Modesto voters gave advisory-only approval Tuesday to moving city employees from pensions to a 401(k)-style investment plan, a preface to a for-real vote in San Diego next June.
Despite a strong opposition campaign from unions, Modesto voters approved three non-binding advisory measures calling for a switch to a 401(k) plan, extending retirement ages and curbing “spiking” or the improper boosting of pensions.
The Modesto vote echoes support for switching new public employees to a 401(k)-style plan in a Public Policy Institute of California poll issued in March, 71 percent in favor.
A pension reform group led by Dan Pellissier filed two statewide initiatives last week — one switching new public employees to a 401(k)-style plan and the other giving new hires a “hybrid” combining a lower pension and a 401(k)-style plan.
The group plans to pick one initiative by early January and begin gathering signatures to place the measure on the November ballot. But Pellissier said the group is still looking for money to fund the signature drive, an estimated $3 million.
A statewide Field Poll issued in March showed support for a hybrid plan, 58 percent. The Field and PPIC polls both found a reversal in recent years in voter attitude toward public pensions, now regarded by many as “too generous” and a “big problem.”
The vote Tuesday also was a reversal in San Francisco, which rejected a pension reform measure last November as voters in six other cities and one county approved a wide range of pension reforms.
This time San Franciscans approved a measure backed by labor and business groups, Measure C, that increases employee pension contributions and gives new hires a lower pension.
Labor groups negotiated the measure as an alternative to Measure D, a stiffer initiative rejected by voters Tuesday that was sponsored by Jeff Adachi, the San Francisco public defender. He also sponsored the initiative rejected last year.
Adachi was one of 15 candidates in a scramble for mayor. The apparent winner, interim Mayor Ed Lee, cited his success in getting broad support for Measure C after his appointment in January to replace Gavin Newsom, who was elected lieutenant governor.
Measure C has an innovative provision aimed at avoiding a legal challenge. Although some disagree, many believe that a series of court rulings mean that pensions promised current workers cannot be cut without providing a benefit of equal value.
The increase in employee pension contributions imposed by Measure C is regarded as a cut in promised pension benefits. The offsetting benefit in Measure C lowers employee contributions in good economic times.
Some backers hope the agreement on Measure C is a small but significant first step toward solving a huge San Francisco pension and retiree health care problem. Costs have soared to $400 million a year and could double in four years.
Public pension systems often expect to get about two-thirds of their revenue from investment earnings. When those earnings fall short, the burden of covering the shortfall falls on the government employer not the employee.
To avoid this risk, the retirement plan offered by most private-sector employers is not a lifetime guarantee of a monthly pension but a 401(k) individual investment plan. The employer makes an annual contribution and has no long-term debt.
The state of California, on the other hand, has a long-term debt or “unfunded liability” for its three pension systems of roughly $100 billion to $500 billion, depending on whether investments earn 7.75 percent in the decades ahead or only 4 percent.
In San Diego Tuesday, officials announced that an initiative qualified for the June ballot that would switch all new hires except police to a 401(k)-style plan. It’s backed by Mayor Jerry Sanders and Councilmen Carl DeMaio and Kevin Faulconer.
The city has a $2 billion long-term pension debt. Two disastrous deals in 1996 and 2002 raised pensions and lowered city payments into the pension fund, resulting in lawsuits, a moratorium on city bond sales and painful budget cuts.
Switching new hires to a 401(k)-style plan could take decades to cut costs. Savings would come sooner from the initiative’s five-year freeze on pay used to calculate pensions, which likely would be challenged in court.
San Jose Mayor Chuck Reed proposed declaring a fiscal emergency and capping city pension contributions at 9 percent of pay. A ballot measure once planned for this month was delayed for talks on a union counterproposal, which failed last month.
Now the San Jose city council is expected to make a decision early next month about placing a pension reform measure on the March ballot. City retirement costs, $245 million this year, are expected to reach $430 million in four years.
The Modesto measures were written by Councilman Brad Hawn, a mayoral candidate who finished second Tuesday and will be in a runoff. Opponents said the measures were placed on the council agenda at the last minute to make the Nov. 8 ballot, avoiding proper review.
“The unions argue, with some justification, that this was a campaign strategy more than a serious reform effort,” said a Modesto Bee editorial. The newspaper opposed the 401(k) and extended retirement measures, but supported the anti-spiking measure.
A union campaign against the measures included an emotional mailer from the family of a police officer, injured in a vehicle pursuit and left in a coma for several years before dying, that suggested a 401(k)-style plan would have given the family no support.
A union cable television ad showed an elderly man putting on SWAT team gear and saying in a quavering voice, “I’m on my way to help,” as he hobbled forth with the aid of a cane.
Another union video showed Hawn saying a switch to a 401(k)-style plan could cost $106 million plus adding Social Security coverage. But the video said the increased cost was not mentioned in the ballot pamphlet.
Some of the costs of switching to a 401(k)-style plan were mentioned by Alan Milligan, the California Public Employees Retirement System chief actuary, in a Capitol Weekly article last May.
A closed pension plan has to be managed for the lifetime of the members, some in their 20s, which could be 60 years. During this period the employer would be paying the cost of two retirement plans, the pension and the 401(k).
As a frozen pension plan ages, less risky investments to maintain liquidity are likely to result in lower earnings and higher employer contributions. Studies show pensions are cheaper to administer than 401(k) plans. And adding Social Security costs the employer 6.2 percent of pay.
“This means taxpayers may end up paying more for less – higher costs for lower worker benefits,” Milligan wrote.
In Palo Alto Tuesday, voters repealed binding arbitration for police and firefighter contract negotiations. Opponents contend that arbitrators, who must pick either the labor or management offer without modification, usually pick the labor proposal.
The Palo Alto vote continues a string of votes to repeal or limit binding arbitration, some paired with pension measures, that includes Vallejo in June last year, San Jose last November and this year San Luis Obispo in August.
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 10 Nov 11