June 7 (Bloomberg) -- Victories for measures to rein in pension costs in San Diego and San Jose, California’s second-and third-largest cities, may show other cash-strapped U.S. municipalities a path to follow, local officials say.
Voters in both communities on June 5 passed ballot initiatives requiring city employees to contribute more to their retirement plans, steer new workers into a 401(k)-style defined-contribution funds and raise the retirement age.
“If you explain this to the voters, they’re going to support you,” San Jose Mayor Chuck Reed said by telephone. “The voters get it. They understand the connection between having to put huge amounts of money into retirement and cutting services to the people.”
Soaring pension expenses have strained municipal budgets in the U.S., forcing city officials to cut jobs and services to stay solvent. Contract talks with workers generally haven’t reduced payrolls enough as costs rise while revenue remains under pressure from the recession that ended in 2009. Meanwhile, most retirement plans haven’t recouped investment losses from the financial crisis. That has left cities with billions of dollars in unfunded promises to retirees.
At least one union-supported group suggested a fight is brewing over implementing the changes.
“These measures will have perilous long-term consequences for workers, the economy and the public,” Dave Low, chairman of the labor-backed Californians for Retirement Security, said in a statement. The organization represents more than 1.5 million public employees and retirees.
“The polarizing and costly campaigns in these two cities - - and certain legal challenges to come -- could have been avoided by going the route that more than 240 jurisdictions in California have, solving their challenges at the bargaining table instead of at the ballot box,” Low said.
In San Jose, the 10th-largest U.S. city with 946,000 residents, annual retirement costs increased to $245 million from $73 million in the past decade, prompting Reed last year to threaten to declare a state of fiscal emergency. In San Diego, the eighth-largest U.S. city with 1.3 million residents, officials budgeted $233.6 million for retirees this year, up from $87 million in 2004, according to budget documents.
San Diego has “set an example for cities across America that are looking for ways to rein in rising pension costs,” Mayor Jerry Sanders said in a statement after the vote. “Public employees should have no better retirement benefits than the taxpayers they serve.”
Passing by 66%
In San Diego, second only to Los Angeles in population among Golden State cities, a proposal to put new employees except police into a 401(k)-style retirement plan, rather than one with guaranteed payments, was leading 66 percent to 34 percent, with all precincts counted, according to unofficial results posted on the San Diego County Registrar of Voters website. About 135,000 absentee and provisional ballots remain uncounted, the agency said.
In San Jose, the center of Silicon Valley, a proposal to allow current employees to choose whether to pay more to keep their existing retirement plan, or switch to one with reduced benefits and a higher retirement age, was ahead, 70 percent to 30 percent, with all precincts counted, according to the Santa Clara County Registrar of Voters website. The city faces $2.9 billion in unfunded retiree costs, including health care. It has a $1.5 billion gap just for pensions.
The votes may inspire other cities to adopt their own retirement system changes more than seven months after Governor Jerry Brown, a 74-year-old Democrat, outlined his plan to rein in pension costs statewide, said Max Neiman, a senior resident scholar at the Institute of Governmental Studies at the University of California, Berkeley.
“The Legislature has not seemed to move one inch on pension reform,” Neiman said by telephone before the vote. “That raises a legitimate issue in the public’s mind. It seems to be they’re playing with fire by not doing so.”
California’s pensions in 2010 had about 81 percent of what they needed to cover the benefits promised to retirees, down from 87 percent a year earlier, according to an annual study by Bloomberg Rankings. The median for all states was 75 percent, the data show.
“Calpers is committed to partnering with all of our stakeholders who are searching for solutions to find ways to resolve these issues,” Anne Stausboll, chief executive officer of the California Public Employees’ Retirement System, the largest U.S. pension, said yesterday in a Facebook.com posting.
“Retirement security is especially critical during this painful recession,” Stausboll said. “We are confident that defined benefit plans like Calpers are the most cost-efficient way to deliver the retirement promises made to the millions of California’s public servants.”
Calpers had $224.1 billion in assets on June 4, according to its website.
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