A ruling by a federal bankruptcy judge in Detroit has changed the game plans for government employee pensions across the nation. Several municipalities declaring bankruptcy, or considering creditor protection to reorganize, found that the principal cause of their fiscal crisis was not subject to alteration. Pensions were sacrosanct, a fancy word for untouchable.
That’s why the surprise legal opinion Dec. 3 sent shock waves across the land to the labor unions and their members, whether retired or working for secure pensions and lifetime health care as promised with union backing. Unfortunately for some municipalities, the guaranteed benefits grew to a level that is unsustainable in today’s economy.
It is equally unfortunate for those millions of private-industry employees who lost their pensions and health insurance when their employer went out of business, merged with a less benevolent company or just changed their benefits programs without the legal protection given to governments.
Both of these scenarios fire up labor union opposition and make attorneys rich from legal actions to prevent changes in contracted pension plans. Not all employees are represented by feisty labor unions, but government workers have the best advocates. That’s why the courts will be clogged with appeals of the Detroit ruling, perhaps all the way to the Supreme Court.
This issue, as it applies to the retirement benefits for the employees of the city of San Diego, was discussed at a forum presented at the UC San Diego Faculty Club last month. Professor Steven Erie of the university’s political science faculty outlined the background of how San Diego is burdened with a $2.1 billion unfunded pension plan. He correctly noted that the unfunded benefits for retirees are really about $4 billion, when lifetime health insurance coverage is factored in.
How can the city ever cover this kind of debt when the recent annual budgets for city services are balanced only with smoke and mirrors? Shortfalls in deferred infrastructure maintenance costs and public-safety services are covered by robbing designated funds for other purposes, like the transient occupancy tax (hotel room assessments) needed for tourism promotion, or the Mission Bay Park lease rentals needed for park improvements and maintenance.
The speaker outlined the history back to 1980 of how the city’s retirement benefits began the long journey into unsustainable debt for taxpayers. Former City Manager Jack McGrory was not the initial perpetrator for the conversion of the system, as generally believed. Nor was Mayor Susan Golding, who found ways to duck the full pension obligation in order to cover the extraordinary costs to the city for hosting the 1996 Republican convention, hoping to boast her political career.
Erie blames our revered former Mayor Pete Wilson for setting the pension deficit in motion by switching city employees from the federal Social Security system to a defined benefit plan. Why was this done? City budget employer payroll costs were reduced substantially by funding pensions on a deferred payment schedule and letting the stock market provide most of the required annual contribution to the system.
Of course that theory does not work when the pension board pays out a “bonus,” the so-called third check, to retirees if the investments earn more than 8 percent for the year. No reserve for a rainy day, no reduction of monthly pension checks. The city just let the unfunded actuarial debt grow to $2.1 billion because it did rain during the past three decades.
Even with this unsustainable debt hanging over taxpayers, the pension board gleefully paid a third check in 2013 under their misguided belief that you don’t reserve the extra income in a good year to offset the bad years.
The real tragedy is if retirees were still on Social Security, they would have pension benefits of about $18,000 a year (before Medicare deduction), instead of nearly full pay at the time of retirement. If they took advantage of all the perks offered over the years to appease the labor unions to allow the underfunding, some pensioners receive in excess of $100,000 a year. What a deal!
Even better for taxpayers, a Social Security system for government employees would have no unfunded debt because the employer pays up at each pay period. Savings for the other San Diego workers and retirees would be $4 billion under Social Security and Medicare.
Erie’s solution to the pension crisis is not bankruptcy like Detroit, but for citizens to realize we have to raise more revenue by increasing taxes and fees. He cited that San Diego does not charge a rubbish collection fee, storm water fee nor receives its fair share of property tax under Proposition 13. Most California municipalities receive 20 to 30 percent of the collected property tax but San Diego is allocated only 17 percent by the state.
In his historic account of the city’s pension debt, the speaker said San Diego was deeply divided on growth if it means more taxes. This seems to be the revival of the historic smokestacks vs. geraniums conflict in the early 20th century.
Ford is a freelance writer in San Diego. He can be reached at firstname.lastname@example.org