Former San Jose Mayor Chuck Reed acknowledged at a recent taxpayer forum that his latest proposed pension reform initiatives won’t solve California’s $350 billion unfunded retirement benefit liability problem. But he thinks they’ll help.
“Sometimes you have to eat the elephant one bite at a time,” Reed told the Contra Costa Taxpayers Association at an Oct. 30 luncheon. “So these are bites out of this elephant that’s $350 billion big.”
Reed and former San Diego City Councilman Carl DeMaio have submitted two initiatives that would limit pension plan benefits for government employees hired after Dec. 31, 2018.
Third Time the Charm?
Reed and DeMaio are hoping the third time is the charm. Previous pension reform efforts last year and in June were canceled due to concerns about ballot descriptions by Attorney General Kamala Harris.
The first initiative, The Voter Empowerment Act of 2016, requires voter approval before governmental agencies can enroll new employees in pension plans and increase their pension benefits. Voters also must approve if an agency wants to pay more than half of the total cost of retirement benefits for new hires.
In addition, the initiative would prevent retirement boards from imposing fees or other punishments on governments that don’t allow new employees to participate in a pension plan. The California Public Employees Retirement System requires its member agencies to pay three-to-five times the cost of their unfunded liability in order to opt out of the system, according to Reed.
These changes are needed, according to the initiative, because “state and local governments face elimination or reduction of essential services because of costly, unsustainable retirement benefits granted to government employees. Almost all of these benefits were granted without the consent of voters.”
The other initiative, “The Government Pension Cap Act of 2016,” limits government contributions for new employees at 11 percent of base compensation; 13 percent for new safety employees. It also requires voter approval before an agency can pay more than half of the total cost of retirement benefits for new employees.
“We are trying to empower the voters,” said Reed. “Either of these two initiatives would have a significant impact on the cost of new employees.”
Those costs are increasing rapidly, according to Reed. In the next five years, state and local governments will need to increase contributions by 50 percent to CalPERS. This is resulting in less state funding for universities, courts, roads, social services, parks and recreation, Reed said.
Price of Pensions
School districts have it even worse. Their contributions to the California State Teachers Retirement System will more than double in five years.
“Where the money goes determines the priorities of the state,” Reed said. “And we are putting our money, I believe, into the wrong priorities.”
Failure to correct those priorities will result in more jurisdictions going bankrupt like Stockton, Vallejo and San Bernardino, he said.
“The people in those cities suffered; the employees working in those cities suffered,” he said. “And we need to avoid that. And so, giving local governments some things they can do to deal with their problems has been the focus of the initiatives.”
A successful pension reform initiative campaign will require $25 million, in addition to the $2-3 million for signature gathering, Reed said. He anticipates raising much of it from Silicon Valley executives wanting to avoid future tax hikes as well as from pension reform advocates around the country.
If they are successful, California will begin making a dent in its unfunded retirement benefits liability, he said.
“Although we acknowledge this will not solve the $350 billion problem,” he said, “if these initiatives were passed, we could save money on new employees that will allow us to help pay down that $350 billion of unfunded liabilities. This is not a solution to those unfunded liabilities, but it would be helpful.”
The savings could be significant, according to a state Legislative Analyst’s Office analysis of Reed’s June initiative, which also was called the Voter Empowerment Act of 2016. It’s similar to the current VEA, but also allows voters to decide compensation for current employees.
“It is likely that [pension] benefits would be reduced or eliminated in many jurisdictions,” the LAO said. “These changes would reduce governmental employer costs significantly in the future.”
Critics of Initiatives Speak Out
Naturally, the public employee unions are opposed to benefit reductions for their current and future members. Three people handed out leaflets outside of the luncheon at Back Forty Texas BBQ in Pleasant Hill that were critical of Reed, DeMaio and their initiatives.
“These two former politicians are currently championing a State-wide initiative approach to destroy retirement security for all new employees that would chose [sic] to work in the public sector, including law enforcement, firefighters and teachers,” said Mike DeBord, a committee co-chairman of the California Retired County Employees Association, in an essay titled “Pension Reformers Continue Their Long List of Failures.”
In another piece, “Proponents Still Trying to Undermine Retirement Security,” DeBord said that the “initiatives would amend the state constitution and erode retirement security for public employees, targeting new hires. If any are approved by the voters, they would likely be subject to many costly and lengthy legal challenges.”
But the luncheon’s other speaker, Contra Costa Times columnist Dan Borenstein, believes Reed’s initiatives don’t take a large enough bite out of the $350 billion elephant. He wants Reed to challenge state judicial rulings specifying that pension benefits for current employees can be increased but not decreased.
“It’s a one-way ratchet,” said Borenstein. “Someone likened it to a mouse trap.”
Pension reforms would not affect benefits that have already been accrued; only accrual rates for future work would be affected, he said. Borenstein said he’s aware of the political headwinds that an initiative challenging vested rights would face, but he asked Reed to take on that more substantial fight.
“Aside from politics, why not challenge the vested rights question?” Borenstein asked. “And if you don’t, how much are you really accomplishing?”
But given California’s political climate, Reed said the focus has been on getting an easily understandable and supportable initiative on the ballot.
“Something that’s hard to misconstrue,” Reed said. “Although this is a political campaign – truth is never really a limitation of any political campaign in California. So we know they’ll be misconstrued. But we want people to be able to pick it up and decide for themselves.”
The legislative analyst will begin a financial analysis of the initiatives probably on Nov. 9, according to Reed, with the attorney general filing titles and summaries by the end of the month.
After that, “we’ll do some polling, try to decide what to do,” said Reed. “And hopefully we’ll be in a position where we’ll actually have these in front of the voters in November of 2016.”