A San Diego pension reform approved by voters nearly four years ago, regarded as a model by some, is headed for a court test — but not because all new hires, except police, receive a private sector-style 401(k) retirement plan rather than a public pension.
A powerful state labor board ordered San Diego to restore pensions after finding that state labor law was violated when former Mayor Jerry Sanders, one of the leaders of the reform drive, failed to bargain the proposed initiative with public employee unions.
With the unanimous approval of the city council, San Diego filed a court appeal Jan. 25 to overturn the board decision, calling it an “inappropriate evisceration of the citizens’ right to bring an initiative” and listing 21 legal errors in the ruling.
San Diego has become California’s test of what many public pension advocates fear: a switch to 401(k) plans that frees governments from future retirement debt critics say is unsustainable, but also shifts unpredictable investment risk to employees.
It’s a private-sector trend with voter support. Switching new public employees to a 401(k) plan was favored by 70 percent of likely voters in a Public Policy Institute of California poll last year, similar to the 66 percent vote for the San Diego initiative.
Whether 401(k) plans that can be risky, skimpy and mismanaged provide an adequate retirement is an ongoing debate, particularly when compared to the tax-backed public pension guarantee of lifetime payments that can’t be cut outside of bankruptcy.
Opponents often argue that governments do not save money by switching to 401(k) plans, as Gov. Brown found when he unsuccessfully proposed a federal-style hybrid plan combining a smaller pension with a 401(k)-style plan.
“When I read the PERS analysis they say if you close the system of defined benefit (pensions) and don’t let any more people in, then the system would become shaky — well, that tells you you’ve got a Ponzi scheme,” Brown told legislators in 2011.
In San Diego, pension officials said switching new hires to 401(k) plans would reduce the flow of employer-employee contributions into the pension fund, requiring a shorter time period to pay off pension debt and increasing city pension costs.
The ballot pamphlet analysis for the pension reform initiative (Proposition B in June 2012) said switching new hires to a 401(k) plan would actually increase city pension costs over the next 30 years by $13 million, or if adjusted for inflation $56 million.
But big savings for the city, the ballot analysissaid, would come from the initiative’s five-year freeze on the amount of pay used to calculate pension amounts: $963 million over the next 30 years or $581 million if adjusted for inflation.
The freeze can be lifted by a two-thirds vote of the city council. But after the initiative passed, the city negotiated new labor contracts with pay increases not used to calculate pensions: health care, uniform allowances, and other benefits.
The group backing the initiative, Comprehensive Pension Reform, disagreed with the ballot pamphlet analysis. In a June 2011 news release, the group’s actuarial analysis estimated that pension savings over 27 years would be $1.2 billion to $2.1 billion.
Opponents of a switch to 401(k) plans also often argue that the lack of a pension makes government employers less competitive in the job market, harming recruitment and retention.
One of the initiative leaders, former Councilman Carl DeMaio, said the city has not had a single unfilled job due to the lack of a pension. He said San Diego may be the only California city that offers firefighters a 401(k) plan instead of a pension.
Two of the four unions that filed a failure-to-bargain complaint with the state labor board, San Diego Firefighters Local 145 and San Diego Municipal Employees Association, did not respond to a request for comment last week.
“We always have 700 to 800 applicants for 40 (firefighter) slots,” DeMaio said of the argument that a lack of pensions harms recruitment. “It’s laughable. Those are the most coveted jobs that we have.”
The city twice asked for bids to provide new-hire disability coverage, formerly provided through the pension system, but received no acceptable replies. The city hired a consultant to analyze options and is negotiating with firefighters.
Meanwhile, a city spokesman said, work-related disability is covered through state workers’ compensation and a city industrial leave plan that provides 100 percent of gross take-home pay during the first year.
The San Diego switch to a 401(k) plan with a five-year pay freeze was the model for a Ventura County pension reform initiative (with the exception that deputy sheriffs were included) that was briefly placed on the November 2014 ballot.
A superior court judge, ruling in a union suit, removed the initiative from the ballot before the election, finding that a 1937 act covering 20 county pension systems only allows the Legislature or a statewide vote to terminate a county retirement system.
A suit by the state labor board to block a vote on the San Diego pension reform was rejected by a superior court. After voters approved the initiative, a state appeals court allowed the Public Employment Relations Board to hold hearings on the bargaining issue.
A board decision issued Dec. 29 came down hard on the city, ordering that employees be “made whole” for lost pension benefits, plus 7 percent annual interest, and that the city pay union legal fees for “pursuing complete relief in the courts.”
The unions do not have “carte blanche to pursue frivolous litigation” at taxpayer expense as “a way to punish the city,” the board said, because the courts can remedy that if necessary.
The board said its decision was made in the absence of “appellate authority” that bargaining is preempted by a citizens’ initiative. The city was invited to “seek redress in the courts” if it believes constitutional rights are violated.
Now the appeals court that allowed the labor board hearing on the bargaining issue is being asked by the city to overturn the board decision. The board concluded that the mayor, Sanders, was as an agent of the city when he led the initiative drive.
Some board points: San Diego has a “strong mayor” system in which the mayor gives unions the city bargaining position, Sanders used city e-mail and the prestige of his office to advance the initiative, a former city attorney memo said a mayor sponsoring a pension initiative would require bargaining.
Some city points: Invalidating an initiative because of its impetus or support is unprecedented and erroneous, Sanders was not acting as an agent of the city, elected officials have the right to advocate issues, the board found no evidence for the allegation that the initiative was a “sham device” backed by “strawmen.”
DeMaio said a class-action lawsuit is being considered, possibly involving elected officials and citizens who signed the initiative petition, to establish new case law that might overturn some previous PERB decisions.
“We are going to load this up like a Christmas tree,” DeMaio said. “We want to establish case law to spank PERB. They stepped out of bounds. They brought this on themselves.”