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When you examine their analysis, this messaging is easy to understand. By itself, their numbers show, their plan for replacing the city’s current pension system with 401(k)s won’t save much money. Swapping out pensions for 401(k)s isn’t the key — even if it is the primary selling point.
But when you add in the measure’s other aspects, most notably a five-year freeze in city employees’ base salary, backers still can make the case for $1.3 billion in savings over almost the next three decades.
And supporters say a 401(k) yields more benefits than savings. It shifts investment risks from city taxpayers to individual employees and provides more certainty in budgeting.
The cost figures released Thursday provide a key basis for supporters to promote their measure. They hope it will appear on next June’s ballot, the same time as the city’s
We’ve put together a Q&A to help you understand how much the ballot measure does, and doesn’t, save.
Transitioning to 401(k)s costs the city money in the short-term. How will the initiative help the city’s deficit-ridden budget?
Giving most new workers 401(k)s not only won’t help the budget in the short-term, but also will make it worse over the next four years. The city will have to speed up its payments to the pension system because it’s closing the plan to most new workers. In the long-term, backers estimate transitioning to 401(k)s make up about 9 percent of the $1.3 billion in projected savings.
Freezing employees’ base salary, or pensionable pay, provides both the initial and long-term savings in the ballot measure. The pay freeze accounts for 87 percent of the total estimated savings.
Overall, supporters project $2.3 million in savings to the city budget in the first year and $189 million in the first five years.
What does it mean to freeze pensionable pay?
Projections for the city’s annual pension payment assume salaries will increase by 4 percent each year. In years when that doesn’t happen,
like this past year, the city saves on the bill it owes the retirement system.
The initiative caps pensionable salaries for the next five years, which means city employees don’t get raises, and it counts the savings toward the pension payment.
The measure also anticipates giving city workers bonuses during those five years that wouldn’t count toward their pension calculations.
What are the potential problems with the pay freeze?
There are many. The measure’s supporters say the freeze strictly caps city workers’ pensionable pay. But it doesn’t. The initiative tries to balance the freeze with labor law, which requires negotiations. My colleague Scott Lewis
described the freeze in April when Mayor Jerry Sanders and City Councilman Kevin Faulconer merged their own 401(k) initiative with a more radical one promoted by Councilman Carl DeMaio:
The main reason Sanders and Faulconer had originally said the cap was illegal was that in California, public employees have the right to collectively bargain about their wages. You are supposed to talk to them before you, for example, freeze their salaries for five years.
To assuage their concerns, DeMaio agreed to a provision in the initiative that says nothing in the new law interferes with collective bargaining. And if the City Council bargains with workers and wants to increase their pensions and pay, they can. They just need a two-thirds vote of the council or approval from the city’s voters.
Most of the near-term savings in the great (pension) initiative comes from this proposal. That means those savings don’t happen if worker pay — and therefore pensions — isn’t really capped.
Supporters are banking on the initiative being something that City Council members will enforce. But rather than the city’s hands being tied with chains, they’re tied with furry handcuffs you can escape from if you don’t like the game anymore.(emphasis added)
Also, the pay freeze doesn’t need to be tied to a 401(k). It could be bargained on its own through labor contracts or passed as a separate ballot measure.
Supporters have released several savings estimates. Have they all been accurate?
No. When the measure first was released, supporters claimed it would save $363 million over the first five years. Those numbers counted on a reform
that’s already done. It’s been discarded in the new estimate.
The initiative’s supporters also released a higher estimate Thursday that claims $2.1 billion in total savings is possible, not $1.3 billion. The larger estimate comes from lower projected costs for 401(k)s. But those extra savings come at the expense of a fair comparison.
The $1.3 billion estimate shows city workers getting 4 percent annual raises after the freeze ends, which is the same as is currently projected. The $2.1 billion estimate trims raises under the 401(k) plan to 2 percent annually, but doesn’t change the current assumptions for the pension system.
It’s a key difference. If salaries only increase by 2 percent, then the pension system would have seen major savings, too.
“That certainly is misleading,” said Mark Hovey, head of the city’s retirement system.
What’s missing from the numbers?
The initiative includes a series of reforms that either don’t result in big savings or are more difficult to quantify. The measure gives future city politicians 401(k)s instead of pensions. It removes perks like extra pay for speaking multiple languages from pension calculations for current and new employees. (
This move has raised legal complications.) It also would give new police officers reduced pension benefits.
The savings estimate assumes the city would make the maximum 401(k) match allowable under the measure.
Please contact Liam Dillon directly at email@example.com or 619.550.5663 and follow him on Twitter: twitter.com/dillonliam.
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