A wave of higher pension costs is hitting California’s three major coastal cities, prompting proposals to shore up future budgets with ballot measures in Los Angeles and San Francisco and eroding progress in San Diego, once dubbed “Enron by the sea.”
The surge from an historic stock market crash, which punched big holes in pension investment funds, is creating concern that pension benefits approved in better economic times are not “sustainable” and need to be cut for new hires.
City council members in Los Angeles and San Diego have mentioned the possibility of “bankruptcy” in remarks to reporters this month, a path taken by the city of Vallejo two years ago when labor costs consumed most of its budget.
Labor unions, agreeing to benefit cuts in some cases, are trying to figure out whether current pension levels are unaffordable and should be reduced, or if city officials are overstating the problem to use the economic downturn as leverage for givebacks.
The retirement systems in the three cities are independent, each operating outside the giant California Public Employees Retirement System that covers about 2,000 local government plans and the 20 county retirement systems authorized by a 1937 act.
San Diego drew national attention for a pension problem before the market crash in the fall of 2008. Charges filed against eight former pension officials five years ago are still pending: conflict-of-interest alleged by the state and fraud by federal prosecutors.
As the upshot of deals in 1996 and 2002, the pension board lowered the city’s actuarially recommended pension payments and the city raised pension benefits for employees, including members of the pension board.
The years of deliberate underfunding resulted in a pension debt of several billion dollars. San Diego has cut services, laid off workers and for nearly two years was unable to issue bonds.
San Diego Mayor Jerry Sanders pushed through a number of pension reforms. A ballot measure in 2006 requires voter approval of increased pension benefits, similar to a century-old provision in San Francisco and an Orange County measure approved in 2008.
The city adopted a more aggressive 20-year plan to pay off pension debt. A plan for new hires that began last July cuts benefits and also is a “hybrid” that combines monthly payments and individual investments.
Despite a pay freeze and other savings, San Diego officials recently were told that a $179 million budget gap presumably closed by painful actions last month has reopened because of increased pension costs.
The city pension payment in the fiscal year beginning in July jumped to $231 million, up $19 million from previous estimates.
Investment losses were larger than estimated and more employees than expected signed up for an optional deferred retirement plan, which they apparently fear may be eliminated.
The growing costs brought calls last week for more reforms. A San Diego Union-Tribune editorial advocated higher employee pension contributions, an end to manipulating final pay to boost pensions, and replacing retiree health care with Medicare.
A city council member, Carl DaMaio, acknowledging that Sanders had taken the first steps, proposed “finishing the job of pension reform” with a five-point plan that includes expanding lower benefits for new hires to police and firefighters.
“The annual pension payment has ballooned to over $231 million — or a whopping 42 percent of city payroll,“ DaMaio wrote in the San Diego Daily Transcript. “When factoring in the cost of all city retirement benefits, taxpayers are servicing a cost of more than $370 million annually — or a staggering 69 percent of city payroll.”
San Diego, struggling with its self-inflicted problem for years, is an example of how difficult getting a grip on pension costs can be, even when faced not with fuzzy future estimates but a well-publicized budget crisis currently cutting services.
Unless labor unions and the city come together to find solutions, “I believe the city will someday go into bankruptcy,” city council member Donna Frye told the Union-Tribune.
In Los Angeles, a city budget official, Miguel Santana, issued a confidential memo this month saying the retirement system is “unsustainable” and proposing a ballot measure in June to cut benefits for new hires and extend retirement ages.
City retirement costs, $653 million this year, are expected to double in four years to nearly $1.3 billion. If pension costs are not scaled back, Santana reportedly warned, the city faces “significant reductions” in its workforce and services.
His projection of dire future consequences, in a city that already has a major budget shortfall, is getting attention from some members of the city council.
“Part of it is about staying out of bankruptcy,” council member Jan Perry told the Los Angeles Times. “Part of it is about increasing our bond rating. And part of it is about preserving essential city services.”
But skeptical labor officials said cutting benefits for new hires would not produce significant savings until they retire decades from now. A union spokeswoman proposed an alternative to cutting $35,000 a year pensions for workers without Social Security.
“There’s a tremendous amount of fraud and abuse of the pension system: people double dipping, people retiring with pensions in excess of $100,000,” Barbara Maynard, a Los Angeles union spokeswoman, told a news service.
In San Francisco last month, Supervisor Sean Elsbernd proposed a June ballot measure that would protect prefunding for pensions and retiree health, increase police and firefighter pension contributions and curb final-year pension boosting.
The city payment for pensions, Social Security and health coverage for active and retired workers went from $384 million ten years ago to $890 million this year and is expected to increase to $1.4 billion in four years.
“It’s alarming growth, and this just underscores the magnitude of the problem,” Mayor Gavin Newsom told the San Francisco Chronicle. “We have to do something dramatic.”
Speaking of dramatic, a reform group is trying to put an initiative on the November ballot that would cut pension benefits for state and local government new hires and extend retirement ages.
But the group needs funding — first for a drive to get the voter signatures needed to place the measure on the ballot, and then to combat a well-funded opposition campaign promised by unions.
Assemblyman Karen Bass, D-Los Angeles, was asked by Fox Business talk-show host Stuart Varney last week whether pensions, a pay freeze and lifting environmental rules should be part of a state budget solution.
“We have to put everything on the table” was part of the speaker’s reply to the question. But it’s not clear that she meant pensions will be part of a “comprehensive reform package” Democrats plan to propose.
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune.