California Referendums Provide Harbinger for Public Pensions Across US

(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.

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.