Tackling the Pension Problem
SD's takes the lead on pension reform
Mayor Jerry Sanders
There is an undeniable shift happening at the foundations of San Diego government right now—one that requires a steady diet of alphabet soup. Everyone will feel the impact, but it comes buried underneath acronyms like MEA, PERB, Prop B, and DROP. What it’s really about is mountains of money.
But in the wake of the great recession, virtually every city paying retired city employees through pensions was faced with a new reality: Its pension funds, which are invested in the stock market, had taken devastating hits. In San Jose, “the funds combined lost close to $1 billion,” says Michelle McGurk, spokesperson for San Jose Mayor Chuck Reed. “And it is definitely a nationwide problem.”
That pothole you drove through for months on your way past a closed library? That’s the recession trickling down into your neighborhood. With pension payments looming, governments have stopped paying for the basics. The response in California, and nationwide, has varied.
In June, San Diegans passed Proposition B, which froze pensionable salaries and abolished pensions for new city employees. The fact that a majority of voters passed the legislation sent a clear message to lawmakers that their constituents did not want the issue of pension reform to be stalled in a political quagmire. And it set an example for other cities struggling to get bipartisan reform measures passed. What’s more—even though Prop B is held up in court right now—both candidates for mayor of San Diego promised to implement the reforms if the courts uphold them.
Experts agree San Diego is leading the nation in pension reform efforts. “San Diego is at the forefront of public pension reform,” says Carl Luna, professor of political science at San Diego Mesa College. “Cities across the country have played fast and loose with their pension obligations and have gotten behind the eight ball.”
Some cities, like San Bernardino and Stockton, are responding by declaring bankruptcy. They say their pension problems are just too overwhelming and they hope bankruptcy courts will help them reduce the debts they owe to their pension systems. “Bankruptcy causes its own problems,” Luna says. Benefits paid to employees drop, making that city less attractive to potential hires. “Then the question is: Where will you get the competent employees that you want?”
In August, California’s legislature passed a law that will raise the retirement age and force some state employees to contribute more of their salaries to their pension, potentially also making the state less attractive to workers. “Statewide, you’re going to see the same kind of brain drain going on,” Luna explains.
San Jose passed Measure B, which changed the math on how much pension and healthcare benefits employees get, as well as how much they have to pay. Those changes also face multiple court challenges. Mike Zucchet, general manager of the San Diego Municipal Employees Union, worries that cuts to public employee benefits will hurt the ability of states and cities to serve taxpayers. Can governments still function with pay freezes and 15 to 20 percent fewer workers? “It’s a nice sound bite,” Zucchet says. “Maybe not this month, maybe not next year, but some day it will come home to roost.”
Wisconsin passed a law that stripped many public sector employees of their rights to have a union bargain over pensions and healthcare benefits, effectively freeing the state government to instate whatever cuts to the programs it wants. San Diego mayoral candidate Carl DeMaio once asked a crowd if they were ready to make San Diego “the Wisconsin of the West.”
“Cities are drowning in red ink trying to support pension systems that are not sustainable. The systems impact the quality of life for taxpayers and gobble up revenues for localities,” DeMaio says.
While these responses vary in detail and severity, they signal that workers are going to have to concede more in exchange for getting less. “Americans are coming to terms with the notion that retiring between 62 and 65 and living happily ever after—that is probably disappearing,” Luna says.
But there may be limits on how far the public is willing to go. In Ohio, the governor signed a law that would stop public employee unions from participating in the final say over their pensions and healthcare benefits. It was the most severe reform law the nation had seen since the start of the great recession, but it may have gone too far. Ohio voters overwhelmingly voted last November to repeal the law.
San Diego Mayor Jerry Sanders has received praise from city workers and city leaders alike for helping balance the city’s finances while under the weight of unfunded pension obligations. In April, San Diego’s equivalent of a credit score received increases from some credit rating agencies, citing the city’s stabilized fiscal management. “San Diego’s turnaround has been a full team effort—from the city council to our employees to the people of San Diego,” Sanders says.
“This didn’t happen by accident or overnight. It happened because everyone made it their highest priority to turn our city around and to put those dark days behind us.”