California Referendums Provide Harbinger for Public Pensions Across US

Decisive votes in San Diego and San Jose to lessen the burden of public sector pensions may prove a bellwether for public plans across the United States.

(June 6, 2012) — The Californian cities of San Diego and San Jose have voted overwhelmingly to overhaul their public sector pensions, passing two referendums that, while different in scope, aim to slow the cities’ soaring price of retirement benefits.

Occurring as they did on the same day as the people of Wisconsin voted to retain Governor Scott Walker, whose recall was largely seen as catalyzed by his efforts to trim the collective bargaining rights of public sector unions and require a higher contribution to worker pensions, the results may offer a foretaste of what some observers have seen as a nationwide trend to contain burgeoning retirement costs by cutting benefits.

In San Diego, voters passed the pension measure, known as Proposition B, by a 2-to-1 margin. The reform would introduce a 401(k) style retirement plan for most new public employees and would also freeze pensionable pay for a 5-year period. Implementing the plan could save the city anywhere from $500 million to $2.1 billion over 30 years.

The proposal in San Jose, dubbed Measure B, passed by an equally wide margin, would provide for a more sweeping pension reform, affecting the benefits of current as well as future public employees. If it survives an inevitable legal challenge, Measure B would force workers to choose between reduced benefits or paying more for their existing plans, shift much of the cost of retirement benefits for future hires to the worker, require pension increases to be approved by voters, and tweak marginal benefits so as to limit costs. According to the Mercury News, San Jose’s yearly pension bill has increased over the past decade from $73 million to $245 million.

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California’s state pension schemes, principally California Public Employees Retirement Systems (CalPERS) and California State Teachers’ Retirement System (CalSTRS), face as much as a half a trillion dollar unfunded liability, an April 2010 Stanford University study concluded. Municipality pension shortfalls across the state further add to that figure by many billions of dollars.

“This is going to encourage other jurisdictions in California to follow San Jose’s lead,” Joe Nation, a public policy professor at Stanford University, told the Wall Street Journal. “Pensions are the biggest challenge facing the state and local governments.”

Coming on the heels of municipal bankruptcies in Alabama and Rhode Island, exacerbated by unaffordable pension benefits, the success of these twin referendums in California may demonstrate to other ailing municipalities that pension reforms are not the electoral poison that they were long assumed to be.

(June 5, 2012) — A variety of factors suggest that the United States’ economy is slowly healing, according to Mohamed El-Erian, the CEO and co-Chief Investment Officer of the Pacific Investment Management Co. (PIMCO).

However, the problem is that these factors, both individually and in combination, are unlikely to be a game-changer, largely due to the fact that “too many sectors of the US economy have not completed their balance-sheet rehabilitation process,” he writes in an article originally published on Project Syndicate. Commenting on signs of improvement for the US economy, El-Erian writes: “For starters, large US multinational companies are as healthy as I have ever seen them.” He adds that rich households also hold significant resources that could be deployed in support of both consumption and investment.

Furthermore, the head of the roughly $1.4 trillion bond fund manager notes that housing and the labor market are on the upswing. “These two long-standing areas of persistent weakness have constituted a major drag on the type of cyclical dynamics that traditionally thrust the US out of its periodic economic slowdowns,” El-Erian writes. “But recent data support the view that the housing sector could be in the process of establishing a bottom, albeit an elongated one. Meanwhile, job growth, while anemic, has nonetheless been consistently positive since September 2010.”

The Federal Reserve’s seemingly activist position in the face of a weakening economy is additionally promising, according to El-Erian.

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He concludes that despite these beacons of hope pointing to the healing of the US economy, “a lot more needs to happen – indeed, urgently – to restore its traditional vigor and vitality.” El-Erian continues: “Most important, robust recovery requires a degree of seriousness and constructive collaboration in Washington that seems elusive today.”

Dean Baker, co-director of the Center for Economic and Policy Research in Washington, tells aiCIO that he is on roughly the same page as El-Erian regarding the future of the US economy. “While the US economy is improving, I think it will be years before the economy is back,” he says. “We had a weak quarter. The latest job numbers don’t look that good. We’re looking at six to seven years before we see any strong results.”

Baker continues to point out that there is no reason to think that over the long-term the US economy is crippled. “Investors in the US clearly don’t have the same uncertainly as the European market,” he says, adding that the threat of companies and banks being insolvent if the Euro collapses is a looming threat. “As an investor, you need to recognize the risk in Europe. You don’t want to pull out completely, and while the US has relatively little downside risk, it’s not a great growth opportunity but one you can feel comfortable with. Emerging markets continues to be the area with the most growth potential.”