Pension Reform Earthquake in California, Other Cities Will Follow

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Voters in San Jose and San Diego Tuesday overwhelmingly approved public pension reform for their cities. It was beyond a landslide. These results send a clear and unmistakable message to municipalities everywhere that are struggling to meet pension obligations. If pension reform can pass in major California cities, it can pass anywhere. Cities and counties across the country are sure to follow suit and put pension reform on their ballots too.

Some have opined that Tuesday’s California primary was a non-event. Nothing could be less true. The reverberations and impact of these big pension reform wins will be felt for years to come in California and in the nation. California has long been known as being friendly to public unions and the unions have enjoyed enormous political power, but that power is now directly being challenged. What happened Tuesday was an earthquake.

Pension Reform Measure B passed with a stunning 70% yes votes in San Jose. Prop B to Amend the City Charter Regarding Retirement Benefits in San Diego passed 66%-34%. This is particularly noteworthy considering that San Jose is strongly liberal and its electorate is presumably union-friendly.

This isn’t so much about unions as it is about finance and cities struggling to remain solvent. San Diego currently spends 20% of their general fund budget on their retirement fund. In San Jose, it is 27%. Clearly, these kinds of obligations are unsustainable. This means the cities are forced to spend money on pensions they badly need to spend elsewhere. Looking forward, their financial situations are even direr. Unfunded public pension obligations reach into the billions for both cities.

In San Jose, public employees will have to pay more to keep existing pensions or accept more modest benefits. New hires would get less comprehensive benefits.  The San Diego measure freezes pay levels for six years which will lead to lower costs but can be overridden by a city council vote each year. New hires get 401k-type plans rather than the current defined benefits packages. Both plans are noteworthy in that they address what was previously untouchable, lowering benefits for existing employees.

Public unions did put up some resistance to these measures but seemed resigned to the fact they would pass. Instead, the unions will challenge both measures in the courts. In fact, the first lawsuits have already been filed in San Jose. There will be long and contentious legal battles. Unions say they are being unfairly scapegoated and that previous agreements should be honored. After all, many public employees accepted lower salaries than they could get in the business world in exchange for a guaranteed retirement. Now their retirement plans may be in peril. This is unfair, say the unions.

It probably is unfair, but the huge and growing cost of public pensions is gravely impacting our cities. The costs have to be lowered.

“It’s novel but it’s certainly not radical. Mayors across the country are very interested. We’re at the leading edge but we’re not alone,” says San Jose Mayor Chuck Reed on their pension reform.