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Pension Reform and Unintended Consequences

Jim Baross

I represent thousands of already retired city of San Diego employees, none of whom will have pensions affected by the upcoming city of San Diego ballot initiative Proposition B. Our pensions are vested and by law cannot be reduced. Even so, most of us are San Diego residents and care deeply about the city and its ability to efficiently and professionally manage essential services now and in the years ahead. We see Proposition B not as a useful reform, but as a train wreck.

Contrary to what backers claim, passage of this initiative will cost the city dearly in both financial stability and in its ability to attract and retain competent, appropriately trained and experienced employees to perform services we all need.

Closing the existing defined-benefit pension plan and placing most future employees into 401(k)-style plans, as proposed, will not itself save money. The current average contribution the city makes for general employees hired since July 2009 is 9.2 percent of wages paid. Proposition B calls for a 401(k) program with the same contribution rate of 9.2 percent. Where are the savings?

Savings would supposedly come from freezing the level of pensionable salaries for six years. Is this likely to happen? No. First, it will no doubt be challenged legally, which could take years and additional legal costs to resolve. Second, as the U.S. comes out of recession and the job market improves, our city will become noncompetitive with respect to salaries.

Perhaps most importantly, the savings estimate from this short-term freeze is based on the assumption that the effects of the freeze will extend for 30 years. There seems little to no chance of that. The projected savings will evaporate when it is realized in future years that there is a need to regain competitive salaries.

Even under Proposition B the City Council could adjust future wages, but the elimination of the current pension plan would make the city a uniquely unattractive employer. A number of state and local governments are contemplating pension modifications to lower costs and risks, but most of these organizations are moving toward blended approaches that retain modest defined-benefit pension plans, coupled with Social Security and 401(k)-type plans. Without some level of guaranteed pensions, the city will become an entry-level training ground for other local governments as employees learn and leave to organizations where benefits are better.

The proponents of Proposition B have also failed to address huge upfront and back-end costs of closing the city’s existing pension program. The Governmental Accounting Standards Board rules require an existing pension deficit to be paid off more quickly if the plan is closed to new members. This will cost about $90 million more over the first six years. What additional city services will have to be cut to pay for this added expense? All of the recent partial reinstatements of city services will likely be lost.

A back-end spike in cost will come from the investment strategy that will have to be employed to close down the current pension system. An open pension system takes a very long-term view (20 to 30 years) to investing. A closed system means that at some point the investing horizon must be much shorter as the ending of the pension system nears. As the horizon approaches, the plan will have to invest much more conservatively, which will yield lower returns. And the city will have to make up the difference.

That’s a lot of potential liability for the city and its taxpayers.

We believe that passing Proposition B will bring a significant net drain on the city. Our city’s options will be to further diminish services, or to increase taxes and fees. If you are concerned about library hours, parks, recreation centers, potholes and quality public safety now, be very concerned about our future. Meanwhile, by becoming noncompetitive in terms of pay and benefits, the city will have the same recruiting problems of a noncompetitive private employer. Some people seem to want to “stick it” to government workers, but the greater victims of Proposition B will be all of us.

Jim Baross is president of the City of San Diego Retired Employees' Association.

Source: The San Diego Union-Tribune - May 17, 2012


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Created 18 May 2012 • Modified 18 May 2012