Pension Hotspots: Cincinnati, OH, San Francisco, CA, and Hialeah, FL
By Josh Altic
The Pension Hotspots Report is a monthly publication about local pension reform efforts.
The November edition of the Pension Hotspots report will provide a post-election review of the election results for the three pension reform measures decided on in the November 5 election as well as the reactions from advocates and opponents. The key November 5 pension reform measure to watch was Issue 4 in Cincinnati. This measure was overwhelmingly rejected by voters. See below for an explanation of this failure at the ballot box from Chris Littleton, campaign manager for the committee behind Issue 4.
The appellate court decision in the CalPERS v. San Bernardino lawsuit regarding the cities recent bankruptcy is also covered by this edition. The November Hotspots report also provides a summary of the new report by the California Public Policy Center on the unfunded liabilities of the California State Teachers Retirement System and its struggles with catch-up payments and lower investment returns.
Of the three pension related measures decided on November 5, the measure in Cincinnati was the only measure on the ballot through initiative petition as well as being the only measure seeking to change the pension plan from a defined benefit plan to a defined contribution plan. The other two measures, in Hialeah, FL, and San Francisco, CA, were referred to the ballot by the city council.
Issue 4, the most extensive pension reform measure on the November 5 ballot, was rejected by 78% of voters:
Cincinnati voters were the only electors in the nation that saw a pension reform measure on the November ballot through petition initiative. Despite the city's unfunded pension debt surpassing $860 million, they rejected Issue 4 with an overwhelming super-majority of 78%. Issue 4 sought to change the city pension plan of new hires from a defined benefit plan, in which employees are guaranteed a monthly pension payout regardless of the health of the pension fund and the performance of the fund's investments, to a 401(k)-style, defined contribution plan, in which the employees have an individual account and their pension depends on their own contributions, the city's contributions and the rate of investment returns throughout the life of the account.
Chris Littleton, campaign manager for Cincinnati Pension Reform, said that the ballot language was the downfall of the Issue 4, especially as the committee spent most of its funds suing to change it.
Littleton said, “First off, we didn’t really get to campaign much as we spent all our funds on getting it on the ballot and then fighting the Board of Elections and then the Supreme Court. But in the end, the Board of Elections essentially inserted a lie into the ballot.”
Littleton did not know one way or the other if the committee would attempt another initiative effort. But he did say, “But one thing’s for sure, we have absolutely zero faith that the politicians who put us into this mess will pull us out of it." He went on to say, "Not fixing it is not an option. What are we going to do, let Cincinnati go bankrupt?”
Ohio Auditor David Yost, never expressed a position on Issue 4 but did say, “Elections don’t change the math that Cincinnati is facing. The pension crisis in Cincinnati is not going to go away. And it will never be easier to fix than it is right now. ... It only gets harder from here, and the numbers only get bigger.”
Ohio local pension reform measures:
San Francisco, California
Measure A, which reformed the Retiree Healthcare Fund of public employees in the ballot in San Francisco, was decisively approved with a 68.6% majority. Proposition A was authored by supervisor Mark Farrell and was designed to help eliminate the $4.4 billion shortfall in the city's retiree health care fund, without adding to employee or taxpayer contributions. Proposition A was designed to change the health care fund, which was approved by voters in 2008 and implemented by the city in 2009, from a pay-as-you-go model to a fully funded, solvent account by 2045, with retiree health care funds coming from the fund's investment returns instead of from the city's general budget. According to Farrell, the retiree health care payments cost the city's general fund $150 million in 2013 and this amount would have grown to $500 million per year over the next 20 years if steps were not taken to reform the way the fund was used.
After the election Farrell said, "I don't want to continue to hollow out the general fund on a yearly basis, and I don't want retirees scared for their health care."
|2013 Pension Measure Count|
|Number proposed:|| |
|Coming up:|| |
|Decided measures:|| |
|Number approved:|| |
|Number defeated:|| |
Opponents of Proposition A believed that it would not be adequate to deal with the unfunded liabilities of the health care fund and that the language of the measure opens up the fund to potential withdrawals by the city council under the duress of an ever tighter budget. They argue that the restrictions on taking money out of the fund are too lenient and will not result in the self sufficient and solvent fund proponents were showcasing before the election.
California local pension reform measures:
Over 80% of Hialeah voters decide to take pensions away from future elected officials and establish voter control of future changes:
According to the 2012 U.S. Census estimate, Hialeah is the 88th largest city in the nation and the 6th largest city in Florida with a population of 231,941. On November 5 its voting population overwhelmingly approved a measure which cuts future elected officials out of the generous pension program that was in place prior to the election. The measure also established the necessity of voter approval for any future changes to the pensions of elected officials.
Currently in Hialeah, elected council members are given a pension after they reach the age of 55 and if they have completed 12 years or more of service on the city council. The charter amendment, which was referred to the ballot by the city council, did away with these pension benefits for future city officials, beginning in January of 2014. The referendum did nothing, however, to change the payments being made to mayors and city councilors who have already retired.
Florida local pension reform measures:
San Bernardino wins the first two rounds against CalPERS in bankruptcy litigation battle:
After San Bernardino discovered it had a deficit of $46 million, a large portion of which was owed to the California Public Employee's Retirement System (CalPERS), it filed for bankruptcy protection in 2012. CalPERS sued and a bankruptcy judge decided in favor of the city. CalPERS immediately brought the case to the U.S. 9th Circuit Court of Appeals where, on November 15, CalPERS suffered its second defeat and the ability for city's to file under chapter nine under duress from ballooning pension debt was reaffirmed. Twice beaten but determined, CalPERS has taken the matter to a U.S. District Court judge, where they will once again try to force San Bernardino to pay its debt as well as establish a precedent against cities using chapter nine in the future. The city of San Bernardino owes $14 million in overdue payments to its CalPERS pension fund. San Bernardino has since developed a plan to deal with its many creditors, inlcuding CalPERS.
New report: unfunded liabilities of the California State Teachers Retirement System (CalSTRS) as high as $154.9 billion
The California State Teachers Retirement System is the counterpart to California Public Employees Retirement System (CalPERS) and exclusively serves the teachers throughout the state of California. Recently the California Public Policy Center released a report that showed that while assuming a 7.5% rate of investment returns CalSTRS is looking at $71 billion in debt not backed by assets but, with more realistic rates of return, that number grows to substantially larger figures.
While the dollar amounts estimated are large, they are not by themselves cause for extreme alarm. The facts that the payment of these unfunded liabilities is not on track to substantially decrease them and that the California retirement systems continue to use unrealistically optimistic investment return projections to avoid the pressing issue were the primary causes for concern on the part of California Public Policy Center.
The Public Policy Center reports that in the 2011-2012 fiscal year CalSTRS brought in $5.8 billion from employees and employers. This sum was broken down into the "normal contribution" of $4.7 billion and the remaining $1.1 billion that was a "catch-up" payment used to reduce the unfunded liabilities of the fund. The report went on to show that according to the currently used estimate of investment returns and a 20 year amortization goal, the "catch-up" payments should be around $7 billion a year instead of just $1.1 billion. If the lower investment returns of 6.2% and 4.81% are used in estimates, the "catch-up" payments should be $9.6 billion and $12.2 billion per year respectively.
Below is a table showing the estimated unfunded liability yielded by three different investment return rates and the estimated necessary yearly "catch-up" payment:
|Return rates vs. unfunded liabilities|
|Investment returns:||Unfunded liabilities||"Catch-up" payments|
|7.5%||$71 billion||$7 billion|
|6.2%||$107.8 billion||$9.6 billion|
|4.81%||$154.9 billion||$12.2 billion|
List of 2013 local pension measures
City of Los Angeles Fire and Police Pension Plan, Measure LA-B (March 2013)
Proposition 201: City of Phoenix Pension Reform Proposition
Proposition 202: City of Phoenix Pension Reform Proposition
City of Hialeah Pension Reform Charter Amendment Question (November 2013)
Retiree Healthcare Trust Fund, Proposition A (November 2013)
- Pew Charitable Trust, "Cities Squeezed by Pension and Retiree Healthcare Shortfalls," March, 2013
- Moody's website
- Standard and Poor's credit ratings website
- Governmental Accounting Standards Board website
- Pension Tsunami website
- Pew Charitable Trust, "A Widening Gap in Cities Shortfalls in Funding for Pensions and Retiree Healthcare," January 16, 2013
- Cincinnati.com, "City pension overhaul soundly rejected," November 6, 2013
- Cincinnati Pension Reform Charter Amendment Initiative, Issue 4 (November 2013)#Aftermath
- SFGate, "Vote on S.F. retiree health care shortfall solution," October 6, 2013
- 'SFGate, "Retiree health care fund measure wins in S.F.," November 6, 2013
- Retiree Healthcare Trust Fund, Proposition A (November 2013)#Opposition
- US Census, "2012 Population Estimates"
- Merced County November 5, 2013 ballot measures
- KMJNow, "CalPERS Loses Bankruptcy Fight," November 18, 2013
- California Public Policy Center, "Are Annual Contributions Into CalSTRS Adequate?," November 8, 2013