Ten years ago, between pension and retiree health benefits for city employees, San Diego had an unfunded liability of $2 billion.
“When I became mayor the financial situation in the city of San Diego was that it was on the verge of bankruptcy,” said Jerry Sanders, former mayor of San Diego.
Sanders was a former San Diego police chief when he became mayor in a special election in 2005. The previous mayor, Dick Murphy, had resigned amid the financial turmoil. Meanwhile, the U.S. attorney and the Securities and Exchange Commission were investigating the city for withholding information about its pension debt in applying for bonds to build a new Padres ballpark.
It took many steps, including a 10 percent cut in the city’s workforce, to right San Diego’s financial ship. And in 2012, city voters passed a referendum aimed at making sure such crises were avoided in the future. Proposition B changed the retirement benefit for new city workers from a guaranteed pension for life to a 401(k), sometimes called a defined contribution retirement plan.
The reform has received a mixed review to say the least.
The source of San Diego’s pension deficit disorder in the past decade has been seen in public agencies around the country: underfunding the public pension while boosting pension benefits.
“It was city management that made those decisions,” said Sanders. “I talked to one of the union leaders and she said, ‘Our job is to ask for better benefits and more money. It’s the city’s job to say no if they can’t afford it. Nobody ever said no.’”
Sanders said the beauty of San Diego’s 401(k) is it forces politicians to make retirement payments when they’re due, rather than promise future benefits and leave it to future leaders to make good on them.
“The city has to pay that every single year,” he said of the contribution to employee 401(k)s. “It can’t say, ‘We can’t make the payment this year,’ because they have an obligation to do that. It can’t get behind with a one or $2 billion deficit like it used to.”
He said Proposition B isn’t yet saving the city money, but it will.
“In the long term it starts saving tens of millions of dollars every single year,” said Sanders, who has become the chairman of the San Diego Regional Chamber of Commerce.
The difference between a 401(k) and a guaranteed pension is who takes on the risk when financial markets surge up and down. When benefits are defined, the risk is on the employer, who has to fill the gaps if the investment falls short in retirement. When the contribution is defined, as in a 401(k), risk falls on the employee.
“It was a loss in benefit that we knew was going to be hurtful not only to the employees but the city’s ability to recruit qualified employees in the future,” said Michael Zucchet, union manager of the Municipal Employees Association.
Zucchet said San Diego’s move to a 401K has hurt recruitment. He said the city now has the highest vacancy factor it’s ever had, especially in departments that offer higher salaries. He says this is due at least in part to pension reform.
City officials respond by saying San Diego’s vacancy rate of 10 percent overall is low compared to other big cities. However, a study of job vacancies earlier this year showed more than a hundred vacancies in Engineering and Capital Projects, a department that employs many skilled workers.
“At the end of the day a well-run pension system is a good thing. Not only for the employees but for the taxpayers,” said Zucchet, who once served on the San Diego City Council.
On a recent morning, city workers made their way to City Hall in San Diego. Many took a detour to a coffee cart in the Civic Center Plaza. The handful of city employees approached about the current pension system were reluctant to talk on the record. But they were unanimous in their views, opposing the new system. One employee, who would not give his name, pointed out that city workers are not part of the Social Security system. He said Social Security should have been made available to new employees before they lost their guaranteed pensions.
“They should have had Social Security in place," the employee said. "Then it would have been smooth. So now (new employees) don’t have anything. Everybody thinks they have social security. But they don’t.”
Under the current system, if the market crashes and a city worker’s 401(k) goes down with it, they have no social security check to fall back on.
Jim Baross, a retiree in Normal Heights who worked for the city for 30 years, feels fortunate that his pension is guaranteed. Though he concedes that some new employees may think the 401(k) is fine.
“Because they don’t plan to stay with the city. They want to get trained. Get some experience,” Baross said.
Then those people can move to a different employer and take their portable 401(k) portfolio with them. Baross said that might be good for employees who do not plan to stay, but it’s not good for the city.
“Citizens of San Diego are paying to train people, and when they leave we gotta hire somebody else and start over. I don’t think that’s a good way to run a city,” he said.
Jean Pierre Aubry, an associate director at the Center for Retirement Research at Boston College, says until now, the private sector has offered better salaries while the public sector has better benefits.
“But the total pie is the same. What you’re seeing now with the cuts to retirement benefits in the public sector is that they’re not being offset by any increase in wages,” Aubry said. “So the whole pie is shrinking compared to what they get in the private sector.”
The question remains whether the public sector can afford to guarantee a retirement benefit as people live up to 20 years after they quit working.
Marney Cox, an economist at the San Diego Association of Governments, said when expected returns on pension fund investments are not reliable, they will require taxpayers bailouts.
He also said he does not think public employees should be left to the mercy of the stock market, and all employees should have the protection of either a pension or Social Security.
“This is the most important part,” Cox said. “If state and local pension programs — and there are some states that are really bad off — if those go bankrupt, you and I both know taxpayers are going to end up picking up the bill. We’re going to pick up the bill anyway. So why don’t we straighten out the program and not call it an emergency?”
In San Diego, taxpayers are propping up the pensions of longer-term employees. Next year, the city’s pension payment will rise from $261 to $311 million due to incorrect estimates of life longevity for retirees. Pension reform, meanwhile, is under review by the courts. Unions have challenged Proposition B for the role the mayor played in promoting it.
