Court Ruling On San Diego’s Public Pensions Demonstrates the Importance of Stakeholder Collaboration in Pension Reform

Last month, California Superior Court Judge Richard Strauss ruled San Diego’s 2012 pension reform effort, Proposition B should be invalidated.

Nearly a decade ago, San Diego voters approved Proposition B as a way to help the city’s struggling finances by replacing San Diego’s public pension plan with a defined-contribution retirement plan for all of the city’s future hires, other than police officers.

If opponents do not appeal the ruling from last month, San Diego will be required to once again offer a defined-benefit pension plan to new hires and the city may also have to pay compensation to the employees who were hired after the 2012 reforms were passed by voters and implemented.

This ruling concludes a years-long legal battle between San Diego and labor unions. Unions have criticized the ballot measure, in part because former Mayor Jerry Sanders failed to negotiate the terms of the proposition with labor representatives prior to it being placed on the ballot. By arguing that Prop. B was not officially sponsored by the city of San Diego, then-Mayor Sanders avoided the labor negotiations required by law. Sanders also campaigned heavily for the pension reform, occasionally using city resources to do so.

In his verbal ruling on Jan. 5, Judge Strauss said that the mayor intentionally and improperly avoided union negotiations in order to get the proposition on the ballot.

The ruling likely means the city of San Diego will have to make backdated pension payments for thousands of employees who were hired after Prop. B was passed in 2012.  This compensation would probably be calculated as the difference between the value of the pension and defined contribution benefits, plus 7 percent interest.

Reason Foundation Policy Analyst Marc Joffe’s analysis of the case in 2017 warned that the worst-case scenario for the city was “retroactive pension contributions for all employees hired since Proposition B took place.”

The backdated pension payments would add to the continued problem of growing unfunded pension liabilities for San Diego. The latest financial report released by the city’s public pension plan showed over $3 billion in pension debt. Furthermore, in 2020, the city’s required pension contribution was estimated to be $365.6 million, $15 million more than in 2019. And San Diego’s public pension costs are expected to continue to grow each year.

The seeming end of this legal fight demonstrates the importance of a collaborative, stakeholder-driven approach to developing and implementing public pension reforms.

Pensions often affect many different stakeholders, from workers and labor unions to taxpayers to city officials. All of these groups should have a voice in the pension reform process to help ensure the political sustainability of any reform legislation.

Pension reforms negotiated amongst these various stakeholders are more likely to generate compromise and buy-in and are less likely to produce changes that get entangled in endless legal battles or have short shelf-lives.