San Diego ready to reverse Proposition B pension cuts, potentially ending 9-year legal battle

The nearly nine-year legal fight over San Diego's Proposition B pension cuts came to an apparent end Friday when supporters of the 2012 ballot measure declined to appeal a court ruling that ordered the city to overturn the cuts.

The end of the legal fight comes nearly three years after the state Supreme Court ruled Proposition B was illegally placed on the ballot because San Diego officials skipped key steps, such as negotiating the pension cuts with labor unions.

Proposition B eliminated pensions for all new hires after June 2012 except police officers. The legal resolution allows city officials to begin creating pensions for the roughly 4,500 workers affected.

The city's cost to create pensions for those workers was estimated at somewhere between $20 million and $100 million at various points during the legal battle, but the robust stock market in recent years has shrunk that amount.

That's because court rulings say the city gets financial credit for providing employees hired since Proposition B with 401(k)-style retirement plans instead of traditional pensions.

Those retirement plans have surged in value because stocks have done so well during the last nine years, increasing how much credit the city will get and shrinking what the city will owe to create pensions for the workers.

San Diego might end up owing nothing at all when the city's pension system calculates how much it will cost to create pensions for workers hired since Proposition B, said Mike Zucchet, head of the largest city employee labor union.

Court rulings say the amount the city must pay is the cost of creating pensions for the affected workers, minus half the value of the 401(k)-style plans those workers received in lieu of pensions.

Half the value would be subtracted instead of the full value because the city and the individual employee have made equal contributions to the 401(k)-style plans.

But the city's cost for creating the pensions will also essentially be half the overall cost. That's because the affected workers will have to follow normal city procedures that require workers to cover half the contributions to their pension.

During the early stages of the legal fight, there was speculation that if Proposition B was overturned the affected workers would be given a choice between entering the pension system or just sticking with the 401(k)-style plan.

But under federal tax law, all workers must be required to have pensions in order for a city's pension system to maintain its tax-exempt status.

The affected workers will likely be given a choice of receiving a pension that starts this summer or receiving a retroactive pension with the same start date that they were hired.

The retroactive pensions, which will be more valuable and allow the worker to retire sooner than a pension that starts this summer, will be costly for the employees because they will have to pay — in a lump sum — years of pension contributions that they missed.

A worker hired in 2019 or 2020 who chooses a retroactive pension will pay far less than a worker hired in 2012 or 2013, who could owe tens of thousands of dollars in retroactive pension contributions.

Also pension reforms approved by the San Diego City Council in 2009 will make pensions for the affected workers less generous than the pensions of employees hired before 2009.

Many affected workers are still expected to consider opting for retroactive pensions.

Details of how this will all work are expected to be negotiated this spring between city labor unions, attorneys for the city, the city's pension system and officials at City Hall.

Just after the court ruling in January ordering the city to overturn the pension cuts, Mayor Todd Gloria said he is ready "to chart a course forward that is in the best interest of San Diegans and the city employees that serve them."

City Attorney Mara Elliott declined to comment Friday because officially the litigation was still ongoing.

The 90-day window to appeal the Jan. 5 ruling closed midnight Friday, but the court could still receive appeal documents that were postmarked Friday.

Officials of the city's pension system, the San Diego City Employees Retirement System, announced last month that they've begun the steps required to bring the 4,500 affected workers into the system.

"The city is not waiting until time runs out and has begun addressing how to restore SDCERS benefits to the affected employees," Chief Executive Gregg Rademacher told the city's pension board March 13. "SDCERS expects all staff will be called upon to work on the re-opening of the city (pension) plan and we have established a task force internally to coordinate our efforts."

Zucchet, general manager of the Municipal Employees Association, said no formal negotiations between the city and its labor unions have taken place.

A key element that must be negotiated is a 7 percent penalty courts have ruled the city must pay for illegally implementing the pension cuts. One possible resolution is requiring one-time contributions by the city to the 401(k)-style plans of the affected workers.

The negotiating process will be overseen by the state's Public Employment Relations Board.

The end of the legal fight starts a procedural process at City Hall.

The council must twice approve an ordinance that removes the language of Proposition B from the city charter. Those votes, which should take place this spring or summer, will allow workers other than police officers to receive pensions.

When the state Supreme Court ruled Proposition B was illegally placed on the ballot, the court declined to take the additional step of invalidating the measure.

Instead the matter was kicked back to Superior Court, where Judge Richard Strauss listened to arguments from labor unions and Proposition B supporters before ruling in January that the measure must be invalidated.

This story originally appeared in San Diego Union-Tribune.

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