Questioning the 401(k) Measure’s Costs

How much money will the city of San Diego save from its proposal to move all new employees but police officers from pensions to 401(k)s? That’s the most significant question we’re tracking about the ballot initiative released last week.

Proponents argue the measure will save $363 million over the first five years and $2 billion over 30 years. But we’re waiting for a detailed financial analysis from the measure’s backers. We’ve already questioned the savings they’ve counted for changes that already have occurred.

Enter Mark Hovey, the CEO of the city’s retirement system. With talk of winding down the city’s pension system to new non-public safety workers swirling, Hovey recently asked the system’s actuary to calculate any costs that might result.

The answer, Hovey told a council member last month, would mean an immediate increase for the city’s annual pension payment. It will cost an average of $10 million more a year in the first four years after the city closed the pension plan to new non-public safety hires, Hovey said. Costs would decrease after that.

The bump in immediate costs, Hovey said, happens because the city would need to accelerate its pension payments to comply with government accounting standards.

Hovey believes other aspects of the proposal could result in immediate cost reductions. For one, the measure plans to exclude pay for speaking multiple languages and other specialties from an employee’s pension calculations. That’s been dubbed capping “pensionable pay.”

“The guts of the whole savings to me appears to be freezing pensionable pay, which you can do without putting everyone into a 401(k),” Hovey said.

It’s true that the proposal’s savings comes from the pensionable pay freeze, said City Councilman Carl DeMaio, one of the measure’s authors. But that’s about all that Hovey said that DeMaio agrees with.

DeMaio conceded the retirement system’s board will determine the need for accelerated payments should the pension plan close, but said accounting standards don’t require it. San Diego already has a payment schedule more aggressive than other pension plans, he said. Arguments like Hovey’s, he said, were motivated by something else.

“It’s a political statement,” DeMaio said. “It’s not a financial statement.”

Further, DeMaio said, it wouldn’t necessarily be bad if the city had to accelerate pension payments. The amount the city owes the pension fund isn’t changing, he said, and paying more money sooner would prevent future taxpayers from shouldering the burden.

But doing so also might exacerbate the city’s budget deficits. Asked if adding to the city’s short-term deficit was the best policy, DeMaio said he’s prepared to offer additional pension reforms should the proposal pass.

As for the full cost analysis for the measure, DeMaio said he was receiving a briefing from his actuary on Tuesday and planned on releasing it soon.

Please contact Liam Dillon directly at liam.dillon@voiceofsandiego.org or 619.550.5663 and follow him on Twitter: twitter.com/dillonliam.