Finally, politicians have picked up on the public fury and are beginning the process of reform.
At least seven states have required existing or new public employees to pay more toward their retirement; Colorado and Minnesota legislators even took the unprecedented step cutting promised cost-of-living increases for retirees. Bakersfield and San Jose officials put measures on the November ballot designed to roll back pension benefits for public employees. And voters in San Francisco and Menlo Park bypassed reluctant elected officials and collected enough signatures to qualify their own pension reform initiatives.
And can you blame them? While Average Joes suffer stagnant wages and punch the clock until until 66 or so, they see friends or family members - police officers, firefighters, city workers - retire at 50 or 55 with generous monthly checks, sometimes as much as 90 percent of their best-paid year of work, and free health care for life.
Over the last month, we've called on Los Angeles Mayor Antonio Villaraigosa to tackle the city's key issues. As part of that, we asked readers to tell us what is the No. 1 problem Villaraigosa should tackle. Overwhelmingly, the most frequent answer was employee pension and pay reform.
They ask how city leaders and workers can defend a system that requires taxpayers to spend $1.4 billion this year to fund city retirees' pension and health care, while programs for the unpensioned poor are cut, current workers are laid off, libraries close an extra day each week and infrastructure is allowed to crumble. Retiree obligations are projected to cost $2.2 billion by 2015.
Their outrage is more than just pension envy. The foul economy has exposed fundamental flaws in the promises Los Angeles has made to its workers. They are simply unsustainable.
Pensions will eventually bankrupt Los Angeles if not dealt with soon. Villaraigosa must do more than tinker with the budget. He must use the small window of opportunity opened by the economic downfall and the public disgust over government salaries to force through full pension reform within the year. In so doing, not only will he set Los Angeles on the path to long-term sustainability, he will make the city a model for pension reform around the country.
By the ballot
Villaraigosa should invest as much of his political capital as it takes to put a measure on the March ballot to replace the current pension benefits with a system that includes higher retirement age, fewer benefits and a 401(k) structure. The voters will surely back him up, and his popularity will likely soar. If he's looking for a new elective position, say county supervisor, he'd do well to start building goodwill with the public.
First and foremost, L.A. needs to phase out pensions. Publicly funded, defined contribution plans are inherently unfair because all the risk is carried by the employer - or in this case, the taxpayer. Workers are guaranteed a retirement income, no matter whether taxpayers can afford it.
And when the stock market falls and the value of the pension fund plummets, taxpayers are forced to make up the difference, not the employees. Nongovernmental employers got out of the pension business a long time ago, and only about 5 percent of private sector workers have pensions.
It's time for a new model. Now, the mayor can't roll back the pensions of current employees. Their benefits are considered contracts protected by the state constitution; any giveback on pensions has to be balanced by a new and like benefit. However, the mayor can and should change the benefits for future employees.
All new city hires - whether civilian workers or sworn police officers or firefighters - should be enrolled in defined contribution plans, known to many as either 401(k) or 403(b) plans. Both the city and the employee would pay into an individual retirement account that is sponsored by the city.
In addition, new city employees should be enrolled in Social Security. Currently, neither the city nor its workers pay Social Security taxes, and so retired employees aren't eligible for Social Security benefits. The combination of Social Security and a 401(k)-like account should provide workers a reliable retirement income, without the taxpayer risk.
Overhauling the city's retirement system in this way is not going to be a magic solution. Indeed, it will be more expensive in the short-term, as the city must continue to fund the pension plans of existing employees and retirees while contributing to new hires' 401(k) plans and Social Security. But this simply must be done for Los Angeles' long-term financial stability - and to be an important role model for the rest of the country.
By overhauling L.A.'s antiquated pension system and setting the city on the right path with a March ballot measure, Villaraigosa could leave a real legacy. No longer the dreamer, he would be the reformer. Also, reforming the pension system of the nation's second-largest city would have ramifications for cities, counties and states across the country, and perhaps spur a nationwide movement to reform public employee pensions.
Small fixes as well
Meanwhile, there are also immediate fixes that the mayor should pursue as well to alleviate the burden on taxpayers from the existing pension plans.
Some would only apply to new hires until a 401(k) system is established. Others could be implemented right away and provide almost immediate savings. And virtually all of these will require extensive negotiation with employee unions. As a former union negotiator himself, Villaraigosa should employ his considerable mediation skills to reach a deal that placates workers and secures real, significant savings.
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1. Increase employee contributions to retirement health care. The city will spend more than $300 million this year on retiree health care, yet employees pay nothing toward that expense. City officials believe they can reduce that subsidy without union approval, so Villaraigosa should direct his appointees to the pension management board to enact that change immediately.
2. Increase employee contributions to their pensions where possible for existing hires. Currently, city civilian employees pay 7 percent of their salary, police and firefighters pay 9 percent and Department of Water and Power employees pay 6 percent. Under the law, the city can't take away a benefit without offering a new and equal benefit, so the cost savings is often minimal. Sure, it's like boxing with one hand tied behind his back, but through negotiations, Villaraigosa and his team may be able to craft a new benefit that ultimately saves taxpayer dollars and gets employees to contribute more to their pensions.
3. Increase the retirement age for new hires. Police officers and firefighters should be required to work until 55, instead of 50, for full benefits and the civilian retirement age should be bumped up to 65.
4. Change the payout formula. Los Angeles doesn't have a big problem with pension spiking - or significantly increasing pay in the final year of service to boost pension payouts. Still, L.A. should base pension payments on the final three-year average salary.
5. Los Angeles should follow the lead of San Francisco, which requires a voter approval for any change to pension benefits. Even if Villaraigosa is successful in negotiating pension concessions from unions, history has shown that as soon as the economy rebounds, workers seek better benefits and political leaders - feeling flush with cash - gladly approve them. |
Voters, too, can be generous when times are good. Angelenos approved rich pension benefits for police and firefighters in 2001 that allow sworn personnel to retire with 90 percent of their salary after 33 years of service. Still, convincing voters to approve new benefits is a hurdle that may prevent the kinds of giveaways that landed L.A. and California pension funds in trouble.
In normal times, Villaraigosa would win few political points for going after public employee pensions and retirement benefits. Gov. Schwarzenegger tried, in a clumsy fashion, and was demonized. But, these are not normal times. And paying $2.2 billion in retirement benefits by 2015 - roughly a third of the city budget - is not sustainable.
Villaraigosa cannot let this moment pass without action. There is public fury and the have-nots are running out of patience with their political leaders. Voters have done it before - just look at the anti-tax wave that swept California in the 1970s and led to Proposition 13, which has fundamentally changed the state's budget. And they will do it again.
Villaraigosa can lead the rebellion or be run over by it.
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