Sales-tax hike’s roots lie in pension increases
Key votes in 1996 and 2002 boosted top 20 pensions for San Diego city workers by 176 percent
By Danielle Cervantes, UNION-TRIBUNE
Craig Gustafson, UNION-TRIBUNE
Saturday, August 21, 2010 at 11:36 p.m.
Click graphic to enlarge.
COMING MONDAY: Who are San Diego’s top 20 pensioners, and what would their pensions have been without key city votes in 1996 and 2002?
METHODOLOGY
The Watchdog analysis included information about the pensions of 4,153 current service retirees and survivors, provided by the San Diego Employees’ Retirement System (excluding disability pensions). The data consisted of monthly allowances paid in February and was annualized for yearly figures.
The analysis arrived at three key data points:
Current pension: For the current benefit, no extrapolation was necessary. The Watchdog used data for actual payments issued by the retirement system that may include cost-of-living adjustments; payouts from city programs such as the Deferred Retirement Option Plan, or DROP; and credit from a program in which employees purchase credit for years they did not work. Overall figures in the story regarding pension trends and averages are based on this data.
Initial pension benefit: This figure was calculated to show an expected pension benefit with enhanced pension formulas and programs in effect at the time all top 20 pensioners retired. It was calculated using highest salary, years of service, age at retirement and a pension multiplier, all supplied by retirement officials. Because of the way the data was released, the estimates include purchased service credits but not payments from the DROP program, which allows employees to collect pension money in a special account before they retire. Individual circumstances are not captured in the analysis, which was designed to illustrate the scope of the benefit changes.
What that benefit would have been without key city votes: For the estimate of how the initial allowance would have differed without the 1996 and 2002 benefit boosts, the analysis used salary, service years and age at retirement and then applied the lower pension multipliers that were in effect until 1997. Again, individual circumstances and decisions about matters such as beneficiary payments would have changed actual payouts in a way that is not reflected in the data or the analysis.
To calculate pensions with and without the 1996 and 2002 votes, the newspaper was provided the highest one-month salary for the top 20 pensioners, a figure that was annualized to estimate the highest one-year salary. For the top 20 pensioners who were enrolled in DROP, the year of retirement was calculated per retirement system practices as the entry into the program, not the actual year that work stopped.
Each pensioner’s date of birth was not provided, although month of birth was. Therefore, a small number of retirement ages used in the analysis may be off by one year. For the top 20, a date of birth was determined using other public records.
Individual circumstances that may have affected initial payout — and estimated payout without key city votes — include lawsuit settlement groups, beneficiary options, tax law and employee contribution levels.
Finally, to figure the estimated nest egg that a private citizen would need to match the top city pensioner’s income, The Watchdog relied on the expertise of Jon Beyrer of Blankinship & Foster.
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The push for a half-cent increase to San Diego’s sales tax has just begun, but it actually goes back to past decisions by city leaders who chose short-term political expediency over the long-term interests of taxpayers.
The deals struck by labor leaders and city officials in 1996 and 2002 created a financial windfall for thousands of city workers, some of whom enjoy double or triple the pensions they would have under the previous program, according to an analysis of pension records by The Watchdog.
For example, the highest-paid retiree in the city’s pension system, former Assistant City Attorney Eugene Gordon, would have been due an annual benefit of roughly $64,600 after his 34 service years if city leaders hadn’t significantly increased retirement benefits.
Instead, bumped-up pension formulas entitled him to more than $155,000 annually when he retired in 2008. Factor in cost-of-living adjustments and special add-on programs approved by past city administrations and his current annual take is about $187,000.
To put that in perspective, a private retiree would need a nest egg of $3.8 million earning 5 percent a year to produce an income stream to equal $187,000 in the first year, plus 2 percent annual cost-of-living adjustments the city allows.
That person would be out of money after 30 years, whereas the city pension is in place for life.
The Watchdog reviewed data for Gordon and the city’s other 19 top pensioners. It found that, on average, pension boosts and programs approved by the city made them eligible for pensions 176 percent higher than they would have been.
The analysis did not account for individual circumstances such as beneficiary payout decisions, but applied pension formulas to data made available by the city’s retirement system to find the effect of the 1996 and 2002 decisions on expected payouts.
Boosted pensions and the subsequent economic recession created a $2.1 billion pension deficit that has hamstrung the city. Library hours have been slashed. Maintenance of parks and beaches has been scaled back. Police units have been eliminated, and the city idles up to eight fire engines a day to save money on overtime.
The financial problem is so bad that Mayor Jerry Sanders and the City Council are asking voters to approve the tax hike on the Nov. 2 ballot. The increase wouldn’t go into effect until the city enacts certain changes to employee pensions and city operations.
For the most part, those changes affect new hires, with minor changes for the bulk of city employees and retirees whose promised benefits have strong legal standing to remain untouched.
The Watchdog’s analysis of pension records shows:
• Annual pensions for 4,153 city service retirees average $45,600. By comparison, recent Census Bureau estimates show the average person of retirement age receives about $19,000 from retirement, pension and/or Social Security benefits.
• More than 450 city retirees, or about one in 10, have annual pensions above $80,000. That puts them in the top 1 percent of all Americans in retirement income.
• The more generous benefits may be spurring earlier retirements. Nearly two-thirds of current beneficiaries retired before age 60, while fewer than one in 10 worked until age 65.
• Among current city pensioners, the average annual allowance for those who retired in the 1980s is about $22,000. For those who retired in the 2000s, it’s $52,400. For those who retired last year, the average is $55,100.
• The highest average pensions are paid to firefighters — at $67,400; police officers, $62,100; and lifeguards, $58,400. General workers average $37,400.
Chuck Prunty, 80, a retired aeronautical engineer who lives in Rancho Bernardo, called The Watchdog upset about the proposed sales tax. When told about the pension analysis, he suggested bankruptcy for the city to void labor deals — an option city officials say would be costly and wouldn’t work anyway.
“I don’t think we can ever get out of this hole we’re in, with the kind of retirement they’ve got,” Prunty said. “We can’t sustain something like that.”
So how did the city get into its financial mess?
Auditors and investigators who have examined city finances point to a string of events in 1996 that strained San Diego’s finances, including hosting the Republican National Convention. That led city leaders to balance the books by paying less into the pension system than was needed to meet its future obligations.
The underfunding was engineered by former City Manager Jack McGrory with the backing of then-Mayor Susan Golding. At the same time, the city adopted benefit increases and a new method of calculating the city’s retirement costs.
The design of the city’s pension changed again in 2002, but things only got worse. Golding’s successor, Dick Murphy, and the City Council established a new underfunding plan that called for a second benefit increase for retirees. Their action instantly created a $1 billion-plus pension deficit. The increase helped win the favor of pension board members, many of whom were city workers, to let the city put far less money into the pension fund than was required.
City officials then failed to disclose that pension debt to investors when the city borrowed $2.3 billion from the bond market. A firm hired by the city to investigate its finances determined that city officials were motivated to hide negative financial information in part to avoid interfering with the city’s 2002 ballpark bond offering, which led to the construction of Petco Park.
That mistake led rating agencies to suspend the city’s credit and prevent San Diego from borrowing money at reasonable rates. Plans for new libraries, fire stations and street repairs were stalled and the city didn’t restore its credit until 2008.
Sanders, who took office in 2005 and played no role in the pension deals or bond offerings, said the underfunding plans have hurt the city tremendously.
“It was shortsighted and it was irresponsible in many ways,” he said.
The city has made progress in recent years by designing a lower-cost pension plan for most new hires, freezing or reducing salaries for current employees and cutting costs in nearly every department. Still, it’s not enough.
In large part because of the 1996 and 2002 benefit increases, the city’s annual pension payment has grown.
In 2002, it was $54 million, or 7 percent of the operating budget.
Currently, the payment is $232 million, or 21 percent of the operating budget.
By 2025, it’s projected to be $512 million, or nearly 47 percent of the operating budget, if no changes are made to pensions or budgets.
Gordon, 69, the top pensioner, said he feels good about his contributions to the city. But he understands that, to some, even his pension allotment before the city boosts in 1996 and 2002 might have seemed excessive.
“I certainly would not be the one nor would anybody receiving a pension be the one to offer an opinion as to whether or not the particular amount is deserved, appropriate or whatever language you want to use,” he said.
“By 2025, it’s projected to be $512 million, or nearly 47 percent of the operating budget, if no changes are made to pensions or budgets”
There is no way to change existing contracts? What about bankruptcy? What city can afford 47% of the budget going into pension funds? This is an outrage.
“By 2025, it’s projected to be $512 million, or nearly 47 percent of the operating budget, if no changes are made to pensions or budgets”
There is no way to change existing contracts? What about bankruptcy? What city can afford 47% of the budget going into pension funds? This is an outrage.
“By 2025, it’s projected to be $512 million, or nearly 47 percent of the operating budget, if no changes are made to pensions or budgets”
There is no way to change existing contracts? What about bankruptcy? What city can afford 47% of the budget going into pension funds? This is an outrage.
“By 2025, it’s projected to be $512 million, or nearly 47 percent of the operating budget, if no changes are made to pensions or budgets”
There is no way to change existing contracts? What about bankruptcy? What city can afford 47% of the budget going into pension funds? This is an outrage.
“By 2025, it’s projected to be $512 million, or nearly 47 percent of the operating budget, if no changes are made to pensions or budgets”
There is no way to change existing contracts? What about bankruptcy? What city can afford 47% of the budget going into pension funds? This is an outrage.
