It’s time for the municipal employees’ labor unions to listen to the taxpayers who pay for the pensions and health care of their members. Primary elections in San Diego and San Jose gave a resounding mandate to reform those city retirement systems. Elsewhere in the nation, dozens of insolvent cities are struggling to avoid bankruptcy.
It’s no surprise to the business communities across the country. Private companies stopped providing defined benefit plans years ago. Even the heavy industries ruled by labor unions for decades have cut back on lavish employee benefits, mostly because of competition from abroad and trends toward outsourcing manufacturing and services into cheaper labor markets.
Elected officials, beholden to labor union lobbyists and the working class, refuse to see these changes in pension benefits. What’s worse is the obvious disregard for the financial burden put on their governments. These politicians have limited terms in office and can pass the liability to the next generation. It’s called kicking the can down the road.
Two major California cities passed pension reform initiatives in June; the state has a pension cost that is unsustainable. Yet the municipal employee labor unions persist in blocking any changes and threaten to file legal action against any voter-approved measure. They just don’t get it.
Last week, California’s state employees, school boards and many municipalities were shocked with the announcement that the nation’s largest pension system, the $233 billion CalPERS, only earned 1 percent for the fiscal year ending in June. What did it expect with interest rates near zero? It’s a shock because the actuaries projected 7.5 percent earnings. The considerable shortfall will have to be made up by taxpayers.
What does that mean to the hundreds of municipalities that are part of the California Public Employees' Retirement System with 1.6 million government employees and retirees? It means these fiscally strapped organizations will have to pony up the difference by increasing taxes or make further operation cutbacks to comply with pension funding.
Fortunately, the San Diego pension system, burdened with its own underfunding of $2.1 billion, is not part of CalPERS. But cities teetering on the brink of bankruptcy will get a final shove to join Stockton and San Bernardino with an unsustainable city employee pension and health care commitment.
To explain the dilemma for the novice, the proposed pension reforms shift from a defined benefit at retirement to a defined contribution. That means the municipality agrees to put a fixed amount into an employee’s retirement account each year rather than being self-insured with a fixed pension benefit formula. It basically shifts the risk from the taxpayers to the employee for coping with gyrations of the marketplace, just like everyone else living on savings and investments.
A defined benefit plan can fall short of its liability to the retiree if the stock market declines. Then the taxpayer picks up the tab. A defined contribution plan, like a 401(k) system, provides what the market has accumulated during employment. There is no unfunded pension liability.
Private business shifted to this system years ago, foreseeing that a market boom would not last forever and can’t be relied upon to pay for public employees’ retirement.
That’s why San Diego voters approved changing the system for new city hires in the June primary election. Even after years of financial underfunding and scandals involving pension officials, any effort to restructure retirement benefits had failed under labor union opposition and legal technicalities. But reform has finally happened.
But don’t think the voters have solved the problem. The years ahead will witness litigation to overturn the will of the people because the labor unions are used to having their way — the public be damned.
The Economist reminds us that pensions are easy to promise but hard to fund. The history of public employees’ retirement systems lets elected officials approve gold-plated pensions that cost taxpayers long after the officials are gone. The promises keep coming, despite the strain on the city budget. The latest giveaway was the distribution of $4.7 million to retired city employees in the form of a bonus, or 13th check for the year 2011.
This bonus is supposed to be half of the pension fund earnings over 8 percent for the year. Doesn’t it seem strange that six months ago the portfolio earned that much when the second quarter this year was only 1 percent? It’s even stranger that a bonus is paid when the pension fund is $2.1 billion underfunded.
Ford is a freelance writer located in San Diego. He can be reached at email@example.com.