Oct. 10 2012 09:42 AM

Less-rosy analysis of new retirement plan got no public vetting

Critics say Prop. B supporters, shown here celebrating victory on election night, misled voters about the measure’s costs.
Photo by Kelly Davis

On Sept. 7, the San Diego City Council got a memo from Jay Goldstone, the city's chief operating officer, accompanied by an analysis of the cost of a proposed temporary, 401(k)-style retirement plan for new city employees. State law, Goldstone explained, requires that the analysis be made public two weeks prior to any legislative action.

The analysis, by Buck Consultants, was surprising in that it appeared to contradict an earlier study on the cost of Prop. B, the June ballot measure that closed the city's pension system to new employees.

The city's analysis, issued last March, showed that a 401(k) plan would cost more than $30 million over the next three decades when compared with the city's current pension plan. The Buck analysis, meanwhile, showed that though the 401(k) would cost roughly $13,000 this year, growing to $93,000 in 2015, after that it would save the city money—$3.4 million annually by the time the plan was fully implemented in 2032.

But Buck used wrong information in its analysis. Shortly after Goldstone issued his memo, the city's Independent Budget Analyst (IBA) realized something was wrong, said Lisa Byrne, the IBA's fiscal and policy analyst. The IBA brought this up to the Mayor's office prior to the Sept. 13 City Council meeting at which the analysis was first introduced, Byrne said. On Sept. 13, Buck agreed to take another look at its numbers.

But Goldstone didn't tell the council this at the Sept. 13 meeting. His presentation was brief: He reiterated that the city's required by law to make public an actuarial analysis of any changes to its retirement system "at least two weeks" before the City Council votes on those changes.

"We're obligated to have this thing posted," he said, "and it's gotta be done through this process of the public body."

The two-week noticing law is new, the result of a bill authored by former state Sen. Pat Wiggins that was based on findings that in San Diego and elsewhere, retirement benefits were enhanced with little to no chance for public scrutiny. Among other things, the new law requires that any changes to retirement benefits be disclosed to the public in advance of a vote and that an actuary attend the meeting where the changes are voted on.

On Oct. 1, the day the City Council was scheduled to vote on the retirement-plan changes, Goldstone sent out another memo. In it, he explained that Buck's analysis was wrong—Buck had used outdated pension data for firefighters and lifeguards. The new analysis showed that the 401(k) plan would cost the city half of 1 percent of payroll—$379,000 this year, growing to $2.8 million in 2032. The memo didn't address the two-week noticing requirement, but it did argue for expediency: When Prop. B took effect in early August, City Attorney Jan Goldsmith imposed a hiring freeze until an interim 401(k) plan could be put in place.

"If the Plan is approved by the City Council on October 1, 2012," Goldstone wrote, "the City will be able to lift the current hiring freeze, allow the Fire Department to start its planned fire academy this fall and would ensure that service levels would not be negatively impacted as they otherwise would be should the hiring freeze continue too much longer."

Terms of the interim 401(k) plan include the maximum matching contributions allowed under Prop. B—9.2 percent for general employees and 11 percent for cops and firefighters. And, employees hired under the plan will be fully vested immediately.

"We were faced with the task of the city attorney claiming that all hiring had to be stopped until we got an interim defined-contribution plan together," said Mike Zucchet, general manager of the San Diego Municipal Employees Association. "So, we said to the city, ‘If you want to go right up to the maximum of Proposition B, and do the full 9.2 percent and the full 11 percent for [public] safety [employees] and have 100 percent of the contributions vest immediately to the employee—basically you want to do everything we ask for, the max of what you can do, sure….' And they said, ‘Yeah, we want to do all that.' OK. So we did it."

Zucchet said he thought the plan they negotiated was cost-neutral. While he saw the first Buck analysis, he never received a copy of the second analysis until he requested it after being contacted by CityBeat.

CityBeat asked three of the four labor unions affected by the change if they'd received a copy of the new analysis; none had.

The revised analysis wasn't posted to the city's website where the public can normally find staff reports and documents related to City Council agenda items. The agenda for the Oct. 1 meeting included a summary of Buck's original finding that the new plan would save money.

Though an actuary from Buck Consultants was present at the Oct. 1 meeting, City Councilmember Carl DeMaio, who spearheaded the Prop. B campaign and has made pension reform the focus of his bid to become San Diego's next mayor, cut in before city staff could make a presentation and quickly motioned to approve the new retirement plan.

"They should have put out the new analysis publicly for two weeks before asking the council to take any action on it," said Frank DeClerq, president of the firefighters union. "This is quite typical of how they've operated for the past few years. Usually, they share the information with those affected at the 11th hour, and then try to get the council to pass it in a vacuum."

City Councilmember Todd Gloria said he wasn't surprised by the cost of the interim plan, which comes on top of costs for consultants and legal services tied to Prop. B's implementation.

"I was initially surprised that [Buck Consultants] projected any savings," he said. Gloria, who chairs the City Council's Budget and Finance Committee, issued a memo on Sept. 12 pointing out that the city will have to make a larger-than-expected payment into its retirement system next year, the result of poor investment returns and a $27-million payment triggered when Prop. B closed the pension system to new employees.

"Prop. B is full of additional costs to taxpayers that its proponents did not widely advertise to voters in June. The costs of the 401(k) is just one of them," he said. "The savings the proponents point to come from a legally dubious pay freeze that is now the subject of expensive litigation, also paid for by taxpayers."

A spokesperson for the Mayor's office told CityBeat that he asked the City Attorney's office to respond to questions on the city's behalf. City Attorney spokesperson Gina Coburn said that the city complied with the spirit of the law's two-week noticing requirement; even though the analysis was wrong, at least it was posted for two weeks.

"The [government] code section does not require re-noticing after an actuary changes his/ her analysis after the determination is made public," Coburn said in a written statement. "That's not surprising because actuarial determinations will normally change as it is always based upon estimates and assumptions."

Coburn pointed out that copies of the new analysis were available at the public-information table at the Oct. 1 City Council meeting.

She also noted that this is only an interim plan while the city and its labor unions negotiate a permanent plan. When those negotiations will wrap up and what the plan will look like isn't known—Zucchet said the unions haven't yet been asked for a proposal. Once a new plan is in place, Buck will do another fiscal analysis.

Former City Councilmember Donna Frye, who championed increased transparency while in office, disagreed that the city followed the law:

"Saying that any actuarial analysis is OK defies common sense and the reason for requiring the analysis—so that the public can participate in a meaningful way and the legislative body can make an informed decision before voting." 

Email kellyd@sdcitybeat.com or follow her on Twitter at @citybeatkelly.


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