Pension reform or double-dip storm in San Diego and San Jose?
June 6, 2012
By Wayne Lusvardi
A pension reform ballot proposition was passed by the voters in the city of San Diego by a margin of 66.2 percent in favor to 33.8 percent opposed.. A similar pension reform measure in the city of San Jose is leading with 89.8 percent of the vote in favor with 37.7 percent of the vote counted.
But the gnawing question remains: Eill voters end up with the pension reforms they voted for? Or are these reforms just the proverbial calm before a possible bigger pension storm?
Tentative Results of Pension Reform Measures
Surely, both ballot propositions will be tested in court by public-sector unions. In San Jose, Democratic Mayor Chuck Reed, who backed pension reform, has vowed to seek a pre-emptive judicial review of his city’s pension reform proposition.
Many public sector unions and labor advocates are convinced their contracted pension and health benefits are guaranteed in the California Constitution. However, charter cities such as San Diego and San Jose believe they have broad powers to alter pensions that general-law cities do not have.
Pensions Grew Like Cancer During Recession
From 2007 — before the Mortgage Meltdown — to 2012, San Diego’s payments to its pension fund grew 43.7 percent. During that same period, the percentage of city employees dropped by 5.5 percent (see table below).
The percent that pensions payments make up of the total general fund in San Diego grew from 16 percent to 20 percent over the same period. That means that $1 out of every $5 in the city operating budget is going to pensions without pension reform.
In San Jose, pension-fund payments grew by 117 percent over the past five years, while the proportion of city employees dropped 21 percent. The percentage of the San Jose’s operating budget dedicated to pensions has grown from 16 percent to a whopping 28 percent. San Jose is nearing $1 out of every $3 of its operating budget going for pensions.
Growing Percent of Pension Obligations in San Diego and San Jose
But San Diego has only cut 412 employees, reflecting 5.5 percent of the total city workforce. Compare that to a reduction of 1,443 employees in San Jose, reflecting a 21 percent cut.
On the other hand, the general-fund budget in San Diego has only grown by half as much (12.3 percent) compared to San Jose’s budget (23.0 percent) over the past five years.
What perhaps is more troubling is that San Jose’s operating budget has been growing 4.24 percent per year on a compound basis over the past 5 years during the economic recession. San Diego’s operating budget has grown by 2.35 percent per year over the same period. What if the U.S. economy stalls following the possible collapse of the European Union, bringing another decline in tax revenues?
Many cities have touted cutting the number of employees in their workforces during the past five years. But the paradox is that their total operating budgets kept growing as pensions have gobbled up more of the budget. If the operating budget of each city had remained unchanged over the past five years, the proportion of their budgets going toward pensions would have jumped to at least 23 percent in San Diego and 34 percent in San Jose.
Let’s consider what would have happened if San Diego and San Jose had cut their 2007 operating budgets by 10 percent during the recession. Pensions would have ballooned to 24 percent for San Diego and 37.8 percent for San Jose of their total operating budgets. In another five years, pensions would have cancerously consumed more than half of municipal budgets in these cities.
Public Employee Cutbacks Masked Wild Pension Growth
During the past five years, many cities were using cutbacks of employees to mask the out-of-control growth of pensions happening at the same time. Public employee cutbacks were an illusion of budget cutting, when in reality total general fund budgets were growing to meet mounting pension obligations.
Pension Reform or Double Dip Storm?
It is estimated that about 50 percent of all federal stimulus program monies went to municipal governments for “shovel ready” public works projects since 2009. Without this infusion of funds, the proportion of pension obligations would have quickly overwhelmed most city budgets.
The stimulus program has now expired. In 2011, there were modest increases in sales, property and income taxes statewide, thought to be a signaling a “recovery.” But in 2012, state tax revenues have reportedly declined, signaling a possible “double dip” recession.
Despite the passage of pension reforms in San Diego and San Jose, this may not be enough to prevent public pensions from overwhelming city budgets, should the economy continue to sour or the courts overturn pension reforms. If the courts overturn pension reform, California cities could be looking at another man-made “perfect storm” like the Electricity Crisis of 2000-01.
The Associated Press reported specifics on the reforms in San Jose:
“The ballot measures differ on specifics. San Diego’s imposes a six-year freeze on pay levels used to determine pension benefits unless a two-thirds majority of the City Council votes to override it. It also puts new hires, except for police officers, into 401(k)-style plans.”
But will such measures be deep enough and fast enough if there is a double dip recession?
Back in March 2011, John Fund accused Gov. Jerry Brown of “shrinking from real pension reforms” when Brown blamed Republicans for the problem. Brown said, “Some Republicans want government to break down. They want to blow it up. They’re radical. They’re not in the mainstream.”
But what happens when even bi-partisan reforms by a Republican mayor in San Diego, with a Democrat-controlled City Council, and a Democrat mayor and council in San Jose aren’t enough to hold back the storm?
The current pension reforms are apparently based on rosy scenarios of gradual economic recovery, coupled with pension contribution cutbacks. It may take leaders on city councils to enact even more reforms without going to the voters each time for cover.
Such reforms won’t reflect the stinginess of Republicans in San Diego, or “profiles in courage” of local Democratic politicians, but public necessity. It is not political courage to undo what one co-created in the first place.