Congressman and San Diego mayoral candidate Bob Filner’s pension reform plan has arrived.
Filner’s plan would reportedly save the city of San Diego $753 million over 15 years without forcing substantial sacrifice by city employees, according to his projections. It comes after Filner’s failure to release the plan had increasingly become an object of derision in the mayoral race.
As he’s described in campaign speeches and debates, Filner finds most of the savings in his plan through restructuring the city’s pension debt, primarily by issuing new bonds. He would also cap pensions for management-level employees, negotiate a new five-year labor contract and eliminate offsets for employee pension contributions.
Most of his plan’s provisions would need to be negotiated with city employees and approved by a City Council vote, but Filner said he’s looking at a 90-100 day implementation schedule if he’s elected.
Filner initially promised 11 months ago to release an alternative to Proposition B, the pension reform initiative championed by Councilman and mayoral candidate Carl DeMaio and Mayor Jerry Sanders.
In any case, Prop B now has its first on-paper alternative.
“Prop B does nothing to reform the current system,” Filner said. “Unlike my plan, it just costs money. With my plan we save money that the city desperately needs.”
According to the Independent Budget Analyst (IBA), all of Prop B’s savings comes from its five-year freeze of pensionable salaries.
Its plan to eliminate defined pensions for all non-police hires and create a new 401(k)-style system would actually cost $13 million over 30 years, or $56 million when adjusted for inflation, according to the IBA.
It would also result in increased costs of $54.1 million from fiscal years 2014 through 2016 due to changes to the pension plan’s payment schedule.
Each of Filner’s opponents — DeMaio, District Attorney Bonnie Dumanis (both Republicans) and Assemblyman Nathan Fletcher, a newly minted independent — supports Prop B.
The centerpiece of Filner’s plan is restructuring the city’s pension debt. He’d do this primarily by issuing “pension obligation bonds” (POBs), which would allow the mayor to take out high-interest loans to pay down the pension shortfall.
The pension fund would then use the returns on its investments to repay the interest on the loans, or even pay down pension costs if the fund performs well enough.
The risk is that the pension funds can’t be sure they’ll see such promising returns, or that falling interest rates won’t result in negative earnings. If there was another major hit to financial markets, or if the fund simply underperforms, the city could be on the hook for the losses, endangering the general fund, employee pensions and the city’s credit rating.
“You always have to be concerned with risk,” Filner said. “The question is: What are our alternatives and what are our risks? Prop B does nothing to reform the system. I say there are alternatives.”
He says the risks associated with POBs are mitigated by funding only $750 billion of the city’s pension debt, rather than all of it, and by spreading that risk over 30 years. The market’s long-run climb flattens the risk over time, he said.
“The county and city have done this, and 30 years is the same term that any city issues on its bonds,” he said. “This is not new stuff. It’s what cities do all the time. We couldn’t do it five years ago because we didn’t have bond ratings, but we can do it now.”
Filner’s plan assumes the city would take out a 30-year, $750 million bond with an interest rate of 6.5 percent.
That would result in $483.1 million in savings over 15 years, according to the plan’s projections. The savings would begin with $11.1 million in the 2013 fiscal year and increase gradually until reaching $57 million in 2027.
Last week, ratings agency Standard & Poors boosted San Diego’s primary rating from A to AA-. Filner said the savings in his plan were figured before the ratings change. The city would likely qualify for a more favorable rate after the upgrade.
He said the market’s current interest rates, which have hovered near historic lows for the better part of two years, present a unique opportunity to save the city money.
Reached for comment, DeMaio said voters have clearly established they want to reform pension payouts, not increase debt by adding borrowing costs and debt service for 30 years into the future.
“There are no surprises in what is essentially a press release,” said DeMaio of Filner’s plan. “He wants to continue to sustain unsustainable debts by borrowing money. It’s the same type of failed approach that created the crisis.”
Filner’s plan doesn’t actually specify how it would restructure the city’s pension debt. Instead it calls for the creation of an advisory panel that would have 90 days to advise the mayor and City Council on how to go about the restructuring.
In addition to POBs, the panel would consider changing the fund’s various operating assumptions — which could significantly alter the cost of its obligations — as well as the fund’s governance and current cost-of-living projections.
“Yeah, because what we really need in government is another task force,” DeMaio said. “He doesn’t even commit to his own ideas. He takes them and hands them to a task force because the labor unions are trying to run the clock out.”
The rest of Filner’s proposals wouldn’t be subject to his task force’s review.
To reach total savings of $753 million over 15 years or over $500 million in 10 years, Filner’s plan would additionally negotiate a new five-year labor contract and eliminate employee pension offsets.
The plan projects a new five-year labor contract would save the city $249.6 million over the next 15 years. Because the city’s labor unions trust him, Filner said, he’s the only candidate who could successfully negotiate such a contract.
It would also need City Council approval.
Filner’s plan assumes a labor contract that sets salary increases at zero percent in 2013 and 2014 and 2 percent for 2015, 2016 and 2017.
Filner’s call for a new labor contract parallels Prop B’s five-year freeze of pensionable pay.
But Prop B’s pensionable pay freeze isn’t definite.
Such a change to employee compensation cannot be imposed through referendum. Instead, the referendum would establish the city’s opening negotiating position with city employees. A City Council two-thirds supermajority vote could also overturn that negotiating position.
The Filner plan finds another $20 million in savings by eliminating employee retirement contribution offsets, wherein the employer pays part of the employee’s regular retirement contribution. This saves the city $1.2 million in its first year and never saves more than $1.7 million in any single year.
Filner also proposes a $100,000 a year cap of pensions for management-level city employees, but doesn’t count any savings from the provision into his $753 million total.
He said there are so few pensions that exceed the proposed cap that eliminating them wouldn’t save much money, but he wanted to do so anyway.
“Politically, I just want to counter the demagoguery of DeMaio’s horror stories that he’s used to drive his initiative,” Filner said.
In March, Fletcher proposed the same hard cap on pensionable pay as part of a plan he said he’d implement alongside Prop B’s reforms. His proposal — Comprehensive Pension Reform Plus —would save another $6.4 million annually by cutting management compensation by 10 percent.
“He stole the pension cap from me,” Filner said.
Filner also calls for half of any budget surplus to be used to pay down the pension deficit.
In recent debates, the candidates have increasingly hounded Filner for a look at his version of pension reform. Dumanis turned Filner’s lack of a plan into a talking point, and DeMaio recently scheduled a press conference challenging Filner to put something on paper.
The Dumanis campaign released a statement Monday afternoon deriding the proposal.
“Bob Filner continues to kick his rusty pension can down our crumbling roads,” the statement read. “Debt for future generations is not a solution to our pension problems. Voters clearly want real pension reform and they want it now.”