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Last week, City Attorney Jan Goldsmith made a quiet but big legal move. He withdrew a motion for summary judgment on the so-called “substantially equal” case.
He wants to go straight to trial.
When I asked why he pulled the case, I got a cryptic response.
“Tactical reasons. We have a May trial date and developed evidence we want to use at trial,” he wrote.
Get excited for May, folks. At stake is the very definition of a pension.
But more is on the line for Goldsmith. The case has already cost the city $2.5 million. It’s Goldsmith’s most creative theory and his biggest risk. He hopes that a decisive win will force major concessions from city workers and their unions. But a loss would add to a growing list of struggles within the city’s legal department.
To understand the case, you have to understand what a pension is.
A pension is a defined benefit. For instance, my father just retired from a big company after 36 years. He’s got a set, yearly pension he’s going to get for the rest of his life. He contributed to it but it will be up to his company to make these payments as they’ve agreed.
For my father’s generation, this was not unusual. For mine, it is. I have a 401(k). I pay into it. Its investments earn money and my employer matches part of it. Whatever is there when I retire is what I’ll have to retire on. If there’s nothing, there’s nothing.
That’s known as a defined contribution.
Like my father, most city employees have a defined benefit. Funding that benefit has been a growing burden on the city that has framed our political conversation for a decade.
But city employees have also contributed to their pensions. Every paycheck they get shows a deduction. This is the controversy: How much should they have to pay?
The San Diego City Charter is unique. It has a line that says the city and its employees should pay “substantially equal” amounts.
Here’s why that matters:
The city’s pension system expects to earn 7.5 percent every year. If it falls short, the city’s taxpayers are on the hook. Were you to get a pension board very sympathetic to employees, they might never want to lower that expectation, even if they think it’s too optimistic, because it would increase employees’ regular contribution.
And if the investments don’t make that much, it’s up to taxpayers to make up the difference.
Goldsmith and his supporters want the employees and city to share this risk right down the middle: If retirees end up living longer than projected or if investments do more poorly than planned, it’s half the city’s problem and half the employees’. Those are known as actuarial assumptions.
“If we don’t get it square and the variances from the actuarial assumptions continue to be 100 percent the responsibility of the taxpayer, we could see manipulation of the system,” said April Boling, who chaired a 2004 Pension Reform Committee that first stumbled onto the unique “substantially equal” wording and pressed the city to investigate it.
Boling says clarifying it might mean that employees get a break from time to time — should investments come in higher than expected or people don’t live as long and therefore don’t collect as much in pensions.
“The point of this isn’t to have it come out better for employees or better for the employer. If it turns out to be better for employees than the city, I don’t really care,” she said.
Goldsmith does. He wants to press the case. And he wants to win. And he wants that to hurt so much that employees feel compelled to switch voluntarily to a defined contribution, a 401(k)-style plan.
“My strategy has been transparent (practicing law in a fishbowl is interesting) — drive up employee contributions by enforcing the substantially equal law and offer a defined contribution alternative with incentives. If the strategy pans out, both the city and employees choosing to move over to the DC save money now,” Goldsmith wrote to the Union-Tribune editorial board in an email obtained through a records request by employee unions.
By “enforcing the substantially equal law” Goldsmith is referring to the part of the City Charter that requires that the city contribute “annually an amount substantially equal to that required of the employees for normal retirement allowances … “
Goldsmith reads this to mean the city employees should not only pay a set amount out of their paychecks, but half of the investment losses and losses associated with failed projections about things like how long a retiree will live.
“Yes, it’s a defined benefit plan, it promises future benefits. But it’s a joint contribution plan where the costs are supposed to be shared substantially equal and the pension board hasn’t been applying that,” Goldsmith said.
For its part, the pension system’s leaders think that if you were to truly divide up investment gains/losses over the last few decades, the employees would deserve a fat check.
Mark Hovey, CEO of the San Diego City Employees’ Retirement System, said that in the 30 years since the city has been allowed to invest in the market, it has earned $1.4 billion more than what was expected in forecasts.
The reason the city is in a hole, he said, is the benefit increases the city gave workers. The city attorney was responding to one bad year, Hovey said.
“It was an epiphany of sorts that was convenient for the city attorney to consider in the wake of one of the most significant declines in the stock market since 1929,” Hovey said.
Indeed, Goldsmith began the effort in 2010, right after the pension system’s eye-popping loss in the investment market. The pension system’s president, an investment manager himself, recently wrote Goldsmith’s move is akin to the city suing itself and he wrote that it’s a reason we shouldn’t elect city attorneys.
Goldsmith’s in a tough spot. Again, the trial is in May. In December, a judge denied a request to settle the issue early. But the judge took the extra step of insulting the city attorney’s case.
“Even if the motion were not denied on procedural grounds, it would be denied on the merits,” wrote Judge Joseph Zimmerman. He explained that he simply didn’t read the City Charter the way Goldsmith did.
Goldsmith’s legacy depends on a much different opinion emerging from trial.
I’m Scott Lewis, the CEO of Voice of San Diego. Please contact me if you’d like at email@example.com or 619.325.0527 and follow me on Twitter (it’s a blast!):
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