By Adam Summers and Lance Christensen | The city of San Diego was once revered as one of the best-run cities in the country. In just a few short years, a couple of ill-advised plans to intentionally underfund the city’s pension system sent the self-described “America’s Finest City” from the heights of being touted as one of the most efficiently run large cities in America and the most efficient of California’s largest cities to the depths of financial despair, near bankruptcy, and a new moniker: “Enron-by-the-Sea.” Before such high-profile pension and fiscal failures as Vallejo, California and Detroit, Michigan, San Diego was the poster child of public pension collapse and budgetary breakdown.
As of 2012, San Diego faced a nearly $2.3 billion unfunded pension liability. The city’s annual pension payment increased from $43 million in 1999 to $231 million in 2012, and consumed about 20% of the general fund budget in 2012. In addition, the city’s unfunded retiree health care liability was estimated at approximately $1.1 billion in 2011, but a deal reached between the city and its labor unions that year is expected to save over $700 million over 25 years. As of 2012, the retiree health care liability had been reduced to an estimated $444 million.
As former City Councilman Carl DeMaio, one of the city’s biggest advocates for, and backers of, pension reform in San Diego, explained, “The impact of (the pension crisis) was twofold: More and more money was diverted from city services to pensions, more and more increases were made in the water fees and development fees to do cost recovery to save the pensions. So there was a higher cost of living in San Diego, a higher cost of government with lower services because they kept cutting services to divert money to the pension system.” Those city service cuts included neglecting pothole and other road repairs, the “browning-out” of fire stations, the elimination of community service centers, and a reduction in hours at city libraries, including reductions of 40% to 50% at some branches.
San Diego’s pension story is filled with scandal, indictments, the suspension of its credit rating, significant budget deficits and service cuts, resignations of top city officials, and talk of bankruptcy. But there may also be redemption. Faced with such serious problems, San Diego embarked on a series of pension reforms in order to help the city right its financial ship and get on the road to fiscal recovery. Perhaps the most well-known of these reform measures is Proposition B, which was featured on the June 2012 ballot.
Proposition B was unique in that it not only called for the city government to provide more modest pensions to its employees—as many other jurisdictions have done—but it also closed the city’s traditional defined benefit pension systems for all employees (police officers were exempted) and placed them instead in 401(k)-style defined contribution retirement plans similar to what most workers in the private sector receive. In addition, it took the step of addressing pensions for existing workers by eliminating supplemental and specialty pays from pensionable pay calculations, focusing instead on base pay, and called for a pensionable pay freeze at fiscal year 2011 levels until June 30, 2018, for current employees. Showing that pension reform is a bipartisan effort and despite a sizable Democratic plurality in voter registration (40% Democrat versus 28% Republican in the last election in San Diego), the public saw the need for further reform and overwhelmingly passed Proposition B with 66% of the vote.
Though Proposition B may have been the most recent and daring of San Diego’s pension reform measures, the success of a number of other previous reform measures, spanning back nearly a decade, is what ultimately laid the groundwork for its passage. This study examines the history that led to the pension problems in San Diego, the path to reform, the Proposition B reforms adopted in 2012, the bureaucratic and legal hurdles the city still faces in implementing its reforms, and the lessons learned from San Diego’s experience.
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Public Pensions in San Diego: From “America’s Finest City” to “Enron-by-the-Sea” (and Back Again?), PDF 7.4 MB
Adam Summers is a senior policy analyst for the Reason Foundation. Lance Christensen is the director of the foundation’s Pension Reform Project.