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Roeder Financial
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La Mesa, CA 91941-6433

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Rick Roeder       January 2016

In 2012, City of San Diego voters ratified a pension measure which was nothing short of revolutionary in the public sector, the last bastion of traditional pension plans in America. Proposition B eliminated a traditional defined benefit plan for all new hires, after July 19, 2012, outside the police force. Surprisingly, even the City's firefighters were impacted. New hires were put into a 401(k)-style plan.

On December 29, 2015, California's Public Employee Relations Board (“PERB”) ruled that Proposition B was illegal and should be overturned. City Attorney, Jan Goldsmith, categorized the PERB as pro-union and said that the appellate courts would uphold the legality of Proposition B. In fact, on January 12, City Council unanimously voted to appeal the ruling to the 4th District Court of Appeals. PERB had previously been unsuccessful in preventing Prop B from ever going to a vote. Goldsmith opined, "The law does not give labor unions the power to negotiate the terms of a citizen initiative."

PERB's ruling was that former Mayor Sanders and other City officials did not negotiate with Labor before putting Proposition B on the ballot. The thrust of labor's contention was that Sanders, while Mayor, helped spearhead the signing drive to get needed signatures to put Prop B on the ballot. By doing so, labor contends that Sanders was guilty of an unfair labor practice. Sanders contended that his role in the signing drive was as a private citizen.

2,000 new hires are potentially impacted by the decision. If the City's decides to reinstate them in the existing defined pension plan, several implementation problems exist. What about the employee contributions and foregone interest if the employees had been in the DB plan since hire? More importantly, the City installed these plans in an effort to save money and better insulate itself from the short-term vagaries of the market. It is hard to visualize that the City will readily agree to give up 100% of those savings. A more pragmatic compromise solution might be a financial settlement of $x per employee impacted by Proposition B.

If PERB's ruling is upheld, the head of the City's Municipal Employees Association, Michael Zucchet, initially estimated that the price tag to the City would be in the rough $100 million ballpark to cover the cost of the accrued pensions and a 7% interest penalty to affected recent hires. Zucchet believes it is futile for the City to further contest the ruling, in part due to the potential high costs of litigation in resolving the matter. If PERB's view prevails, one hopes common sense would prevail in one regard. The City should get credit for their contributions made on behalf of the recent hires to the replacement plan. We performed some actuarial analysis and have concluded that $100 million significantly overstates the City's potential liability, even with protracted litigation and the priciest lawyers.

This dispute has a ripple effect beyond San Diego. Other cities who have passed pension reform packages, such as San Jose, will be watching closely for future developments.

For now, two huge elements in San Diego are now in limbo: the City's pension plan and the future locale of the San Diego Chargers. Ironically, the two are, at the very least, indirectly related. If the City had not repeatedly increased pensions during the 1996-2002 period, the City would have had much more financial wherewithal to help with the financing of a new stadium. Consider that the amount the City is scheduled to contribute to the mostly-closed defined benefit plan is in excess of $250 million for the current fiscal year. This staggering amount is in addition to the City contributions for recent hires. Fascinating times!

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