San Diego Proposes Pension Fixes

Steven Greenhut: San Diego, which has been the poster child for pension abuse in the past, remains plagued by pension scandals.Fortunately, City Councilman Carl DeMaio continues to push for pension reform, as evidenced by his recently unveiled “Roadmap to Recovery,” which is designed to balance the city’s troubled budget and reform its pension system. DeMaio wants to reform “pensionable pay” by reducing city salaries by 5 percent to 8.5 percent. This, he said, would reduce the city’s pension payments by 20 percent. He wants to create a pension opt-out program. The key here is to increase employee contributions for the defined-benefit plan, which will give employees more reason to enter the defined-contribution option. I talked to him Friday, and he’s looking to place the pension reforms on the city ballot.

DeMaio said his reforms are based on the current legal climate, not on ideas that might work if certain courts rule in a certain way. The brilliant part of this: The city can’t change current pension benefits but it is legally allowed to change the way the final year’s pay is determined, which is what pension benefits are based upon. Currently, city employees have many ways to spike their last year’s pay, which is why so many city employees retire with multimillion-dollar pensions. The reform would ban most forms  of pension spiking and cap the pensionable pay — the amount of pay the pension is based upon.

I’m not so sure about the voluntary second tier. Orange County last year passed a voluntary lower tier retirement plan, but according to its critics it won’t save the county money because the only people opting into it are those who have maxed out on their defined-benefit plan.

DeMaio believes that ultimately cities need to manage total salaries on a net basis. You get so and so amount for Job A and that’s it — the salary and benefits need to come out of that amount. It’s the best way to keep unfunded liabilities from piling up. My Pacific Research Institute colleague Jason Clemens has been making this argument for some time.

San Diego, like most California municipalities, must do something soon. According to DeMaio, the city has $2.4 billion in unfunded liabilities for pensions. Its annual pension payment has gone from $150 million to $230 million and will soon climb to $500 million. Retirement costs are 68 percent of the city’s payroll. The city runs a structural deficit every year.

Unions are waiting for the economy to rebound, but DeMaio reminds us that we can’t grow our way out of the devidit. Even 10 percent returns for the next 25 years won’t fix the deficit.

It’s time to cut these outrageous benefits for public employees.

DEC. 12