Originally billed as too good to be true, it may not be true after all. In 2003 when San Diego pension officials encouraged city workers to participate in a special program to purchase additional years of service that they didn’t actually work, they knew that they were pulling a fast one on the city.
Now an appeals court has ruled that the special program promoted by the pension board was illegal, and that as many as 2,200 current and retired employees may be required to take big cuts in their expected pensions, or fork over up to $50,000 to keep their current pension payments.
The special program, first enacted by then-mayor Susan Golding in 1997, allowed workers to participate in a so-called “purchase of service credit” program. City employees could make a lump sum payment determined by actuaries, in order to add extra years to their actual years worked, so they could retire early, or retire with more years of service, entitling them to a higher pension payment.
The general idea of the program was that the employee would pay an amount equal to the present value of the future incremental benefits, so that taxpayers would not be on the hook for such amounts. The problem occurred immediately and over a number of years because workers weren’t changed enough for the extra benefits. In 2003 when the discrepancy was discovered, the amount undercharged to city employees was nearly $13 million.
In order to fix the problem, the pension board voted on Aug. 15, 2003 to substantially hike rates to properly charge for the purchased benefits. Under the revised program, an employee could purchase an additional year of service for 27 percent of their annual salary, up from 15 percent. Public safety employees would be required to pay 37 percent of their annual salary to purchase an additional year of service, up from 26 percent.
Instead of implementing the well-publicized increases immediately, the board delayed the rate increases to Nov. 1, encouraging workers to take advantage of the cheap buy-in rate. Once the word got out, workers bought into the program at a furious rate. During the short 10-week window, more city employees bought into the program than the entire previous six years combined. The average credit purchase was about $65,500, when the fully-funded amount should have been $103,200.
Former city attorney Michael Aguirre sued the pension board in November 2007 over the illegal credit purchases. Anyone retiring after that date is subject to the appellate court decision.
The amount calculated as the undercharge to employees was determined to be about $100 million. The appellate court ruling found that the pension board was responsible for matter and ordered it to fix the mistake by adjusting pension benefits, without charging the city for the deficiency.
The city council has until the end of January to decide how it will handle the problem and whether it will exempt some or all of the employees from additional payments, and instead charge taxpayers. If the city does nothing, employees will see their benefits adjusted or have the option of paying additional monies to keep their existing pensions.
Retirees and union leaders have already told the city that they intend to sue if workers are forced to make up the deficiency in their original credit purchase, or if payments are adjusted.