Increasingly, it looks as though the nation faces a recession and stocks are in for a bear market. San Diego is almost certainly in a recession already. Ditto for California. The national, state, and local woes may well last into 2009 or even beyond. This means the crushing liability of the City’s pension fund will expand, as the system’s investment portfolio, which was 56 percent stocks at year-end 2007, runs into trouble. Bonds and real estate in that portfolio are at risk of stumbling too.
Therefore, it is urgently necessary to reduce the excessive benefits now plaguing the system and draining taxpayers.
Workers and their unions will claim that a recession is no time to cut benefits. Au contraire. It is time to think of taxpayers rather than merely city employees, who already enjoy outsized pay and perks. As tax receipts drop in the sputtering economy, city services will decline more and infrastructure will not get the attention it desperately needs. A weakened San Diego City Employees’ Retirement System will want even larger contributions from a financially destitute City.
Consumer spending is 70 percent of the national economy, and the percentage is probably a bit higher in San Diego. But consumers, already deep in debt and suffering with negative savings, don’t have the money to spend. They would have more if wealth and income were distributed more evenly. Taming the excesses of San Diego City workers, including elected officials, would give taxpayers relief.
In this context, it was deplorable, but no surprise, to hear Mayor Jerry Sanders utter in his State of the City speech January 10, “It is disappointing that we cannot reverse many of our pension benefits, but this is the hand we’ve been dealt.” He was referring to the attempt by City Attorney Michael Aguirre to get illegally granted benefits reduced through the courts. Judges are on government payrolls too, so the trial-level defeat was hardly a shock. But the case is still on appeal. And even if the courts won’t take the initiative in that particular case, there are other ways to reform the system, and with an election coming up, Sanders is backing down and breaking earlier reform promises. He wants to play Santa Claus with city employees and hopes taxpayers won’t notice.
“Unfortunately, the Mayor’s Office has been silent on pension reform for over two and a half years,” says Steve Francis, who has thrown his hat in the mayoral ring. “The fact that the City of San Diego is letting individuals retire in their mid-50s and then paying generous retirement benefits for another 20, 30, and even 40 years has created the pension tsunami that is crashing down on San Diego taxpayers.”
And a tsunami it is. The City Attorney’s Office provided a report January 3 summarizing the pension load that taxpayers are carrying. The present value of benefits owed in the future was $6.5 billion in mid-2006. That was up more than 65 percent from the year 2000. Over the same period, payroll (in dollars) increased only 19 percent and the number of active and retired persons rose just 4 percent.
In 1996, the same year the Golding administration tapped the retirement fund to finance the Republican convention, the City enacted a purchase-of-service-credits plan. Employees could buy years of service so they could get the generous benefits, even though they hadn’t worked those years. But the employees got the credits cheap: those years of phantom service weren’t priced at actual cost. Employees got this juicy deal for 6 years. When the mistake was discovered in 2003, the pension system gave the employees several months to get in at the actuarially inaccurate rates. All told, they piled in at a cost of $146 million, which the San Diego City Employees’ Retirement System decided last November to hand to city taxpayers. That’s 8268 years of service purchased at a lowball price — and permitted.
Then there is the Deferred Retirement Option Plan, better known as DROP, adopted by the city council on a trial basis in 1997 and made permanent in 2000. Employees at an average age of 55 declare that they will retire in five years. They keep getting their salaries, but over the same period, 90 percent of their highest one-year salary is plopped into their personal pot each year, piling up 8 percent interest annually plus accruing a cost-of-living adjustment. Then they retire with both an annuity and a fat lump sum. It is double-dipping, pure and simple. When DROP was enacted, the public was told it would be cost-neutral. But two different actuaries have said it definitely is not.
Both DROP and the purchase-of-service-credits program should be made cost-neutral, says Aguirre. Those who have purchased service credits on the cheap should see their payments reduced. Those in DROP should not be able to accumulate pension benefits any faster than they ordinarily would, he says. If both those reforms were enacted for present enrollees, the City could save $400 million, or about one-third of the $1.2 billion pension deficit.
Sanders wants to end these abuses for new hires. That has already happened. Aguirre wants to end the abuses for current employees too and not permit this generation to pass the bill to later generations. He is trying to get these programs cost-neutral in the case now on appeal and has filed a separate lawsuit against the $146 million caper and is putting together another lawsuit against DROP.
Other abuses must be eliminated now, he says. Elected officials are buying more pension credits than the law permits. Employees are using purchased years to satisfy the rule that requires ten years of work to get a pension. It should be ten years of actual work. Also, employees are using purchased credits to qualify for retirement at age 55. That’s not legal and should be eliminated, says Aguirre.
The pension system is using a 20-year (or longer) period to amortize the pension debt, says Aguirre. That goes against the City Charter. That debt should be paid off in the required 15 years. Since the year 2000, the pension system has paid benefits of $2.8 million above Internal Revenue Service limits. That should be ended or at least put to a vote of the people, he says.