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