Budget-busting pensions spark ballot measures

Los Angeles leads off Tuesday with a modest ballot measure aimed at curbing pension costs, which are threatening to take a big bite out of the budgets of California’s three major coastal cities.

City officials in San Diego are talking about putting dueling initiatives on the ballot to switch new hires to 401(k)-style individual investment plans, one including police and firefighters in the cost-cutting change and the other leaving them out.

The sponsor of a pension initiative rejected by San Francisco voters last November, as voters approved measures cutting pension costs in seven other retirement systems around the state, is talking about trying a new version of Measure B.

San Francisco Public Defender Jeff Adachi calls his new measure “Son of B.” He may propose, among other things, that employer contributions be capped, going no higher than employee contributions.

A similar cap on employer contributions is part of a statewide initiative being developed by California Pension Reform, a new group led by Dan Pellissier. Voters in Pacific Grove approved an employer contribution cap in November, 10 percent of pay.

At the Capitol, where Gov. Brown is seeking a handful of Republican votes needed to put a budget-balancing tax extension on the ballot, there is speculation that he may cut a deal that puts a cost-cutting pension reform measure before voters.

A bipartisan watchdog, the Little Hoover Commission, last month called for a dramatic overhaul of “unsustainable” public pensions, similar to a recommendation two weeks earlier by the nonpartisan Legislative Analyst’s Office.

The prime examples of “pension costs (that) will crush government” in the Hoover report are the three big cities. Soaring pension costs have more impact on local governments than the state because personnel is a much greater part of local budgets.

Pensions and retiree health care are projected to eat up a third of the general fund in Los Angeles by 2015, crowding out funding for other programs. In deeply troubled San Diego, a grand jury said pensions could require half the general fund by 2025.

By comparison, if all three of the big state pension funds were fully funded (far from the case now), the cost excluding retiree health care arguably would be roughly 10 percent of the general fund.

Pension costs in the governor’s proposed budget are about 4.4 percent of the general fund. But the pension percentage would increase if the $11 billion tax extension is not approved, forcing deep cuts in the total proposed general fund, $84.6 billion.

The governor’s proposed budget expects the rate set by the California Public Employees Retirement System to be $4.1 billion, $2.4 billion from the deficit-ridden general fund and the rest from transportation and other special funds.

CalPERS is nearly 70 percent funded using the market value of assets. Big losses in the recession and stock market crash, when assets plunged from $260 billion to $160 billion before rebounding to $230 billion, are being phased in over three years.

Full funding of CalPERS would require a greater increase from the current state rate, $3.8 billion, than the $4.1 billion expected in the governor’s budget, probably about an additional $1 billion.

The California State Teachers Retirement System, which unlike CalPERS cannot set the rate paid by employers, is expected to receive $1.35 billion next year, all from the general fund.

As of June 2009, CalSTRS was 64 percent funded using the market value of assets and 78 percent funded using the actuarial value, which spreads gains and losses over several years to reduce the volatility of contribution rates.

CalSTRS needed a contribution increase of $3.8 billion to be fully funded. But funding levels presumably have improved since 2009, given strong investment earnings in a rebounding market. A new valuation is expected soon.

The CalSTRS contributions are teachers 8 percent of pay, school districts 8.25 percent and the state, 4.5 percent. A CalSTRS legal analysis contends that the teacher contribution cannot be raised without providing another benefit of equal value.

School districts get more than half their funding from the state general fund. So under that scenario, a plan to phase in higher CalSTRS contributions probably would expect most of the money to come from the state general fund.

The UC Retirement Plan, after going a remarkable two decades without contributions, restarted employer and employee contributions last year. The state has not resumed contributions to UC Retirement, but a $400 million target has been mentioned.

The Los Angeles ballot measure is an example of the power of an important pension player, the public employee unions, who usually set employee contributions and pension benefits through collective bargaining.

Measure G lowers the pensions for new police and firefighters if they retire early after 20 years. The new hires also would contribute 2 percent of their pay toward retiree health care, up from zero for current police and firefighters.

The change is expected to save the city $152 million over a decade. The police and firefighter unions support the plan, which did not draw an opposition argument in the ballot pamphlet.

Former Mayor Richard Riordan helped persuade voters to approve a pension increase in 2001 that allows police and firefighters to retire with up to 90 percent of their final pay after 33 years of service.

More generous pensions were said to be needed to remain competitive and attract and retain the safety workers. The Highway Patrol had negotiated a trendsetting pension, approved for local agencies in a CalPERS-sponsored bill, SB 400 in 1999.

Last year the Highway Patrol union agreed to a contract that gives new hires a lower pension after 30 years. The Measure G reduction is only for early retirement and will still allow new hires in Los Angeles to retire with 90 percent of pay after 33 years.

“Within five years, pension expenses are expected to increase from less than one-sixth of the general fund budget to more than a third,“ a Los Angeles Times editorial said on Feb. 15.

In an article in the Wall Street Journal last May, Riordan warned that pensions could bankrupt the city.

The San Diego proposals to switch new hires to 401(k)-style plans would be initiatives placed on the ballot by gathering voter signatures, rather than bargaining with unions and getting the city council to put a measure on the ballot.

A proposal announced last November by Mayor Jerry Sanders, now aimed at a ballot next year, excludes police and firefighters. Councilman Carl DeMaio announced a rival 401(k) initiative last month that includes police and firefighters.

In San Francisco, Adachi reportedly is preparing an initiative for the November ballot in case negotiations with unions by Mayor Ed Lee and the city-county supervisors fall short of needed reform.

A “pension time bomb just exploded,” the San Francisco Chronicle said in January, as city pension costs were projected to be $375 million next fiscal year, up $100 million from the current year, and to jump again to $439 million in 2012 and $532 million in 2013.

An argument for the cap on employer contributions being considered by Adachi and Pellissier’s group is that unions would be less likely to negotiate “unsustainable” pension benefits, if they knew they had to share the risk of increased costs.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 7 Mar 11

8 Responses to “Budget-busting pensions spark ballot measures”

  1. Rex The Wonder Dog! Says:

    The Gravy Train ride is coming to an end, thanks to Mr. Math.

    If Brown thinks he is going to get tax increases/extensions without major pension reform he is living in dreamland.

  2. Chris Says:

    The sky is falling, the sky is falling……yawn.

  3. Captain Says:

    “The CalSTRS contributions are teachers 8 percent of pay, school districts 8.25 percent and the state, 4.5 percent. A CalSTRS legal analysis contends that the teacher contribution cannot be raised without providing another benefit of equal value.”

    I think the increased benefit is the assurance that the retirement checks wont bounce.

    Ed, thank you for including the Market Value of Assets (MVA) funding ratio. When you say that Calpers is nearly 70% funded is that an average of all funds – both state and local, or is that just the funding level for the state plans?

    The plans in my city are all under 60% funded, and the 12.5% return Calpers is claiming (I’m assuming that is net, but who knows) may increase the funding percentage slightly but it won’t change the actual dollar amount of the unfunded liability. I did some math for one of the groups (MVA 52%) and a 12.5% return was about what it takes to break even; no increase or decrease in the dollar amount of the unfunded liability.

    Am I missing something here?

  4. Tough Love Says:

    Quoting …”San Francisco Public Defender Jeff Adachi calls his new measure “Son of B.” He may propose, among other things, that employer contributions be capped, going no higher than employee contributions.”

    That last sentence is (short of a “hard freeze on current DB Plans and a shift to 401K-style Plans) perhaps the ONLY proposal that may save California from insolvency.

    As an example, the total cost (expressed as a level percentage of pay) of a 3%@50 pension for a cop retiring at age 55 after 30 years is 58% … yes 58% of pay EVERY year !

    The Cop contributes 8%, with the TAXPAYERS on the hook for the other 49% (over 6 TIMES more than the cop). So what good are the piddly suggestions of a few more % contribution from the cop ? Meaningless !

    But Jeff Adachi’s proposal is the real deal …. the TAXPAYERS contribute
    NO MORE than the cops. Which means, if they want to continue to get the same (HUGE) pension they must contribute HALF of the 58% or 29%
    of pay …. or take a smaller pension.

    The initial reaction is “ridiculous” … contribute 29% ? Think about it … that’s needed BECAUSE these Plans are EXTRAORDINARILY EXCESSIVE.

  5. john moore Says:

    No DB plan will survive without a limit on salaries. In 1999,Calpers set 3.25% as the annual salary growth for 3@50,but salaries grew at 2-4 times that rate. According to Calpers,the excessive salaries accounts for about 50% of its’ deficit. Yet regulation of salaries as a limit on pension growth is rarely cited as a necessary pension reform. It seems obvious?

  6. Charles Sainte Claire Says:

    http://www.mercurynews.com/ci_17426124

  7. Theresa Says:

    This is not the way to balance the budget: to take modest retirement funds of working class people and consign teachers to live their last days in destitution. They put in a lot of their own pay. There are so many things that could be revised that we are not talking about . the income tax structure is upside down for one. OIl severance tax for two. The extentions of the existing taxes should be agreed to by the republicans. They would clsoe the gap on the budget deficit in a somewhat painless way: they are taxes we are already paying. These are extensions of taxes started under swazenegger.

  8. Eiizabeth Sholes Says:

    As far as the state is concerned, the pension contribution is part of the operating budgets of each department. Not one dime in tax payer funds PAYS pensions when they are claimed. The pension funds – CALPERS and CALSTRS – pay the pension. The mewling about creating a “defined contribution” plan would not change a thing for the state but would have the real potential of leaving pension recipients with highly variable incomes month to month. One wag in Sacramento wrote his “401K is now a 201K” after the 2008 Wall Street collapse. High-figure pensions harm other pension recipients, not the general public. Not one penny of your tax money pays pensions for state workers. Get over your simplistic notions and stop listening to the lies. And no I am NOT a state worker. I work for a non-profit and have only a 401K.

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