Ongoing litigation over San Diego’s 2012 pension cutbacks could be costly for the city, but no one knows how costly and opinions vary widely.
Estimates in recent months of a potential city payout have ranged from $100 million down to less than $20 million, but even the people making such guesses always qualify them based on a wide number of variables.
Key among those variables is whether roughly 2,000 employees denied pensions since 2012 would have to split the city’s costs of retroactively creating pensions for them, and whether they could do that with money in 401(k)-style retirement plans the city created in lieu of pensions.
Other variables include whether the city would be forced to pay penalties and interest and how large those amounts would be, and what the city might owe in attorney’s fees to the labor groups that filed the suit challenging the pension cutbacks.
And there’s also a chance the city could pay nothing if it wins the case, which the state’s Fourth District Court of Appeal is scheduled to consider and decide sometime next year or in 2018.
Or the city could lose the case but have the appeals court demand a different remedy than suggested last winter by the state labor board, which said the city had to “make the employees whole” and pay them interest and penalties of 7 percent.
The most detailed analysis was completed last winter by an actuary the city hired to estimate its liability if the courts overturn Proposition B, the successful June 2012 ballot measure that made the pension cuts.
That analysis by the Cheiron actuarial firm said it would cost $20.1 million to retroactively create pensions on Dec. 31, 2015 for 1,635 employees hired since the city eliminated pensions for all new hires except police officers on July 20, 2012.
But time has passed since then, increasing the cost of creating those retroactive pensions, and the city has hired a few hundred additional employees since then, pushing the price tag even further up.
In addition, recent delays in the case caused by a flood of Amicus briefs and the sudden death of a judge could push a ruling into 2018, making the retroactive pensions more expensive and increasing the number of new hires entitled to them.
The city has been hiring between 300 and 500 new employees annually in recent years.
That $20.1 million estimate also came before the city’s pension system sharply increased last month its estimates of overall pension debt based on employees living significantly longer than previously expected.
Tracy McCraner, the city’s director of financial management, concedes that the $20.1 million estimate would certainly be higher based on the number of new hires since the end of 2015 and increased costs of providing them retroactive pensions.
But McCraner noted that the actuarial analysis said $9.4 million of the $20.1 million would come from employees to account for contributions to the retroactive pensions they haven’t been making, plus interest on those contributions.
If a court allows the city to require such retroactive contributions from employees, the city’s liability would be slashed nearly in half.
McCraner said it would be ideal if the employees could use money from the 401(k)-style retirement plans the city created in lieu of pensions.
She noted that the city had contributed more than $19 million to those retirement plans through last year, nearly as much as the $20.1 million that actuary estimated as the city’s liability if Proposition B gets overturned.
“Our argument would be they’ve been collecting it in a 401 (k) all along, so it’s not like they would have to come up with that additional money,” McCraner said.
She conceded, however, that there could be legal hurdles because money contributed to such retirement plans is tax-deferred.
“I don’t know if they would even be allowed to move money from what they’ve already saved,” she said. “I don’t know if that’s legal.”
Michael Zucchet, general manager of the Municipal Employees Association, said it’s possible the court would allow the employees to keep the 401(k)-style plans and still require the city to retroactively create pensions for them.
“Do the employees just get to keep that, or does the city get some kind of credit for what they contributed,” said Zucchet, whose union is a co-plaintiff in the case.
McCraner said it would be illegal for individual employees to get both a 401(k)-style plan and a pension from the city, even in such an unusual circumstance.
While that sometimes happens for high-level city employees, such as department heads, she said it would not be legal because other employees represented by the same labor union would only be receiving pensions because they were hired before July 2012.
Zucchet also questioned the city’s plan, at least as the actuary laid it out, to charge workers interest on contributions they would have made if the city hadn’t eliminated pensions.
“Why should the employees have to pay interest on something the city told them they couldn’t be a part of?” Zucchet said.
He said $100 million is a decent guess at the city’s liability, but he stressed that it’s only a guess.
“Nobody can come up with a rigorous defensible number, all they can come up with is guesses,” he said. “I think speculating about the number is a fool’s errand.”
Zucchet also noted that all guesses become more like wild speculation if the appeals court veers from the ruling by the state labor board, known as the Public Employment Relations Board.
“Even if we assume the appeals court agrees that the city violated the law, they may or not order the same remedy,” he said. “They may be very clear or very vague about the remedy that gets ordered. And there could be substantial negotiation or litigation about what the remedy is.”
The uncertainty partly stems from San Diego being the only city in California to discontinue pensions for new hires, eliminating any chance of a blueprint to follow in restoring them.
“This is completely uncharted territory,” Zucchet said.
He said it’s his opinion that the city would benefit by losing the case, because the restoration of pensions for all employees would help solve the city’s recruiting problems since Proposition B went into effect.
Zucchet also noted that eliminating pensions isn’t saving the city money because they contribute nearly as much, if not more in some cases, to the 401(k)-style plans.
Proposition B supporters don’t dispute that that the contributions are roughly equal.
But they stress that pension plans put cities in financial jeopardy because employees receive a “defined benefit,” leaving the city on the hook to come up with money to pay that benefit even if the stock market crashes or other problems arise.
The 401(k)-style plans, called “defined contribution” plans, don’t guarantee a particular benefit, meaning the city faces essentially no risk.
The lawsuit over Proposition B contends former Mayor Jerry Sanders described it as a citizens’ initiative but used the power of his office to gather signatures, making it a city initiative that required conferring with labor groups.
Sanders has said he acted as a private citizen, not as the mayor, when he worked to help get the measure passed.
david.garrick@sduniontribune.com (619) 269-8906 @UTDavidGarrick
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