Municipalities take aim at public pensions
After losing billions of dollars in recession-wracked investments, public pension funds in California are seeking to pare back the historically generous retirement benefits they provide to government workers, but not without push-back from unions.
About 70 local governments, stretching from Redding to Long Beach, are coming up with new, stingier formulas for calculating pension benefits for future hires.
This month, proponents turned in more than 75,000 voter signatures to put a measure on the November ballot to require San Francisco city employees to pay more toward their retirement funds.
Newport Beach approved a contract with firefighters and lifeguards that used planned pay raises to cover pension costs and required lifeguards to pay 3.5% of their pay toward retirement.
Orange County has approved a contract with the deputy sheriff’s union that moves the retirement age to 55 from 50 for new hires and requires deputies to contribute part of their pension costs, according to a statewide survey compiled by the California Public Employees’ Retirement System.
Similar labor negotiations are underway in Sacramento.
Gov. Arnold Schwarzenegger recently reached tentative deals with six state workers’ unions to reduce benefits and hike employee retirement fund contributions for new hires. He has also vowed to veto any budget for the current year — now almost three weeks overdue — that does not roll back retirement benefits to 1999 levels and require workers to contribute an additional 5% of pay toward retirement.
Because obligations to current workers are constitutionally protected, the negotiations are aimed at creating less expensive retirement arrangements for future employees that would ease the burden on taxpayers and keep pensions on a more solid financial footing over the coming decades.
Schwarzenegger’s approach to fixing pensions is in line with national trends, said Ronald Snell, an analyst with the National Conference of State Legislatures. “The more common approach is to make a number of adjustments,” he said. “Marginal changes add up” in creating savings.
Union leaders vigorously defend their members’ rights to receive adequate pension benefits and are using their considerable political power to prevent the governor and Republicans in the state Legislature from taking an ax to long-established programs.
Pension costs as a percentage of payroll are lower than they were three decades ago for state and school district workers, said Dave Low, a lobbyist for the California School Employees Assn.
Changes in benefits and contributions, if needed, should be worked out on the local level in contract bargaining sessions and not imposed by lawmakers, Low said.
“Where immediate and long-term issues exist, solutions are best constructed locally and implemented through the collective bargaining process,” he said. “Such solutions have already been implemented in numerous cases across California.”
California is one of about two dozen states trying to get a handle on burgeoning pension costs by putting in place a variety of benefits and funding changes.
The drive to reduce costs coincides with estimates from think tanks and economists that the nation’s state pension funds collectively could eventually face a $1-trillion to $3-trillion shortfall for currently promised future retirement benefits.
In Los Angeles, former Mayor Richard Riordan has predicted that rising pension and health benefits will push the city into bankruptcy within five years. He has called for a series of reforms, including ending pensions for new hires and raising the retirement age.
The looming shortfall has been made worse by steep losses in pension investments, particularly in risky bets on real estate and sometimes private equity funds. The value of the portfolio at the state’s biggest pension, the $200-billion California Public Employees’ Retirement System, is down 23% since a record high in the fall of 2007 and the system asked the state and school district employers to boost their retirement contributions by $700 million for the fiscal year that began July 1.
Despite the growing financial burden on public treasuries, making a dent in these obligations can turn into a long, bitter slog, as residents of the place that calls itself “America’s Finest City” have learned over the last decade.
" San Diego was an early warning of the kind of difficulties that public pension funds could find themselves in,” Snell said. “They started with a badly funded plan and it’s been difficult for them to move out of it.”
Most San Diego city employees can retire at 50% salary at age 55 if they have 20 years’ service. They also receive health benefits, survivor benefits and a “13th check” in years when the pension fund is booming. The average retiree receives $38,484 a year.
Pension payments could consume half the city’s annual budget by 2025 unless major changes are made, the San Diego County Grand Jury has warned.
But politicians have been whipsawed by tax-averse, service-hungry citizens on one side and powerful unions on the other as the pension issue has become an overheated element of the civic debate. Much of the focus has been on the workers, some of whom say they feel they have been made into scapegoats.
Jan Lord, who works in the city’s job training program, said that when someone sits next to her on the trolley and finds out she is a city employee, he or she inevitably starts talking about city pensions, often in incredulous tones, mixing envy with anger.
“I defend city employees,” Lord said. “I tell them that most of what they’ve heard isn’t true. Most city employees are not retiring with six-figure pensions.”
Mayor Jerry Sanders has cut jobs, trimmed services and taken a hard line with employee unions during contract talks. A two-tier pension plan has been established, with lower payments for new hires. The city’s bond rating has improved, allowing it to borrow enough money to embark on a major street paving campaign.
But Sanders has steered clear of proposing massive service cutbacks or layoffs, an all-out war on pension costs or tax increases. (Still sacrosanct: free trash pickup for single-family homes, something most big-city residents began paying for decades ago.)
As a result, there remains a “structural gap” between the services residents have come to expect and the amount they are willing to pay, according to the city’s independent budget analyst. Progress toward reducing the city’s pension payments has been undercut by the recession.
Two weeks ago, Sanders appeared ready to propose a ballot measure for a half-cent sales tax increase. But the Republican Party and others vowed to mount a campaign to defeat it, preferring layoffs and outsourcing. Sanders backed down.
With higher taxes a tough sell in most places, some governments see a partial solution in having workers fund some of their own retirements.
Half a dozen states and the District of Columbia have pushed to incorporate 401(k)-style programs, either to replace or to complement so-called defined-benefit pensions, which pay the worker a predetermined amount throughout retirement. Defined-benefit pensions are still the norm for government employees but have largely disappeared in the private sector.
But many retirement experts say 401(k) plans won’t provide a secure retirement for the massive late baby boom generation that will retire over the next 10 years.
“They don’t work for people except for those at the highest incomes,” said Teresa Ghilarducci, an economist and pension expert at the New School for Social Research in New York.
West Virginia and Nebraska recently dumped their employee-contribution programs and went back to a defined benefit.
Schwarzenegger, earlier in his administration, called for forcing all new employees to switch to 401(k)-type funds. He later withdrew that demand.
CalPERS allows law enforcement officers to start collecting up to 90% of their working salary at age 50, and general state workers can get more than 60% at age 55.
Those benefits got a big boost from lawmakers in 1999 during the Internet boom, Schwarzenegger noted at a pension roundtable discussion he hosted this month. That increase is costing taxpayers an additional $110 million a year in pension costs, he said.
“Pension debt … without reform will continue to grow and crowd out funding for programs and services that Californians hold dear, such as higher education, parks and environmental protection,” Schwarzenegger warned.