The pension landscape this week underwent a tectonic shift in California, a state well known for its natural and financial disasters.
Earlier this week, referendums passed in two California cities that changed the pension promises made to public sector workers. Seven out of 10 voters in San Jose voted to require municipal workers to make a choice: either contribute a heck of a lot more money to their pensions or get a smaller pension payout in retirement.
In recent years, pension cutbacks have been implemented in various cities and states around the country. But this one in San Jose, dubbed Measure B, is significant because it affects the benefits of current workers and retirees, not just those of future workers, as is usually the case. Measure B almost certainly will be challenged in court by San Jose's public workers unions on the premise that pension benefits are contractual obligations that are legally binding. But if the voters get their way, similar pension changes are expected to spread across the country like an uncontained wildfire.
According to an article in The Wall Street Journal, San Jose's police officers and firefighters say they made sacrifices over the years, giving up higher salaries in return for the promise of pension benefits. Those public servants who have retired since 2007 collect pensions of $95,336 on average, according to that article.
In my opinion, you can't pay cops and firefighters enough money during their careers to put their lives on the line in the course of their duties. But public servants in California and throughout the country have been goosing their paychecks by "pension spiking," a type of abuse where sick leave and unused vacation days are used in the calculation of pension payouts. Governor Jerry Brown presented a pension reform plan earlier this year that called for curbing the practice and instead calculating pensions on base pay over three years prior to retirement.
Public safety workers in San Jose, who already contribute 11 percent of their salaries toward their pensions, may have to fork over another 16 percent if they want to keep the same level of benefits, according to The Wall Street Journal. The mayor of San Jose told the publication the ballooning pension deficits hanging over the city caused it to reduce library hours and cut police personnel in recent years. With the $25 million that San Jose will save in the first year the reform is implemented, the city can open four libraries that have been sitting unused because of a lack of operating funds.
In San Diego, voters passed a less ground-shaking measure, called Proposition B, by a 2-to-1 margin. Unlike the changes in San Jose, that reform probably didn't register on the Richter scale. It calls for the introduction of a 401(k)-type plan for future public workers (except police officers). And it would freeze pensionable pay for a five-year period, according to an article on ai-Cio.com by contributing editor Benjamin Ruffel.
Ruffel's conclusion about this week's events: "Coming on the heels of municipal bankruptcies in Alabama and Rhode Island, exacerbated by unaffordable pension benefits, the success of these twin referendums in California may demonstrate to other ailing municipalities that pension reforms are not the electoral poison that they were long assumed to be."
However, whether or not they'll withstand challenges in court is another question. "Judges in several states have approved (cost-of-living adjustment) freezes or reductions, but to my knowledge any major reforms applying to current pensioners have all been rejected by the courts," Ruffel wrote me in an email.
What do you think should change, if anything? Should state and municipal workers get the pension benefits they had been promised, or should they accept less and revise their retirement planning because of revenue shortfalls in their city or state? Is it fair to cut their benefits unless they pony up more money?
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