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San Diego Begins to Solve the Pension Problem — as California Sinks

California’s total public employee pension debt of $2.067 trillion is still climbing fast, but the City of San Diego’s is shrinking after five years of only giving new employees a 401(k).

The total public pension liability on a market basis for all state, county and municipal governments is $106,848 for every household in California, according to Stanford University’s Pension Tracker. Even if the brilliant government employees earn a 7 percent annual return without any loss over for the next 30 years (they only earned 0.61 percent last year), every household in California will still owe $28,507.

As Breitbart News has reported, that San Diego was being referred to in 2008 by the New York Times as “Enron by the Sea.” Backroom deals between local city fathers and powerful public-sector unions in America’s eighth largest city created a massive financial mess that peaked with the financial crisis.

With the City of San Diego on the brink of bankruptcy in 2005, voters ejected the old guard and elected Republican Jerry Sanders, former commander of the San Diego SWAT team, as Mayor. Despite being a former member of the police union, he eliminated all pension spiking, and pushed the passage of Proposition B, which required all non-police employees hired after July 19, 2012 to receive a funded 401(k) contribution instead of the right to an unfunded defined benefit pension.

Jack Dean, who has been publishing the Pension Tsunami daily blog since 2003, has been continuously lectured by union leaders that cities who dump their defined benefit pensions for 401(k) options will suffer economically. The argument is that it would be impossible to hire competitive public employees whose combined wage and benefit compensation would be 30 percent below the average of the 17 cities in San Diego County that offer a California Public Employees Retirement System (CalPERS) defined benefit pension.

But Dean comments that San Diego has had no problem filling public employee openings. Even the number of firefighter applications to join the city’s 863-member force still averages several thousand each year, despite only offering a 401(k).

The fire department did report that retention losses in the 401(k)’s first full year rose somewhat from an average of 53 per year to 77, according to the local Fox News affiliate. Unions claimed that proved the city had become a training ground for other fire departments. However, retention losses have fallen back since 2013.

According to the University of San Diego’s Index of Leading Economic Indicators, the area’s economy since converting public pensions to the 401(k) system has expanded for 58 of the last 60 months. In April, the Index reached its highest level since February 2006.

The City of San Diego was forced into a four-year legal battle with public employee unions trying to overturn the voters’ right to pass Proposition B and impose reform on what many called outrageously lucrative public employee pensions.

But on April 11, a three-judge panel ruled in favor of voters, according to the San Diego Union Tribune. The taxpayers of San Diego still are on the hook for $2.7 billion in unfunded pension liabilities from employees that joined the city before 2012, but that number will begin falling this year.

The City of San Diego remains the only jurisdiction in California that does not offer public employees defined benefit pensions. Jacksonville, Florida, began switching all new employees, including police, into 401(k)’s last year; the Pennsylvania’s Governor signed a bill last week to move all new state employees and teachers into a 401(k); and Michigan’s governor is expected to sign a bill in the next few days that will push new teachers into 401(k)s.

While California’s Governor Jerry Brown took some modest steps five years ago to control future pension spiking, the Pension Tsunami blog reported this week that the legislature and the governor have just received their fifth consecutive percentage pay raise that exceeded the U.S. inflation rate.

 

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