Big city pension reform: San Diego, LA begin

The San Diego city council is expected to approve a 401(k)-style retirement plan today for all new city hires except police, a rare switch from public pensions to the individual investment plans common in the private sector.

As directed by voters last June, the interim plan, still facing a challenge from a state labor board, avoids adding to the pension debt now cutting city services. Critics say the plan could provide an inadequate retirement and hamper recruitment.

The Los Angeles city council last week voted 14-to-0 to give all new hires except police and firefighters a lower pension. The council, which plans to reaffirm the vote within a month, ignored union threats of a lawsuit.

The revised proposal of Mayor Antonio Villaraigosa is not only less generous than a plan signed by Gov. Brown this month for CalPERS and 20 county systems, but it also has an unusual requirement: new hires help pay off any future pension debt.

Still awaiting action is a San Jose plan approved by voters in June, which would reduce the cost of pensions earned by current workers for their service in the years ahead, a step urged by the watchdog Little Hoover Commission and others. The plan needs:

1) IRS approval to give workers a choice between a lower pension for future service or paying more to continue earning their present pension amount and 2) a decision about whether union lawsuits will be heard in state court or consolidated in federal court.

The state’s three largest cities, which have their own independent retirement systems, are like many other cities hard hit by pension investment losses and generous retirement benefits boosted in good times.

Much of city spending is for personnel. Retirement costs are already 20 percent or more of the general funds in San Diego and San Jose and are projected to reach that level in Los Angeles in two years.

As the Legislature considered the governor’s pension reform plan, the mayors of eight of the state’s 11 largest cities sent a letter to legislative leaders saying the big cities, like the state, have expenses that continue to outpace revenue.

“The leading cause of this imbalance for many of us is the rising cost of pension obligations forcing us to reduce services to our residents, layoff our workers, and defer needed improvements to our facilities and infrastructure,” said the letter dated July 17.

The letter was signed by the mayors (ranked by population) of Los Angeles, San Diego, San Jose, (not San Francisco), Fresno, Sacramento, Long Beach, (not Oakland), (not Bakersfield), Anaheim and Santa Ana.

“Cities need clear authority to modify future pension accruals and to give their employees an option to choose a lower-cost benefit,” said the letter to the four top leaders of both parties in the Assembly and Senate.

“Enhancing local governments’ abilities to use these tools, subject to the meet and confer requirements of state law (bargaining with unions), is one of the most important things the Legislature can do this year,” the mayors wrote.

Most cost-cutting pension reforms only cover new hires. Court rulings apparently mean pensions promised current workers are a “vested” right, protected by contract law, that can only be cut if offset by a benefit of equal value.

A reform bill passed as the Legislature adjourned in late August, AB 340, calls for workers to pay half the “normal” cost, the amount estimated to be needed along with investment earnings to pay for pensions earned during the year.

If unions do not agree in bargaining to pay half the normal cost by 2018, an increase can be imposed by the local governments in the California Public Employees Retirement System (450 of 482 cities) and 20 county systems operating under a 1937 act.

The increase that can be imposed on current workers through the bargaining impasse procedure is capped at 8 percent of pay for most workers, 11 percent for “safety” workers and 12 percent for police and firefighters.

The caps, roughly half of the normal cost, protect current workers from being forced to help pay the “unfunded liability” or pension debt from previous years, usually due to investment earnings shortfalls, that in some cases nearly equals the normal cost.

But the reform bill lifts current CalPERS restrictions on using employee contributions to pay what is regarded as the employer share: the unfunded liability that ballooned when pension funds were hit by big investment losses during the recession.

The ability to bargain employee contributions that help pay off the unfunded liability was a “key issue for us ” during talks on the bill, Dwight Stenbakken, a retiring League of California Cities official told the Little Hoover Commission last week.

“The only way you can really get at the current cost for current employees is to have a greater contribution from the employee to pick up some of those costs,” Stenbakken said.

The three largest cities, which are not in CalPERS, are using different strategies in their attempt to cut the pension costs of current workers.

The San Diego measure, Proposition B, directs the city to take an initial bargaining position that would freeze pay used to calculate pensions for five years, a provision that can be over-ridden by a two-thirds vote of the city council.

The 401(k) plan for new hires before the council today provides a 100 percent employer match for a contribution of 9.2 percent of pay from most employees and 11 percent of pay from firefighters and lifeguards, the maximum allowed by the measure.

The State Public Employment Board tried to block a vote on the measure, contending that Mayor Jerry Sanders and other city officials failed to bargain with employees as required by law before leading a signature-gathering drive for an initiative.

Sanders argues that he was acting as a private citizen. A PERB judge held a hearing in July but has not issued a decision. The board also has a lawsuit pending in superior court.

The Los Angeles plan for non-sworn new hires trims several retirement benefits, extends the normal retirement age from 55 to 65 and provides 1.48 percent of final pay for each year served at age 62, less than the 2 percent at 62 in the new CalPERS plan.

What a staff memo calls “the most unique aspect” of the plan requires the new hires to contribute 75 percent of the normal cost and 50 percent of the unfunded liability cost.

As the new plan begins without an unfunded liability, the initial employee contribution is expected to be 10 percent of pay (75 percent of normal cost) and the city contribution 3.31 percent of pay (25 percent of normal cost).

Unions contend that state labor law required bargaining before the council voted for the plan. City officials said no bargaining is needed because the plan affects new hires not yet in unions, but the council directed bargaining before the second vote.

“If I slit my wrist I would bleed union blood,” the council president, Herb Wesson, told a rowdy union crowd last week, the Los Angeles Times reported. “Do you think I want to do this? No. We have to do this.”

Former Mayor Richard Riordan, who has warned that Los Angeles faces bankruptcy if soaring retirement costs are not curbed, is working with a business group that has talked about putting a pension reform measure on the ballot.

The San Jose plan requires current workers to pay up to half the cost of the unfunded liability, an increase capped at an additional 16 percent of pay, or choose a less costly and less generous retirement plan.

An option similar to the San Jose plan was negotiated by Orange County with employees in 2009. But the U.S. Internal Revenue Service issued a rule in 2006 that could deny tax-deferred status if a public employee chooses a lower retirement benefit.

After the IRS delayed action on the Orange County plan, U.S. Rep. Loretta Sanchez, D-Santa Ana, and Republican co-authors introduced legislation to give optional plans tax-deferred status.

“The unions are trying to stop that at the national level, lobbying the Treasury to keep that from happening,” San Jose Mayor Chuck Reed said last month at a UC Berkeley Institute of Governmental Studies conference on “California’s Fiscal Crisis.”

Reed expects the voter-approved Measure B to prevail when a city suit in federal court and a half dozen union suits in state court are sorted out. He said the city charter reserves the right to reduce retirement benefits.

But Reed said there is a need for a state constitution amendment to clarify the “vested rights” issue raised by unions, giving cities the authority to reduce “future pension accruals’ and “choose a lower-cost benefit” as urged in the mayors’ letter.

“The law of vested rights in California is unsettled,” said Reed. “But it’s not based on the language of the constitution. It’s case law, and we can change our constitution and allow us to change future accruals.”

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 1 Oct 12

22 Responses to “Big city pension reform: San Diego, LA begin”

  1. Tough Love Says:

    (1) Quoting … “As directed by voters last June, the interim plan, still facing a challenge from a state labor board, avoids adding to the pension debt now cutting city services.”

    That’s not correct as accruals for FUTURE service for CURRENT workers will continue to grow that pension debt. Ending future accruals for CURRENT workers would result in a material improvement in the Plan’s finances. Ending future accruals only for new employees does next to nothing for 20-30 years until they begin to retire. We’ll never make it.

    (2) Quoting … “Critics say the plan could provide an inadequate retirement and hamper recruitment.”

    It in NOT Taxpayers obligation to fully fund the retirement of it’s workers. The Taxpayers obligation is to provide Total Compensation (cash pay + pension + benefits) equal to that of Private sector workers in comparable jobs (or jobs with comparable risks if an exact comparison is not possible). Per the US Gov’t BLS, cash pay in most Public and Private sector jobs are very close. As such, there is zero justification for greater pensions and better benefits. Today, the taxpayer paid-for share of Public Sector pensions have a value at retirement ROUTINELY 2-4 times (6 times for safety workers) greater than those of their Private Sector counterparts. And, who but Public Sector workers get retiree healthcare subsidies any longer… at great expense to Taxpayers.

    (3) Quoting … ‘The Los Angeles city council last week voted 14-to-0 to give all new hires except police and firefighters a lower pension.”

    There is no logical reason not to include safety workers in ALL reform measures. While their service are necessary and appreciated, their pensions are excessive to the point of absurdity.

    (4) Quoting …” “Cities need clear authority to modify future pension accruals and to give their employees an option to choose a lower-cost benefit,” said the letter to the four top leaders of both parties in the Assembly and Senate. Enhancing local governments’ abilities to use these tools, subject to the meet and confer requirements of state law (bargaining with unions), is one of the most important things the Legislature can do this year,” the mayors wrote.” ”

    Actually, THE most important thing to do is to end Collective Bargaining. As FDR said 60 years ago … it has no place in the Public Sector.

    (5) Quoting … “A reform bill passed as the Legislature adjourned in late August, AB 340, calls for workers to pay half the “normal” cost, the amount estimated to be needed along with investment earnings to pay for pensions earned during the year. If unions do not agree in bargaining to pay half the normal cost by 2018, an increase can be imposed by the local governments in the California Public Employees Retirement System (450 of 482 cities) and 20 county systems operating under a 1937 act. The increase that can be imposed on current workers through the bargaining impasse procedure is capped at 8 percent of pay for most workers, 11 percent for “safety” workers and 12 percent for police and firefighters.”

    Why wait until 2018 ? Is it not necessary NOW ? And ask a Pensions Actuary … the true cost to fully fund the typical pensions of CA workers over their working career is roughly a level annual 30% of pay for misc workers and 50% for safety workers. Half of these figures would be 15% and 25%, NOT the much lower 8% and 12% caps in the legislation. If the workers want to start out with a lower %, fine, but there should be a recording of accumulating deficits, HALF of which should be paid by increased later-year contributions from the workers and pensions reduction from those who retire w/o paying off their share of the deficit.

  2. captain Says:

    “The ability to bargain employee contributions that help pay off the unfunded liability was a “key issue for us ” during talks on the bill, Dwight Stenbakken, a retiring League of California Cities official told the Little Hoover Commission last week.

    “The only way you can really get at the current cost for current employees is to have a greater contribution from the employee to pick up some of those costs,” Stenbakken said.”

    Didn’t Jerry Brown, during the roll-out of his “twelve step” pension reform plan, say that if employees don’t agree to pension reform you can always cut their pay – pay isn’t a vested right. It is getting tiresome listening to all the officials, elected or otherwise, talking about what can’t be done.

  3. captain Says:

    “”After the IRS delayed action on the Orange County plan, U.S. Rep. Loretta Sanchez, D-Santa Ana, and Republican co-authors introduced legislation to give optional plans tax-deferred status.

    “The unions are trying to stop that at the national level, lobbying the Treasury to keep that from happening,” San Jose Mayor Chuck Reed said last month at a UC Berkeley Institute of Governmental Studies conference on “California’s Fiscal Crisis.””

    What a surprise!

    An educated guess is that it’s both the unions & CalPERS that are very busy in Washinton. I guess CalPERS is also spending more taxpayer pension contribution dollars than normal to fight all these middle-class taxpayer revolts. Just more unfunded liabilities that will be passed on to the general population in defense/to protect the public employee unions right to retire early with overblown spiked pensions – the same deal the CalPERS employees get.

  4. Joel Says:

    In New York we have a scandal. The City sponsors a 403(b) plan for its teachers. The City borrows $12 billion of that savings at a rate of 7 percent. It can borrow all the money it needs at 50 basis points. So the taxpayer is picking up the 6.5 percent or $780 million per year.

    Then the City turns around and says we must reduce the $120 million a year the City pays to operate the five municipal systems.

    Then the Legislature says we cannot afford these lavish public employee pensions and passes a Tier 6 for workers hired after March 31, 2012.

    YOU CAN’T MAKE THIS STUFF UP!!!

  5. SeeSaw Says:

    CalPERS members are not allowed to spike their pensions, Capt. and CalPERS is simply a gatekeeper for the members’ funds. CalPERS is not a union and is doing no such thing as you describe–or imagine..

  6. Tough Love Says:

    BS seesaw…. CalPERS IS and has always been an ADVOCATE for more and better benefits for plan participants (e.g., SB400) … almost always in an adversary roll against taxpayers (80-90% of whom are NOT Public Sector workers) who pay for all but the 10-20% of total Plan costs paid for by the workers’ contributions (INCLUDING all the investment income earned on those contributions).

    CalPERS SHOULD BE (as you said) “simply a gatekeeper for the members’ funds”. It’s FAR more …. and YOU know it.

  7. Sugel Says:

    Under the proposal, the retirement age for city workers will be raised from 55 to 65 and they will be allowed to receive maximum payouts of 75 percent of their pay instead of 100 percent. Also, the rate at which pension payments are calculated is being reduced from 2.16 percent per year of service to 2 percent and employees transferring from one retirement system to the city plan will have to make sure it is revenue neutral.

  8. SeeSaw Says:

    CalPERS is not a political organization and it is not out “fighting” anti-union interests. It is a pension plan which has a fiduciary duty to the members–that is its purpose, simply. CalPERS recently held two Town Hall meetings on pensions and the PERS health care plans. I viewed the pension meeting on the website. CalPERS invited all sides to those meetings. Joe Nation and Dan Pellissier were there in person on one side; David Low and other pension officials gave their side of the issue; there were also representatives from the private sector. The State legislature founded the Plan 80 years ago, and the Plan principals are charged with carrying out that Plan. I repeat–CalPERS is not a union–the highest paid CalPERS beneficiares are former high-level managers who had no connection with unions. .

  9. captain Says:

    “CalPERS is not a political organization and it is not out “fighting” anti-union interests”

    Of course not. CalPERS is too busy trying to figure out how to milk the taxpayers. I want to make this perfectly clear: I have zero respect for CalPERS, CalPERS management, and especially the CalPERS Board of Administration. To reiterate – ZERO,NADA, ZILCH respect for these criminals.

    Seesaw, as the last man standing keep up the good work. BTW, how have the CalPERS investment returns been coming along? Yea, I know – billions more in taxpayer obligations!

  10. SeeSaw Says:

    It is the long term that counts–not the short-term. I am far from being the last man standin,g when it comes to being a beneficiary of CalPERS and a supporter of same. I am a taxpayer, and my taxes are the same as yours and everyone else’s in my income category. I am not out there working a private sector job–I am supporting jobs both private and public with the money I spend from my CalPERS pension. You may own your own opinions–you may not own your own facts, when it comes to CalPERS.

  11. Tough Love Says:

    SeeSaw, If your pension were about HALF what it is ….. which is what a Private Sector retirees with your pay, years of service, and retirement age would have received … and the lower pensions payments to YOU meant equal spending of the SAME incremental amount by the TAXPAYERS in whose pockets those contributions would have stayed, would not THEIR spending have the SAME benefits of supporting jobs both private and public with the money THEY would be spending instead of YOU ?

    ALL of your argument are BS.

  12. SeeSaw Says:

    What is BS, is your continual, argument that private sector salary/benefit policies and public sector salary/benefit policies must be exactly the same–an oranges/apples comparison. My carpenter spouse would be enjoying a pension equal to mine right now, if the illegal invision had not happened in 1986, and his pension was frozen. Carpenters who were able to stay in commercial construction and continue to get the benefits, do enjoy pensions now that are as much and some more than mine. The public sector did not put up with those shenanigans–you don’t see illegals working in the public sector.

  13. Tough Love Says:

    Quoting seeSaw …” My carpenter spouse would be enjoying a pension equal to mine right now, if the illegal invision had not happened in 1986, and his pension was frozen”

    On the contrary, If the Public Sector Unions were not bribing the politicians (with campaign contributions and election support) for favorable votes on pay, pensions, and benefits, YOUR pension would be more like your carpenter husbands.

    And quoting …”The public sector did not put up with those shenanigans”

    Bull. They just BOUGHT the politicians’ votes.

  14. SeeSaw Says:

    Same old opinions from TL–completely devoid of facts.

  15. SeeSaw Says:

    My carpenter husband’s pension does not even pay the medical insurance premium TL. Is that what you want for people in general! You are shameless! And, yes, there are retired carpenters who worked in the commercial section of that industry who have pensions the same and more as mine. That is a fact–not an opinion.

  16. Tough Love Says:

    Quoting SeeSaw …”My carpenter husband’s pension does not even pay the medical insurance premium TL. Is that what you want for people in general! ”

    No, but THAT’s what Private Sector Taxpayers get. You want and think you deserve MORE and you expect the Taxpayers to pay for for it.

    With no less in cash pay, JUSTIFY Public Sector workers deserve greater pension and better benefits.

  17. spension Says:

    Well, my recollection is that private sector pension funds were seized by guys like Ivan Boesky during corporate takeovers in the 1980’s. And the private sector also includes the amazingly high pension benefits of executives, which trickle over into the amazingly high pension benefits of high administrators, physicans, etc in the public system, and then trickle down to all the public sector employees.

    The same old same old things being posted here. Public pension benefits were strongly guaranteed and long ago many (not all) public employees bargained away salary increases for pension benefits. Now their pensions look to high, and Tough Love etc want to chop them. The public employees feel double crossed. Ho hum… I’m consistently for lowering some public pensions… sovereign default is the only alternatives.

    Much more interesting were Jack Bogle’s recent comments…

    http://www.bogleheads.org/forum/viewtopic.php?f=10&t=103711&newpost=1505490

  18. Tough Love Says:

    Spension, What a crock of a response (to my response to SeeSaw). Of the 80-90% of all workers who are Private Sector workers, 99+% are in the MIDDLE CLASS (NOT the Ivan Boeskys of the world), but you seem to justify making that 99+% subsidize the Public Sector do to the greed of the rich (and yes greedy) 1%.

    What a poor rational indeed.

  19. SeeSaw Says:

    All public sector workers are in the middle class, TL!

  20. captain Says:

    “SeeSaw Says: All public sector workers are in the middle class, TL!”

    Get off the See-saw because it’s making you dizzy. I can’t think of a statement more easy to disprove.

    Most public safety members, department heads, and city administrators are considered upper middle class based on their government wages alone. Once they retire in their fifties, start collecting a 100k plus pension, and take a second job working for a government agency (or even in the private sector) they instantly become part of the 1 percent the unions love to bash.

    Irony? Maybe. Probably more like corruption, collusion, and benefiting from the ridiculous and retroactive policies of the crooked organization known as CalPERS.

  21. SeeSaw Says:

    And, where does the upper middle class morph into the rich class according to the size of its pensions.. A 100K+ pension which only 2% of public retirees get, is still part of the middle class. So if you are going to consider them the rich, which I don’t–beside the point–that leaves 98% of the public sector in the middle class. We will just agree to disagree. When you come up with a document that defines the financial classes with hard figures, I will be willing to take a look.

  22. silver account Says:

    In 2007 and 2008, San Diego needed to increase pensionable pay – salary and benefits used in the pension calculation formula – by 15 percent to stop the exodus of officers. Moving to a 401(k) plan would require a much larger financial commitment. Where would the city get the money to pay for the costs involved in the change and for a probable immediate spike in retirements?

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