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Salary freeze accounts for all of Prop B’s savings, IBA says

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An initiative to reform San Diego’s pension system seeking voter approval in June is projected to save $950 million over the next 30 years, according to a fiscal analysis by the city’s Independent Budget Analyst (IBA).

Proposition B — or “Comprehensive Pension Reform” — would switch all new city hires except police officers to a 401(k)-style retirement plan and freeze city employee salaries for six years. The legally mandated fiscal analysis, which will be mailed to voters with other informational materials, projects that all of the savings generated by the initiative would come from from the salary freeze.

The salary freeze is projected to save the city $963 million over 30 years, or $581 million when adjusted for inflation.

Labor leaders have said the salary freeze is illegal and have promised a court challenge. The bill itself allows the city to negotiate salary increases with employees as long as it has two-thirds of the City Council’s support.

The IBA fiscal analysis suggests Prop B would increase the city’s retirement liability if the pay freeze is struck down in court or nullified by a City Council supermajority.

If the salary freeze doesn’t occur, “the projected savings of $963 million would be reduced or not achieved,” the analysis says.

But those projected savings far exceed the costs associated with the rest of the ballot measure.

The other element of Prop B, switching the city to a 401(k)-style retirement plan, is projected to cost $13 million over 30 years, or $56 million when adjusted for inflation.

Closing the current defined benefit plan to new hires would save the city more than $1.3 billion in Annual Required Contribution (ARC) payments over 30 years. But annual payments to the new defined contribution plan are projected to cost an additional $60 million.

The projected cost of annual payments to the new plan assumes the maximum employer contribution rates allowed by the initiative. The actual structure of the new defined contribution plan would need to be negotiated with labor unions.

The maximum contribution allowed in the initiative is 9.2 percent for general employees and 11 percent for safety employees. The fiscal analysis assumed those numbers would be used because city employees are currently ineligible for Social Security and Prop B would force the city either to enroll new hires in the program, at 6.2 percent annual payroll cost, or account for the difference in its defined contribution. Private companies generally match 401(k) payments at 3 percent.

Supporters of the program — including Mayor Jerry Sanders and City Councilmen Kevin Faulconer and Carl DeMaio — had touted greater savings than the analysis’ $963 million number during their signature gathering effort to put the measure on the June ballot. But an actuarial analysis of the city’s pension system announced in January found improved economic conditions had resulted in a better-than-expected outlook for the city’s pension fund — a $1.9 billion reduction in future pension payments — compared to previous expectations, which were the basis for the supporters’ projections.

Changing the defined benefit plan’s payment schedule for the Unfunded Actuarial Liability (UAL) is the most volatile component of the IBA’s analysis.

It says the changes will result in $215 million in net savings but they’ll actually increase costs in the first six years. In 2014 it would cost $26.7 million before gradually declining on an annual basis. It would eventually result in $2.8 million of inflation-adjusted annual savings in 2020.

The IBA also says the ballot measure is projected to increase pension costs by $54.1 million in fiscal years 2014 through 2016, primarily because of changes to the UAL payment schedule.

“These costs will be greater and could continue over a longer period of time if salary freezes are not implemented,” the report says.

Prop B would also need to create a new death and disability program for future employees, a projected $217 million cost of the initiative. The IBA assumed for its analysis that the new program would provide benefits comparable to those received by current employees, but it too will need to be negotiated with labor unions.

Changes to the benefit cap for future police officers would also save $49 million, according to the report.

The IBA specified a few issues that weren’t calculated into its net price tag for Prop B.

Changing employees to a defined contribution plan would shift the investment risks of their retirement packages onto the employees themselves. The defined benefit plan assumes a 7.5 percent rate of return, but in the past 20, 10 and 5 years has produced returns of 8.5 percent, 6.4 percent and 4.4 percent, respectively.

Administrative and set-up costs and potentially necessary actuarial analyses for the new plan and the disability program could increase the costs as well.

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