Message From Ann M. Smith: City Surrenders On “Sub-Equal” Pension Litigation

After three years of litigation – with MEA opposing the City in court at every turn – the latest threat to City employee paychecks has ended in the City’s complete surrender.  There will be no change in how SDCERS determines what the City versus the employees must pay into the pension plan when investment losses occur.   The additional contribution burden which the City sought to shift to employees will not occur.  The City Attorney’s stated litigation goal (per e-mail to the UT in September 2010) of causing employee contributions to SDCERS to get so big that employees would be forced to give up their defined benefit pension plan altogether, failed miserably – just as former City Attorney Aguirre’s litigation goal of rolling back your pension benefits had also failed.  In both landmark cases, MEA took the lead as your litigation voice in defeating the City’s claims.

The City’s latest piece of pension litigation against its employees began when the SDCERS pension plan took an $800 million hit from investment losses at the peak of the recent recession.  In response, City Attorney Jan Goldsmith filed suit in May 2010 arguing that 60 years of plan history (giving the City the benefit of all investment gains) — and the related legal protections — should be ignored, and that the City was entitled to a Court order directing SDCERS to charge employees for half of these (and other) losses.  Fastening on certain “substantially-equal contribution” language in the City Charter (Article IX, section 143), Goldsmith argued (1) that this language was “clear and unambiguous” in dictating the relief he sought, and (2) that SDCERS and its actuaries had gotten it wrong since 1954 when they failed to allocate half of all system losses to employees.  Ironically, as recently as 2004 (50 years later), in an “Impartial Legal Analysis” authored by a former City Attorney and published by the City in connection with a Charter amendment to section 143, the City itself had informed voters that these losses were entirely the City’s not the employees’ responsibility.

No matter . . . undaunted by decades of history to the contrary, the City Attorney pursued his bogus “theory” through three years of costly litigation.  He continued the unnecessary legal battle even though the City had done no cost impact analysis to understand (1) how employees would be affected, (2) how the City’s ability to provide vital public services would be affected if employees could neither be retained nor recruited, or (3) how the City’s annual contribution obligations would be affected.  Goldsmith continued the legal battle even after Judge Zimmerman had ruled that the disputed language was actually ambiguous rather than “clear and unambiguous” as the City Attorney argued – and on which the City’s case depended.  Goldsmith continued the battle even after the City was forced to retreat from its motion for summary judgment in the wake of a crushing opposition filed by MEA and three other employee unions (Firefighters Local 145, San Diego POA, and AFSCME Local 127), as well as by SDCERS (with whom we were aligned in opposition to the City).

The City Council approved the “settlement” (i.e., the City’s surrender) by an 8-1 vote on 11/21.  The SDCERS Board approved it on 11/25.

The “settlement” requires Judge Zimmerman’s approval based on his determination that it is made in good faith.  The “settlement” also permits MEA to seek a recovery of attorney’s fees against the City.  Whether or not MEA will be awarded its fees will be a matter for the Court’s discretion and will not be decided until next May based on the filings which occur early next year.

Congratulations to all of you for winning this latest legal battle – by paying your dues or agency fees, you assured yourselves a voice and a strong advocate in the courtroom.  “Justice for all” doesn’t happen on its own; in the end, justice comes with a price tag and your unity makes it more likely to be achievable.

Warm regards to all for Thanksgiving and the holiday season ahead,

Ann M. Smith

Lawsuit over ‘equal’ pension share dies

Goldsmith effort to make employees shoulder more costs is settled

Published in the San Diego Union Tribune

By Craig Gustafson 6:07 p.m. Nov. 25, 2013

A pivotal lawsuit touted by City Attorney Jan Goldsmith over how much city employees should pay into the retirement fund has been settled with none of the major changes he sought being implemented.

At issue in the case was an interpretation of the city charter which states the city and its employees shall contribute “substantially equal” amounts toward pension obligations each year.

Goldsmith said that means workers should have to contribute more toward their pensions in bad investment years and, conversely, less in boom years. That would have been a sharp departure from the current model where an employee’s contribution remains a fixed percentage of salary while taxpayers bear all the financial risk.

At Goldsmith’s behest, the city sued its pension system in May 2010 to have his interpretation implemented and have city workers pay as much as $40 million of the investment losses incurred at the peak of the recent recession. That has not been the outcome.

Instead, more than three years later, the most tangible outcome has been legal bills topping $4 million for the San Diego City Employees’ Retirement System, which has its operating budget funded by the city. The City Attorney’s Office also likely spent a significant amount on the case although those costs are absorbed in the department’s annual budget and aren’t itemized.

The City Council voted 8-1 in closed session Thursday to settle the litigation, but the deal wasn’t made public until Monday. Under the settlement, the city retains the right to require employees to pay more toward pensions in the future but for now the status quo remains in effect.

The end result is essentially a draw between the city and SDCERS although it’s hard not to view it as a public-relations loss for Goldsmith, who championed the legal strategy for years. Former Mayor Bob Filner urged dismissal of the lawsuit in May, calling it a loser that was costing taxpayers millions.

In a statement Monday, Goldsmith said the charter allows the city to voluntarily pay more than its “substantially equal” amount and under Proposition B, the pension overhaul approved by voters last year, can do so with six or more council votes.

“The City Council has the right to decide policy,” Goldsmith said. “The only thing we care about is that the law is followed. The law states that the city cannot be required to pay more than a substantially equal amount. The city can, as it is doing here, agree to pay a higher amount as long as it is with 6 votes or more and approval of the court. A future council can change this under the terms of the settlement.”

Ed Kitrosser, president of the pension board, said the city spent more than $4 million suing itself over an interpretation of the charter that was ultimately left to stand.

“Since inception, SDCERS has been confident in its position,” he said. “The city is obligated to pay for SDCERS’ legal expenses through operating costs that are bundled into the city’s annual pension payment. … I commend the City Council for ending this wasteful spending so that the city and SDCERS can move forward.”

Four city employee unions intervened in the case and were also part of the settlement. Ann Smith, an attorney for the Municipal Employees Association, the city’s largest union representing white-collar workers, said the city’s lawsuit aimed to change six decades of how the pension plan was administered.

“The settlement is, in fact, the city’s surrender of its litigation position during the past three years and its decision to leave everything alone,” Smith said. “In other words, the city is walking away from a position MEA thought was ludicrous and unfair to employees who already make very substantial contributions to their pension plan each payday — along with all of the other economic concessions they have made during the past few years which have helped to improve the city’s fiscal strength.”

City workers have increasingly paid more toward their pensions after former Mayor Jerry Sanders and the City Council began systematically eliminating the once-common practice of the city agreeing to cover the employee’s own share of pension contributions — on top of the city’s share as an employer. Now those annual costs are split 50/50.

What remains unequal is who is on the hook to make up for the pension fund’s investment losses. Taxpayers are 100 percent responsible which is what Goldsmith hoped to change to 50/50 with the lawsuit.

Interim Mayor Todd Gloria said it was a policy judgment to not pursue the case further. He said the council had already achieved significant savings from a freeze on workers’ pensionable pay in new labor deals reached earlier this year and decided against moving ahead with a lawsuit with an uncertain outcome.

“After successfully negotiating five-year labor agreements with our employees and implementing Proposition B, it is now appropriate to end this litigation and spare potential further sacrifice by our workers,” Gloria said.

The settlement also signals a truce in the decade-long legal hostility between the city and SDCERS since a pension scandal engulfed San Diego in a fiscal crisis that earned it the moniker “Enron by the Sea.” There currently is no active litigation between the two public entities.

One quirk of Goldsmith’s lawsuit was that if successful the city’s pension deficit likely would have increased. That’s because the fund has historically exceeded its 7.25 percent projected rate of return. If that trend continued, city workers would have over time paid less than currently required toward pensions under Goldsmith’s interpretation. With less seed money coming in, the city’s positive returns would have less of an impact on the overall deficit.

But unions opposed basing an employee’s contribution on investment returns because in bad years low-wage workers would have been forced to significantly increase how much they pay and it would have put financial strain on them.

The amount workers contribute annually to their pensions varies by union and is negotiated in labor deals. Public-safety workers pay far more than general workers because their benefits are more costly to fund. “The city attorney chose to pursue this case in the wake of one of the most significant declines in the stock market since 1929,” said Mark Hovey, the pension system’s chief executive. “Applied historically, this lawsuit would have served to increase the City’s pension deficit, not reduce it. I am grateful to the City Council for doing the right thing for the pension system, the city and for San Diego taxpayers.”

Councilman Scott Sherman was the lone dissenter to the settlement. Sherman’s spokeswoman said he voted against the settlement because he believes public employees should be subject to the same market fluctuations that affect private-sector workers.

The city has a nearly $2.3 billion pension deficit and its annual payment to service that debt is $275 million.