The problem of the San Diego city pension deficit is well known. But what is not understood is that many city workers are often entitled to three pensions, not just one.
Even with the new 2nd tier pension structure (a rather tepid improvement that marginally reduces taxpayer pension costs), all current San Diego employees are largely grandfathered under the lucrative plans discussed below.
The problem is deeper than the pension underfunding, or even the burgeoning unfunded liability that now exceeds two billion dollars. The problem is that city workers get a compensation package that’s far more generous than what the taxpayers receive, or what is necessary to hire city workers. It is fundamentally unfair to the employers of the city workers – the beleaguered taxpayers of San Diego.
Below is an example of what pensions a career “general” city employee (not police and firefighters) can receive. Police and firefighters get two pensions (assuming they participate in the DROP pension program), but general employees sometimes can receive three pensions.
The DROP program (Deferred Retirement Option Program) is a fairly common extra pension plan found throughout California. Originally it was designed to encourage critically needed early retirees to remain with their government employer – primarily for police and firefighters.
But DROP has metastasized into a double pension for many government workers who deign to stay on for up to five extra years – critically needed or not. Of course, DROP would have never appeared if state, county and city governments had not first dramatically reduced their employees’ retirement age – at a time when people in the private sector are having to work even more years before retiring.
SPSP (Supplemental Pension Savings Plan) constitutes a third pension of considerable value. Most cities opted out of Social Security in the early 1980’s. The IRS considered their standard government defined pension plans acceptable substitutes for Social Security, so the cities could opt out. It was a one time offer, and most cities jumped on it with the full support of the employees’ unions.
So did San Diego politicians. But in addition, city officials arbitrarily chose to provide a second full pension for “their” general employees – the SPSP plan. In a nutshell, it’s a full matching 401k-type plan, in which the employee’s contribution is matched by taxpayers. The employee must put in 3% and can choose to put in up to 6% – all matched dollar for dollar by the city.
The funds are placed in earmarked accounts, and are then invested in mutual funds or savings funds at the employee’s discretion.
Let’s consider a San Diego general employee hired at age 25, “retiring” at age 55 and then remaining on the job via the DROP program for five more years before really retiring at age 60 with a final salary of $75,000. Such a retiree gets three pensions – the well-known city defined pension plan, the relatively unknown SPSP plan and the infamous DROP program.
Assume the retiree opts to receive only the earnings of the SPSP and DROP pensions – leaving the corpus untouched. Assuming the SPSP account averages an 8% annual return, and DROP program earns an average 4% (guaranteed by taxpayers), the combined total age 60 pension for such a retiree (assuming a conservative 3% total annual pay increases from age 25 to 55) comes to over $154,000 annually – plus some annual cost of living increases.
But that’s not all. Not hardly. Upon the retiree’s death, the DROP and SPSP amounts will be paid out to designated beneficiaries. In this example, the lump sum will be about $1,313,000 – almost 18 times the highest year’s salary.
This example is intended to demonstrate the magnitude of the giveaway. The actual calculation would be different because of the many variables. There are literally an infinite number of retiree options and investment returns. For instance, a retiree may choose to take more upon retirement from the SPSP and DROP accounts than they earn – increasing today’s pensions while leaving less for beneficiaries.
The format of this column limits any meaningful explanation of the math. But our Excel spreadsheet is available online for “what if” modeling and analysis – with more detailed explanation of the variables. Click here to download.
In addition there are other variables too difficult to program into such a spreadsheet – age differences in contributions, different benefits for different tiers of employees based on hiring date, future rates of return, etc. But all these differences have a limited effect on the magnitude of the final pensions.
If there’s a more generous pension package offered by anyone in California – public or private – we are not aware of its existence. And we’ve looked. San Diego politicians must finally realize that a drastic overhaul of city compensation is needed now. Failing that, we need to contract out every possible city job.