Pension costs decreasing for some San Diego cities -- we look at why
February 28, 2012 1:08 p.m.
Lani Lutar, President and CEO, San Diego Taxpayers Association
Alison St John, KPBS Senior Metro Reporter
Related Story: Pension Costs Decreasing For Some Cities In San Diego County
CAVANAUGH: The City of San Diego's pension problems have been in the news for years. And of course, that story will continue as voters weigh in -- a ballot measure in June that would stop guaranteed pensions for most newly hired city workers. The City of San Diego is not the only city in the county challenged by obligations to employees. Alison St. John has done years of reporting on public pensions around the county. And now the San Diego taxpayers' association is out with its assessment of pension reform in San Diego County. My guests, Lani Seiler is president and CEO of the San Diego County taxpayers' association, it's good to see you.
SEILER: It's a pleasure to be on your show.
CAVANAUGH: And KPBS senior metro report Alison St. John is here.
ST. JOHN: Glad to be here.
CAVANAUGH: First of all, the City of San Diego San Diego is not included in this analysis. Why is that?
SEILER: That's because the City of San Diego is in its own separate pension system. Of the rest of the 17 cities in the region are part of the statewide CALpers pension system. So they have different limitations for the city in terms of what type of reform they can actually implement.
CAVANAUGH: Okay. So let's go to what quash report found out. Your analysis found ten out of the 17 cities in San Diego County will have a reduction in pension costs in the next fiscal year. And that's -- good news, right?
SEILER: It is. It's finally some relief for a number of cities that have been experiencing year over year pension cost increases. Finally, now, as a result of the efforts, deliberate efforts by a number of the councils that have implemented pension reform, they will get some relief, and that will go to improving your streets, library hours, public safety. But of course that's only part of the picture. And what we also found is that for many cities throughout the county, there were -- it's mixed news. There's still a lot of work to do unfortunately.
CAVANAUGH: I'm going to ask you more in detail about the reforms that the cities have implemented to bring down those pension costs. But just in general, what types of reforms have these cities been utilizing?
SEILER: Most cities have pursued one or two options. First they have been asking employees to finally start paying a little bit toward their pension costs. This is -- most people expect that city employees would be paying a fair share. But in numerous instances throughout the region, you have had employees that have paid almost nothing -- either nothing or very, very little toward their pension costs. And finally now, they're going to be paying a percentage toward their actual pension costs as the rest of us in the private sector do. The other option that we have seen some cities pursue is having new employees be part of a new lower benefit pension program. Because that is only applicable to new employees, that means that the benefit of the cost reduction is not going to be seen for some time. We do think that that's something that all cities should be pursuing. But the asking of employees to pay a greater share of their pension costs, that results in an immediate reduction for the city's costs, and that's a good thing.
CAVANAUGH: Where did you find the biggest reductions, in which cities in the county?
SEILER: Solana beach has seen the greatest pension cost decrease for this year. And they're degree to have employees finally contribute to their pension plan, they instituted a new pension plan for all of their new employees of the on the other hand, we see Chula Vista, which is going to see a significant increase in their pension costs. So it really varies. We've seen anything from on the good side, Lemon Grove and Solana beach will see 7%, 12% decreases respectively. And in terms of the increase in pension costs, Carlsbad is a 3% increase, to Del Mar, which is a 15% increase. Increases in pension costs can come from a variety of reasons. The city like Carlsbad may have added new employees in recent years or they're finally paying for the ramifications of benefit increases years ago. And because of the accounting methodologies at the state, there isn't any immediate impact to their bottom line.
CAVANAUGH: In your analysis, did you see a reduction in pension costs to the city have any connection to a reduction in unfunded liabilities in the pension system? Inside are they connected at all or can someone have reduced their pension costs and just allowed their unfunded liabilities to continue to climb?
SEILER: There is a connection between the two. But you could still have I city that maybe implemented reforms in recent years but might still see its unfunded liability go up because they may have added new employees, it might be because they weren't having employees contribute. And now they are. But they're still paying for the decisions of the past. So as is I'm sure it's not a surprise, pensions are very complex issues. So while it would be great if it was that simple, with the accounting gimmicks that occur with the state pension system, people will be feeling the pain from the decisions that were made, or their respective pension systems way back for another decade at the very least. But at least we're now seeing a number of cities on the right track.
CAVANAUGH: Let me bring Alison St. John into the conversation. You've been covering this story for several years. You did an analysis a few years ago about the pension obligations of cities around San Diego. What's your impression of this report?
ST. JOHN: First of all I'd like to say that I think that it is really a service to have done this report. Having done something similar in 2009, I know how much work it takes to collect all the figures and analyze then. I think it is useful for people living in cities to have somewhere where they can go and say, okay, how does my city compare to other cities? For so long, we just focused on the City of San Diego, and when it comes down to it, they are not the city in the worst situation, as far as the pension goes. But if you are going to go and look at this report, which I encourage you to do, be careful not to get misled by some of the chart which is show the unfunded pension liability by a city makes it look like for example Chula Vista and Oceanside and Escondido have much bigger pension unfunded liabilities than other cities. But you've got to take into account that their population is much bigger too. So in some way, you've got to remember that perhaps by doing it per capita might be a way of representing this in a way that an individual citizen could look and see, me personally, I'm paying more than my neighbor in the next door city for the pensions. So that's one thing I observed. And then it's such a complicated subject, there are so many different ways you can attack it. And I was interested to see that you say Carlsbad has a 3% increase, because it was one of the cities in the North County that really took the lead and took some dramatic steps to encourage its employees to pay more into their pension funds than anybody else, and yet they still are coming up with an increase.
SEILER: That's correct. And Carlsbad is one of the cities that we believe is a model for the region, and they really have been aggressive in their pension reform efforts. But they also had a much -- they were in a much better fiscal position than numerous others, they had more money in their reserves, so they didn't have to dramatically decrease their work force compared to other cities. And if a city is either holding steady or adding employees, that will result in a slight uptick to their pensions. But also keep in mind, even though there have been market gain, because of the way the pension system, and the accounting works at the state, Carlsbad is going to be feeling the pain of decisions that were made many, many years ago for some time in spite of all the good they have done in recent years.
CAVANAUGH: I wanted too ask you about those decisions made many years ago. Why are cities running into pension payment problems? Are there some general reason enforce that?
SEILER: The simple most reason you've seen, increased costs in pensions are the benefit enhancements that numerous cities made anywhere between two thousand, and 2004. And the employees who were a part of that plan, with the baby boomers retiring now, the costs are now being felt. Now with the market losses from the early 2000s, that takes a while to work its way through the system. So with pensions, it's such a complex issue, and all of these different factors play into it. What we do know is that pension reform has to continue happening because as I noted, even in spite of some good decisions that have been made by Carlsbad, they're going to be paying for those poor decisions that were made in the early 2000s for a number of years to come. And going back to Allison's point as individuals look at this report and are comparing the graphs, a table that's a good one for them to look at is table 1, which looks at the most expensive pension plans because that just looks at the amount that the steady is paying for their pensions as a percentage of payroll, which would insure is that there isn't a bias between a large city versus a small city. Of those numbers in some cases are as high as 35%, as a percentage of payroll. So you can imagine, that's a lot that the city is going to have to pay right off the top for an employee, which means that that's less money that's going to go to public safety, less money going to the parks and recreation, and all the other services people would like to see.
ST. JOHN: On the other hand if you have Carlsbad seeing an increase in pension costs, that could be because they're hired more people and are providing more services.
LUTAR: It could be, exactly.
CAVANAUGH: I'm wondering, those bad decisions that people made a few years ago, there must have been some reason that they made these decisions? What were the reasons? What were the reasons to offer these benefits, these enhanced benefits to city workers and county workers to begin with?
LUTAR: Well, there was a statewide legislation that was approved that allowed cities to enhance their benefits beyond the original options that were provided. And as soon as that legislation was passed, you had one city that increased their benefit, and it was a ripple effect. Everybody copied and said, okay, well, if we don't offer these benefits, we’re going to lose our employees.
CAVANAUGH: So they would get the best people.
>> And this was during a time of economic growth. But what was not thought with is the fact that your not going to have economic growth forever, and when the economy dips, this is not a 401K. So the -- it's not the employees that are going to be paying when the economy tanks, it's the taxpayers that end up having to pay for the burden of that. So that's really why we're experiencing throughout the region and the country what we are seeing, come is increased costs because numerous cities just did not think about the long run, and they were looking in the short run, enhancing benefits when the economy was really strong.
ST. JOHN: I think this is part of the irony of this whole situation, as you say, back in the early 2000s, are the market was looking strong. So they were obviously feeling fine about giving these benefits. Now we have a situation where some people are arguing the solution is to give everyone a 401K, and be at the mercy of the markets, and give up this idea of a defined, secure pension. And it seems to me that we're sort of jumping in the wrong direction to be saying just because public pensions now are -- the markets are meaning that we cannot afford them to be saying let's just get rid of a defined benefit and go to one that relies entirely on the market is condemning everybody to be at the mercy of the market, and therefore a very unsecure future.
LUTAR: That's certainly one perspective, and I would respectfully disagree. I think most people in the private sector are in a 401K style plan, and we think that the taxpayers shouldn't be bearing this type of increased risk, and that that should be the responsibility of the individual and the individual government employee as we see in the private sector. So we have in the City of San Diego, we're fortunate to have the comprehensive reform initiative, which the taxpayers' association is a strong advocate for, and the residents of San Diego is will have an opportunity to vote for that. Borrow the rest of the cities throughout the region, and most of the cities through the State of California, they have limited options that their City Councils can pursue. And it really will take a statewide legislation or initiative to implement the type of comprehensive reform that we feel the state needs to finally have a sustainable system.
CAVANAUGH: Let me just piggyback on what Allison was saying, it seems to me there are so many different ways that one can reform a pension system that's out of control without completely undermining the idea of having a guaranteed pension and having the 401K the only solution. It seems to me that there are some cities in San Diego who are looking at this from your own report and looking at this and doing this in a different way. Would you agree that there can be different sorts of ways to reform this problem?
LUTAR: There are different means by which reduce the severity of the problem. But we do truly believe that in order to insure that the taxpayers will not be bearing the type of risk that we have seen in recent year, that it would require a transition either entirely to a 401K style plan or to a dramatically different defined benefit plan. But what we have observed at least for the City of San Diego, is that the laborer unions were not willing to ever consider a drastically different defined benefit plan. And if that's the case, then you need to go directly to a 401K, where you will insure that taxpayer costs are going to be capped, and that that risk will not be borne. So there are certainly a variety of different options, but when it comes down to getting either the legislators to agree to actually approve it or to come to the table what you find is often that the options become much more -- much less, and you have fewer options to choose from.
CAVANAUGH: I just want to ask a question about public safety worker pensions. Because in your analysis of the pension reform that other cities have done in San Diego County if the ballot measure succeeds here in the City of San Diego, new firefighters will move to a 401K plan, but police will remain on a guaranteed defined benefit pension. Are public safety workers in other cities at risk of losing their defined benefit pension plan in the county from your analysis?
LUTAR: No. Those other cities in the region don't have that option of moving to a defined contribution plan because of the state restrictions, which is why we believe that there will need to be statewide legislation or voter initiative, citizens initiative, in order to see the type of reform that will lead to sustainability. Again, there are things that you can do as numerous cities have done to reduce the risk, but we believe that in order to insure sustainability over the long run and insure you're not going to have these volatility, and the fluctuation in pension cost, that it's going to require a legislative bill or initiative.
ST. JOHN: I think this is the fight going on in Sacramento right now, and I know some of the cities are saying this isn't something we can solve. But already there's some talk about whether in fact you have to go to the 401K, which is not a guaranteed pension anymore. And I would point out that part of the reason that the private sector has pretty much gone to 401Ks which are not guaranteed is because many of them -- the workers are not represented by unions. To some degree, you could say rather than being jealous of what the unions have obtained for the public sector, you could say it would have been helpful if there had been more union representation in the private sector. But I do think that one of the most interesting graphs that you have here in your report, it shows how each city is asking their employees to contribute to their plan. So a contribution to your pension plan seems to be a fair enough thing to ask. Everybody is doing that in the private sector. And some cities are asking their employees not to contribute anything. And some are asking them not to contribute. So that is a way to progress toward pension reform without necessarily giving up the guaranteed side of it.
CAVANAUGH: I know that the ultimate goal of San Diego taxpayers' association is to move away from these defined benefit plans that leave the taxpayers to pick up the slack if the stock market goes south the way we've seen it in recent years. But looking at this analysis that you've done, does it seem to you that things are moving in the right direction? That cities are working to lessen the amount of responsibility that they have to pick up that slack?
LUTAR: I think we're absolutely seeing cities headed in the right direction with the reform options that they have to choose from right now, those limited options. And what's going to be imperative is for residents throughout the region to talk to not only their City Council members, to urge them to adopt the most aggressive reform options that they have available to choose from, but to also contact their state legislative representatives as well as the governor to say, look, we understand that our councils right now have limited options. And we want to give them greater flexibility to reduce pension benefits. The lowest pension benefit that is offered to the government employees right now in these jurisdictions is still extremely generous. And that's why we don't believe it's sustainable. But if the residents understand that they can make an impact by contacting their legislators and urging for more comprehensive reform statewide, I think that would make hay huge difference.
CAVANAUGH: Where can people find this report?
CAVANAUGH: Thank you very much.
LUTAR: Thank you.
ST. JOHN: My pleasure.