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Finishing the job of pension reform

As a businessman, I never liked leaving money on the table in negotiations. Now that I have dedicated my time in elected office to fixing San Diego's financial problems, I feel the same way when it comes to reforming the city's pension system. Until the pension system is fixed, our city's financial health will never be reformed.

Last week's troubling news on the city's annual pension payment only reinforces the need for further pension reform. The annual pension payment has ballooned to over $231 million -- or a whopping 42 percent of city payroll. When factoring in the cost of all city retirement benefits, taxpayers are servicing a cost of more than $370 million annually -- or a staggering 69 percent of city payroll.

That's not to say that the city has not made important progress on pension reform under Mayor Jerry Sanders -- we certainly have and that is commendable. However, much more pension reform can and should be achieved. Based on what I hear from taxpayers every day, the public agrees.

Unfortunately, city leaders seem poised to reject any effort to reform the pension system further -- and seem content in declaring a premature victory. Already we hear a chorus of sound bites emerging from City Hall that the pension system for new hires has been completely reformed -- and that all remaining pension benefits for current employees are "vested" and legally untouchable.

Legally speaking, these claims are completely wrong.

Financially speaking, millions in taxpayer funds are being left on the table by not pursuing more pension reform.

Working with pension reformers across the state of California, my office has compiled a list of reforms that fall into the following categories: reducing pension costs through benefits reform (new hires and existing employees), reducing the pension debt through reforms that achieve actuarial savings (managed competition, salary freezes, reductions-in-force, etc.), and achieving savings in other parts of employee compensation to pay down accrued pension liabilities, (increasing employee contributions, eliminating supplemental pension contributions, etc.).

In October, I joined with Councilmember Donna Frye in a bipartisan call for a thorough legal review of all pension benefits to determine which are indeed vested and which may be renegotiated.

Pension law does indeed protect vested benefits. However, pension law also offers city governments protection to alter total compensation packages and to scrutinize whether pension benefits were properly granted.

Recent court victories by City Attorney Jan Goldsmith -- and other pending court cases -- give us optimism that several reforms to existing pension benefits may be available to city leaders in the future.

Importantly, San Diegans cannot wait for court decisions to secure our city's financial future. While there are some potential reform options that require appropriate legal vetting, I propose that the city move forward to implement reforms that are legal and have already withstood legal arguments.

1. Finish Reforming Pensions for New Hires: The first task should be to finish the job of reforming the pension system for all new hires. In 2008 I stood alongside Mayor Sanders to support the creation of a new pension plan for new hires. However, as I noted at the time and continue to point out today, the new pension plan did not address pension reform in public safety classifications -- which constitute a significant share of our city's annual pension costs.

Among the reforms we can legally implement through labor negotiations include raising retirement ages, more equitably distributing investment risk, and preventing "pension spiking" by moving to a three-year average of highest salary for pension calculations. While city leaders correctly tout savings from partially reforming the pension system for new hires, by finishing the job and covering all new hires we can save taxpayers millions more.

2. Require Proper Employee Pension Contributions: The city of San Diego over the years has "picked up" a share of the employee's pension contribution -- in addition to paying the employer contribution rate. These costly accommodations are known as "Employee Offsets." While some of the offsets have been eliminated, one union and city elected officials themselves continue to receive these costly "offsets." In addition, city officials should closely scrutinize how the "normal retirement cost" is calculated to ensure city employees are truly paying their fair share of pension benefits.

3. Eliminate Supplemental Pension Contributions: Many employees actually receive a "second" pension package known as the "Supplemental Pension Savings Program" (SPSP). Within one month of assuming office, I proposed to eliminate this duplicative program that requires city taxpayers to match a mandatory 3 percent of salary for city employees -- and further match as much as 6 percent of a voluntary contribution. I was thrilled when we were able to negotiate the elimination of this perk for one labor union. However, two other unions and senior management continue to receive this program. City leaders should finish the job of suspending the SPSP program entirely.

4. End Terminal Leave Benefits: Several city employee groups still have "terminal leave" -- wherein city employees continue to accrue pension service credits after they retire -- based on their vacation and personal leave payouts. This policy is not vested and can be changed through labor negotiations -- and would help reduce our pension costs. The savings for taxpayers do not stop there. In addition to pension savings, taxpayers would save on other benefits provided during terminal leave such as holiday pay, workers compensation, and disability insurance.

5. Finish Reforming the DROP Program: The city still has not completed a cost-neutrality study of the notorious "double-dipping" Deferred Retirement Option Plan (DROP) -- which could open the door to significant taxpayer savings. Worse, a legal dispute with the pension board has held up the elimination of the DROP program for several groups of city employees.

Implementing these reforms -- which can all legally be achieved through labor negotiations -- will save taxpayers more than $25 million starting in FY 2012 alone.

City leaders should also continue to examine all pension benefits to ensure they were properly granted and administered -- to determine if reforms can be made to any benefits currently presumed to be "vested" or legally untouchable. Moreover, city leaders should be carefully watching the pension reform program undertaken by Orange County -- which may provide a legal vehicle for allowing city employees to "opt-out" of costly benefit packages into more affordable ones.

To lay the groundwork for pension reform in future years, we must also amend the City Charter to remove an unorthodox requirement that gives city employees a de-facto veto on many changes the mayor and City Council may want to make to the pension system. Presently there are a number of benefit reforms already approved by the mayor and City Council that are being delayed partially due to this Charter provision. Every day of delay potentially costs taxpayers -- and contributes to the pension debt.

There is no silver bullet in pension reform. It will take a combination of all of these reforms to fix San Diego's pension crisis.

Nevertheless, in contrast to the sentiments of some city leaders, further pension reform can not only be legally achieved, it must be completed in order to secure our city's financial future.


DeMaio is a member of the San Diego City Council, representing Council District 5.

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2 UserComments
In The "Trench 7:22pm June 7, 2011

The pension is so good I couldn't keep my student engineer for more than 3 months before she was hired-on at 3 times the pay and better benefits with a private firm.

Tough Love 2:01pm January 20, 2010

The types and number of abusive (and costly to TAXPAYERS) pension gimmicks is so extensive, the entire system needs to reformed with ONE singular measure for potentially granting ANY benefit or provision to Civil Servants .... and that is .... do the majority of participants in PRIVATE SECTOR plans get that provision or benefit. If not, then neither should Civil Servants. If this principal were followed, 90% of underfunding issues would disappear.