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After about 300 days, mayoral candidate Bob Filner finally released his plan to reform San Diego’s pension system, something he first promised “about a month” after he announced his candidacy. Like we did when the June pension initiative was first released, we’ll break down the plan’s key elements and answer three significant questions about it.
Filner proposes to:
• End six-figure pensions for new hires.
• Negotiate five-year labor contracts with city workers that freeze pay for the next two years and provide 2 percent raises in each of the following three years.
• Create a task force to advise the mayor on further pension reforms, including taking out a $750 million loan, called a pension obligation bond, on the hope it earns more money in investments than it costs in interest to borrow.
• Eliminate the city subsidy for employee pension contributions and put half of any projected budget surplus into the pension fund.
• Keep guaranteed pensions rather than give 401(k)s to new city workers. This is its primary distinction from Proposition B, the ballot measure promoted by the city’s Republican and business interests and supported by Filner’s three mayoral opponents.
1. How Much Money Does Filner’s Plan Save?
Filner contends his plan will save $753 million over 15 years. But there are major catches.
The biggest savings — $483 million — comes from pension obligation bonds. This is the source of Filner’s oft-repeated claim that he can put hundreds of millions of dollars into the city’s day-to-day operating budget without raising taxes.
That comes at a significant cost. Filner is kicking the pension can down the road by paying back the city’s existing costs over a longer period of time, forcing the debt further onto future generations.
Filner couldn’t be reached for comment on Monday. But he has said that voters wouldn’t care if the pension debt grew if it meant more money could be freed up to fix the city’s current problems.
“The problem is now,” Filner told me in August. “If people are saying no new taxes and they want their potholes fixed and I can lower the payment, I think that makes more sense.”
Of course, city leaders previously pushed today’s pension costs off on future generations. That’s what caused the original pension crisis and officials have spent years undoing costly decisions like this.
Another aspect of the plan won’t save as much money as he says. He claims more than $25 million in savings from the five-year labor contract over the next two years. But the retirement system already assumes zero percent pay increases during that time. So that savings is already calculated into the city’s pension debts. There’s no savings left to claim.
2. What’s the Risk?
Filner often bashes Prop. B by arguing that the city shouldn’t make its workers reliant on the stock market “casino.”
But his plan doubles down on the casino and puts taxpayers at risk.
The way cities can make money off pension bonds is by playing the stock market.
Here’s how they work: Borrowing money doesn’t erase the debt, it just shifts it from one side of the books to the other.
A city’s goal is to make more money each year through investments than the interest rate it’s paying on its pension bonds. If that happens, the city can save money in the long run. If it doesn’t, then it costs even more and taxpayers are left to make up the difference.
So Filner not only is fine with the casino, but also he’s willing to borrow money to place his bet.
Filner is assuming the city will pay 6.5 percent interest on the pension bonds. The retirement system assumes the city will make 7.5 percent each year on its investment. This spread is where Filner hopes to make the city money.
Pension bonds make the most sense if they’re issued at the bottom of an economic cycle when the stock market is likely to rebound with big investment returns. That’s already happened for this latest cycle.
Public pension expert Girard Miller, who writes a column in Governing magazine, has called using pension bonds “increasingly imprudent” in current market conditions, when stock prices have already doubled from their recession bottom.
In a recent pension-related federal court trial in Baltimore, Miller compared pension bonds to taking out a second mortgage on your house and using the proceeds to fund your IRA. If you’re right, you make a profit. But if you’re wrong, you still owe the bank and have nothing to show for it. Miller would not take issue with the prudent use of pension bonds, but he would wait until the next recession. That begs the question of how Filner’s plan would save any money before then.
It’s also not like pension obligations bonds are a new idea. Current Mayor Jerry Sanders pondered pension bonds throughout his tenure, but never pulled the trigger because of the risk, his top deputy has said.
The outside investigators hired to clean up the city’s pension and accounting scandal also panned the idea of pension obligation bonds for similar reasons.
3. What About the Other Parts of Filner’s Plan?
Like Prop. B, Filner’s plan relies on savings from new labor contracts with city workers. The rationale is the same: Pay people less when they’re working and you pay them less in retirement.
The retirement system assumes city worker pay will increase by 3.75 percent each year. By giving 2 percent across the board pay hikes in years three through five of a labor contract, Filner aims to save pension costs. Contrast that with Prop. B, which aims to save more by giving no pensionable salary increases during that time.
In either case, though, these savings aren’t guaranteed. They have to come through union negotiations. Michael Zucchet, head of the city’s white-collar union, wouldn’t commit to supporting Filner’s exact salary figures, but said a long-term deal benefits the city and its workers. It’s also preferable, he said, to Prop. B’s five years of pensionable pay freezes.
“The notion of having a reasonable cost of living adjustment some years into the future doesn’t seem too unreasonable,” Zucchet said.
The other big ticket item in Filner’s plan — the $100k pension cap — won’t save any money in the short term. It will only affect new employees.
Liam Dillon is a news reporter for Voice of San Diego. 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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