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It’s official. San Diegans will vote on a sweeping pension reform initiative in June 2012.

The initiative is shaping up to be one of the hottest issues facing San Diego voters in June, alongside the mayoral primary. Republican and business leaders proposed and financed the measure and have already engaged in a bitter fight with organized labor opponents. Supporters estimate the measure will save the city more than $1 billion over almost three decades and claim it will end the almost decade-long pension crisis.

We’ll be covering the campaign in-depth. Here’s our initial reader’s guide on the initiative to get you started.

The Starting Point

Begin with our San Diego Explained segment with NBC 7 San Diego. It’s a fun one. We used Lego people to stand in for city employees.

The initiative has many parts, but two pieces make the most significant changes. The measure gives most new employees 401(k)s instead of guaranteed pensions. And it attempts to impose a five-year freeze on employees’ pensionable pay.

The 401(k)

San Diegans will most easily understand the 401(k) part of the measure, given that 401(k)s have long been central to private-sector retirement plans. If the initiative passes, all new city employees except for police recruits will receive them instead of the guaranteed pensions they get now.

The key word is “new.”

City leaders haven’t been able to solve San Diego’s pension problem in part because it’s tricky to fix the problem’s root. Pensions for retirees and existing employees, which account for much of the pension system’s financial burden, have nearly iron-clad protection under state law.

Mayor Jerry Sanders’ previous pension reforms already reduced pensions for more recent employees. That does away with the more costly benefits for future employees, so giving new ones 401(k)s saves little-to-no money. The 401(k) plan has an initial sticker shock. The city will pay its retirement system almost $100 million more over the first six years because of accelerated costs to close pension plans.

Supporters argue the up-front costs are worth it to eliminate the city’s risk of another pension debacle.

The Pay Freeze

Here’s where backers of the measure get their cost savings.

The concept is breathtakingly simple: Pay people less when they’re working and you pay them less in retirement.

Here’s a slightly more complicated explanation: Keeping salaries steady saves on pensions because the retirement system’s projections assume pay will increase every year. If pay doesn’t go up, the city’s forecasted costs aren’t as high.

Initiative supporters add in a sweetener for city workers. Employees can receive raises, but those pay increases wouldn’t count toward their pensions.

The freeze makes up 87 percent of the initiative’s projected low-end savings, and allows supporters to argue the measure saves the city money immediately.

But there’s a catch. The freeze isn’t guaranteed.

California law prohibits voters from imposing city worker salaries at the ballot box. The initiative, then, merely requires the city’s opening negotiating position with labor unions include the freeze. The city can change that negotiating position with a two-thirds majority of City Council.

Supporters of the initiative argue that political pressure on council members will force them to support the freeze and lock in the savings.

What Else?

The circumstances surrounding the pay freeze reveal a huge issue: Implementing the initiative’s reforms won’t be easy. Budget savings and retirement security for thousands of future city workers will depend on what happens after the initiative passes.

The city will have to make a major decision about Social Security. Currently, city workers do not participate in Social Security. A return to Social Security is complicated. Our own Scott Lewis found that just one new city worker might be responsible for making that decision. If the city doesn’t re-enter Social Security, workers will receive a larger 401(k) match.

San Diego’s three major Republican mayoral candidates, Carl DeMaio, Bonnie Dumanis and Nathan Fletcher, all support the measure and argue they’ll be able to give workers retirement security. Their answer likely will be a guaranteed income stream called an annuity. Annuities often use 401(k) retirement accounts to pledge retirement income insulated from the stock market. But in order to have enough money to purchase a large enough annuity, employees probably will have to bear much of the initial investment risk themselves.

Opponents of the initiative likely will take the fight to the courtroom as well as the ballot box. The city’s white-collar union argues the law requires the city to negotiate before placing the initiative on the ballot. Labor groups also believe the pay freeze language is illegal.

The Bottom Line

The initiative represents the most dramatic attempt to change San Diego’s retirement system since the early 1980s.

If it passes, the city will transition out of the guaranteed pensions that have defined public sector retirements. It also will have to develop another way to provide retirement security for its employees.

But lots of things have to go supporters’ way even after the fact for the measure to have the maximum impact, particularly the pay freeze. Regardless, pension payments’ burden on the budget won’t disappear. Even if the measure passes, annual pension payments are projected to increase to almost $400 million in 2025.

A Deeper Look

If you want to go deeper, read three primary source documents. First, here’s the initiative itself. Second, retirement system CEO Mark Hovey detailed the up-front costs from introducing 401(k)s. Last, here’s the supporters’ financial analysis.

Liam Dillon is a news reporter for voiceofsandiego.org. He covers San Diego City Hall, the 2012 mayor’s race and big building projects. What should he write about next?

Please contact him directly at liam.dillon@voiceofsandiego.org or 619.550.5663.

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Liam Dillon

Liam Dillon was formerly a senior reporter and assistant editor for Voice of San Diego. He led VOSD’s investigations and wrote about how regular people...

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