By Ed Mendel
March 7, 2011
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 Pellisier. 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.
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