Questions Raised On Pension Reform Analysis
Thursday, June 30, 2011
Analysis of the proposed Comprehensive Pension Reform measure released by The San Diego County Taxpayers Association.
Backers of the city worker pension reform proposal announced by San Diego Mayor Jerry Sanders last month, have released an economic analysis of the plan. The reform proposal would replace the current guaranteed pension with a 401k plan for new city hires. Previous estimates found the move would actually cost the city more in the first years of the switch. But this new analysis says the plan as a whole would result in savings immediately.
Lani Lutar, president of the San Diego County Taxpayers Association.
Frank DeClercq, president of the San Diego City Firefighters Union Local 145.
CAVANAUGH: Supporters crunch the numbers on San Diego pension reform. A fairy tale with group questions, Peer Gynt opens at La Jolla playhouse. This is KPBS Midday Edition. I'm Maureen Cavanaugh, it's Thursday June†30th. Later this hour, the director of Peer Gynt at the La Jolla playhouse talks about the play's fantastic journey through the meaning of identity. We'll talk about things to do this holiday weekend on our weekend preview. But first, backers of the city worker pension reform proposal announced by San Diego mayor Jerry Sanders last month have released an economic analysis of the plan. The reform proposal would replace the current guaranteed pension with a 401K plan for most new city hires. Previous estimates found the move would actually cost the city more in the first years of the switch, but this new analysis says the plan as a whole would result in saves. Almost immediately. We'll hear from both a supporter and opponent of the plan. First Lanny Lutar, president of the San Diego County taxpayers' association which took the lead creating this new pension analysis. Lenny, hi.
LUTAR: Hi, Maureen. Great to be here.
CAVANAUGH: Pension officials have already said this reform proposal will cost taxpayers $94†million more over the first years. I believe your analysis does acknowledge some initial increased payments. Where would they come from in.
LUTAR: Let me help clarify that. What the retirement board produced was an analysis of how much it would cost to accelerate payments of having a 401K plan. But our initiative is much more than transitioning new employees to a 401K plan. And there are no increased costs with having that. What happens is the city has an unfunded liability regardless of whether you transition new employees to that plan or not. That debt exists and we have to address it. But when you establish that 401K plan, you have to close the existing defined benefit, the traditional pension plan that's guaranteed. And that means that you have to pay your debt off faster. So you're paying your mortgage off or credit card off in a shorter timeframe, 15†years is the schedule, and that means from a cash flow perspective you're going to be paying more up front. But the cost doesn't mean the 401K costs more. Their saves over the long run. Not to mention you're gonna have predictability. It's much easier to establish your budgeting because every year you'll know what your costs are, as opposed to the guaranteed retirement plan that we have right now, which is very volatile.
CAVANAUGH: You factor in saves from other aspects of the reform measure. It's not just the switch from guaranteed pension to 401K. Tell us about the saves that you found that offsite those increased payments.
LUTAR: Our analysis found that over a long-term period, roughly about 30†years, the initiative is estimated to save between one billion to approximately $2.2†billion. And this initiative is comprehensive. It doesn't just transition employees to a 401K. It also includes a five-year pensionable pay freeze. What that means is as soon as the measure passes from the five years within that duration, the city will be able to award one time bonuses, for example. But they won't be able to do anything that increases the pension payouts. So that alone has a significant impact. We also have a provision in this initiative that insures that moving forward you cannot do pension spiking. Pension spiking has been a major issue for the City of San Diego. And a number of jurisdictions throughout the county. And our measure addresses that. You eliminate pension spiking. You also require employees to start paying a fair share toward their pension payments. Taxpayers have been subsidizing the employees share of the pension costs. There's no reason to do that. When you look at all of the different components of this comprehensive global initiative as a whole, that's when you get to the one billion to approximately 2.2†billion over 27†years.
CAVANAUGH: Specifically in the first year, factoring in everything, you say that the city will save about $2†million the very first year this initiative was enacted.
LUTAR: That's correct. It's about $2.3†million in the first year. Over the first five years, the saves will amount to approximately $90†million. Over ten years, about $400†million.
CAVANAUGH: What about the pensionable pay freeze though and the pay freezes in general? Isn't there a legal issue involved in this?
LUTAR: We had an extensive legal analysis of this looked at, and regulations in the State of California, as well as issues specific to the City of San Diego. What we found is that there is a way to accomplish this type of reform in a legally defensible manner. And that's what the initiative does.
CAVANAUGH: If the wage freeze is found not to be legal, this analysis doesn't holdup, does it?
LUTAR: Again you can speculate about what might happen. But we feel we are very confident that it is solid. And let me clarify, it is not a salary freeze. This is a freeze -- five-year freeze on pensionable pay. That's an important distinction. If the council should decide that they would like to award bonuses, for example, during that time period, they could. It's just that that pay will not count toward final pension calculations.
CAVANAUGH: Where is the idea of transferring city employees to the Social Security to allow them to get Social Security? Is that part of this plan anymore?
LUTAR: The initiative allows the city to enter into the Social Security system should it decide it. What it does do also is have a cap on the amount that the city can contribute on behalf of employees. Injure general employees, that would be about 90.2%, for safety employees, that's 11†percent. We didn't establish that because this is a charter initiative. 20†years down the road, the City Council and employees might decide they don't want to be in the Social Security system. Right now, they're not. There's a healthy debate that could occur over that. And we leave that at the discretion of the council.
CAVANAUGH: None of these figures take it what it might cost the city to actually contribute to Social Security for city workers.
LUTAR: It actually does. Even if the city were to enter into the Social Security system, the costs are capped at 9.2%. If you go back into Social Security, it's about 6.2%. These costs already assume the saves estimates we provided already assume the city might enter Social Security. It is a very conservative estimate because we don't incorporate costs that come from, for example, the reform that we've done to police the police officers' pension payouts. This is again a comprehensive initiative. It doesn't just attempt to address the pension system from one angle. It looks at it from a variety of different privileges. And as I mentioned, pension spiking is one component. Transitioning all employees except police to the 401K is one component. Permanently redefining what can be counted toward pension calculations, that's another very important component often lost. That's in addition to the five-year pensionable pay freeze. Even beyond the five years, in year 6 and 7, and year 30, for police officers, instead of having their calculations calculated on base pay and especially pay and add ones, and all of these players of comprehension, in the future it will be calculated on base pay alone.
CAVANAUGH: I know this is a comprehensive analysis you're deputy. One question about it is the idea that city workers are already on a two-tiered pension plan. Has there been any analysis of if the lower pension benefits, new hires are already receiving is factored into, let's say in 30†years, does this compare with the actual pensions that new hires are receiving now?
LUTAR: It actually does, Maureen. Our estimates, and the saves that we're showing is compared to the payments that the city's retirement system anticipates that would occur 27†years out, based on those new plans that you're talking about. And again, even if spite of the new tier, the lower formula that exists for new hires hired after a certain date, what that doesn't do is address pension spiking. It doesn't insure that moving forward permanently, the taxpayers won't be on the hook for subsidizing pension costs. That's why you really need to have a comprehensive solution, which is what the initiative does.
CAVANAUGH: I want to let everybody know that they can see this analysis on our website at KPBS.org. I've been speaking with Lanny Lutar, president of the San Diego County taxpayers' association. Thank you so much.
LUTAR: It's my pleasure.
CAVANAUGH: On the line now is frank deClercq, president of the city fires union 145. Hi frank.
DECLERCQ: How are you?
CAVANAUGH: Fine. What do you think about this analysis?
DECLERCQ: We need to take into account who's actually -- what they're saying here, and what Ms. Lutar is asserting. This is the same special interest group, the San Diego County taxpayers and the Lincoln club that got the city into this mess. We met with the mayor and counsel member Faulkner, they knew it was a bad idea to put public safety into this type of a plan. It hasn't worked in other states. It's been changed in Alaska and Colorado, they're coming back now from the DC plan back to a DP plan. They know -- what they did, this is something that goes back to what created this economic turmoil. Wall street and the bankers, they have their friends downtown here, the Lincoln club group, these are special interests, the developers and builders, the taxpayers, same people that got us out of Social Security and recommended in 1980, Ms. Lutar and her group got us out of Medicare. They also managed the managers proposal 1 and 2. And their group is also the one that recommended the Chargers take [CHECK AUDIO].
CAVANAUGH: I gotta ask you specifically about this analysis, these numbers.
DECLERCQ: Okay. The numbers that they're putting out, if they had numbers that were legitimate numbers, they would have produced them when they did the titlement summary and put this how the. They didn't do that. What they did is sit on it and I've been saying they're gonna produce something. They just did, they took high runs report, and the numbers they're hanging their hat on are already the numbers that the mayor has come out and said it's questionable whether they can freeze pensionable pay. While attorneys will be looking at that to see if what they're written, and they're asserting they can do, that'll be weighted and decided probably by the Courts. Of but I think they're wrong. I don't think they're gonna be able to do it. And I believe like hi-Ron wrote, it's gonna cost them over $90†million, 28 million the first year to the taxpayers.
CAVANAUGH: What are you hearing from fire firsts about this proposal?
DECLERCQ: The firefighters are concerned about our ability to protect citizens. If they're going to put them into a defined contribution plan, there's potentially going to be firefighters that don't have Social Security or Medicare, and they're going to have to work until aged 62 and 65, many of them without any kind of medical care they might get. And at the same time, the question is -- I don't know. The firefighters are just having a difficult time with this thing because what's going on is it's not gonna work. It's going to increase the workman's comp cost by a longshot. Those are things that have not beg your pardon analyzed. There's enormous things. They're gonna become a huge training ground. It costs a hundred thousand a year to train a firefighter. You want quality people, these are people that come on, take these jobs, go through a 16-week training academy, and they're all gonna be heading to other cities.
CAVANAUGH: Frank, I gotta stop you and ask you a question. Obviously you don't agree with these numbers that just came out in this analysis. You don't like this reform proposal. Are the unions thinking of countering the 401K pension reform proposal with any kind of reform proposal of your own?
DECLERCQ: Well, we've discussed it. We believe we've already done a reform proposal of our own. The firefighters in all the laborer unions, in these last notions we agreed to eliminate pension spiking and go to three% at 55. High three years. All of the unions have given concessions. That's what these people are trying to weigh in on and count those concessions that have already been negotiated on. We absolutely put out the reform. They haven't let those reforms take place. Effectively our new contract starts tomorrow. There's so many things involved here. And I think this is again bad policy. It's a far reach from a group of special interests. Builders, developers, taxpayers, Lincoln club, that can't get what they want to get less than legislatively through the people we've elected in office. What they do is get their wall street and buddies downtown to pony up money and take another ballot initiative that's bad policy to the citizens that's going to cost them over a hundred million dollars over the first six years.
CAVANAUGH: We are going to talk about this an awful lot more. We are out of time right now. I've been speaking with Frank de Clerk, president of the San Diego City fire workers local, thank you frank. [CHECK AUDIO].
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