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$73.2
Million 6%,
6%, 7% 1176
at $178 Million $1.2
Million $1.2
Billion |
| NOTE
ON FOOTNOTES: The San Diego Citizens' Budget Project is committed to presenting accurate, methodical research. The Citizens' Budget Plan contains more than 100 footnotes, all of which can be found in the print and full PDF versions. |
| QUOTABLE: "The $3.2 billion pension system, serving about 11,000 active workers and 5,700 retirees, is expected to meet its obligation to current retirees. But the bailout is certain to burden future taxpayers and eat up mammoth shares of future city budgets." - San Diego Union Tribune, June 21, 2004 |
Reduce
Skyrocketing City Labor Costs and the Pension Liability
Reform
City Employee Compensation and Benefits Packages to Levels Appropriate
in the Labor Market While Requiring that City Employees Be Part of the
Solution to the City's Pension Fund Crisis
As documented in the previous section, City employees are generally hard working and care about the services they provide and the communities they serve. They should be treated with value and respect-and provided fair compensation for their work in the City.
However, given the immense financial challenges facing the City, City employees must be part of the solution. While the employees did not directly create the financial problems, the unions that represent them have had an immense role in proposing and securing wage and benefit increases that the City simply cannot afford. How? The influence of the City's public employees unions is considerable-with elected leaders in the City reluctant to take on these powerful interests.
In the pension area, the labor unions pressed and won substantial concessions in contract negotiations with the City – resulting in a 20 percent spike in total pension benefits, lowering the retirement age, increasing the percentage of salary used to calculate retirement benefits, and even creating the Deferred Retirement Option Program (DROP) that allowed City employees to "double dip" in salary for continuing to work in the City after retirement eligibility.
These expanded benefits are on top of policies that allow City employees to purchase years of service to count towards early retirement – at bargain rates when pension benefits are factored in. In addition, the City provides health insurance for its retirees even though a dedicated revenue source is not available for this expenditure. Finally, the City provides a "13th Check" to retirees out of excess earnings in the retirement system, rather than retaining these earnings for market downturns.
At the same time that benefits were being increased, City leaders intentionally under-funded the pension system to the tune of tens of millions each year. All told, the pension system has a liability of 1.2 billion for regular pension benefits-and an additional $1.1 billion for health insurance coverage. What's more, by FY 2011 the pension payments will balloon to $306 million annually – or 21 percent – of the City's General Fund.
Exacerbating
the City's pension woes are salaries that are inflated for some City
employee positions. It is clear that not all City employees have inflated
salaries-and police officers are earning slightly less than their counterparts
in other law enforcement agencies in our area. However, some positions
in the City's salary schedule could be adjusted downward.
A final troubling set of sweeteners that labor unions have negotiated
for City workers come in the form of elaborate "special pay"
and compensation rules articulated in the lengthy labor contracts. Just
a sample of the outrageous payments negotiated in the Police and Fire
union contracts include:
•
Motorcycle Washing Bonus:
Motor cops are paid 6 hours per pay period to wash their cycles. If
they are into overtime, they are paid a total of 9 hours!
• Uniform Allowance:
The City pays nearly $1000 to each police officer for them to purchase
uniforms during the year. Other jurisdictions operate a supply store
where new uniforms are exchanged for older ones-providing accountability.
• Take-Home Car Privileges:
A recent ZBMR report documented that 25 percent of the police cars are
taken home by officers and permitted for personal use.
• Overtime:
In addition to standard overtime rules, the contract calls for overtime
automatically whenever Fire personnel have court appearances and when
attending mandatory training programs-regardless of whether the employee
worked more than 40 hours that week.
The City's Pension Reform Committee has been meeting and deliberating
over a series of reforms to the Pension System. Based on the minutes
and votes from the meetings of the Committee, the San Diego Citizens'
Budget Plan offers a blanket endorsement of their reforms-likely to
be presented before the City Council on June 29, 2004. Nevertheless,
there are several reforms that the Citizens' Budget Plan offers to improve
upon the recommendations of the Pension Reform Committee.
•
Divert Half of FY 2005 Salary Increases to Contribute to a Comprehensive
Pension Solution
The Pension Reform Committee will likely propose that the City use Pension
Obligation Bonds (POBs) to address the current liability in the Pension
Fund. The current proposal is to issue a $200 million POB this year,
and instruct the City Manager to find an additional $200 million in
FY 2006 and $200 million in FY 2007.
However, it is not reasonable to expect the taxpayer to bear the full impact of the Pension Liability without substantial assistance from the City employees themselves. After all, their unions negotiated and pushed for increased pension benefits-which, under the law, the City must honor now for ALL current members of the system. Since the unions are unlikely to concede the overly generous pay increases in FY 2005, only the last two options in the reform above are reliable tools for achieving the $40 million cost savings target. Nevertheless, while politically unpopular with a union-influenced Council, the $40 million target can be achieved even without concessions from the labor bargaining units.
As a result, the City Manager should be instructed by the Council to prepare a plan to divert $40 million in General Fund and Non-General Fund employee costs to contribute to the payment of the Pension Liability. The manager could craft a solution using one or more of the following to achieve this level of employee compensation cost savings:
• Defer Half of the FY 2005 Salary Increases: The Manager could negotiate and convince the unions to defer half of their salary increases in FY 05. The likelihood of this occurring is slim, but the request should be made. Unions may be amenable to revising the existing contract in concert with decisions on labor contracts for the next 2-3 years. If unions demand that that City fulfill its existing contract, the City should impose a salary freeze for FY 2006 and FY 2007-until the entire pension liability is addressed.• Require City Employees to Make the Employee Portion of their Pension Contribution: Based on its last labor negotiations, the City agreed to cover not only its own contribution to the pension fund, but also agreed to cover the 5.8 percent employee contribution to the pension fund. In essence, the City gave an immediate 5.8 percent raise to its workforce – on top of the other raises outlined in the chart below. According to the San Diego City Retirement System, this “employee contribution offset” costs the taxpayer over $34 million a year. 75 The City Manager has already reversed this “double pension payment benefit” for “unclassified” management positions. This revised policy should be extended to all City employees through renegotiation with the unions.• Personnel Reductions: Using more of the 226 Options provided by the Citizens Budget Project could result in additional staff reductions throughout the City. Cost savings from these personnel reductions would go directly into the pension fund. In addition, during this first year, the Citizens' Budget Project did not examine non-General Fund agencies-another potential source of staff reductions and cost efficiencies. At least in those funds a full pension payment for those City employees could be made in FY 2005.• Furlough Program: The Manager could require City employees to participate in a furlough program whereby City workers take one day of unpaid leave every two weeks-resulting in an approximate 10 percent reduction in compensation costs for the year.
Is a $40 million diversion of compensation costs City-wide to the pension fund a draconian step? Not really. This proposal merely calls for reducing by under half the planned salary increases for FY 2005. Not a cut-just half of the massive increase in employee costs. While nothing can be done to substantially revise the sweet pension benefits packages for worker's already in the system, an added benefit of this $40 million reduction in the FY 2005 salary increase would be to decrease base salary in FY 2005 from which some of those benefits are to be calculated.
When it is a choice between taxpayers being left holding the bag for an out-of-control pension package or employees contributing in a small way to the solution, the Council should insist on the latter.
•
Negotiate Reasonable Labor Contracts for FY 2006-2008
The current labor contracts with employee unions are not reasonable
and should be significantly revised when they are up for renegotiation
this year. Negotiations over the new labor contracts begin July 1 and
must conclude by June 30, 2005. During the next year, negotiations should
focus on making the following reforms to the contracts:
• Restrain Salary Increases: Until the unfunded pension liability is eliminated, city employee salary increases should be kept to a bare minimum. As a result, the Citizens’ Budget proposes a FY 2006 salary freeze, followed by a 1.5 percent “cost of living” increase in FY 2007 and a combined 1.5 percent “cost of living” increase with a 1.5 percent “performance pay increment” in FY 2008. With expected increases in city revenues in these fiscal years, the City should be able to finance the additional $200 million contributions in FY 2006 and FY 2007 under the Pension Reform Committee’s plan without tax or fee increases.• Reform of Special Pay and Allowances: The “sweeteners” that have been added to each union contract over the years should be significantly curtailed in the new contracts. Top of the list for elimination: uniform allowances, FIT Program, motorcycle washing bonus, and guaranteed “overtime” provisions for duties that are within an employee’s job description. In addition, the rules governing workers compensation and Family and Medical Leave Act management should be reformed—providing greater authority for management to reduce abuses of these provisions. Finally, special pay allowances should be limited to one allowance per employee to “spread the wealth” around to all employees.• Eliminate the Retirement “Offset”: For the past several years, the City has picked up the employee’s contribution to the retirement system—in essence giving a 5.8% pay increase each year to employees on top of the negotiated base salary increase. At a time when the city is struggling to make its own contributions to the Pension Fund, employees should pay their fair share and make their own contribution to the Pension Fund. This reform alone would save $36 million annually starting with FY 2006—growing to a savings of $41 million in FY 2009.• Performance Reviews and Performance Pay: Most importantly, the contracts should significantly enhance the ability of city managers to evaluate, correct, and reward employee performance—as well as base some portion of employee compensation on performance. Too many times, employees in government talk about “THE” pay increase rather than “MY” pay increase. This reflects a system that relies on the “cost of living” and “across the board” base increases negotiated in the union contracts, rather than a system that recognizes and rewards individual performance and value. Under this approach to “employee performance management,” any salary increases should be split into two categories: a modest cost-of-living increase, with any excess going into a city-wide “Pay-for-Performance” fund that would be given out by management pursuant to employee performance evaluations. The net salary increase would be the same budget-wise, but the increase would be more strategically distributed to those employees that deliver solid performance.
Each employee would be evaluated under an annual “Employee Performance Plan” that articulates clear goals and measures for judging the work product of the employee—as well as identifies ways that management should support the employee through training and development. This approach reflects the “best management practice” in government—and it is strongly suggested that the City of San Diego adopt the same regulations as the federal government’s Office of Personnel Management in developing and implementing its employee performance management system. This reform would be delayed until FY 2008 so appropriate employee performance goals and measures could be devised over the next two years.
Before negotiations on the labor contracts begin, the Council should adopt a resolution expressing the “Sense of the Council” that the Manager should seek these reforms. Such a resolution would bolster the Manager’s negotiating position and result in an agreement more favorable to the taxpayer.
•
Adopt the Pension Reform Committee Recommendations in Whole
The taxpayer should be watching the City Council very closely when the
Pension Reform Committee's recommendations are voted on. Without substantial
reform of the pension system itself, the taxpayer will not be protected
by the issuance of a Pension Obligation Bond. As a result, the provision
of funds to address the unfunded pension liability must be directly
linked to reform of the pension benefits.
In addition to the likely pension benefit changes outlined below, the City Council should implement the following:
• Elimination of City Council's Conflict-of-Interest: Just as the Retirement Board must be reformed to eliminate a conflict-of-interest, the Council should adopt a rule prohibiting Council Members and legislative staff from receiving pension benefit improvements if enacted during their tenure of service. This reform would eliminate any appearance of impropriety.• Elimination of Option to Purchase Years of Service: The City should discontinue the practice of allowing employees to "buy" years of service to spike their retirement benefits. It is a bad deal for taxpayers and defeats the "employee retention" purpose that a pension fund is supposed to have. At present, more than 3,000 City workers have requests pending to buy these additional years of service.• Reform Contingent Benefits: The City should require a larger co-payment for health insurance for dependents of retirees and revise the policy governing the "13th Check" to retain these earnings to offset possible investment losses in other years.
NOTE: Depending on the ultimate set of recommendations issued by the Pension Reform Committee, additional reforms might be suggested by the Citizens' Budget Plan. As such, this section will be updated on June 29, 2004 to reflect the final report of recommendations from the Pension Reform Committee to the Council.
• DROP
The Pension Reform Committee will likely recommend that the City eliminate the Deferred Retirement Option Plan (DROP)• Governance
The Pension Reform Committee will likely recommend to change the composition and governance of the SDCERS’ Board. The approved motion determined that the Board should consist of seven members appointed by the City Council with staggered terms of four years each, with two consecutive term maximum. To avoid any conflict of interest, the Board will not consist of any City employees, SDCERS participants, or union representatives.• Disability
The Pension Reform Committee will likely recommend changing the disability requirement definition to the Social Security system definition of total disability for General and Legislative members only.
