Editor’s note: Jack Humpreville discusses Mayor Chuck Reed’s statewide pension reform initiative and its potentially wide-reaching effects on the City of Los Angeles.
Originally posted at CityWatch LA.
By Jack Humphreville.
On October 15, San Jose’s Democratic Mayor Chuck Reed and four other mayors* submitted a statewide ballot initiative, The Pension Reform Act of 2014, to California Attorney General Kamala Harris for her review in anticipation of the collection of over 800,000 signatures needed to place this measure on the November 2014 ballot.
If the Pension Reform Act is approved by a majority of the voters, local governments such as The City of Los Angeles will have the opportunity to modify existing pension and retiree health care plans for current employee’s future years of service either through the collective bargaining process or a voter approved initiative.
However, this act does not require cities to modify their existing plans nor does it dictate any level of benefits. Furthermore, it prohibits the State, including the California Public Employee Retirement System, from interfering with the rights of the local governments granted under this measure.
Importantly, any benefits that have already been earned are fully vested.
Underlying this initiative is the fact that the out of control increase in pension contributions are chewing up an ever increasing portion of local budgets, forcing cities to cut public services, furlough or lay off employees, and underfund the maintenance and repair of our streets, sidewalks, and the rest of our deteriorating infrastructure.
This proposed change to California’s “vested rights doctrine” was recommended by the Little Hoover Commission in February of 2011 when it “confirmed that California [and its local governments] cannot solve its pension problems without making prospective changes going forward for current employees.”
But public sector unions are adamantly opposed to any changes to the current system, arguing that this is a cut in benefits that were promised when the city worker was hired. Even CalPERS issued a press release denouncing this statewide ballot initiative, despite the fact it supported Senate Bill 400 which foolishly granted retroactive pension increases to state employees in 1999.
However, we have not heard of any realistic solutions to avoid “service level insolvency” from the public sector unions other than huge tax increases on an already heavily taxed electorate.
In any case, we are in for a battle royal, starting with the need to overcome union sponsored sabotage of the effort to gather over 800,000 valid signatures followed by a nasty and very expensive donnybrook if this pension reform initiative makes it to the ballot.
The Pension Reform Act of 2014 has the potential to help the City of Los Angeles solve its massive pension problem.
When Mayor Villaraigosa was sworn in, pension contributions of $350 million represented less than 10% of the general fund budget. By 2017, pension contributions will more than triple to $1.2 billion, chewing up 23% of the City’s projected revenues.
As of June 30, 2012, the City had an unfunded pension liability of $11.5 billion, representing a funded ratio of an unacceptable 68%, an increase from the fully funded level (98%) in 2007.
But the severity of the City’s pension liability is understated because the pension plans and their politically appointed trustees rely on the overly optimistic investment rate assumption of 7.75%. If this rate were adjusted to a more realistic rate of return, say 5.7% as suggested by Moody’s Investors Service, one of the three major credit rating firms, the unfunded pension liability would increase to over $20 billion (54% funded). Pension contributions would soar by about 50% ($600 million), consuming over one-third of the budget and forcing the City to lay off thousands of employees and outsource services to more efficient operators.
Under the Pension Reform Act of 2014, the City does not have to modify its pension plans. However, since the two pension plans have a funding level of less than 80%, the City will be required to develop (but not implement) a “stabilization” plan outlining how the pension plans will achieve 100% funding within 15 years. The stabilization plan would include the benefits to be modified, the additional costs to the employees, the additional costs to the City, and the sources of any funding.
Now that the City is enjoying record revenues, our Elected Elite tend to look at the City’s finances through rose colored glasses, patting themselves on the back for reducing the next year’s budget deficit to “only” $250 million. But the massive pension problem that is eating the City’s lunch is not going to be solved unless the City is willing to adjust the future benefits of current employees.
Mayor Garcetti and the members of the City Council are in an awkward situation. Do they endorse The Pension Reform Act of 2014 that provides the City with the tools to solve its $20 billion pension problem? Do they endorse meaningful pension reform that was favored by 70% of the voters in San Jose and San Diego? Or do they bow to the campaign funding leaders of our public sector unions who have failed to offer constructive solutions to the City’s financial problems?
Put another way, will Progressive Democrats who want to revitalize the Los Angeles River, repair our streets, and provide services to the public and the less fortunate prevail over union funded Democrats who endorse increased salaries and benefits?
Stay tuned. We are in for a knockdown, dragged out rumble.
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*Chuck Reed (D) of San Jose was joined San Bernardino Mayor Pat Morris (D), Santa Ana Mayor Miguel Pulido (D), Anaheim Mayor Tom Tait (R), and Pacific Grove Mayor Bill Kampe (D).