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Jun 14

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LA pension reform receives encouragement from San Jose and San Diego

LA Mayor Antonio Villaraigosa’s 2012-13 budget proposal includes lots of the usual stuff that one comes to expect when a city faces yet another financial crisis: some layoffs, some reduced services, and, of course, “revenue maximization efforts” (i.e. tax hikes). But this budget also has something that is different and somewhat bold: pension reform.

Pension plans are traditionally attractive places for politicians and unions to pile on benefits for public employees. It is easy to compare public compensation measures such as salary against their private sector counterparts. This ease of comparison tends to keep salaries in check. Yet making the same comparison for pension benefits is not so easy.

This comparison is difficult because most of the private sector has given up on pensions in favor of 401(K) plans, so there is no apples-to-apples comparison to be made. Additionally, pension plans involve formulas, present and future values, actuarial adjustments and lots of other sleep-inducing factors that make for poor headlines and even worse news stories. For these reasons and others, public pensions long escaped much public scrutiny and faced little restraint. This seems to be changing.

On June 5th, large majorities in San Jose and San Diego voted to reign in pension benefits. In the case of San Jose and according to the Mercury News, these reforms included (i) suspending current retirees’ 3 percent yearly pension raises up to five years if the city declares a fiscal crisis, and (ii) requiring current employees to pay up to 16 percent more of their salary to continue their benefit plan or choose a more modest plan, among other reforms. San Jose voters passed this measure overwhelmingly with nearly 70% in favor. Unions plan to fight the reforms in courts. Meanwhile, San Diego’s reforms seek to move new city employees to 401(K) plans. San Diego also anticipates that a judge will have the final word on the measure which voters passed 2-to-1.

All of this should come as encouraging news for Mayor Villaraigosa’s hopes to implement some reforms of his own. While his proposals don’t go as far as others, his budget makes some efforts to adjust what he properly calls “very generous” and “excellent post-employment benefits.” So generous, in fact, that post-employment benefits will soon require “nearly 30 cents towards retirement benefits for every dollar (the city) spends on salaries.” These efforts include:

1. Increase the retirement age to 67. Currently employees as young as 55 can retire with full post-employment benefits.

2. Cap maximum retirement allowance at 75% of salary, down from the 100% of salary that employees can currently obtain.

3. Reduce the retirement factor (effectively, the amount of benefit value added by each additional year of service).

4. Restructure the calculation of “final compensation” as an average of several years rather than a single year that can be more easily manipulated.

5. Reduce cost of living adjustments to 2% per year.

If these reforms are to pass, the mayor will have a fight on his hands to be sure. But if Tuesday’s elections in San Jose and San Diego are any indication, Mr. Villaraigosa should have public support in his corner.

About the author

Eric Madsen

Mr. Madsen is a Chartered Financial Analyst (CFA) charterholder and a Manager at Fulcrum Inquiry, a finance and economics consulting firm that performs economic damages analysis involving commercial litigation, financial investigations, business valuations, and forensic accounting. He also holds an MBA from the UCLA Anderson School of Management and a B.S. in Economics. He conducts expert analysis in finance and economics. Mr. Madsen may be contacted at 213.787.4122 or at emadsen@fulcrum.com.

Permanent link to this article: http://betweenthenumbers.net/2012/06/la-pension-reform-receives-encouragement-from-san-jose-and-san-diego/

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