Feb 24, 2011 11:02 PM by Nancy Chen

The Problem with Pensions: Changing the system

There's a growing call for reform to keep city budgets in control.

But the solutions are not as easy as taxpayers might hope for--and any changes have their ripple effects.

But critics say sometimes, they're imperative.

"The costs are going up, and they're continuing to go up," said Andrew Carter, a San Luis Obispo city councilmember.

Pension-related budget woes are not unique to the Central Coast; cities are running in the red all across California.

Solving these imbalances gets tricky, especially when CalPERS, the state's public pension fund, is legally required to keep paying retirees at current rates even though markets have crumbled.

That means the city must also keep paying the same rates.

But with big budget shortfalls, cities are having to get tough.

Santa Maria, for instance, has reformed its pension programs three times in a month--for police officers, firefighters and all other city employees.

"The problem that we're having right now is two-fold," said Rick Haydon, the assistant city manager of Santa Maria. "Our revenues are down, and our pension rates continue to skyrocket."

Pension formulas for current government employees can't change by law, but they can be revised for those who haven't been hired yet.

The city will save close to $1.2 million dollars a year by extending pay cuts and creating a two-tier pension system for new employees.

Those hired after July 1st will pay into their own retirement plan, something the city does for current employees.

Non-safety city employees and firefighters agreed to the two-tier plan, but the police union didn't buy into it.

"We understand the finances with the city is tough," said Chris Nartatez, the president of Santa Maria's police union. "We gave last year and this year. All they want to do is take, take, take, and there's a point we've got to stand up and say, enough is enough."

In the end, the Santa Maria City Council forced the two-tier pension plan on the police union.

Likewise, new city employees will be getting 26 percent less than they did before, and new firefighters will be getting 20 percent less in benefits than they did just a year and a half ago.

But the fire union says it understands it's crunch time.

"Yeah, it's necessary," said Elijah Coleman, the president of the firefighters' union. "I mean, the city's obviously expecting some pretty hard times in the next budget year, so we do what we can to assist them."

Morro Bay also recently changed things up, becoming the first one in San Luis Obispo County to go to a two-tier system.

The retirement age for newly hired firefighters is now 55, instead of 50.

These changes are all because CalPERS can no longer afford to pay its retirees what it is now.

"The only way they can (continue to pay retirees) is by increasing the rates to cities and counties, and expecting us to pick up the costs for their bad return on their investments," Haydon said.

As a result, cities are taking action.

For instance, San Luis Obispo is letting voters decide in August whether to repeal binding arbitration.

Right now, a third-party arbiter makes the final decision if there's an impasse in negotiations between the city and the police and fire unions.

Critics blame binding arbitration for out-of-line salary boosts for police officers and firefighter, but unions say it's a fair process.

"It's forced both sides to actually communicate and negotiate in a fair manner," said Erik Baskin, the president of the San Luis Obispo firefighters' union.

Some other pension reform ideas proposed at the state level include requiring all public employees--instead of just some--to pay half their retirement benefit costs, instead of the government picking up the whole check.

Another is creating a pension system where the state and employees share the risk, just like 401(k) plans in the private sector.

CalPERS currently takes on all risk, so full benefits are guaranteed even in a market crash.

State lawmakers are also trying to do their part.

Jerry Hill, a Bay Area assemblyman, has introduced a bill to limit state pensions for future workers to the federal cap of $195,000.

And Assemblyman Allan Mansoor of Costa Mesa introduced a bill just this week to eliminate collective bargaining for pension benefits by public employees.

But big cuts also have their fallouts.

Employee morale is an issue when two people working next to each other get very different retirement plans just because one person started earlier and was grand-fathered into the better plan.

That's the case with two-tiered pension plans.

Experts also warn slashing lucrative retirement checks has its consequences when it comes to keeping quality people in the public sector, raising serious questions.

"How do we bring employees to work for the City of San Luis Obispo, how do we keep the employees once they come to work here, and how do we as a community want to provide the services we're providing?" asked Katie Lichtig, the city manager of San Luis Obispo.

Just like any change, reform is indeed a risk.

But at this point, it's a risk more cities are willing to take as they face crucial crossroads.

And the pension problem is only going to get worse..

Lawmakers are discussing lowering the expected CalPERS return rate from its current 7.75 percent to 7.5 percent this summer.

Right now, if the fund returns anything less than that, taxpayers have to make up for it.

That means if they do lower the rate, cities will have to pay even more for those retirement checks.



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