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National media and analysts jumped on Mayor Jerry Sanders’
proposal to replace pensions with 401(k)s for new city
Over the past few weeks, the national media has jumped on San Diego Mayor Jerry Sanders’ proposal to replace pensions for new non-public safety employees with 401(k)-style plans.
San Diego Mayor Jerry Sanders is pouring fuel on the fire of pension politics in California.
The mayor of California’s second biggest city is proposing to do away with traditional pensions for most new city workers, an effort analysts say will be closely followed by other cash-strapped local governments in and beyond the most populous U.S. state.
What’s lacking in the stories — and the mayor’s proposal to this point — are significant details. How much money will a 401(k)-style plan for new hires save over already reduced pension benefits for new hires? How will the city address Social Security, given that city doesn’t participate in the program now?
To this point, Sanders’ argument seems to be that the benefits of ending the possibility of future city leaders not funding pensions is reason enough to go forward.
“Governments just haven’t done 401(k)s in the past, they’ve always done defined benefit, but that leaves that unfunded liability when cities and counties and state governments don’t pay their fair share to it and that’s what really raises the costs of the pension payments every year,” Sanders said in a national television interview on Bloomberg.
Not all the coverage has been favorable, including from unexpected sources.
Girard Miller, an analyst who writes a public finance column in Governing magazine, criticized Sanders for eliminating pensions entirely and especially for exempting public safety employees from his plan.
… the idea that public pensions should simply be replaced entirely by 401 plans is an inferior strategy. It’s even worse when politicians carve out the public safety employees from their defined contribution policy proposals in order to maintain their union support in the polls. Talk about duplicity! Any claim that this exemption is necessary to “attract and retain” police and firefighters is just rhetoric. It’s been proven elsewhere that a reasonable hybrid plan can easily provide market-competitive benefits, and few police and firefighters ever job-jump to new employers to glean bigger pension benefits.
Also, in the Union-Tribune this week California pension reform hawk Marcia Fritz attacked Sanders’ plan as being “an unfortunate distraction” to the city’s pension problems. She wrote in an op-ed that savings would be minimal and only realized in the long term.
Most interestingly, she argued that Sanders’ plan would actually cost the city money in the short term. If the city were to close its pension plan, Fritz wrote, actuarial assumptions would change that would significantly increase costs at a time when pension payments already are expected to balloon for the next 15 years.
Instead, Fritz praises a competing plan by City Councilman Carl DeMaio, which focuses on reducing current city employees’ pay and eliminating specialty pays from pension calculations.
But DeMaio wants to eliminate pensions for new city employees, too. I asked Fritz if DeMaio’s plan would cost the city more money like she argues Sanders’ does. She said it wouldn’t.
“Carl’s plan works because the SAVINGS from reducing pensionable pay will more than offset the temporary increase in costs that occur when the [defined benefit] plan is closed to new workers,” Fritz wrote to me in an email.