Comparing City of San Diego Pension Benefits
According to William F. Kay
(Union-Tribune Editorial Opinion)
July 1, 2005
Many public comments have been made about the outcome of the City of San Diego's recent labor negotiations with its unions. As the chief negotiator for the City, I welcome this opportunity to provide background information about the negotiations regarding pension and retiree medical benefits.
Nothing I say should be read to underestimate the magnitude of San Diego's unfunded pension liability and unfunded retiree medical benefits. The current City Council and the future mayor face an enormous, albeit solvable, problem. My experience from other jurisdictions is that the liability will rapidly expand if it is not actively managed. Fortunately, the Pension Reform Commission's September 2004 report, including the minority opinion, offers a valid blueprint for a businesslike resolution.
All four unions are coming off of three-year contracts negotiated in 2002 and expiring June 30, 2005. Before that expiration date, the City reached agreement with three unions and imposed terms on the Police union after the POA rejected the City's final offer. These contracts will begin July 1, 2005, with a three-year term for MEA and AFSCME, and a one-year term with the Firefighters. The POA will likely go without a contract for this coming year.
What did our negotiations achieve regarding the pension?
First, we negotiated a two-year wage and benefit freeze that will result in an estimated actuarial reduction of the pension liability of $150 million. Second, as a result of the equivalent of an additional 3% pay cut starting July 1, the employees will immediately provide the City with the equivalent of an approximately $17 million annual revenue stream, solely dedicated to reducing the pension's unfunded liability. A recurring stream of $17 million is sufficient to make the annual payments on a $200 million pension obligation bond, or to make the recurring loan payments on a $200 million loan secured by City-owned property. According to actuarial projections, when the $200 million pension contribution supported by the $17 million stream is coupled with the pension liability reduction of $150 million resulting from negotiated wage and benefit freezes, the combined impact on the unfunded pension liability will be $350 million over the next two years. These wage settlements will also ease the pressure on the City's budget. Within two years, the $350 million impact on the pension's unfunded liability could reduce the City's annually required payment to the pension by an actuarially estimated $18 million per year.
In addition, for future employees without vested rights, we eliminated the much-criticized DROP program and other non-traditional pension benefits - the purchase of "air time," the 13th check, and the non-core pension formula. Finally, we eliminated the retiree medical benefit for future employees, we established more stringent eligibility standards for receiving retiree medical, and we will reopen negotiations next year on the retiree medical benefit for all employees.
Is this all? No. The Council and the City Manager's staff are now preparing for a second phase of the overall plan - reducing the pension liability through means other than labor negotiations. I expect Council deliberations will be scheduled over the next several months on the remainder of the plan.
Why did the City negotiate increased employee-paid pension contributions instead of rolling back pension benefits for current employees?
The City's negotiating strategy focused on increasing the employees' payment for existing pension benefits and restructuring benefits for new employees, not on reducing benefits for current employees. Why? Because California public sector employees, unlike private sector employees, have well-established constitutional legal protections against rollback of their pension benefits once granted. These legal guarantees are independent of the negotiated contractual benefits. Under current California law, even if a union agreed to a pension benefit rollback, individual public employees could block the agreement because their pension rights, once granted, are individually vested. In addition, the most costly portion of the benefits enacted since 1996 are incorporated in a binding court settlement (Corbett) entered in 2000.
I can assure you that had the City insisted to impasse on rolling back core pension benefits, the City would now be entangled in protracted litigation in the courts and before the Public Employment Labor Relations Board, with a low probability of a successful outcome for the City. If it were only a question of hard bargaining, the City could have opted to roll back the pension benefits for current employees. But it's not that simple.
What about illegal benefits?
The City Attorney has advanced several legal theories for determining certain pension benefits as illegal. Assuming there is merit to the theories, they must be tested and weighed against the well-established right of vested pension benefits. Initiating legal action to declare benefits illegal would invite an avalanche of individual employee lawsuits based on an employee's vested pension rights and a host of other legal claims advanced by the unions. These legal battles would consume a number of years before the appeals would be completed, with the legal fees being measured not in the millions but the tens of millions.
And to what end? At best, any eventual rollback of the benefits would likely not reduce the unfunded pension liability by more than the $350 million start made through the labor negotiations. San Diego taxpayers should be very cautious about relinquishing control of the pension issues to the trial attorneys and bankruptcy specialists.
Do these agreements lock in the pension benefits for the next three years?
No. Both the Police and Fire negotiations will be open at the end of this coming fiscal year. The new mayor will probably begin those negotiations as early as this coming January. Both three-year agreements allow the City to renegotiate any benefit a court finds unlawful. In addition, both agreements require reopening negotiations on retiree medical benefits next year - benefits not covered by the same vested rights as pensions.
Are the City's pension benefits better than those of other public employees?
No, the core benefits are almost identical. A survey (PDF: 162K) prepared for negotiations comparing pension benefits for public agencies shows that the City's core pension benefits for its employees are similar to those offered by other cities in the County, by the 10 largest cities in the state, and by the County itself. This information is available on the City's Web site at www.sandiego.gov.
The survey shows that the major source of San Diego's pension problem is not the level of the core benefits - they are not outside the public sector norm. The City's problem is the failure to fund the benefits. Even if a rollback were possible, reducing the level of San Diego's pension benefits below par would be questionable because doing so might eventually hamper the City's ability to attract and retain trained personnel as long as other public employers continue their current level of benefits.
Where do we go from here?
Is $350 million enough? No, but it's a start. Now it's the City Manager and Council's turn to build upon this base. Council action to provide an additional one-time $450 million contribution to the unfunded liability would place the City's pension at a relatively stable funding level. An important side bonus of such a one-time payment could be an estimated $23 million recurring savings in the City budget's annual pension contribution.
The City has gained concessions to help pay for the promised benefits. This should be viewed as the first step toward solving a problem that has been more than a decade in the making.
View the survey (PDF: 162K)
¹ William F. Kay is an attorney who has practiced public sector labor relations for 30 years with the law firm of Kay & Stevens. Mr. Kay is co-editor of the labor relations treatise, "California Public Sector Labor Relations," Lexis-Nexis (Matthew Bender), and a frequent lecturer on public sector labor relations.