For the third time in four years, advocates for altering public pensions have a plan they want to put to a statewide vote.
But this time the proposal by pension-change advocates Chuck Reed and Carl DeMaio has a new twist: Pensions and other retirement benefits would automatically become a matter of ballot-box politics by requiring voter approval any time government officials sought to upgrade benefits.
It also would make “defined-contribution” plans the default retirement program for state and local employees hired Jan. 1, 2019, and later. Employers who wanted to add new employees to “defined-benefit” plans now common in government – but rare in the private sector – would have to get voter approval after that date.
Reed said that the measure is necessary to rein soaring retiree benefit costs that are “crowding out funding for important services such as police, fire, schools and road repairs.”
As news about the plan spread Thursday morning, union reaction was swift and predictable.
“Chuck Reed is a hypocrite,” said Bruce Blanning, executive director of the state engineers’ union. “He’s not interested in protecting taxpayers. His real target is working men and women who dedicated themselves to public service and then retire. He wants their money to be controlled by the same Wall Street bankers who gave us the Great Recession.”
The proposal would also apply to other retirement benefits, such as medical insurance, aiming to cut what the proponents say are soaring retirement costs that have driven some cities into bankruptcy. Other provisions would prohibit government employers from paying more than half the cost of employee retirement benefits without voter approval and block politicians and government agencies from suing or taking other actions to impede voter-approved ballot measures regarding employee compensation or retirement benefits.
Republican campaign strategist Richard Temple said voters are concerned about pensions and that the new measure is “smart” because it is simple to understand.
Despite pension rollbacks enacted two years ago, Temple said, the political environment to raise money for the latest proposal has improved since last year’s failed effort.
“There’s growing concern among groups and individuals about pensions and unfunded liabilities,” he said. “And with that a growing concern, there’s more likelihood there will be funding for a measure.”
“But any time you change the status quo, it’s a heavy lift,” Temple said, “because you’re up against people who benefit from the status quo.”
Besides Reed, the Democratic former mayor of San Jose, and DeMaio, a former San Diego city councilman, the measure is backed by former San Bernardino Mayor Pat Morris and Pacific Grove Mayor Bill Kampe, both Democrats; former Vallejo Vice Mayor Stephanie Gomes; and Anaheim’s Republican Mayor Tom Tait.
Most state and local government employers offer pensions that require taxpayers and employees to contribute according to various factors, including anticipated investment returns and the life expectancy of members. The pension payouts are fixed by a formula, regardless of the return on the pension fund’s investments.
CalPERS, for example, gave government employers a pass on their pension contributions in the early 2000s when its investment returns soared so high that its assets on paper more than covered its long-term obligations. State law has since changed to prohibit so-called “pension holidays.”
But after investments collapsed during the recession, the fund’s asset values fell precipitously. Those losses and other factors forced CalPERS to raise pension contribution rates by billions of dollars over the coming years on school districts, the state and local governments.
According to state figures, the gap between what California’s 130 public pension systems have promised and their assets to cover those promises went from $6.3 billion in 2003 to $198 billion in 2013. Pension-change advocates say the gap will only grow and meeting obligations to retirees is draining money from core services, particularly in cities where employee compensation is a hefty percentage of budgets.
Reed and DeMaio persuaded San Jose and San Diego to pass local ballot measures in 2012 with the message that guaranteed benefits are drowning government finances. After losing at the ballot box, unions took the fight to the courts, where the battle rages on.
The long delay in fully implementing those measures proves the need for the new initiative, its proponents say, to discourage endless court fights and bureaucratic appeals.
The new proposal, DeMaio said, would “give voters a seat at the table” and “cut through the Gordian knot” of laws that entangle efforts to cut public pension costs.
But unions view pensions as compensation, just like salaries. As such they must be bargained, labor leaders say, just like furloughs or other pay cuts. Any perceived attack on benefits, Blanning predicted, will be a call to arms for labor.
“Retirement benefits, including pensions and retiree health, are right up there with salaries when it comes to members’ priorities,” Blanning said.
Conventional legal thinking says that pensions once promised to an employee are unalterable without another benefit, such as a cash payment, to offset the loss.
Defined-contribution systems, such as 401(k) accounts common in the private sector, shift the risk from the employer to the retiree by aligning pension payouts with investment returns. The amount contributed by the government – and by extension, taxpayers – isn’t subject to hit-or-miss investment returns because there’s no guaranteed payment owed retirees. If the market tanks, retirees simply receive less money.
Previous attempts to put a pension measure before California voters over the last decade have focused on defined contributions vs. defined benefits and efforts to cut the benefit for current and future workers.
Reed, for example, tried to parlay his San Jose success into a 2014 statewide measure that would have frozen employees’ accrued defined benefits under certain circumstances and switched them to defined-contribution plans going forward.
The effort stalled when he sued Attorney General Kamala Harris, a labor-friendly Democrat, over language she drew up for voter materials. Reed claimed she misrepresented the measure to bias voters against it. The court sided with Harris.
This time, however, Reed and DeMaio aren’t going after current employees’ retirement guarantees. Instead, the measure would change retirement benefits for employees hired in 2019 and later. Those workers would come under a defined-contribution plan, unless voters approved something else.
And by giving voters opportunity to weigh in on future pension upgrades, Reed and DeMaio are appealing to Californians’ love of direct democracy. Polls over the years have shown time and again that a strong majority of voters support the state’s ballot initiative system.
“It sounds like the proponents want a conversation about transparency and accountability,” said Michael Shires, a Pepperdine University government budgeting expert. “It’s a legitimate approach, with all the pluses and minuses that go with putting things in the hands of voters.”