The San Diego Experiment

San Diego, California, is a place to keep an eye on as it serves as a laboratory for Movement Conservative experiments in economic malfeasance and runaway plutocracy, helped along by a marvelously kleptocratic and corrupt Democratic contingent. This is the mess Pete Wilson built. The biggest experiment underway right now is how to use Republican controlled major municipalities to eliminate any kind of retirement for workers except 401(k)s. They just might get away with it.

The City of San Diego stopped participating in Social Security system in 1982, when Pete Wilson was mayor, in exchange for a city-funded retirement pension and health care package. City employees do not pay into Social Security or Medicare. The current retirement system is a slightly better than Social Security deal for ordinary long-term employees. Short term employees (less than 10 years of employment) are not vested, so it is a worse deal. For a small number of very long term employees who are at the top of the civil service ladder, especially those in Police, Fire or Life Guard positions, it is a much better deal than Social Security. The people at the top have more opportunities to game the system and maximize their eventual payout. In short, business as usual for the oligarchic kleptocracy.


Until fairly recently, the City has used the pension system exactly as the Federal Government uses Social Security - a piggy bank to raid at will. As a local analyst, Vlad Kogan, describes:

During good economic times, the city relied on strong investment earnings to divert funds from the pension system to pay for projects that San Diego voters supported and to offset other required payments, including the city's annual bill for retiree healthcare.

The City got investigated by the SEC for its shady deals and insider agreements on how it was handling its pension system, and got slapped around sharply for not having a functional financial system which would allow things like, say, auditing. In truth, what it had previously used to keep track of budgets and resources was a set of programs that individually functioned well, but weren't integrated. Those who knew how to manipulate the disparities and gaps did so. It lost its bond rating which prevented borrowing and had to agree to implement a real ERP (Enterprise Resource Planning) system.

The City powers that be (most centrally this person, Kris Michell, who has been a part of every mayoral administration for over 15 years, but has never been elected to anything) (that's how power elites function, after all), turned their liability into political gold by blaming the greedy, dirty unions for extorting undeserved money from the virtuous taxpayers (never mind that the current mayor, Jerry Sanders, who is leading the charge, is going to get TWO pension payouts from the city - one from his stint as Chief of Police and another from his stint as Mayor), and that we must defend the citizenry from the grasping unions by eliminating their pensions and healthcare entirely.

This despite the fact that the pensions in question are actually on par with Social Security and Medicare.

Vlad Kogan posted a pair of articles that are must reads because while they are specifically addressing San Diego's pension bait-and-switch, they provide insight into how pension systems (from Social Security on down) will be under attack and what moves will be made to try to turn this into an opportunity to transfer yet more wealth upwards.

His first article, What Caused San Diego's Ballooning Pension Payment?, details two actions that put the pension system at risk - deliberate underfunding with diversion of funds to non-pension related expenditures and a significant change to the investment strategy of the SDCERS (San Diego City Employees Retirement System), which went all in to the boom stock market:

Over the past two decades, SDCERS has fundamentally transformed its investment strategy, embracing greater risk.Increasingly, the majority of new money added into the pension system has come from the appreciation of asset prices — instead of member and employer' contributions, and return on fixed-income investments like interest and dividends. While this has reduced the city's pension payment during the boom stock market years, allowing it to spend more money on public services and big-ticket (and voter-approved) projects like Petco Park, it also exposed the pension fund to greater market volatility. As a result of the global financial crisis, which wiped out more than $1 billion in pension fund assets, the city's pension payment must now grow to offset these financial losses. This is one of the primary causes of the growing pension bill.

On top of these changes to the pension system itself (one callously self-serving, the other foolishly optimistic), was a growth in the size of the pension benefit payout. Even that has its roots in the City's deliberate manipulation of the pension system:

In fiscal year 1990-91, the average SDCERS benefit payment totaled $11,403. By fiscal year 2006-2007, it had grown almost three-fold to $33,418. (Note that while $100,000-a-year pension payments are the ones that usually attract the most media attention, the vast majority of employees receive far, far less.)While some of these increases would have occurred as a result of regular cost-of-living adjustments, a significant portion of the growth is due to Managers Proposals 1 and 2, two agreements worked out between the city and the pension system that allowed the city to make less than its required pension payment in exchange for sweetened retirement benefits for its employees. ...

Yet, higher pension benefits can explain only part of the recent rise in the city's required payment. During the same 1990-2006 period, the city's annual pension payment has grown from less than $37 million a year to nearly $180 million, an increase of almost 400 percent. As the chart shows, the city's pension bill has grown significantly faster than then retirement benefit payouts.

In addition to covering the higher benefit payments, the city is now also repaying for its previous practice of diverting money from the pension fund to increase the city budget. Though public employee unions condoned the practice, they certainly were not its primary architects.

Hmm, sounding familiar? It has overtones of the use of Social Security to make the federal budget look better than it is coupled with screams and howls of how underfunded and in peril the SS system is. Of course, had SDCERS not taken the money and gambled it away in the biggest casino in the world, Wall Street, there might be, at worst, a modest shortfall, kind of like Social Security itself:

The shift from fixed-income investments to asset appreciation to produce investment earnings has resulted in increased volatility.That's because, even in the worst years, dividend and interest income generally does not fall below zero. By contrast, assets don't always appreciate — sometimes they depreciate. This is precisely what happened in 2008, when the global financial crisis triggered a market panic that wiped out more than a $1 billion in SDCERS assets.

The effect of asset depreciation needs to be underscored,because this wipes out not only assets but the compounded interest on those assets that had been assumed by actuaries decades into the future just the year before. Overnight, the funded status of the pension system collapses, pushing up employer contributions dramatically.

So, in a nutshell, the City power players took employee contributions and taxpayer matching contributions, tossed it into the stock market, shorted the retirement system, spent the money on pet projects that do not benefit the city in proportion to the money they siphoned away, and now want to renege on all of their fiduciary obligations by blaming it in the unions.

After that article, Kogan published Why a 401(k)-Style Retirement Plan Won't Save the City Money in September this year, going after the idea being pushed by various Movement Conservative interests to simply move the entire city to a 401(k) system and be done with this union-pampering pension nonsense. Here, Kogan actually compares the costs of different systems, and also points out that a move to a 401(k) system tomorrow will do nothing to resolve the city's budget woes, though it will force employees to put all of their retirement savings at risk on the stock market:

First, how much does the city currently contribute to fund the pension benefits of its employees? According to the latest actuarial valuation for the city's retirement system, the current "normal cost" for employees hired prior to July 25, 2009, is 11.4 percent of payroll (see page 9 here). For newer employees, hired under a less generous pension plan negotiated by Mayor Jerry Sanders, the city's contribution rate is 8.6 percent of payroll.

Suppose now that the city of San Diego was indeed a private business and, instead of sponsoring a defined-benefit pension system, paid into Social Security and contributed to a 401(k)-style pension plan. First, the Social Security bill would total 6.2 percent of payroll. Second, if the city made a 401(k) contribution equal to the private-sector average, this would add another 4.1 percent of payroll. The total cost: 10.3 percent of payroll, significantly more than the city's contribution under its existing pension system for new hires.

The problem is that the "normal cost" represents just a fraction of the city's annual pension bill. Most of the current payment (more than 30 percent of payroll) is instead going to pay down the $2 billion unfunded liability in the pension system. As I have written earlier, the vast majority of this liability is due to investment losses in the wake of the global financial crisis. Switching to a 401(k) plan would do little to eliminate the need to pay off this massive liability.

So, the current defined pension is either 11.4% or 8.6% depending on hire date, and a Social Security plus 401(k) system would be 10.3% if the city followed ordinary private sector business practices. Head to head, the "lavish" pension plan provided to city employees is on par with what a comparably sized private sector company would expect to pay. The excess payments are not payroll contributions but back payments for the financial shenanigans and deliberate underfunding done in the 90s.

The point of changing from a defined pension to a 401(k) has nothing to do with saving anyone any money. It is an ideologically driven desire to force all retirement money into private, stock-based accounts where the government cannot guarantee a return and where the funds can be used to transfer the wealth upwards to Wall Street. In short, it is yet another money grab by the have-much-mores. There is no interest in cost savings, because that cuts into the take for the monied class. The purpose is to redistribute tax and payroll dollars.

But wait, there's more. Yesterday, Mayor Sanders announced that he wants to force all new hires into a 401(k) system without the Social Security component. The police and firefighter new hires would remain in the pension system (Jerry rewards his old buddies), but all new hires would be tossed into 401(k) hell (my emphasis):

Sanders acknowledged the Social Security dilemma and said some work groups might be allowed back into the system. He said any proposed city match for a 401(k) plan would likely have to be high to ensure approval from the Internal Revenue Service. A typical 401(k) plan has a 3 percent match.

Some groups might be allowed to contribute to Social Security? OK, so the employee has no secure retirement benefit (no SS, no pension), there is nothing in here about medical benefit (the current pension system replaces Medicare as well as SS), and there is no guarantee what the City will actually contribute.

What San Diego is trying to do is set the precedent for opting out of any employee retirement guarantees at all, and actually goes so far as to force the employees to hand their money over to the private sector to enrich others while losing any hope of security for themselves. When the stock market crashes, you can be at worse than zero appreciation - you will lose your capital. The investment firms probably lose nothing, as they can count on Federal bailouts, as we have seen over the last two years.

The main proponent for this (aside form the shadowy Kris Michell) is the radical Republican City Council member Carl DeMaio, who is single mindedly pursuing two goals - outsourcing and privatizing as many city services as possible (and shutting down those that can't be sold to the best inside bidder) and ending the pension system in its entirety:

Replacing pensions with 401(k)s for new hires already was a part of DeMaio's 80-page financial proposal released two weeks ago. He's holding a rally Monday with the head of the local Republican Party and the fiscal conservative Lincoln Club to promote his reforms, which also seek to cut current employees' pay and benefits, through an initiative.

DeMaio believes there's only room on the next election ballot for one reform initiative: His own.

"It's chump change compared to the reform we need," DeMaio said of a solely 401(k)-based ballot initiative.

No pension system for new employees, but a cheap-ass 401(k) instead, renege on contracts to cut current pensions down to the same level, and destroy union negotiation power.

The Republicans are clever, if horrifyingly brutal towards humanity as such. They know they can't outlaw Social Security head on. Instead, it is a death by a thousand cuts. If San Diego succeeds in replacing both pension and SS with a 401(k), probably by promising an initially high payout to get past IRS watchdogs,  then they've also neatly eliminated Medicare, too, and now their target is to reduce the amount of the city's contribution to the privatized 401(k). Or maybe not, since that is money goes directly to their friends. They've shown how other cities can weasel their way out of the system, and set an example for companies to follow, arguing that, hey, why can't we also just pump more into 401(k)s than into SS?

The emphasis on payouts and those damn retiree parasites (it matters that city staff is more female and less white than the surrounding population) bleeding us dry is already a drumbeat against SS, even though the problem for San Diego is deliberate underfunding and SS is facing a time-limited period of potential underfunding decades ahead, plays well in tight financial times as resentment against those who have a little more blinds most people to the way in which their financial future has been exploited by those who have astronomically more. It is all about how to get the public to agree to handing its money over to those who have no interest in your financial well being, only their own.

All of this is perfectly acceptable to the cultural Stevensonians who are also part of the monied elite, or who fancy themselves to be part of it. I mean, we need to be fiscally responsible, and people should be in charge of their economic futures, and just providing handouts doesn't work, and investment is good, and so on and so forth, tapping away on their iPads and Tweeting each other about meeting up for some craft brews, while working class families are being told that they are going to bear the burden for the fiscal irresponsibility of Timmy Geithner's golfing buddies.

The socialization of risk, the privatization of wealth, coming to a paycheck near you all too soon.

Anglachel

Update - See also Mark Thoma's post today on the "payroll tax holiday" proposal from Republicans.