Pension Reform – The San Diego Model
Beginning around 2009 it became clear to civic leaders and councilmembers that the City of San Diego faced serious financial challenges. A San Diego County Grand Jury in that year released a report that recommended the city file for bankruptcy. The report cited the underfunded City’s pension system as the primary underlying cause of their budget deficits. By June 2009, the City of San Diego’s independent pension system was only 66.5% funded. By 2012, the systems unfunded liabilities were well over $200 million. Apart from bankruptcy, the only solution available to San Diego was pension benefit reform.
In June 2012, voters in the City of San Diego voted 66% to 34% to enact sweeping reforms to that city’s pension benefits. The coalition that promoted this reform included advocates for taxpayers, fiscal conservatives, and local business and trade associations that wanted to improve the financial health of the city. Since then, these reforms have been challenged repeatedly in court, but thus far the entirety of the pension reform package has been upheld. Here is a checklist of things to consider for local pension reformers in other cities and counties in California:
1 – The Reform Cannot Attack “Vested Rights”:
“Vested” benefits in California under current law require public employees to receive whatever benefits they were promised when they were hired. This means that even future benefits for existing employees cannot be changed. San Diego’s reform made certain to only affect future retirement benefits for new hires. San Diego’s reform also enacted a salary cap on existing employees, which did not violate vested rights. These two steps, putting new employees onto 401K plans that will not generate unfunded liabilities, and putting a cap on pension eligible salaries for existing employees, significantly reduced the amounts the City of San Diego has to contribute to their pension fund in order to keep it solvent.
2 – Rely on a Citizen’s Ballot Initiative:
Because most city councils and county boards of supervisors are populated by local elected officials whose campaigns are overwhelmingly funded by public employee unions, it is almost impossible to rely on them to enact pension reform. But a citizen’s initiative bypasses these beholden officials and relies on local activists and concerned citizens to research, write, qualify for the ballot, and campaign for meaningful reform.
3 – Prepare to Spend Between $5 and $10 per Signature to Qualify a Measure for the Ballot:
Or more! Signature gathering almost never can be 100% completed by volunteers, and professional firms are almost universally relied upon to make up the difference. In San Diego, supporters of the reform initiative spent about $1.1 million to gather 94,000 signatures – over $10 per signature.
4 – Expect Relentless Harassment From Public Unions:
One of the reasons it costs so much to obtain signatures is because the anti-initiative forces mount well organized opposition to signature gathering efforts. Tactics used in San Diego or elsewhere in California include (a) sending people to pace in front of the signature gatherer’s table, intimidating anyone who may want to sign the petition, (b) following signature gatherers home and photographing them in an attempt to intimidate them, (c) circulating flyers and sponsoring media campaigns that present misleading information – in San Diego the anti-initiative forces paid for a radio campaign that suggested people who signed petitions might have their identity stolen, (d) deliberately having people sign the petitions using fraudulent names in order to cause the entire body of petitions to be invalidated during the verification process.
5 – Be Prepared to Repeatedly Defend the Reform in Court:
San Diego’s reform was challenged before it went onto the ballot by opponents who argued it violated the “meet and confer” rule, wherein city officials have to talk with union representatives before changing conditions of their contract. This challenge first went to the Public Employee Relations Board, packed with gubernatorial appointees who are all former labor activists. PERB, predictably, upheld the opponents accusations, but in court the judge overruled PERB and permitted the initiative to stay on the ballot. The initiative survived other pre and post ballot legal challenges, but still faces one more round, sometime in either 2017 or early 2018, at the California Supreme Court.
What reformers did in San Diego succeeded because the language of the initiative minimized the potential for legal challenges, and it succeeded because there was a critical mass of committed reform minded activists, business associations, and politicians who were prepared to stay in the fight for years. Here is the language of San Diego’s Proposition B:
PENSION REFORM – SAMPLE LANGUAGE
BALLOT TITLE
Amendments to the San Diego City Charter Affecting Retirement Benefits
BALLOT SUMMARY
This measure would amend the San Diego City Charter to make changes to retirement benefits. The measure would:
From its effective date until June 30, 2018:
1. Limit a City worker’s base compensation used to calculate the employee’s pension benefits to Fiscal Year 2011 levels.
2. Require that any new job classification be created only after specific findings are made that the new classification “is necessary to achieve efficiencies and/or salary savings” by consolidating job duties or creating a more efficient service delivery method.
3. Define the terns the City must use when it begins negotiations with the City’s labor unions for their contracts, unless the City Council overrides those terms with a two-thirds vote.
Provide all new hires at the City, except for sworn police officers, with a defined contribution plan modeled after a 401 (k) plan in place of a defined benefit pension plan.
Provide contributions for employees participating in the new defined contribution plan, in order to compensate for the lack of Social Security provided to City workers. The City’s maximum contribution for general City employees would be 9.2 percent of ah employee’s salary; the maximum contribution for uniformed public safety officers would be 11 percent of their salaries.
Authorize the City Council to enroll police officers in either the defined benefit or the defined contribution plan. The maximum payment to a sworn police officer hired after the measure goes into effect, under the defined benefit pension plan, would be based on the officer’s highest three years of pay, and capped at 80 percent of the average of those years.
Eliminate the defined benefit pension plan prospectively for elected officials (Mayor, City Attorney and City Councilmembers).
Eliminate, to the extent allowed by law, pension benefits for City officers or employees convicted of a felony related to their employment, duties or obligations as a City officer or employee. This may be reversed if the conviction is overturned.
Eliminate, unless otherwise allowed by law or agreement, the requirement of a majority vote by employees or retirees in the retirement system for changes that affect their benefits.
Require the City to contribute annually to the defined benefit pension plan an amount substantially equal to that required of the employee for a normal retirement allowance, but not contribute in excess of that amount.
Provide disability benefits for defined contribution plan participants who have a work-related disability.
Require the Retirement System to submit an actuarial study to the Mayor and Council regarding the impact on the pension plan “of any increases in proposed compensation or benefits” in an initial Council proposal.
Require the City to annually publish the amounts paid to City retirees, but redact their names.
REFERENCES
Ballotpedia – San Diego Pension Reform Initiative, Proposition B (June 2012)
https://ballotpedia.org/San_Diego_Pension_Reform_Initiative,_Proposition_B_(June_2012)
Ballotpedia – Pension reform: San Jose and San Diego Voters Weigh in
https://ballotpedia.org/Pension_reform:_San_Jose_and_San_Diego_voters_weigh_in
City of San Diego – Text of 2012 Proposition B
San Diego Union-Tribune, April 11, 2017 – Appeals court vindicates San Diego’s 2012 pension cutbacks
http://www.sandiegouniontribune.com/news/politics/sd-me-pension-appeal-20170411-story.html
San Diego Union-Tribune, May 22, 2017 – Appeal says ruling that vindicated San Diego pension reform could create statewide problems
http://www.sandiegouniontribune.com/news/politics/sd-me-pension-appeal-20170522-story.html
KPBS San Diego, July 27, 2017 – San Diego Pension Reform Headed for California Supreme Court
http://www.kpbs.org/news/2017/jul/27/san-diego-pension-reform-prop-b-supreme-court/