A bipartisan coalition of politicians and business people, led by former San Jose Mayor Chuck Reed and former San Diego Councilmember Carl DeMaio, filed a pension reform ballot initiative with the California Secretary of State today.
Unlike many other efforts targeting pension reform, this initiative does not dictate how various government agencies approach their own, unique circumstances, instead requiring that local voters approve of the pension benefits being promised to any new employees.
While not impacting current employees or retirees, the Voter Empowerment Act of 2016 would give voters the right to approve, or reject, the compensation and retirement benefit promises made to new employees, as well as requiring voter approval before pension benefits are enhanced for any current or future employee. The proposed state constitutional amendment covers the retirement benefits offered by all state and local government agencies, including the state itself, cities, counties, school districts, the University of California and California State University systems, and special districts.
Additionally, the initiative requires that government agencies pay no more than 50% of the total cost of retirement benefits – including any future unfunded liabilities – unless the voters explicitly approve otherwise. Employees would be required to contribute the balance of the cost. This is an important element of the initiative because equal cost sharing equates to equal risk sharing. This stands in stark contrast to the status quo, in which all risk and debt liabilities are transferred to the taxpayers.
Some government agencies may want to continue to provide future employees the level of pension benefits now offered to current employees, including unequal cost sharing – and they can, as long as voters explicitly approve these benefits.
If an agency finds that their voting residents don’t approve of a defined benefit plan for new employees, the act allows those agencies to use the collective bargaining process to agree on other types of retirement benefits, potentially including the 401(k)-style defined contribution plans already being offered by CalPERS, CalSTRS and other pension plan providers, without voter approval.
Although this initiative does not address the nearly $200 billion in unfunded liabilities that currently exist in California, it does prevent retirement boards from levying termination fees or other discriminatory conditions against agencies that close defined benefit pension plans to new employees. These exorbitant costs have been a significant barrier to reform for many government agencies struggling to meet their pension obligations.
This initiative provides a method for elected officials to address their community’s specific circumstances through the collective bargaining process and allows voters to ratify the agreements, while steering clear of the vested rights doctrine that has stymied reform previous reform efforts in California and a number of other states. By focusing on future employees, this initiative should avoid significant legal challenges leading to tangible results for struggling agencies throughout the state. Moreover, it provides for crucial voter control rather than the than the typical politician/union dynamic that has led to unsustainable spiraling benefits and costs.
Stay in Touch with Our Pension Experts
Reason Foundation’s Pension Integrity Project has helped policymakers in states like Arizona, Colorado, Michigan, and Montana implement substantive pension reforms. Our monthly newsletter highlights the latest actuarial analysis and policy insights from our team.