San Diego Mayor Jerry Sanders dropped the big one on public pension advocates last week, proposing that all new city employees except police and firefighters get a 401(k)-style individual investment plan instead of a pension.
The mayor’s announcement that he plans to put an initiative on the next city ballot is the most far-reaching proposal to emerge so far after voters approved seven of eight local pension reforms this month.
The Los Angeles city council last week put a measure on the March 8 ballot that would cut police and firefighter retirement costs. After San Francisco voters gave pension reform its lone setback this month, officials there reportedly are discussing new plans.
At the state level, two reform groups are talking about an initiative. University of California Regents may act on pension reform next month. State worker union holdouts will test incoming Gov. Jerry Brown in negotiations for new contracts.
And the possibility that public pensions will become a federal issue has CalPERS officials planning a trip to Washington, D.C., next month to begin staking out a position in case there is a national debate.
San Diego voters rejected a Sanders-backed proposal for a sales tax increase linked to pension reforms. Controversial deals in 1996 and 2002 lowered city pension contributions below actuarially required levels, while raising pension benefits.
“Eliminating pensions is a radical idea in municipal government, but we must acknowledge that we cannot sustain the current defined-benefit system, which was designed in another era for completely different circumstances,” Sanders said in a news release.
“Public employees are now paid salaries comparable to those in the private sector, and there’s simply no reason they should enjoy a far richer retirement benefit than anyone else,” he said.
A spokeswoman said the mayor’s proposal, not yet drafted, exempts police and firefighters to avoid “severe recruiting issues.” The unsuccessful Republican candidate for governor, Meg Whitman, made a similar exemption in her proposal to switch new state workers to 401(k) plans.
The president of a pension reform group, which is planning a third attempt to put an initiative on the ballot, said a question added to a recent private poll found that exempting police and firefighters from a 401(k) proposal caused a sharp drop in support.
“The luster has gone off public safety (workers),” said Marcia Fritz, president of Californians for Fiscal Responsibility.
A campaign against a 401(k) proposal briefly backed by Gov. Arnold Schwarzenegger in 2005 featured police and firefighters, who traditionally have strong public support.
Most private-sector employers that offer retirement benefits now use 401(k) plans rather than pensions. The employer makes a “defined contribution” and avoids the long-term debt of pensions. Workers have a retirement plan easily shifted to a new employer.
A 401(k) plan also shifts the risk of investment loss from the employer to the employee. Pensions depend on investment earnings for much of their revenue, 75 percent for many public plans.
One reason public pension costs are going up, diverting money that could be spent on other programs, is huge investment losses in the stock market crash two years ago.
Critics contend that optimistic earning forecasts conceal massive public pension debt. A Stanford graduate student study said state pension debt is $500 billion if a risk-free bond rate is used, not the $55 billion reported using risky diversified investments.
Fritz argues against switching new government employees (current workers have pension rights protected by the courts) to a pure 401(k) retirement plan. Some of the problems she cites: Most public employees in California do not receive Social Security, a backup if investments fall short. Closing a pension plan ends revenue from new members, driving up employer costs. Pure 401(k) plans in Alaska. Colorado and Nebraska have not provided enough retiree income.
Fritz prefers a “hybrid” plan that combines smaller pensions with a 401(k)-style individual investment plan. She thinks that an initiative is needed, because public employee unions are unlikely to agree to the necessary long-lasting reforms.
Her group has not been working with the new Think Long Committee for California backed by $20 million from financier Nicolas Bruggruen. Its broad agenda for an overhaul of state government reportedly includes “runaway pension costs.”
Gov. Arnold Schwarzenegger got two-thirds of unionized state workers to agree to cut pension costs. Current workers contribute more toward their pensions, new workers get lower pensions, and the sweetener is a top-step pay raise after two or three years.
Unions representing the other third held out, hoping for a better deal from the new administration. But Jerry Brown was an early advocate of pension reform, proposing lower benefits for new hires in the final budget of his previous term as governor.
His argument for a “two-tier” system in 1982 was that pensions and Social Security gave some retirees more income than they earned on the job.
UC Regents may vote Dec. 13 on a plan to begin closing a $21 billion unfunded retirement liability. Unions must approve parts of the plan to increase employer-employee contributions, reduce retiree health coverage, and extend new worker retirement ages.
A ballot measure to cut Los Angeles police and firefighter retiree costs has union support. Pensions for new hires would be lowered. Current workers would contribute 2 percent of their pay toward retiree health care. Critics say more savings are needed.
Unions and others reportedly spent more than $2 million to defeat a San Francisco ballot measure that would have increased worker pension contributions and cut health care coverage for dependents of current workers.
But the ballot measure sponsor, Public Defender Jeff Adachi, told a newspaper columnist he may try again. Unions said they are working on their own plan to cut pension costs in San Francisco.
A federal lobbyist, Don Marlais, told the California Public Employees Retirement System board last month that Congress and federal officials are beginning to be affected by “the relentless drumbeat of negative press” about public pension plans.
“We assured them and congressional staffers that public pension plans are sound and they are not looking for a bailout,” Marlais said.
Two CalPERS officials, chief executive Anne Stausboll and external affairs director Patricia Macht, are scheduled to go to Washington next month to gather information about the national pension situation.
If there is going to be a federal discussion of long-term retirement security, as some expect, CalPERS wants to be ready to participate, possibly with guidelines to be considered by the board next spring.