Analysis: San Diego's polemic plan for California pension woes

SAN FRANCISCO Fri Dec 3, 2010 3:24pm EST

SAN FRANCISCO (Reuters) - San Diego Mayor Jerry Sanders is pouring fuel on the fire of pension politics in California.

The mayor of California's second biggest city is proposing to do away with traditional pensions for most new city workers, an effort analysts say will be closely followed by other cash-strapped local governments in and beyond the most populous U.S. state. The proposal has outraged public employee unions.

A ballot measure asking San Diego voters to back the idea is in the works, Sanders told Reuters in an interview, adding that he aims for defined-contribution plans like 401(k)s common in the private sector to replace defined-benefit pensions.

San Diego can no longer afford its pension plan, Sanders said, adding it is not alone in California, where the recession, housing slump and double-digit unemployment have slashed property and sales tax revenue vital for local governments.

"It's pretty unrealistic to think that we're going to have defined-benefit plans, at least on a local level," he said.

Sanders' plan may be a trendsetter because pension costs threaten to push local governments toward bankruptcy if not contained soon, said former California lawmaker Joe Nation.

"I hate to use the 'B-word,'" said Nation, now a public policy professor at Stanford University. "But the numbers are just staggering."

In a recent report for the Stanford Institute for Economic Policy Research, Nation said California's independent public pension funds -- those outside the California Public Employees' Retirement System -- need roughly $200 billion to cover their combined pension obligations over the next two decades.

RIPE FOR CHANGE

Typically Sanders' idea is discussed quietly in California's city halls so as not to rile unions.

Lorena Gonzalez, head of the San Diego and Imperial Counties Labor Council, said workers could be left with only savings accounts for retirement.

"It would be terribly immoral," said Gonzalez, whose union represents nearly 1,500 blue-collar city employees.

City officials say the politic solution to rising pension costs is to have public employees put more of their pay toward retirement plans and offer less generous but guaranteed pensions to future workers.

Governor Arnold Schwarzenegger did just that in October by signing legislation to roll back pension benefits for newly hired state workers effective next month, and the Los Angeles city council recently put a measure on the March 8 ballot to cut retirement pay of future firefighters and police officers.

Sanders, by contrast, seeks to staunch rising pension expenses because he does not believe city residents will stand for slashed services or tax hikes to cover them.

Last month San Diego voters rejected pension reforms linked to a proposed sales tax increase, tipping the mayor to call for a clean break for the city's current pension system.

"This is one of those things that has to be done fairly quickly," he said, noting that San Diego's annual contribution to its pension fund will top $500 million in 2025, compared with a current $232 million. "It's too big a burden."

OTHERS MAY FOLLOW

Republican Sanders' plan is palatable in San Diego. The city is politically conservative by standards in California, where Democrats swept every statewide office and held on to the legislature, bucking November's national Republican wave.

The city is also still smarting from a pension fund scandal that earned it the nickname "Enron by the Sea" and froze it out of the municipal debt market for several years, and the fund faces a $2.1 billion unfunded liability.

But pension reform also looks to be a hot topic in liberal San Francisco, where Public Defender Jeff Adachi plans to again ask voters to back a measure to rein in city retirement costs.

"Basic services are being crowded out," said Adachi, a Democrat. "We're spending one out of six dollars on pensions."

Meanwhile, researchers Robert Novy-Marx of the University of Rochester and Joshua Rauh of the Kellogg School of Management at Northwestern University peg the unfunded liability of San Francisco's pension system at nearly $35,000 for each household in the city.

Even so San Franciscans last month rejected a measure to have city workers put more money toward their health plans and pensions. Unions that rallied opposition to the measure won a Pyrrhic victory since they risk voters turning to more drastic proposals like Sanders' as pension costs soar, Adachi said. He predicted that in five years San Francisco will need to set aside one of every three of its dollars for pensions.

Moody's Investors Service last month cut San Francisco's general obligation debt a notch, noting in a statement that the measure's defeat suggests "little near-term fiscal improvement is likely to result from external political pressure."

Adachi said he aims to test that view with a new and perhaps more robust ballot measure, potentially next November. Nation expects it will be one of many in coming years as local governments risk being swamped by pension costs: "They have to do something dramatic there or they're not going to survive."