LA WATCHDOG-On October 15, San Jose’s Democratic Mayor Chuck Reed and four other mayors* submitted a statewide ballot initiative, The Pension Reform Act of 2014, to California Attorney General Kamala Harris for her review in anticipation of the collection of over 800,000 signatures needed to place this measure on the November 2014 ballot.
If the Pension Reform Act is approved by a majority of the voters, local governments such as The City of Los Angeles will have the opportunity to modify existing pension and retiree health care plans for current employee’s FUTURE years of service either through the collective bargaining process or a voter approved initiative.
However, this act does not require cities to modify their existing plans nor does it dictate any level of benefits. Furthermore, it prohibits the State, including the California Public Employee Retirement System, from interfering with the rights of the local governments granted under this measure.
Importantly, any benefits that have already been earned are fully vested.
Underlying this initiative is the fact that the out of control increase in pension contributions are chewing up an ever increasing portion of local budgets, forcing cities to cut public services, furlough or lay off employees, and underfund the maintenance and repair of our streets, sidewalks, and the rest of our deteriorating infrastructure.
This proposed change to California’s “vested rights doctrine” was recommended by the Little Hoover Commission in February of 2011 when it “confirmed that California [and its local governments] cannot solve its pension problems without making prospective changes going forward for current employees.”
But public sector unions are adamantly opposed to any changes to the current system, arguing that this is a cut in benefits that were promised when the city worker was hired. Even CalPERS issued a press release denouncing this statewide ballot initiative, despite the fact it supported Senate Bill 400 which foolishly granted retroactive pension increases to state employees in 1999.
However, we have not heard of any realistic solutions to avoid “service level insolvency” from the public sector unions other than huge tax increases on an already heavily taxed electorate.
In any case, we are in for a battle royal, starting with the need to overcome union sponsored sabotage of the effort to gather over 800,000 valid signatures followed by a nasty and very expensive donnybrook if this pension reform initiative makes it to the ballot.
The Pension Reform Act of 2014 has the potential to help the City of Los Angeles solve its massive pension problem.
When Mayor Villaraigosa was sworn in, pension contributions of $350 million represented less than 10% of the general fund budget. By 2017, pension contributions will more than triple to $1.2 billion, chewing up 23% of the City’s projected revenues.
As of June 30, 2012, the City had an unfunded pension liability of $11.5 billion, representing a funded ratio of an unacceptable 68%, an increase from the fully funded level (98%) in 2007.
But the severity of the City’s pension liability is understated because the pension plans and their politically appointed trustees rely on the overly optimistic investment rate assumption of 7.75%. If this rate were adjusted to a more realistic rate of return, say 5.7% as suggested by Moody’s Investors Service, one of the three major credit rating firms, the unfunded pension liability would increase to over $20 billion (54% funded). Pension contributions would soar by about 50% ($600 million), consuming over one-third of the budget and forcing the City to lay off thousands of employees and outsource services to more efficient operators.
Under the Pension Reform Act of 2014, the City does not have to modify its pension plans. However, since the two pension plans have a funding level of less than 80%, the City will be required to develop (but not implement) a “stabilization” plan outlining how the pension plans will achieve 100% funding within 15 years. The stabilization plan would include the benefits to be modified, the additional costs to the employees, the additional costs to the City, and the sources of any funding.
Now that the City is enjoying record revenues, our Elected Elite tend to look at the City’s finances through rose colored glasses, patting themselves on the back for reducing the next year’s budget deficit to “only” $250 million. But the massive pension problem that is eating the City’s lunch is not going to be solved unless the City is willing to adjust the future benefits of current employees.
Mayor Garcetti and the members of the City Council are in an awkward situation. Do they endorse The Pension Reform Act of 2014 that provides the City with the tools to solve its $20 billion pension problem? Do they endorse meaningful pension reform that was favored by 70% of the voters in San Jose and San Diego? Or do they bow to the campaign funding leaders of our public sector unions who have failed to offer constructive solutions to the City’s financial problems?
Put another way, will Progressive Democrats who want to revitalize the Los Angeles River, repair our streets, and provide services to the public and the less fortunate prevail over union funded Democrats who endorse increased salaries and benefits?
Stay tuned. We are in for a knockdown, dragged out rumble.
*Chuck Reed (D) of San Jose was joined San Bernardino Mayor Pat Morris (D), Santa Ana Mayor Miguel Pulido (D), Anaheim Mayor Tom Tait (R), and Pacific Grove Mayor Bill Kampe (D).
(Jack Humphreville writes LA Watchdog for CityWatch. He is the President of the DWP Advocacy Committee, The Ratepayer Advocate for the Greater Wilshire Neighborhood Council, and a Neighborhood Council Budget Advocate. Humphreville is the publisher of the Recycler Classifieds -- www.recycler.com. He can be reached at: [email protected]. Hear Jack every Tuesday morning at 6:20 on McIntyre in the Morning, KABC Radio 790.)
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PENSION REFORM ACT OF 2014 SUMMARY
The Pension Reform Act of 2014 would provide cities, counties and other government agencies with clear authority to deal with skyrocketing retirement costs by allowing changes to pension and retiree healthcare benefits on a strictly going‐forward basis, while making sure employees get paid the benefits they have earned.
The Pension Reform Act of 2014 has two equally‐important goals:
To make sure employees get paid what they have earned.
To make sure residents and taxpayers receive the essential public services they deserve.
This Ballot Measure…
PROTECTS WHAT IS EARNED
The initiative protects all pension and retiree healthcare benefits that government employees earn as work is performed.
CLARIFIES THAT FUTURE BENEFITS ARE NEGOTIABLE
The initiative allows changes to pension and retiree healthcare benefits for current employee’s future years of service, either through collective bargaining or by the voters.
RESPECTS COLLECTIVE BARGAINING
Changes to employee retirement benefits must comply with applicable collective bargaining laws and could not be enacted until labor contracts expire.
DOES NOT DICTATE BENEFIT LEVELS
This initiative does not dictate a particular level of retirement benefits, nor does it require any government agency to modify its employee retirement benefits.
PROTECTS LOCAL REFORMS
State agencies would be prohibited from interfering with local governments’ authority to prospectively amend retirement benefits for future years of service. This includes prohibiting CalPERS from charging exorbitant termination fees to employers who modify their retirement plans.
REQUIRES REPORTING OF UNDERFUNDED PLANS
Government agencies with plans whose funding level fall below 80% will be required to annually publish a report detailing the funding status of the plan and outlining specific actions that would allow the plan to achieve 100% funding.
COVERS ALL GOVERNMENT AGENCIES
This initiative would apply to the State of California and all of its political subdivisions, including cities, counties, school districts, special districts, the University of California, and California State University.
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