Advancing a Free Society

A California Penchant for Pension Reform?

Monday, May 28, 2012

Take a look at the four largest cities in California (by population) and you’ll notice a disparity: the first and fourth metropolises – Los Angeles and San Francisco – get most of the attention; the two cities in between – San Diego and San Jose – go far less noticed.

That changes when Californians vote next Tuesday, thanks to pair of ballot measures that speak volumes to the Golden State’s interest in pension reform – a topic that the union-beholden string-pullers in Sacramento would love to avoid, but can’t, for various pressing reasons.

A little background on the two measures, which coincidentally occupy the “B” slots on their respective citywide ballots:

San Diego’s stab at reform, Proposition B, would impose a six-year freeze on the amount of city workers’ “pensionable pay” (estimated savings: almost $1 billion over the next three decades). All new hires, except for law enforcement, would convert to 401(k)-style individual plans (an added cost of $13 million, but a risk tradeoff).

San Jose’s run at pension reform, Measure B, would give current city workers the option of switching to a lower pension or staying in the existing plan – but at a cost: annual contribution increases of 4% of pay.

That both major cities (San Diego is America’s 8th most populous city; San Jose the nation’s 10th) now find themselves tin this political predicament is testament to California’s decline the last decade-plus – a tale not so much of biting off more than they could chew, but promising more than they could afford.

In San Diego, aka “America’s Finest City, payments to the city's retirement fund soared have grown nearly six-fold: from $43 million in 1999 to $231.2 million (about 20% of the city’s general fund budget). San Jose's payments haven’t ballooned as dramatically – over the past decade, more that tripling from $73 million to a current $245 million. Still, that accounts for 27% of the city’s general fund budget.

One might ask: how does a city get itself into this kind of mess? Look no further than San Jose.

Fifty years ago, the city’s pension benefits were established. The agreement at the time: police and firefighters could retire at 55 and receive a pension equal to one-half of a final salary, if the city worker had 20 years of service.

Twenty years later, the city sweetened the arrangement with its workforce, with employees and their families getting healthcare for life – after 15 years of service.

As the turn of the century approached (the heady days of the dot.com bubble), San Jose’s pension benefit was raised yet again – to 80% of final pay. Soon after that, police and firefighters received a guaranteed annual increase and a “13th paycheck” (as do San Jose’s civilian employees) when plan earnings beat expectations (all of which Bloomberg Businessweek details here).

You probably know what happened next. The boom went bust – unemployment in San Jose doubling to 8%. But city government, as this report notes, didn’t match the changed reality. Revenue that had been growing at 10% annual shrunk to about one-fourth that growth rate. San Jose’s response: layoffs, wage freezes and other belt-tightening moves – the equivalent of putting a finger in the leaking dike.

Enter Chuck Reed, elected mayor of San Jose in November 2006. A non-sense Air Force Academy and Stanford Law grad, Reed’s also something of a political unicorn: a Democrat who dislikes unions’ influence over his city’s budget (a feeling of contempt that’s mutual, by the way). So he’s made pension reform the hallmark of his mayoral tenure.

Which takes us to the looming vote on Measure B. Reed and business/taxpayer allies have raised about $700,000 to get the measure passed; labor has raised about $450,000.  If the measure passes, Reed’s legacy of fiscal reform in San Jose is set (through his statewide prospects not as clear, as antagonizing unions seemingly is the downward escalator of California Democratic politics). And if fails: look for more austerity from a city that already can’t open libraries or repair roads.

As for San Diego, different political timing makes for a different political dynamic.

Whereas Reed is still the mayor of San Jose for the next two years, there’s soon to be a change in San Diego, which presently is in the middle of a contentious mayoral primary (as previously discussed on this site here).

Carl DeMaio, a Republican councilman who’s competing in the city’s June 5 mayoral primary, has made pension reform and Proposition B his signature issue.  DeMaio’s the stuff of scribes’ dreams: he’s been described in print as a “drown-government-in-the-bathtub Republican”; he’s in a committed relationship with the owner of a local gay newspaper; he’s also a dead ringer for the actor Jack Black.

DeMaio’s also in a tough competition for one of two top spots in the open primary and a ticket to a runoff should there be no majority winner (polls like this one have had him in the lead with a narrow plurality).

About that race: three candidates are looking to fill those two slots – the Republican DeMaio, running on pension reform; Democratic Rep. Bob Filner, the lone major candidate on the ballot who opposes Prop B; and independent State Assemblyman Nathan Fletcher, running as a independent-minded legislator who just bolted from the state GOP.

With the exception of a Democrat who ran the city from 1985 to 1992 (that would be Maureen O’Connor, who sold her La Jolla beachfront home to Mitt Romney), San Diego has been a province of GOP mayors dating back the past four decades.

It’s also a city with an evolved business portfolio (tourism and a longtime naval presence supplemented by biotech and telecommunications) and a younger population that’s given Democrats an edge in voter registration.

A Democrat running on economy and education; a Republican taping into pension reform and anti-government frustration; and an independent showcasing a maverick persona. Which outweighs which?

It’s a fine kettle of fish, for the good people of America’s finest city.