Analysis of San Jose and San Diego’s pension reform efforts
“Labor unions try to have it both ways. They fight statewide reform of public employee pension systems by insisting that change must be bargained at the local level. But, as we see in San Jose, when they get to the table they claim they can’t legally agree to substantive improvements. Welcome to the crazy world of public employee pensions, where benefits are easy to increase, but nearly impossible to reduce — even when they’re unaffordable.” --Daniel Borenstein, Contra Costa Times, Nov 20th, 2011
Overview
While Governor Brown’s 12 point pension reform plan languishes in the Senate where it was introduced by Republicans (it does not have a single Democrat cosponsor) California cities face impending fiscal disaster because of the crushing burden of escalating pension costs. The most basic services such as police and firefighters are at risk from unfunded pension liability costs.
In San Jose, 20 percent of its general fund goes to retirement costs. In the past decade, costs have tripled from $73 million to $245 million this year, and are expected to reach $432 million by 2015-16. The $3.5 billion debt for underfunded pension and retiree health benefits works out to nearly $11,000 for every household in San Jose.
The city of Stockton, facing unfunded retiree health benefits in excess of $400 million, may well file bankruptcy if negotiations with its creditors and unions falter.
Meanwhile, the Mayors of San Jose, and San Diego – Democrat Chuck Reed and Republican Jerry Sanders, respectively – have sponsored pension overhaul measures. In San Jose, pension reform has been put on the ballot by action of the City Council and in San Diego by initiative.
In both cities the reforms seek to a) require that city employees pay full and fair share of pension costs; b) move employees from defined benefits to defined contribution plans; c) require voter approval of enhanced benefits.
San Diego Public Employee Reform Initiative (Unfunded pension liability: $2.1 Billion)
Reforms Retirement Plans for All Employees
The Comprehensive Pension Reform Initiative reforms the retirement plans for ALL City of San Diego government employees.
Voter Approval For Pension Increases
The initiative mandates that any pension increase must get the approval of the voters. Increases cannot be collectively bargained or voted on by the council.
Ends “Pension Spiking”
Currently, City of San Diego employees can have their life-long pensions calculated on not only their base salaries, but various specialty pays, bonuses, and other forms of compensation. The CPR Initiative bans that practice and requires pensions for existing and new employees be based strictly on base salaries. This measure also reduces the cap on pension payouts for sworn police officers to 80% of their highest consecutive 36-month salary.
401 (k)-style Plans for New Hires and City Politicians
The CPR Initiative eliminates traditional pensions for new employees – excluding police recruits – and replaces them with 401(k)-style plans, with contribution rates based on private sector benchmarks.
City Employees to Pay Fair Share of Pension Costs
After years of taxpayers assuming a disproportionate share of the cost - and risk - of government pensions, the CPR Initiative imposes fair cost-sharing between the city and city employees.
Caps Pensionable Employee Compensation for 5 Years
The CPR Initiative imposes a cap for five years on individual pensionable compensation. An individual pensionable compensation cap produces bona-fide savings by reforming pensions for existing employees.
Online Disclosure of Pension Payouts
Taxpayers deserve to know the levels of pension payouts being made by city government. To ensure accountability and transparency, the CPR Initiative requires the city to annually post online the total pension payout per individual retiree (without names) and the last job classification held by the individual.
Prevents City Government Unions from Blocking Reforms
Currently, government employee unions may vote to block any action by City Council to reform pension benefits. The CPR Initiative would eliminate that de-facto veto ability by government workers.
Guarantees Death and Disability Benefits for All Public Safety Personnel, Including Police Officers, Firefighters and Lifeguards
This measure ensures any city employee who puts their life on the line to keep the public safe is protected with death and disability benefits for them and their family
San Jose Public Employee Reform Ballot Measure (Unfunded pension liability: $3.5 Billion)
The City Council would be prohibited from enhancing retirement benefits without voter approval
New Employees would be placed in a new, lower-cost retirement plan
• New employees would pay 50% of the plan’s total cost (employees currently pay about 1/4 of the cost).
• Any defined benefit component would have to meet the following requirements:
-Retirement Age: 60 for public safety employees and 65 for all others. (employees would have the option to retire earlier with reduced benefits)
- Accrual Rate: could not exceed 2% (of salary) per year of service, with a 65% maximum benefit.
-Benefit would be based on the highest average salary over a 3-year period.
-Cost-of-Living-Adjustments: based on CPI, capped at 1.5% per year.
• The City could also contribute to a defined contribution plan as long as the City's total cost for the retirement benefits does not exceed 9% of an employee's base salary
Current employees would be given the option to either: a) pay more to keep their current retirement plan or b) opt-in to a new, lower-cost retirement plan
• Option 1: Employees would contribute an additional 4% of their salary (starting in June 2013) to help pay off the pension plan’s unfunded liabilities. These extra contributions could increase by an additional 4% per year until they cover 1/2 of the cost of paying off the unfunded liability or reach a cap of 16%.
• Option 2: Employees would keep benefits earned to date under the current plan – but going forward, benefits would accrue at a lower rate and the retirement age would increase:
- Retirement Age: 57 for public safety employees and 62 for all others (increase would be phased in over 14 years; employees would have the option to retire earlier with reduced benefits).
-Accrual Rate: 2.0% (of salary) per year, for future years of service.
-Benefit would be based on the highest average salary over a 3-year period.
-Cost-of-Living-Adjustments: based on CPI, capped at 1.5% per year.
The City Council would have the ability to temporarily suspend retiree Cost of Living Adjustments (COLAs) during a fiscal and service level emergency
• If the City Council declares a fiscal and service level emergency, it would have the ability to suspend the guaranteed 3% COLA for up to 5 years (Retirees’ pension payments would not be reduced).
Disability retirement rules would be reformed to prevent abuses
• Determinations of disability would be made by an independent panel of medical experts.
• The City may provide matching funds for disability insurance for employees who do not qualify for disability retirement but incur lost wages.
“Bonus” Pension Checks from the Supplemental Retiree Benefit Reserve would be discontinued
Union Obstruction
Hyper-aware that the public overwhelming supports pension reform, the public employee unions have deployed every maneuver at their disposal to prevent these proposals from ever reaching the ballot.
“San Diego union leaders filed a complaint with the state Public Employment Relations Board, whose lawyer then asked a judge to block the Sanders-sponsored initiative, contending that it circumvented state law requiring negotiations on compensation changes.
It was a novel legal theory and a judge didn’t buy it, ruling that the proper time to challenge a ballot measure was after voters had acted, not before. And the unions left no doubt they’ll do that if the Sanders measure passes in June.
Meanwhile, unions representing San Jose’s city workers directly filed suit themselves, alleging that placing pension reform on the ballot also violate the state collective bargaining law that Brown signed three-plus decades ago.
Moreover, union-friendly legislators have sought a state audit of the city’s finances, especially its pension costs, and unions have alleged that Mayor Reed’s assertions about the impact of pensions may violate laws on bond disclosures.
The unions’ drives to prevent pension reform plans from reaching the ballot indicate they are worried that given a chance, voters will endorse change because pension costs are hitting city budgets much harder than those of state and county governments.
Lurking in the wings, meanwhile, is Stockton, which may well file for bankruptcy protection if negotiations with its creditors falter.”—Dan Walters, Sacramento Bee, 4/11/2012
