Talk About Money: Public pension leave cities in a pinch

Remember 1999? Silicon Valley ruled the global economy, the Nasdaq was going up about 30 percent a year and tech companies with no earnings saw their stock prices skyrocket, then split, then skyrocket again. People thought it would never end.
That’s when the California legislature made a projection that, at the time, seemed overly conservative: The state’s investment returns would grow by 8.25 percent a year in perpetuity — equivalent to assuming that the Dow would reach 25,000 by 2009.
It didn’t work out that way. Instead, 2009 saw the Dow hit a low of 6,600, and it’s still lower than in 1999. The optimistic assumptions made in 1999 led state and local governments to make pension promises to public workers that will be hard to keep. Some workers are able to retire at age 50 and receive 90 percent or more of their salaries for life. In one example, a former San Ramon Valley fire chief gets a yearly pension of $284,000 — more than his $221,000 annual salary.
Cities and counties throughout the state are trying to get a handle on pension costs. Unable to pay its bills, the city of Vallejo declared bankruptcy in 2008 in an effort to wring concessions from powerful unions. It has cut its police force by a third and slashed virtually all city services, but its future pension obligations haven’t been touched.
Scotts Valley Mayor Jim Reed, who has closely followed developments in Vallejo, said he thinks it is unfair for cities to break promises to employees.
“By law, by the California constitution, and by what’s right, government can’t change deals they’ve already made with staff,” he said.
But he recognizes that pension costs must be brought under control.
“The fiscal reality dictates that government can’t keep offering these benefits to future employees at current levels of taxation,” he said. “Something’s got to give.”
Reed has been talking with mayors in other cities in Santa Cruz County about switching to a two-tiered pension system. Under one approach, new hires would be covered by a defined contribution system, similar to the 401(k) plans private-sector workers have, instead of the generous defined benefit plans public workers have now.
Santa Cruz is also looking at a two-tiered pension system. Santa Cruz Mayor Mike Rotkin proposes that newly hired public workers be required to stay on the job longer before they retire. The present retirement age for public safety workers is 50, and for other city workers, it’s 55.
“These people still have their best years ahead of them,” Rotkin said. “I say this as a 64-year-old. And I also speak as a labor activist. We won’t be in a position to give our employees pay increases or give the public the services they expect if we don’t fix our pension system.”
Rotkin said the problems of local government cannot be blamed solely on the recession, which has caused big drops in sales tax and property tax.
“Even if the economy comes back, we’d still have problems,” he said. “That goes for every city and county.”
Other cities are looking at more extreme measures. San Jose Mayor Chuck Reed proposes hundreds of layoffs and 10 percent wage cuts for all of his city’s unionized workers. And the mayor of Las Vegas last month proposed firing all city employees and hiring them back as non-union workers.
Reed wants to keep the issue in perspective.
“Having this discussion is not shorthand for beating up on public employees,” he said. “But we have to address this pension imbalance.”
• Mark Rosenberg is a financial consultant for Financial West Group in Scotts Valley, a member of FINRA and SIPC. He can be reached at 439-9910 or [email protected].