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It’s almost accepted as an article of faith that killing pensions and replacing them with 401(k)-style retirements for most new employees will help the city of San Diego’s budget woes. The plan is the centerpiece of a high-profile ballot initiative planned for next June that its proponents, Mayor Jerry Sanders, Councilman Carl DeMaio and other Republican and business interests, touted as saving more than $2 billion when they announced it two months ago.
But an inconvenient detail has hovered over the measure for a while: 401(k)s may not do anything to affect San Diego’s massive pension deficit, and in the short term, force the city to pay more to fund it. That detail has become more inconvenient recently.
Closing the pension system to all new employees except for police officers and offering 401(k)s to everyone else would force the city to speed up its pension payments, said Mark Hovey, head of the San Diego City Employees’ Retirement System. It would cost the city $94 million more over the first six years, a new retirement system analysis says, at a time when the city’s budget continues to face incessant strain from its pension and other debts.
“The colossal problem for the city is trying to pay off that $2.1 billion pension liability,” Hovey said. “The 401(k) plan doesn’t address that.”
For now, backers are insisting 401(k)s will save money, but aren’t saying much else. They still have a year to make their case. When they do, they might not have to prove how much 401(k)s save, but whether they save anything at all.
To be sure, 401(k)s aren’t the only thing in the measure. Its other aspects, including freezing employees’ pay, likely will reduce the costs the retirement system is predicting will come with 401(k)s. But those changes could happen without adding 401(k)s to the mix. Further, 401(k)s, not pay freezes, are the measure’s crown jewel.
Over the past two months, the measure’s proponents have promised detailed cost savings estimates, which includes pension changes beyond 401(k)s. They aren’t ready yet.
“Developing long-term projections is a little bit more complicated than I anticipated,” said Lani Lutar, president and CEO of the San Diego County Taxpayers Association and a key supporter of the measure. “We are working on it.”
Should the measure qualify for the ballot, as is expected, it will be one of the most significant issues facing voters next June. Voters also will be choosing in a primary among a crowded field for the city’s next mayor.
The ballot measure already is looming large in the race. DeMaio and City Councilman Kevin Faulconer, both Republicans, helped write it, so they’re in support. (Faulconer has yet to decide if he’s running.) San Diego District Attorney Bonnie Dumanis, also a Republican, opposes it, saying firefighters shouldn’t have 401(k)s. The two presumptive Democrats in the race, U.S. Congressman Bob Filner and state Sen. Christine Kehoe, eventually are expected to oppose it, too.
But the lack of financial data is holding up the decision of Republican Assemblyman Nathan Fletcher. Fletcher was unavailable for an interview Friday, but his chief of staff confirmed the assemblyman wouldn’t make a decision about the measure at least until more financial data was available.
“A lot of the things that created the problem were politicians voted on proposals that were very popular that probably polled well, but hadn’t been thoroughly vetted and examined and gone through,” Fletcher told a local television station last weekend. “Of course I’ll weigh on in the local issues. We’ll weigh in on the statewide issues. But I think every leader should not do it until there’s been a full analysis.”
If the city offers new employees 401(k)s and closes its pension system to all employees but police officers, it will have to pay more for six years to comply with government accounting standards, said Hovey, the retirement system’s head. Those accelerated payments will save the city money in the following six years.
The retirement system’s actuary did not analyze the entire measure. Its other aspects could produce savings in the initial years, particularly the pay freeze, Hovey said.
“That’s significant,” he said.
Lutar said the retirement system’s data was important and planned to meet with Hovey prior to releasing the measure’s analysis. But she did not concede that any of the system’s assumptions were correct. Previously, DeMaio has said an acceleration wasn’t necessary and criticized Hovey for insisting it was.
Even the little financial information the ballot measure’s backers have released is suspect. More than a third of the savings estimated over the first five years came from a pension reform that’s largely been completed. Backers have said the measure makes that reform, eliminating pension offsets, permanent.
Lutar wouldn’t discuss anything else about the savings estimates, including if the measure will take credit for any cost-saving reforms already made.
She also didn’t have any timeframe for completing the full analysis.
“I wish I could give you a date but I can’t,” she said.
Please contact Liam Dillon directly at firstname.lastname@example.org or 619.550.5663 and follow him on Twitter: twitter.com/dillonliam.