Bipartisan Mayors Propose Pension Reform Initiative

pension-reform-stockA group of bipartisan California mayors – including San Jose Mayor Chuck Reed (D), San Bernardino Mayor Pat Morris (D), Santa Ana Mayor Miguel Pulido (D), Anaheim Mayor Tom Tait (R) and Pacific Grove Mayor Bill Kampe (D) – have filed a statewide ballot initiative to provide state and local governments with the tools needed to fix California’s unsustainable public employee retirement plans.

“The Pension Reform Act of 2014 would amend the California Constitution to give government agencies clear authority to negotiate changes to existing employees’ pension or retiree healthcare benefits on a strictly going-forward basis,” a release stated on Tuesday.  “The measure explicitly protects retirement benefits government employees have already earned, while allowing benefits to be modified for future years of service.”

“Many of California’s public employee retirement plans are simply unsustainable and it’s in everyone’s interest to provide the tools to fix the problem now before even tougher actions are necessary,” said Mayor Chuck Reed of San Jose who is heading up the initiative. “During tough economic times, we believe employees would much rather adjust their future expectations than risk seeing their accrued benefits slashed in bankruptcy. We’ve already seen that tragic situation play out in cities like Stockton and Central Falls, RI. Our teachers, police officers, firefighters and other dedicated public servants deserve to know that the pensions they’ve earned will be there when they need it – not just the day they retire, but also when they’re 85 or 90.”

Union leaders were quick to blast the proposal, attacking Mayor Reed as “a self-aggrandizing political lifer” and “puppet of Wall Street interests.”

Dave Low, Chairman of Californians for Retirement Security, responded, “This extreme proposal, advanced by a career politician and funded by a former Texas-based Enron trader, breaks the promise of a secure retirement made to millions of Californians, many of whom are ineligible for Social Security and have an average pension of $26,000 per year. It will allow public employers to unilaterally cut the retirement benefits promised to current teachers, firefighters, police officers and school bus drivers — a promise upheld by the Supreme Court that politicians and hedge fund managers want to change to allow employers to reneg on it.”

He warned, “If it is put on the ballot, it will energize the same coalition that defeated Proposition 32 by a record margin in 2014. Californians have constantly shown their distaste for measures put on the ballot by Texas interests and secret out-of-state contributors, and we expect this flawed proposal to be no different.”

But a large group of Democrats, emanating from cities across the state, have come to recognize that the public employee pension system is putting a huge strain on city coffers.

“In Pacific Grove, pension costs have crowded out library hours, overdue street and infrastructure maintenance, and other important services,” said Mayor Bill Kampe of Pacific Grove, a Democrat. “This initiative states a simple and fair principle for a retirement benefit: you’ve earned it when you’ve done the work. If you haven’t done the work, it’s still negotiable. It’s the right thing for the people, for the city, and ultimately for the employee’s retirement security. We need to fix a very broken system.”

“Exploding public pension costs have become the T-Rex of California’s state and local budgets – eating all public services and leaving behind dangerous, dark and pothole-filled streets, closed libraries, degraded parks and blighted buildings,” said Mayor Pat Morris of San Bernardino, also a Democrat. “If we expect our government to remain solvent it is critical that California voters curb the appetite of this monster in a way that protects employees’ existing pension benefits while giving us the tools necessary to control the costs of the future pension benefits. If we fail to act, then many other cities and counties will soon follow my city into bankruptcy.”

Current pension reform efforts, such as Governor Brown’s as well as efforts in local communities like Davis, have moved toward creating two-tiered pension systems where newer employees get considerably less in benefits and pensions that current employees.

That system is created by California Supreme Court rulings that have held that benefits not yet earned are nevertheless contractually protected through vested rights.  This initiative would allow state and local government to protect those benefits already earned but alter future benefit packages.

“Federal law allows private pension plans to prospectively change employee retirement benefits. At least 18 states have the flexibility to do so for public employees as well. However, in California, a series of judicial decisions has made it extremely difficult for government employers to make any changes to retirement benefits for existing employees, even if he/she has only been on the job for a single day,” the group said.

Given California’s skyrocketing retirement costs and huge unfunded liabilities for pension and retiree healthcare benefits, numerous independent experts have argued that prospectively modifying current employees’ benefits is the only way to solve the problem, the group believes.

This includes the state’s Little Hoover Commission, which determined: “Public agencies must have the flexibility and authority to freeze accrued pension benefits for current workers, and make changes to pension formulas going forward to protect state and local public employees and the public good.”

The Pension Reform Act of 2014 also includes provisions to:

  • Prevent the State of California, pension plan administrators, and other government boards from interfering with elected leaders’ or voters’ ability to amend their public employee retirement benefits for employee’ future years of service.
  • Protects existing collective bargaining agreements by requiring government employers to wait until current labor contracts expire before negotiating changes to retirement benefits.
  • Require any government agency with a pension plan that is less than 80% funded to prepare and publish a public report outlining how it can achieve full-funding in 15 years.

“In Santa Ana, our annual retirement contribution has more than doubled over the past decade,” said Mayor Miguel Pulido of Santa Ana. “This has been a contributing factor in the City of Santa Ana having to reduce its full-time workforce by approximately 40% during the past six years. We need to consider meaningful reforms to reduce current benefit levels and obligations in the near term in order to maintain basic services.”

“There is no denying the impact that the rising cost of public employee pensions has had on municipal budgets in our state and across the nation,” said Mayor Tom Tait of Anaheim. “The huge unfunded liabilities in our state’s pension funds pose significant risk to local governments’ ability to meet our obligations to retired employees. Cities need the proper tools to protect basic public services while ensuring the retirement security of retired employees. This proposed measure gives us those tools.”

Cities like Davis have been forced to slash employees and seek two-tiered approaches, which will be very slow to recognize cost savings as we move forward.

The California Public Pension system is underfunded by billions of dollars and those dollars will come from future general fund budgets for communities like Davis.

—David M. Greenwald reporting

About The Author

David Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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  1. Mr.Toad

    “The California Public Pension system is underfunded by billions of dollars and those dollars will come from future general fund budgets for communities like Davis.”

    Only partly. It will also come from increased contributions by employees, recent market gains and the state.

  2. yeahmyam

    Mr. Toad, recent market gains can quickly become recent market losses and I think its the taxpayer, Cities, etc.. that need to make up the difference. CalPers invested in huge speculative real estate deals that collapsed at the height of the market losing millions if not billions of dollars yet they are still guaranteed a certain pension by taxpayer despite these losses. Everyone took a haircut during the great recession except public pensions from what I can tell.

  3. wesley506

    The sky is not falling. Birds will continue to fly, rivers will continue to flow, and flowers will continue blooming.
    CalPERS was about 55 percent funded in the early 1980s, following another severe recession. As the economy rebounded, so did CalPERS funding status. By 2000, the system was 130 percent funded. CalSTRS was about 29 percent funded in 1975, and it increased to 57 percent in 1983. As the economy rebounded, so did CalSTRS funding status. By 2000, the system was 110 percent funded. A pension plan’s funded status or unfunded liability is a snapshot in time that can change significantly over the course of a few years, depending on whether the economy and financial markets are strong or weak.
    Calpers invested in huge speculative real estate deals because like nearly everyone else in the world they had been assured by Wall Street’s best and brightest that these were rock solid investments. For the 12 month period ending June 30, 2013 Calpers return on investment was 12.5%, which is a little higher than the 7.5% rate of return assumed for actuarial purposes.
    The recent pension reforms enacted for state workers include changing the retirement formula to 2% at age 62, caps on the salary that can be used to calculate final compensation at $113,700, requiring new members to contribute at least 50% of the total normal cost of their retirement plan, prohibiting purchasing of service credit, prohibiting public employers from granting retroactive benefit enhancements, prohibiting pension holidays, and using the members average highest 36 consecutive months when calculating final compensation. I think another change that will make the system a little more honest is that govt agencies are now required to include all unfunded liabilities in their budgets.

  4. SouthofDavis

    wesley506 wrote:

    > Calpers invested in huge speculative real estate deals
    > because like nearly everyone else in the world they had
    > been assured by Wall Street’s best and brightest that
    > these were rock solid investments

    Calpers actually invested in real estate (and just about everything else) as a way to “pay back” wealthy campaign donors.

    I’m no fan of “Wall Street” but they were not the ones telling CalPers to buy a bunch of rent controlled crappy apartments in East Palo Alto with Page Mill Properties (where CalPers lost 100% of their $100 MILLION investment) or invest in even more rent controlled apartments in NY with the Speyer family (where CalPers lost 100% of their $500 MILLION investment).

    Right now there is no political downside to paying big bucks for worthless land in the desert (like CalPers did when it lost close to a BILLION on Newhall Land and Tejon Ranch deals) owned by your friends (aka campaign contributors) since taxpayers will just pick up the slack when the deals don’t work out…

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