With Legal Fights Over Pension Reform (Maybe) Over, a New Ordeal Begins

Government

With Legal Fights Over Pension Reform (Maybe) Over, a New Ordeal Begins

Supporters of 2012’s Prop. B will now have to decide whether they will pursue another appeal – with all the cost and time that would require. If they don’t, the city will have to begin negotiations on what to do.

San Diego City Hall / Photo by Brittany Cruz-Fejeran

In 2012, before voters decided on Proposition B, which would end guaranteed pensions for most city of San Diego employees hired from then on, labor union leaders and attorneys warned the city to hold off.

They argued the mayor, Jerry Sanders, was crafting and leading the effort and he was the city’s top labor negotiator. Over and over, throughout the financial crisis, he had made deals with the city’s workers to curb retirement benefits. He had an obligation, they said, to talk with them again before dramatically reforming employee benefits at the city.

Sanders and the city attorney ignored them, explicitly making the point that they did not want to negotiate again. The mayor continued supporting the measure and taking credit for it. Last year the California Supreme Court decided it was his, and thus the city’s initiative – not an independent effort of a group of taxpayers. As such, it was an employer’s illegal end run around labor law.

This week, after nine years of these legal arguments, Superior Court Judge Richard Strauss ruled the city must remove the language of Proposition B from the City Charter.

Absent yet another appeal, it could be the end of years of legal squabbling but it will also mark the beginning of an unimaginably complex process of rebuilding the pension system or otherwise making city employees who were hired after 2012 “whole.” The decision came as the city prepares to make a massive payment to the pension system during a horrific year for city finances.

Supporters of the initiative will now have to decide whether they will pursue another appeal – with all the cost and time that would require. If they do not appeal within 60 days, the city will have to begin negotiations on what to do.

The most likely outcome is that new employees hired at the city are put into the pension system as it stood before voters approved Proposition B in 2012. But roughly 4,000 city employees were hired after that – some of them have left – and they have been building a 401(k)-style retirement account. Most of them built investment portfolios in stocks that may have performed well.

It may take years to figure out whether they can continue in that option, can buy into the other, guaranteed pension option or take another route.

“It’s not rocket science. It’s going to take a good meet-and-confer to see what is possible and what makes sense,” said Michael Zucchet, the general manager of the largest union of city employees, the Municipal Employees Association.

It may be complex, but it also may not be very expensive.

At least not compared with the large pension numbers we have become accustomed to in the 19 years since San Diegans began debating city employee pensions, an argument that defined city politics for a decade. Proposition B was the symbolic end of it.

The total pension payment from city is projected to rise by $52.4 million this year, for a total of $418 million – $317.5 million coming out of the general fund and an increase from the general fund of $39.8 million.

It’s a big part of the reason the city must immediately find $124.1 million in savings just to balance the budget.

But about 15 years from now, the city and the pension fund – the San Diego City Employees’ Retirement System – expect that annual payment to dramatically drop. And that’s not because of Proposition B but because of changes to retirement benefits city employees negotiated with Sanders before he pursued Proposition B.

In fact, all sides of the argument acknowledge that the new pension benefits the employees and Sanders negotiated in 2009 were so low they may even have been less lucrative to city employees than the 401(k)-style plan that replaced them. The city has been matching its employees’ contributions to that plan up to 9.2 percent for general employees and 11 percent for firefighters and lifeguards.

An employee who started after the 2012 ballot measure, contributing that much of their salary and watching the city match it for eight years, could have built an account worth hundreds of thousands of dollars by now. Now the city will have to decide whether that person can somehow continue to build that account or use it to buy years they lost in the pension system or do something else. It doesn’t seem legally possible for the city to try to seize those assets for the new pension plan.

But that also means that making these employees “whole” as is now required by the court rulings may not be expensive (beyond the many lawyers and actuaries who are going to have to figure it all out).

“Until the actuaries can sink their teeth into questions like, ‘How many employees are moving over?’ And ‘How many are purchasing missed years of service?’ Nobody is going to have the answer about how much more is the city going to owe. But they certainly have no right to say there’s going to be financial chaos,” said Ann Smith, the attorney for MEA that has led its legal strategy on Proposition B since 2012.

Though it was a major part of the campaign for Proposition B, supporters of it have largely abandoned the argument that the measure itself saved the city large amounts of money. What they argue now is that city taxpayers needed to be relieved of any future risk – either that the city would once again enhance pension benefits without laying out how they were going to pay for them or that bad investment performance would leave the taxpayers with large bills to deliver the employees their expected pension payments.

“We always believed the defined contribution plan was going to be as good or better than the defined benefit plan,” said City Councilman Chris Cate, who worked on the measure as a taxpayer advocate before becoming a politician. “But we were going to eliminate the risk to taxpayers should the pension system not have returns meet the target.”

With Proposition B, the employees bore that risk and much more: They were not contributing to Social Security and were not likely to collect that guaranteed pension either. The 9.2 percent contribution came from supporters and city leaders who acknowledged employees would not get Social Security and so employees would put in 6 percent (the normal Social Security contribution taken from payrolls) in and the city would match it and then they would put 3.2 percent in and the city would match that as a kind of market-rate 401(k) contribution.

The average 401(k) match in 2019 was 4.7 percent.

It was a kind of conservative dream: San Diego was set to become a model where employees had neither Social Security nor guaranteed pensions but had control of all their retirement assets. Supporters expected it to spread to other cities.

But it never did, and became a negative recruiting factor for the city.

The city pension fund’s latest valuation says there are 18,843 members in the fund, including 5,535 active members and 10,400 receiving benefits. The average pay per active member was $90,552 in 2020. The average benefit paid out in 2020 was $51,000.

Nearly $532 million in benefits were paid out in 2020. None of those have been available for city employees hired after 2012 – except for police officers, whose pensions were protected.

Now, the 4,000 or so employees hired since 2012 may get to join.

Ashly McGlone contributed to this report.

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