In San Diego "radical idea" could help cities Slash $ 382 billion pension gap

The cities of New York to San Jose, California, compared to nearly $ 400 billion in unfunded pension liabilities will be looking at what San Diego Mayor Jerry Sanders called his "radical idea" to reduce costs.

After voters in the eighth largest city in U.S. rejected an increase in the sales tax half a cent to balance the budget on November 2, Sanders is pushing to eliminate pension plans for new city employees, offering 401 (k) savings accounts, as in place.

Sanders' plan would replace a return of a pension benefit based on the market, is an example of struggle in the cities to escape from the clutches of the fall in tax revenues and increased retirement costs consume to a fifth of their budgets. The longest recession since the Great Depression in 2010 cut revenues over 25 years, the National League of Cities, said last month.

"We're all going to have to be realistic," said Sanders, a 60-year-old Republican, in a telephone interview. "The private sector went through this. Government will have to relook at how to do things well."

stock losses in the market left 50 of the largest municipal pension plans with an unfunded deficit of 382 billion U.S. dollars in June 2009, according to Joshua Rauh, a professor at Northwestern University Kellogg School of Management in Evanston, Illinois. That's the equivalent of $ 14,000 per household in cities, or more than three years of income.

"It's a double whammy," Rauh said in a telephone interview. "Just at the time that tax revenues have declined, as their pension portfolios."

Numbers Opaque

There is no standardized reporting rules for analyzing municipal pension costs, said Gary Pollack, who helps oversee 12 billion U.S. dollars as head of fixed-income operations in the unit of Deutsche Bank AG in New York Wealth Management .

"I would like to see some consistency, so that comparisons can be made without a magnifying glass," Pollack said in a telephone interview. "It's a long-term problem that needs to be treated."

The truth is that the percentage of general fund spending in retirement benefits have in the past decade, more than double in some of the largest U.S. cities, resulting in cuts in services and employment.

The mirrors problem in the states, where only half could pay 80 percent of promised benefits in its 2009 fiscal years.
Not by police

About 15 states allow employees to join the so-called defined contribution plans similar to 401 (k), according to the Baton Rouge, Louisiana-based National Association of State Retirement Administrators. Nationally, only 17 percent of public sector workers are in such plans, compared with 41 percent in the private sector, according to the Employee Benefits Research Institute in Washington.

Sanders' plan is defined contribution apply to civilian employees of the city of 1.3 million euros. Police and firefighters are not entitled, because children could hurt recruiting benefits, he said.

His idea, he will ask voters to approve, "probably will be explored by other cities," said Christopher Hoene, director of research at the Washington-based National League of Cities, in an e-mail.

Chuck Reed, mayor of San Jose, 460 miles (740 kilometers) north of San Diego, Sanders said inspired him to address his city pension.

"San Diego is the leader, the spearhead," he said. "They've been ahead of the rest of us on this."

San Jose, which is the 10 most populous U.S. city and has 1 million inhabitants, increasing payments to the police and fire three times in the past 15 years, raising the maximum benefit for 90 percent of its salary. In 1995, was 75 percent, according to a September filing by the mayor.

Boom times

The changes came when the population of the municipality of Silicon Valley rose by 20 percent and doubled the price of housing, according to City-Data.com. Benefits enacted when times were good, very expensive cost, Reed, 62-year-old Democrat, said in a telephone interview.

"The health care costs continue to rise, but the retirement was self-inflicted," said Reed. "We thought we were rich when they last forever."

Instead, the bills came due.

San Jose voters approved two measures related to pensions 2 November. One reduces the power of arbitrators to determine the municipal employee contracts. Another allows the city to create a second level of benefits for new workers, said Reed.

Potholes and sidewalks

In Los Angeles, pensions and health care will cost more than $ 800 million or 18 percent of revenue this year, according to City Administrative Officer Miguel Santana. Ten years ago, which cost 164 million U.S. dollars or 5.1 percent.

second largest municipality in the nation, with nearly 4 million people, has eliminated 3,500 jobs and libraries closed two days a week, said Santana. This is done only temporary asphalt repairs to the sidewalks and fill potholes least one-third said Lisa Hansen, a spokesman for the city.

New York cut 10,000 jobs over the next 18 months. That will help pay for a 18.5 percent increase in pension costs to 8.3 billion, or 20 percent of projected revenues in 2012, according to Marc LaVorgna, spokesman for the mayor. A decade ago, the costs of pensions in New York were up 4.8 percent of revenues.

Big Drag

"A reduction of 10,000 jobs represents a significant burden on the economy," said James Parrot, chief economist at the nonpartisan Fiscal Policy Institute in New York. "That's almost half the job growth projected for next year."

Yesterday, the chief actuary of New York, Robert North, and Mayor Michael and Comptroller John Liu in predicting the most populous city in the nation will lower the cost assumed in the $ 106,200,000,000 the pension investments current 8 percent rate.


Pittsburgh City Council in October rejected a proposal by Mayor Luke Ravenstahl to lease parking spaces to raise $ 452 million pension, leaving the city of 311,000 to deal with a state takeover of the plan the following year, Joan Doven , a mayoral spokesman, said in a telephone interview.

City costs of pensions will rise to $ 127 million from $ 45 million by 2017, according to a statement from the mayor. The plan is funded 34 percent, according to an actuarial report.

Ravenstahl is not willing to issue "new irresponsible debt" to pay an ongoing expense, said: "It's just kicking the can down the road."

The courts have ruled that the pensions of current employees can not be removed, San Diego, City Attorney Jan Goldsmith, said in a telephone interview.

Pulling the rug

"We can not promise something to someone for 30 years and pull the rug out from under them when they retire," said Michael Zucchet, general manager of San Diego Municipal Employees Association, in a telephone interview.

Put forward contracts in defined contribution plans will not reduce current deficit, Steven Kreisberg, director of collective bargaining and health policy at headquarters in Washington, the American Federation of State, County and Municipal, the largest country public employees' union, said in a telephone interview.

Costs will increase because cities remain traditional plans that work with fewer members, he said.

"The only way to cope with shortage of funding is to fund," he said.

Sanders said San Diego's plan will cost less "simply because you pay as you go, do not accumulate the huge deficit." An actuary will create an estimate of the savings before a ballot measure, not yet scheduled, he said.

"Enron by the Sea '

San Diego earned the sobriquet "Enron by the Sea" by a pension fund scandal that led to the resignation of a former mayor and half a dozen city officials. The city settled the claims by the Securities and Exchange Commission in 2006 have committed fraud by failing to make adequate disclosures to investors about a pension fund deficit.

Sanders, a former police chief elected in 2005, has supported the changes in benefit plans. The city eliminated retiree health coverage for employees hired after 2005. Last year, San Diego reduced their maximum pension payments and reduce by half to 8.75 percent of the city's contribution for new employees.

The defined contribution plan is not necessary because the city has already reduced benefits for future hires, said Zucchet, the union boss.

"We've been cutting for five years," he said. "We're five years before the game."