California’s four largest cities all have public pension problems, but their mayors are split on the solution – two negotiating changes in the existing system, and two planning to ask voters to overhaul the system.
San Francisco Mayor Ed Lee last week announced that months of negotiations had produced a “consensus pension reform” supported by business and much of labor that could save $800 million to $1 billion over the next decade.
Los Angeles Mayor Antonio Villaraigosa announced a pension and retiree health care agreement in March negotiated with 14 of 18 bargaining units in a labor coalition expected to save $400 million during the next five years.
The agreements get most of their savings from requiring employees to pay more toward their pensions and retiree health care. Both are being criticized for not cutting enough from rising retirement costs that divert money from basic government services.
In San Diego and San Jose, already hit by painful budget cuts and layoffs, the mayors apparently have given up on negotiations and are talking about going directly to voters with major changes in their retirement systems.
San Jose Mayor Chuck Reed, saying the city cut 800 jobs last year and may cut 600 more this year, is planning to declare a fiscal emergency and ask voters in November to approve a measure cutting pensions for current and future workers.
Most pension cuts are limited to new hires. A series of court decisions are widely believed to mean that once a public employee in California is “vested” in a pension, it’s a contract that can’t be cut without providing an equal benefit.
Savings from cutting pensions for new hires can take decades. Reed contends that San Jose desperately needs immediate savings. His plan would protect pensions already earned by current workers for past service, but cut their pensions for future work.
The watchdog Little Hoover Commission is among those suggesting a court test of whether the unearned pensions of current workers can be cut, similar to corporate pensions. Reed expects an expensive court battle.
San Diego Mayor Jerry Sanders is leading a coalition that plans to put a measure on the ballot next year that would switch all new city hires, except police, to a 401(k)-style individual investment plan.
An early pension crisis erupted in San Diego, triggered by two deals in 1996 and 2002 that raised pensions and lowered city payments into the pension fund. Lawsuits, a moratorium on city bond sales and painful budget cuts followed.
After voters rejected a sales-tax increase linked to pension reforms last fall, Sanders announced that he would seek a long-term pension solution by switching most new hires to a 401(k)-style plan.
Most private-sector companies that offer retirement plans have switched to 401(k) plans. Employers make a single annual payment, avoiding the long-term pension debt said to have helped push once-mighty firms like General Motors into bankruptcy.
Critics say the 401(k) was intended to be a supplement, not the main retirement plan, and is likely to be inadequate. Among the problems: poor investment choices, high management fees and little time to recover if the market drops shortly before retirement.
The four big cities all have their own independent pension systems. Most of the smaller cities are in the giant California Public Employees Retirement System, the nation’s largest public pension fund.
Whatever the outcome of local struggles, there is a possibility that the final version of pension reform may be imposed statewide by a ballot measure.
Gov. Brown needs at least four Republican votes in the Legislature, two in each house, to get a budget-balancing tax extension. He reportedly is talking to Republicans who want pension reform, a spending limit and business-friendly regulatory reform.
In March, five Republican senators who had been talking to Brown issued a letter proposing a federal-style “hybrid” pension plan, a Little Hoover recommendation that combines a smaller pension with a 401(k)-style plan.
A new state budget proposed by Brown earlier this month contains $1.5 million for a CalPERS study of alternatives for a hybrid plan “for all public employee pension systems in the state of California.”
At a news conference this month, the governor was asked if he would put a pension reform on the ballot along with a spending limit as part of a budget deal.
“We are going to propose pension reform,” Brown said. “That’s more contentious, and I’m told there is going to be a lot of pension reform on next year’s ballot, anyway. So, one way or the other, I think we are going to get whatever pension reform we need.”
The sponsor of a pension reform initiative, former Assemblyman Roger Niello, R-Fair Oaks, reportedly is dropping the measure, leaving open the possibility of filing an amended version for the ballot next year.
“Our urgency is gone,” Niello told the Sacramento Bee last week. “The reason for filing this measure was to have something in line for a November election alongside the measure on taxes, but that appears unlikely to happen now.”
Dan Pellissier, president of California Pension Reform, is working on an initiative that would cap normal employer contributions at 6 percent of pay and give new hires a 401(k) plan.
The employer would be responsible for any previous “unfunded liability,” allowing employer contributions to exceed 6 percent until the debt is paid off. Employees could negotiate increases in their contribution to maintain pension levels.
Pellissier has not yet filed an initiative. He said the campaign is “still trying to wrap up fundraising for the first phase” and talking to potential backers with “thick skin,” not intimidated by public employee unions.
A labor coalition, Californians for Retirement Security, said it picketed a Sacramento luxury auto dealership partly owned by Niello. One of the picket signs: “Pensions not Porsches.”
Pellissier said he thinks defeating other initiatives that may be on the ballot next year (a spending limit and “paycheck protection” making it difficult to use union dues for campaigns) could be a greater priority for unions than hot-polling pension reform.
“The unions may find that they can’t wage nuclear war and spend hundreds of millions of dollars on four different initiatives,” he said. “They may have to pick and choose.”
If the governor and Legislature do not put a pension reform measure on the ballot, or agree on a plan that does not yield enough government savings, that might give a spark to a pension reform initiative, which have failed to attract funding in the past.
In San Francisco, the negotiations led by Mayor Lee were prompted in part by an initiative sponsored by Public Defender Jeff Adachi. He began working on a new plan after voters rejected his Measure B retirement reform last fall.
Adachi reportedly thinks that the mayor’s negotiated reform does not save enough money, an estimated $86 million a year compared to $142 million under the Adachi plan. Unless the mayor’s reform is tightened, Adachi plans to go ahead with his “Son of B.”
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/ Posted 31 May 11