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City Attorney Jan Goldsmith’s big gamble on pensions looks to have amounted to nothing.

The San Diego City Employees’ Retirement System – SDCERS – gets to hold onto its interpretation of the City Charter, after settling a three-year legal battle with the city Monday.

That interpretation sheltered city employees from potentially paying way more than their regular contributions – i.e., the burden fell entirely on the city if investments fell short of expectations. Goldsmith challenged that process in a 2010 lawsuit, saying city employees should pay half.

The settlement said the City Council didn’t want to take more from employees after agreeing to a five-year pensionable pay freeze in contract negotiations in June.

“In light of this freeze, the City Council has decided that it does not want to further increase the burden on employees thereby risking loss of valued employees, including those in public safety,” according to the settlement.

When it comes to city employee pensions, nothing changes. The city will continue to be responsible for all financial shortfalls, meaning city employees won’t be at the mercy of the stock market on top of regular contributions to their pension funds.

At issue was a line in San Diego’s City Charter, which says the city and its employees should put “substantially equal” amounts toward the pension fund. In 2004, a pension reform committee read that and pushed the city to investigate.

Goldsmith and his team decided it meant the city and employees should split 50-50 the risk that the pension system might fall short of its then-goal to earn 7.5 percent in annual investment returns over time. (The rate was recently lowered to 7.25 percent.) But in 2010, San Diego was still in a tough spot financially. City employees might have had to pay an estimated $4,000 each to make up for massive losses during the recession.

At the time, Goldsmith said the individual costs wouldn’t always be so high. Here’s what we reported way back when:

Goldsmith downplayed the impact of his position. A victory, he said, merely would provide Mayor Jerry Sanders and the City Council with more power to decide how much employees would pay toward their retirements, a tool that Goldsmith believes the charter requires them to have. It could lead, he added, to negotiations to mitigate the effects of market swings on both the city and its employees. In most years, Goldsmith believed city employees could make out better than they would otherwise.

The city attorney seemed pretty proud of his creative interpretation. He was so confident, in fact, that he withdrew a motion for summary judgment in April, ready to go to trial in May. Scott Lewis explained:

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.

But that strategy just fizzled. When SDCERS announced the settlement Monday, Board President Ed Kitrosser cheered the end of what he characterized as a waste of time and money.

“The city spent more than $4 million suing itself at an interest rate of 7.25 percent over an interpretation of the City Charter that was ultimately left to stand,” Kitrosser said in a statement. “I commend the City Council for ending this wasteful spending so that the city and SDCERS can move forward.”

And yes, the city does have to pay SDCERS’s legal expenses.

Goldsmith said the Council decided to pay employees more than what he believed the charter required.

“The City Council has the right to decide policy,” Goldsmith said in a statement.

Liam Dillon contributed to this post.

Catherine Green

Catherine Green was formerly the deputy editor at Voice of San Diego. She handled daily operations while helping to plan new long-term projects.

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