The Morning Report
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The accord announced Tuesday on a 401(k) ballot initiative from Mayor Jerry Sanders, Councilman Carl DeMaio and others identified their chosen tactic for addressing the pension problem that has dominated city finances and politics for a decade.
We’ve decided to highlight the biggest points from the proposal and answer four significant questions about it. The plan:
• Replaces a traditional pension plan with a 401(k)-style retirement system for all new city employees except for police officers, who were exempted because of concerns about recruitment.
• Freezes base pay for current city workers for up to five years — unless overridden by a two-thirds City Council majority. The freeze would lower projected payments to the pension system.
• Removes special pay, such as emergency medical training pay, from counting toward pension calculations going forward.
• Aims to save $363 million in the first five years and $2 billion over 30 years, its proponents say. (We have more details on whether that much will be saved below).
• Includes firefighters and lifeguards, the city’s other public safety workers, in 401(k)s.
• Ends weeks-long negotiations within the city’s Republican ranks about the potential for two 401(k) ballot measures. The agreement likely gives a significant boost to the plan’s chance of passing, instead of two separate initiatives facing a muddy and bloody campaign.
1. What does the measure do for the city’s current budget deficit?
Nothing. The city’s deficit could be $56.7 million or $130 million, depending on what you include. The city’s faced a deficit every year for a decade. This measure is scheduled for the June 2012 ballot and won’t produce savings until afterward — potentially not until the 2014 budget.
Two other decisions on tap this month will be more relevant than this measure to current budget matters. The mayor has to present a plan to close the $56.7 million gap by April 15 and the city and its labor unions have to reach a decision on reforming retiree health care, a $1.4 billion unfunded obligation.
That doesn’t mean the 401(k) ballot measure isn’t worthwhile, said Vince Mudd, the head of a business-led task force on city finances that helped move the initiative negotiations forward. Mudd applauded both sides for reaching a deal that he said could give voters “a chance to solve a huge problem related to pension costs.”
But Mudd added the focus over the next couple of weeks should be on resolving the deficit for this year and next.
2. Will this measure save all the money it claims?
Supporters of the measure released a brief financial analysis for savings over the first five years to be $362.8 million. But that estimate attributes $135.4 million of those savings to something that’s largely been done.
The city and its employees contribute to the city’s pension system. The city can “pick up” or pay a percentage of the employees’ contribution. How much the city picks up increases an employee’s take-home pay by the same amount. The ballot measure seeks to eliminate the city’s ability to pick up those costs any longer.
But for the most part these pickups have been eliminated in the past few years. Last fall, the Union-Tribune produced this handy chart showing how they’ve disappeared since 2004. Since then, the two remaining employee groups with pickups — lifeguards and white-collar workers — have reached tentative deals with the city to reduce them substantially.
So how can a ballot measure claim savings for something that barely exists?
It assumes that the decisions made to cut these pickups during previous contract negotiations weren’t permanent, and that the city could reinstate them at any time, said Chris Cate, a vice president at the San Diego County Taxpayers Association.
Further, Cate said, the measure eliminates any pickups that still exist. No numbers were immediately available showing those savings.
In the meantime, we’re still waiting for a detailed financial analysis of the ballot measure. Bill Sheffler, an actuary who is preparing an analysis, said he was planning to deliver one to DeMaio within 10 days. It will be up to DeMaio to release it, Sheffler said.
3. Does the measure make San Diego the poster child for pension reform?
The buzzwords at Tuesday’s press conference were “national model.”
“This initiative will not only reform our pension system, but transform it into a national model,” Sanders said, one of the many times someone used the phrase.
Is that true? This morning, I sent emails to numerous folks who look closely at pensions in California and around the country. Two answers are worth highlighting.
Steven Greenhut, author of a book against public employee unions, replied that this plan “seems like the most wide-ranging reform proposal that I’ve seen at the local level.”
“This plan will help ensure the sustainability of public pensions, save taxpayers money and create a much more fair and reasonable system,” Greenhut continued. “San Diego had been the poster child for pension abuses and excess, so now it has the opportunity to be the poster child for serious reform.”
Girard Miller, a public financial expert who writes a column in Governing magazine, cast doubt on whether the plan would succeed. He doesn’t think that excluding certain specialty pays from counting toward an employee’s pension would pass legal muster.
“I believe the only solution to this problem is an amendment to the California Constitution,” Miller said.
4. Wait, didn’t the mayor say this plan was illegal?
Yes. In mid-March, he and Councilman Kevin Faulconer released a legal opinion from a Los Angeles attorney that they argued showed DeMaio’s specialty pay exclusion plan wasn’t legal or viable.
Now, a pay freeze is central to the ballot measure Sanders and Faulconer endorsed. It makes up most of the ballot measure’s projected savings over the first five years ($224.7 million).
How did Sanders explain the shift? Simply that attorneys signed off on the language that’s in this measure. Asked if DeMaio’s concept was always legal, Sanders replied, “It depends on how you word it.”
Clarification: Two sections of this story have been updated to more clearly state that concerns about the ballot measure’s legality focus on not the pay freeze but excluding certain pay from employee pensions.
Please contact Liam Dillon directly at firstname.lastname@example.org or 619.550.5663 and follow him on Twitter: twitter.com/dillonliam.