A Roadmap to Recovery: Comprehensive Pension Reform

Office of City Councilmember Carl DeMaio
San Diego, CA

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Several years ago, San Diego became the national poster child for irresponsible administration of government pensions. Dubbed “Enron by the Sea” for deceptive and dishonest pension accounting practices, San Diego was first to show the signs of trouble that have now mushroomed into a crisis in states and municipalities around the country.

The outlandish scale of generous city employee retirement packages is neither subtle nor difficult to see. In some instances, rich retirement packages pay retirees more even than active city employees are paid to work in positions that the retirees vacated. As a particularly egregious example, the City’s former head librarian receives $227,249 in an annual retirement allowance, while the head librarian actually working for the City earns $139,680.

Retirement system data show a long list of City retirees earning six-figure pension payments, with one retired City employee’s pension payout actually hitting $299,103. The top 10 pensioners combined are expected collectively to receive a whopping $ 61 million over 25 years. These pensions are wasteful and disrespectful to our city’s taxpayers.

One former member of the City Council “retired” at 31 years old, and began collecting a $21,058 annual pension. This pension payment for this 31-year-old “retiree” is roughly equal to San Diego’s median per capita income.

Estimates show that under the City of San Diego’s current defined benefit pension system, annual pension payments required of the City will consume a full 20% of General revenue by 2014. As staggering as these numbers are, they do not represent the full cost of retirement benefits granted to city employees.

When the annual costs to the City of other city employee retirement benefits and retiree health care costs are added, the total annual employee retirement cost exceeds $370 million, or roughly two-thirds of the City’s entire payroll expense. These costs dwarf the retirement costs to employers in the private sector, where total employee retirement costs are generally between 14 percent and 16 percent of payroll.

The City’s annual pension payment has climbed from $154 million in FY 2010 to approximately $230 million in FY 2011. The pension system actuary estimated that the City’s annual pension payment would climb to $343 million in FY 2016, and spike to $511.6 million in FY 2025. (To see the cost of pensions as a percentage of the General Fund, the Roadmap to Recovery assumes General Fund spending of $1.15 billion for FY 2012, increasing to over $1.2 billion by FY 2015.)

The Roadmap to Recovery offers specific proposals for comprehensive pension reform. The Roadmap’s pension reform proposals are the centerpiece of a broader package of reforms that rein in city employee retirement costs, including retiree health care costs and rich benefits that are layered on top of the City’s already highly generous pension benefits.

1. Close the Old Pension System

The Roadmap to Recovery proposes phasing out the defined benefit pension system and establishing a retirement system that is centered on defined contribution 401(k)-style plans. This element of the comprehensive pension reform closes the current pension system and prevents any new city employees from enrolling in the pension program.

2. Shift New Employees into Defined Contribution Retirement Accounts

Under the Roadmap’s comprehensive pension reform, all new City employees would receive a defined contribution retirement plan modeled after 401(k) plans. To provide for a complete and lasting solution to our pension crisis, these retirement plan changes apply equally across every category of city employee, including public safety pensions, which are the most generous and costly city pensions.

The Roadmap to Recovery is already gaining traction. The Little Hoover Commission, California’s independent oversight agency, recently made the proposal to transition from defined benefit pension plans to defined contribution plans the centerpiece of its reform proposals.

3. Require Fair and Equal Pension Contributions by City Employees

In order to comply with the San Diego City Charter, and to reduce costs to the taxpayer, the Roadmap proposes requiring City employees to pay their fair and equal cost of annual pension costs. The Roadmap also proposes to achieve compliance with the Charter’s “substantially equal” requirement by ending the generous City “offset” contributions that greatly inflate the taxpayers’ pension costs.

4. End Pension Spiking and Cap Pensionable Pay

It is not just that employee base pay, which is often subject to automatic annual increases, produces overly generous pension payouts. On top of base pay, in calculating pension payouts the City tacks on “add-ons” and “specialty pays” to employees’ base salary. These “add-ons” and “specialty pays,” such as supplementary payments to firefighters for Emergency Medical Technician (EMT) certification, produce pension “spiking.”

In order to end pension “spiking” abuses, the Roadmap to Recovery proposes reducing and capping “pensionable pay.” Pension payouts should be calculated using only an employee’s base pay.

The Roadmap to Recovery’s comprehensive pension reforms will incur no start-up costs. These reforms move the City from an unaffordable and unfair retirement system to a new affordable and fair retirement system.

These reforms will produce significant savings for the City of San Diego, beginning the very first year. These pension reforms will save $40 to $50 million in the first year alone, and save at least $300 million over five years:

1. Reduce Pension Costs

Assuming that City labor costs are capped for five years, the Roadmap to Recovery estimates that together these pension reforms could reduce costs to taxpayers for the City’s annual pension costs by at least 25% in five years.

2. Save Services and Avoid Bankruptcy and Tax Increases

Tackling the City’s pension costs, which are the biggest driver of San Diego’s budget deficit, is absolutely necessary to protect essential city services. These reforms will fix the City’s presently unsustainable pension commitments without requiring any tax increases. Moreover, these reforms reorganize and restructure the City’s employee retirement system, and will avoid the City even needing to consider bankruptcy.

3. Preserve Take-Home Pay for City Employees

City employees themselves will be primary beneficiaries of these pension reforms. The escalating pension costs compromise the City’s ability to preserve employee take-home pay. The labor unions that represent our city employees must face the choice between preserving our City’s unsustainable pensions and protecting their members’ take-home pay. If the necessary pension reforms are not achieved, the City could be faced with the unappealing options of layoffs or cuts to employees’ take-home pay.

4. Reduced Taxpayer Risk

Constraining “pensionable pay” will save the City taxpayers approximately $150 million over just five years. The Roadmap to Recovery estimates General Fund savings from freezing pensionable pay of $8.1 million in the first year, with savings of $53.8 million in the fifth year. Ending the employee pension contribution “offset” was estimated to achieve a savings of $4.8 million in the first year.

Massachusetts faces the same problem addressed in this proposal, namely that of unaffordable public employee pension obligations. States and municipalities around the United States are facing this problem. In fact, the Massachusetts pension system is in almost the identical dire condition that the City of San Diego’s pension system is. Each is only funded to about 68% of liabilities.

In addition to pension reform, the Roadmap to Recovery offers a number of reforms to hold the City accountable for meeting performance goals, improve transparency in the way the City conducts its business, create safe neighborhoods, align City employee pay with comparable pay in the San Diego area, and many others. Together these reforms will fundamentally improve the way our City provides essential services, enable the City to properly maintain the City’s streets and other infrastructure, and provide essential services at the high level that San Diegans rightly expect.

Roadmap to Recovery was released in November 2010. In spite of continual insistence on implementing these reforms, the Mayor and the City Council have yet to take the action that is needed. The push for these reforms will continue until such time as they are implemented.

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