San Diego’s Independent Budget Analyst has released its projections of the fiscal impact of Proposition B, the pension reform initiative on the city’s June 2012 ballot. It finds that the pension reform provisions of the measure would save taxpayers exactly no money.
Let me repeat that.
Proposition B would close San Diego’s pension plan to all new city employees except police. Future hires would be enrolled instead into a new 401(k)-style defined contribution plan for retirement saving and a new disability benefit plan to replace the disability coverage now offered through the pension plan. This new plan would leave city workers exposed to the risks of investing and of outliving their retirement.
And what would taxpayers get in return? According to the city’s analyst, this change would actually cost the city a small amount more ($13 million over 30 years.).
There are potentially cost savings in Proposition B. In addition to eliminating San Diego’s defined benefit pension for employees other than police, the measure requires the city, in labor negotiations over the next five years, to start with an offer of no pay increase. Were the city to hold firm to that position, and give no pay increases over the next five years, it would save $581 million over 30 years, according to the analyst. But Proposition B provides no certainty on that score: the initiative cannot create a contract legally binding on city workers or future city councils.
These findings underline a point that I make here frequently, but that gets widely ignored: The key budget issue about public employees in California is not about their pensions, it’s about their total pay. And it’s not about all public workers equally, but particularly about police, firefighters, and prison guards.
Pensions are an easy target for media coverage and political talk. There’s a huge pension gap between public workers and private workers. Most public workers have secure defined benefit pensions; few private workers get them anymore, depending instead on inadequate substitutes like 401(k) plans or, in too many cases, no retirement plan at all. In California, some kinds of public workers have the most generous pensions in the country.
This is fuel for pension envy. Want to make someone angry? Just talk about what public workers have that you don’t.
But in this case, as so many others, talking about what’s easy can be a distraction from talking about what matters.
For one thing, there are big differences among public workers in their pensions. Teacher pensions, for example, are quite reasonable in California; those for police and firefighters are hugely out of line with private sector practice, except for fringe cases like CEOs and professional athletes. Pension envy obscures these complexities.
Another big problem with pension reform narrowly conceived is that, as in the case of San Diego, it’s not likely to save much money. By law, current retirees and employees have a vested right to current pensions for the years they have already worked. Savings are only available going forward.
But moving from defined benefit to defined contribution plans creates new costs. Negotiating two-tier plans with lower benefits for new hires saves little money in the short-term and, unless two-tier plans are sustained over many years, save no money in the long term, as California should have learned (but apparently hasn’t) from its experience in the 1990s.
But the biggest problem is forgetting that what matters, both to public budgets and to public workers, is total pay—the full value of the bundle of compensation, including wage, health insurance, disability, Social Security, unemployment, retiree health benefits, and pensions. If sustained over the long run, pension reform can lower the cost of the retirement piece of the total pay bundle. But that will be of no value to public budgets and taxpayers if the savings on the pension side of the ledger are offset by increases in worker pay.
This is not a theoretical concern. Just one example: In Sacramento last summer, elected leaders celebrated that they had cut city costs with a new labor contract with firefighters. The contract calls for workers to contribute 6 percent of pay to their own pensions beginning in 2013. But it also provides a 5 percent pay increase.
In the short run that pay increase offsets the negotiated pension concession. And in the long run it increases the size of the pension today’s workers will receive when they retiree, thereby raising future city pension contributions. The celebration was self-serving nonsense.
Looking at what really matters to public budgets—total pay—is a lot harder than spotlighting just pensions. It doesn’t lend itself as easily to the envy narrative; comparing total public pay with total private pay gives different results depending on the job involved (many low-skill public jobs pay better than their private counterparts, many high-skill jobs pay far worse, and there are few private comparables for public safety workers, although those in California do far better than their cousins in other states).
But unless Californians, as leaders and voters, begin to do the harder thing, efforts like San Diego’s Proposition B will only end in disappointment.