone until we get more details.
Finally, there was one other surprise. The city’s police and fire fighters have been hostile to this plan to switch new employees out of a guaranteed benefit and into a 401(k)-type plan. I couldn’t figure out why. After all, they are spared in all of the plans to do this, including Councilman Carl DeMaio’s so-called Roadmap.
Here’s how police officer and union activist Jeffrey Jordon explained it on Twitter after the panel:
@vosdscott we care because closing off system drives cost up for everyone left in db system.
This is a fascinating point and it is related to the earlier discussion about how the city’s costs will go up even with a move toward austerity. The city’s pension fund is 67 percent funded right now. That means it has 67 percent of the assets it feels it needs to pay everything that’s been promised to current and future city retirees.
For years, we’ve been dealing with the argument from many at City Hall that this was fine because the system will go on forever. What’s wrong with having only 67 percent of the assets you need if you can just leave it like that into perpetuity?
But if you close the pension system to new hires, that shortfall suddenly has to be dealt with. You’ll have more people collecting benefits from it than you’ll have people paying into it. That means we’ll have to dump a bunch of money into the pension system.
Sheffler, the actuary who’s worked for DeMaio and supports a switch to the 401(k) plans, offered a surprising solution to this: issue pension obligation bonds. This is the act of borrowing money from investors and putting it into the pension system (where it’s invested). A debt to employees becomes a debt to bond buyers. It would be the nail in the coffin to the vision that some employee benefits were granted illegally or they could be renegotiated or eliminated.
Sheffler says that with a plan like DeMaio’s that minimized the pension deficit as much as possible and then pension obligation bonds, you’d put the city on a course to recovery.
He anticipated a likely reaction from City Hall: taking on debt like this would decrease the city’s capacity to borrow for other things.
“That sounds fine to me,” Sheffler told me Thursday.