I participated in an issue forum on Measures A and B, Stockton's proposed 3/4 cent sales tax increase, last night. I was the economist pointing out pros and cons of the tax plan, but not taking a stand one way or the other.
The most outspoken opponents of the tax are generally opposed to the City's approach to bankruptcy and want the City to cut pension benefits in bankruptcy. They score a lot of points when they talk about six-figure pensions. The enhanced pension benefits that allowed safety employees to retire at 90% of their highest salary levels certainly created some ex police chiefs who are collecting nearly $200,000 per year while retired in their fifties.
The tax opponents' solution: cap pensions at $100,000 per year. It's an appealing idea, especially when one considers the inequitable impacts of the City's approach to cutting retiree benefits entirely by eliminating healthcare benefits. That hit lower income retirees the hardest, and if the City was going to take more from retirees by addressing pensions, I would agree that these high pensions or "spiked" pensions would be the first place to look.
But how much would that solution save? And how hard would it be to implement?
I pondered that after the forum, and looked up some numbers to get a rough ballpark estimate. Before quoting these exact numbers, I would reemphasize the word rough.
Pension reform advocates have posted the names and pension payments of the 98 Stockton retirees receiving over $100,000 on the web. In FY 2012, those 98 folks received $12.2 million in benefits from CalPers. If they were capped at $100,000 each, they would have received $9.8 million from CalPers, reducing CalPers payments by $2.4 million.
I looked up the City's CalPers actuarial reports for FY 2011 (most recent available). CalPers made a total of $66.3 million in benefit payments to the City's retirees that year. If there had been a $100,000 cap in effect, that total would have been reduced to about $64 million or only about 3.6%.
But that $2.4 million in benefit reductions should not be confused as an annual savings to the Stockton budget, as CalPers is not a pay as you go system like the discontinued retiree health benefit. CalPers is making these payments from their investment portfolio. Saving that $2.4 million payment, and a similar amount in subsequent years, would reduce the City's liability to CalPers which would then translate into lower CalPers contributions from the City. But the annual savings to the City budget, would be substantially less than $2.4 million, probably no more than half that amount.
So the tax plan opponents have only offered up about $1-2 million in annual savings from this measure, less than 1% of the City's general fund spending. (Yes, the City needs to find all the savings it can, but the benefits of this action shouldn't be overstated.)
What would it cost for the City to gain that savings?
The City would have to change its approach to bankruptcy and take on CalPers to reduce pension benefits, and thus invite the precedent setting case that would pit federal bankruptcy laws against state law protecting pensions. The outcome of that effort would be uncertain, the City could lose. The only two certain outcomes is that Stockton would end up paying millions of dollars more for lawyers, and that the City would be stuck in bankruptcy for a much longer time. Even if Stockton prevailed in an effort to cap pensions, it isn't clear that City would have gained much more than it spent in legal costs and time.
Thus, I see the proposal that the City should try to cap pensions through bankruptcy as a feel good measure that would cost the city more in the short-run than it saves, and may not even accomplish much net savings in the long-run. The main beneficiary of the City's efforts would be other cities who might benefit from the precedent if Stockton succeeded. But a City in bankruptcy needs to focus on how to solve its own problems.
Stockton's pension reformers should team up with other like minded people around the state to try to change state law. For example, the San Jose mayor is working on a statewide initiative that would give Stockton and other cities new powers to adjust pensions. They should put their energies towards those reforms, and then press Stockton to take advantage of it if they succeed.
For Stockton right now, that energy can best be directed at making sure new employee contracts that will soon be negotiated are sustainable in the long-term. Pensions are a burden, but they are only part of an overall compensation package, and pension reform is only one way for a City to control its costs of delivering services.