The cost of public-sector pay and benefits, combined with hundreds of billions of dollars in unfunded pension liabilities, are weighing down state and city budgets. The burdens are staggering: states face a cumulative shortfall of $1.26 trillion, according to a Pew Center report. Skyrocketing pension and healthcare costs present an especially daunting challenge to municipal finances. Recently, both Los Angeles and San Diego have taken contrasting approaches to this problem.
Mayor Villaraigosa’s plan for L.A. — negotiated directly with city unions — offers modest but certain savings. By contrast, the San Diego city council’s ballot proposition touts potentially larger long-term savings, but faces a long and uncertain path to implementation.
Most Californians support public employee pension reform. According to a recent PPIC Statewide Survey, 56 percent of likely voters in California say the amount of money state and local governments spend on public employee pensions is a big problem – up from just 32 percent in 2005. A Times/USC poll reported that 70 percent of Californians said they supported a cap on pensions for current and future public employees. Nearly as many (68 percent) favored raising public employee contributions to retirement; 52 percent wanted to increase their retirement ages. Finally, an overwhelming 74 percent favor changing the pension system for new public employees from a defined benefit plan to a defined contribution system similar to a 401(k) plan.
In San Diego, Mayor Jerry Sanders and city council leaders have proposed such a pension reform plan to help close the city’s $56.7 million budget deficit. The ballot measure replaces a defined-benefit pension plan with a 401(k)-style defined-contribution plan for all new city employees except police officers. It also freezes base pay for current city workers for up to five years, removes special pay from counting toward pension calculations, and forces the city to post each year’s pension payouts online. (Special pay includes more than 160 types of payouts are given for reasons ranging from rewarding special expertise to helping fill unpopular assignments.) Proponents argue the plan will save $363 million in the first five years and $2 billion over 30 years. “It’s a beautiful marriage of ideas that will benefit taxpayers tremendously in the short term and the long term,” said Lani Lutar, president of the San Diego County Taxpayers Association.
Critics point out that moving new employees to a 401(k) type system leaves the city’s current defined benefit plan in even worse condition than before, since those new employees will not pay into it. The measure represents a compromise between authors of dueling ballot measures to curtail San Diego city pensions. It combines elements from a proposal by Mayor Jerry Sanders and Councilman Kevin Faulconer with ideas from Councilman Carl DeMaio and business leaders. Many stakeholders feared that competing ballot measures could confuse voters, deplete resources, and derail both initiatives. A desire to focus the political clout and fundraising on a single measure thus spurred the compromise, which the sponsors hope will appear on the June 2012 ballot. Thus it will not produce savings until after that election — potentially not until the 2014 budget.
The inclusion of firefighters and lifeguards in the 401(k) plan is one of the most significant changes in the package. Sanders and Faulconer had insisted that city workers who risk their lives should receive guaranteed pensions, and included such guarantees for all public-safety workers in their original proposal. The new proposal, however, only exempts police officers from the 401(k). Faulconer argues the measure combines the best concepts from both sides. “This plan protects the taxpayer. It ends the pension system as we know it,” he said, “and it gives us the money we need for a range of neighborhood services.”
The proposal faces many hurdles before it reaches the ballot. After the City Clerk’s Office certifies its language, sponsors have 180 days to collect more than 94,000 signatures from the city’s registered voters to call an election. Then they face the campaign itself. In essence, the ballot measure would close the pension system to new workers and give them 401(k)s instead. The fiscal benefit of this move will not materialize in the short-term. It will, however, significantly reduce the city’s long-term liabilities by shifting financial risk from taxpayers to employees. Mayor Jerry Sanders has also announced a separate deal with city labor unions to cut health care benefits for current employees, which he argues will save $714 million over 25 years.
In Los Angeles, Mayor Antonio Villaraigosa and city leaders reached a similarly ground-breaking deal with a coalition of city unions that increases employee contributions to retiree health care benefits and ends furloughs for most workers covered. The coalition includes AFSCME and SEIU, among others, and represents 18,719 workers, roughly half of the municipal workforce. Those city employees nearly doubled their contribution to retirement benefits from 6 to 11 percent of their salaries starting July 1. Workers will also forgo planned salary increases and overtime pay for one to three years. Unlike the San Diego plan, this change affects not only new workers but also existing workers represented by the coalition. City retirement costs were $653 million last year, representing almost 10 percent of the total city budget.
But four unions representing more than 6,300 full-time workers initially voted against the labor agreement, citing disapproval of the increase in employee contributions and distrust that the Mayor would keep his promises to avoid layoffs and furloughs. They included deputy city attorneys, mechanics, park rangers, lifeguards, animal control officers and waste water treatment plant workers. A few weeks later, however, two of those four unions approved the deal on its second go-around. A total of 18,719 unionized employees have ratified the deal. However, the agreement still does not cover half of the Los Angeles city work force of sworn employees, such as police officers and firefighters, or workers at the Department of Water and Power.
The LA City Administrator’s Office says the deal will save $43 million in fiscal year 11-12, though additional concessions excluded from the estimate could increase those savings. While impressive, those savings may not add up to the $396 million Mayor Villaraigosa expects over the agreement’s three year term.
Villaraigosa is a former labor organizer elected with the backing of the city’s unions, but has been at odds with many unions as he seeks to cut costs. Union leaders said the concessions were painful, but prove that collective bargaining can work. The city still faces a $450 million shortfall for the next fiscal year. This deal, however, may be used as a model for future budget negotiations the remaining 20,000 L.A. municipal workers.
The L.A. and San Diego plans could have a ripple effect across the nation. Most cities in the U.S. struggle with the same economic forces: healthcare spending, retirement costs, and shrinking revenues. These forces threaten to reduce the effectiveness of government and the quality of public services. That is why San Francisco, New York, and Baltimore are considering similar pension reform efforts. If the dramatic moves made by both Los Angeles and San Diego prove successful, other cash-strapped cities may also follow suit.