San Diego Pension Proposals Don’t Do Enough

City needs shift to 401(k) plans, voter approval for benefit increases

San Diego’s staggering pension shortfall of at least $1.3 billion – plus another $1 billion in unfunded retiree health benefits – should be in forefront of voters’ minds when they cast their ballots for mayor. Pension reform is so critical that both Donna Frye and Jerry Sanders have made solving the mess a central plank in their mayoral campaigns. And while any positive steps on the pension disaster are good news for taxpayers, neither plan does enough, given the gravity of the crisis.

Both candidates’ plans would have some helpful effects on the city’s pension woes, but there are few reforms in either proposal that would actually produce the structural changes needed to prevent the crisis from re-emerging.

Candidate Frye has centered her pension proposal on the notion of putting the plan into receivership which would be overseen by an independent receiver who would then suggest a reorganization plan. Unfortunately, Frye doesn’t offer any details on why type of reform she has in mind through this reorganization.

Sanders proposal has more meat, such as increasing the retirement age of city employees to make them more consistent with the private sector, negotiating with government employee unions to fund a larger share of the benefits through employee contributions and eliminating the so-called 13th check (a pension giveaway whereby the system writes checks to retirees if there are “extra” returns).

The severity of San Diego’s fiscal crisis clearly calls for the mayoral candidates to push for changes that fundamentally alter the way that future employee benefits are managed, but both plans lack structural reforms and ignore the elephant in the room. Neither candidate addresses the obvious — shifting all new employees to individualized 401(k)-style plans would go a tremendously long way in preventing future pension disasters. The 401(k) plans still offer attractive retirement benefits to government workers, but they prevent lawmakers from making pension promises and deals they can’t pay for.

While the powerful government unions will surely oppose a shift to 401(k)-style plans, taxpayers must remember the significant role that the unions’ meddling played in creating the pension problem. Intentional underfunding, excessive – arguably illegal – benefit increases, and general mismanagement seemed to have union blessing throughout the crisis’ build-up. And union complaints that a 401(k) plan is unfair or insufficient will likely fall on deaf ears with voters. After all, those voters likely have 401(k) retirement accounts. And it is appalling to taxpayers when they are asked to fund excessive guaranteed benefit plans for government workers, while being told that their own 401(k) retirement is not good enough for city employees.

The second fundamental problem is that current retirees and employees already in the system cannot be shifted involuntarily out of the defined-benefit system. Here, neither candidate proposes adequate protections against future benefit increases for existing city employees. Sanders proposed a limit on pension benefits as a fixed percentage of their salary that will offer little comfort to taxpayers because pension benefits are still subject to “spiking” (such as cashing in vacation or filing false disability claims). Frye’s plan does even less. Under both plans, some city employees will still be able to earn pensions of more than $100,000 per year.

Fortunately, last week City Attorney Michael Aguirre offered a sensible idea to prevent this abuse by recommending that any future benefit increases require voter approval. San Francisco does the same. It is the height of irony that more conservative areas like Orange County and San Diego have massive deficits in their pension systems, but ultra-liberal San Francisco is fully funded because voters must approve pension benefit increases. Even San Francisco voters know excessive benefits when they see them.

The California Constitution says government officials must receive permission from taxpayers before borrowing large sums of money. Because pension commitments are basically ironclad, they effectively carry the same long-term legal obligations as general obligation debt and should be subject to the same requirements. Requiring voter approval of pension benefits would also help keep benefits at reasonable levels in the eyes of the San Diego taxpayer, who, after all, are paying the government employees’ salaries and will ultimately foot the bill for their retirement.

If Sanders and Frye wish to offer genuine protections to taxpayers they should propose a shift to 401(k) retirement plans and push for Aguirre’s San Francisco-style charter amendment demanding public approval of union pension increases. That one-two punch would put San Diego back on the road to fiscal health.

George Passantino is a senior fellow at Reason Foundation and co-author of the recent study How Government Pension Plans are Breaking the Bank and Strategies for Reform.