In June of 2012, a majority of San Jose, CA voters approved changes to pension and retiree health care plans for city workers. In late December 2013 a judge ruled that certain components of the city’s reforms changing future pension benefits for current employees violated the state’s constitution. The ruling relied on a legal precedent known as the “California Rule,” which protects the right of workers, from their first day on the job, to accrue future benefits. For more background, see here or here.
Mayor Chuck Reed led the local initiative in San Jose and is now sponsoring a statewide ballot initiative that would change California’s constitution to allow state and city governments to make prospective changes to retiree benefits. The change would protect any benefits that an employee had already accrued, but would no longer guarantee employees the right to accrue the same level of benefits forever into the future.
To better understand the initiative and why he’s sponsoring it, I spoke with Mayor Reed. The following interview has been edited for clarity and length.
Chad Aldeman: First, can you say what drew you to pension reform? Why take it up as a key issue?
Mayor Reed: Well, I took it up as Mayor because, after a decade of cutting services to balance the budget, I thought it was necessary to take on the primary cause of budget shortfalls: skyrocketing costs. The main drivers were retirement benefits (in the aggregate) including pensions and retiree healthcare. And the choice was to continue to cut services or take action. I thought we should take on the most significant factor which was increasing costs for pensions and retiree healthcare.
Aldeman: You’re a lead sponsor of a potential ballot initiative that would allow state and local governments to make prospective changes to pensions. Can you say more about the initiative, how it would work and why you support it?
Reed: The initiative would put language into the California Constitution that does two things: protects the benefits public employees have earned, as they’re earned; and, two, allow elected officials around the state — the cities being the most important to me, but the state of California as well — to negotiate changes to bring down the costs of retirement benefits by making changes to benefits that would be earned in the future under future contracts for future years of service. That allows us to deal with the skyrocketing costs – by dealing with future accruals for future years of work, while protecting what people have already earned.
Aldeman: The initiative would also require state and local governments to prepare detailed funding status reports, which the California Legislative Analyst’s office estimates could cost tens of millions of dollars. Why did you choose to include this provision in the initiative?
Reed: Well, I thought it was important to be honest with the people: the taxpayers who have to make the payments, the employees that have to make the payments, and the retirees that are counting on the systems to have the money and to be there when they retire. We ought to be open and honest about whether or not there are adequate funds.
It’s a reporting requirement, not an action requirement. It doesn’t require people to take any steps to deal with the problem. But it does require them to be honest about it, and to be open and transparent about the size of the problem. Retirement systems that have less than 80 percent of the funds available to pay for the benefits would have to do a report based on the actuarial work that they already do. There would be a public report, a public hearing, a public debate, a public decision, so that people wouldn’t be shocked to find out, for example, that the California teacher’s retirement plan [CalSTRS] is grossly underfunded. I think everybody should know that. Every teacher should know that their retirement funds are grossly underfunded, and they ought to know when they’re going to run out of money. And I don’t think that’s widely known by beneficiaries of the plans or taxpayers. This would be a requirement to get the information out.
Aldeman: The Attorney General recently supplied a title and a short description that would go on the ballot. What’s next? Were you happy with the wording, and are you planning to go forward with it or wait?
Reed: I am not happy with the wording. It is inaccurate and misleading. So we are considering our options. One of those options is to file an action in Superior Court to get the wording corrected. I am conferring with our lawyers and our state coalition to see what action we might take. We haven’t decided that next step.
Aldeman: Can you say more about the wording? What did you not agree with?
Reed: I think when people read the first sentence of the summary, they are likely to conclude that we are proposing to eliminate the vested rights of future work performed. We’re not proposing that. That’s not our intention. We don’t want to do that. In fact, as people perform work, we believe that their benefits ought to be vested as that work is performed. So it’s contrary to what we’re trying to do and certainly contrary to the language of the initiative which is why it is inaccurate.
Aldeman: CalPERS announced recently that its investments grew at a 16.2% rate in 2013. Steve Maviglio, a spokesman for Californians for Retirement Security, said this rate of return “takes the wind out of the sails” of pension reform efforts. How would you respond to those claims?
Reed: Well, it’s good news that they’ve gotten good returns this year. It’s good for everybody. It’s good for beneficiaries, good for the plan sponsors, good for the taxpayers. So that’s excellent news.
Unfortunately, the problem hasn’t gone away with a good year’s return. The unfunded liabilities remain. In California, hundreds of billions of dollars at the state level alone, and then when you factor in the local level, much more than that. Those unfunded liabilities haven’t gone away with one good year’s return and even a couple of good years’ returns are not going to take care of those unfunded liabilities. CalPERS has notified their participating agencies (and there are thousands of them) that they expect a rate increase of 50 percent over the next six or seven years, and that’s creating problems and will create problems for cities and agencies all over the state.
Aldeman: Recently there have been some high-profile cases of cities declaring bankruptcy in part from rising pension costs: Detroit, Californian cities like Vallejo, Stockton, and San Bernardino, as well as cities in Alabama and Rhode Island. Some people point to these instances as bellwethers of what’s to come, while others say they’re extreme examples without larger implications. How broad is the pension problem?
Reed: Well, I think it’s a very broad problem. Bankruptcy is basically a last resort for cities. The mayors I know will do everything they can to avoid bankruptcy. But it is clearly a big enough problem nationally that cities have gone into bankruptcy and they’re not alone in the distress that they’re experiencing. So I expect that there will be more bankruptcies.
But even without a bankruptcy, there are cities that are having great distress over skyrocketing retirement costs crowding out other services. We’ve experienced that here in San Jose. Many other cities are experiencing the same problem.
Short of bankruptcy, you can be in service delivery insolvency, which is when you have enough money to pay your bills, but beyond that, you just can’t provide basic services to your taxpayers and residents. There will be many more cities that are in that situation. But even cities that aren’t extremely distressed have seen cuts in services as these cost increases are crowding out other services. We’ve seen that all over the state of California in cities large and small. And that’s a problem.
What I draw from these bankruptcies are some things that we should all avoid doing. Because typically, like in Detroit, there are many causes. If you look at the recent bankruptcies, you can see that retirement benefits and unfunded liabilities are a huge part of the debt that these cities are incurring. When they get in trouble, they can’t afford to pay their obligations and retirement costs are part of what takes them into bankruptcy. And once you’re in bankruptcy, then we’re seeing that retirement benefits are being cut in bankruptcy, something I want to avoid. I want to make sure that everyone gets paid what they’ve earned. That is why I’m advocating that we take action now, so we can deal with future accruals and not have to be cutting benefits like they’ve done in these bankruptcies.
Aldeman: What message would you have to the governor or other leaders in California? What steps can they take to help cities manage their pension liabilities, pension debts?
Reed: Well, they can support my constitutional amendment. Because in California, under what’s referred to as the “California Rule of Vested Rights”, there are currently a very limited number of things that cities, counties, and the state of California can do to deal with the cost of pension benefits. We need a constitutional amendment to make it clear that – while we’re protecting benefits that have been accrued, that they’re vested and protected – benefits that might be accrued sometime in the future should be negotiable, just like wages in the next contract are negotiable. So, I would ask them to support my constitutional amendment because that allows the state of California to do the things it needs to do to deal with the state’s share of problems as well as local governments having the flexibility to negotiate changes to future contracts.
One more thing that I would ask them to do is to pay what they owe to the California Teachers’ System. The state of California is shorting CalSTRs by about $4.5 billion a year and they should be paying that.
Aldeman: You’re a twice-elected Democratic mayor in a county where 70% of the 2012 presidential vote went to the Democrat. You’re also the lead sponsor of an initiative that would allow cities and the state government to potentially reduce pension payments to government workers like teachers, state employees, and police officers, all groups that are traditional Democratic supporters. What does this say about pensions and the politics of pension reform?
Reed: First, let me just clarify that we’re not trying to reduce pension payments. My proposal would ensure people get paid what they’ve already earned. So the people already retired, we’re not talking about changing their pensions. What we’re trying to do is change the future accruals and things like that.
As you mentioned I’m a Democrat, in a Democratic city, and most of my councilmembers are Democratic. So why did we take on pension reform? Basically, the pain of doing nothing was worse than the pain of taking on the reforms. We have cut services for ten years. We were facing a fiscal disaster. We were facing service delivery insolvency. We laid off police officers, we laid off firefighters, we closed libraries, we closed community centers, and we decided that we couldn’t continue to cut services. We had to deal directly with the problem and that problem required us to take on retirement reform. And that’s why we did it. We were sick and tired of cutting services.
Aldeman: Is there anything else that you would like to say or things that you wish people would know about your initiative?
Reed: People should understand that we’re trying to do two things: one is to make sure that people get paid what they’ve earned, and the second is to make sure that we can provide basic services for our residents and taxpayers. Those two goals are hard to do simultaneously. If we were choosing one or the other, it wouldn’t be that hard. We’re trying to do both and those twin goals make it a very difficult thing to do. But that’s our objective.