Profiles in courage

Suppose you’re serving as, or thinking of running for, mayor of a small Bay Area city.  You understand full well that spending on retirement benefits for public employees is gobbling up more and more of your city’s revenues and soon will be eating into reserves.  In addition, the unfunded liability – i.e., the gap between the amount the city owes for retirement benefits and the assets it has set aside to pay for them – is skyrocketing.

This isn’t, to use your word, “sustainable,” and you want to do something about it.  But you don’t want to go where no one has gone before.  And you don’t want to commit political suicide.  You’d like, well, reassurance before you are willing to make a move.

You’ve come to the right place.

Allow us to give you three examples of politicians – all Democrats, all in “blue states” – who promoted real pension reform at the risk of incurring the wrath of the public employee unions — and who lived to tell the tale.

chuckreed2  We’ll start, closest to home, with Mayor Chuck Reed of San Jose, who was elected in 2006 and re-elected in 2010.  By 2012, San Jose faced a fiscal crisis:  The city’s unfunded liability for public employee pensions and health care had reached $2.9 billion.  Spending on retirement benefits had more than tripled in a decade and now consumed close to a quarter of the general fund budget.  The mayor and council already had implemented such cost-saving measures as layoffs and pay cuts with corresponding reductions in municipal services.  Something had to give.

(To put these numbers in context:  Based on 2011 figures, the City of Alameda’s unfunded liability for pensions was $106.5 million and for other post-employment benefits it was $86.1 million.  For fiscal year 2014-15, the City will spend $13.2 million on public employee pensions and other retirement benefits.  This amounts to 19.1% of general fund operating expenditures – and the percentage is expected to grow).

So Reed convinced the San Jose city council, nine of whose 11 members were Democrats, to put on the ballot an initiative – Measure B – that would change the pension system for both newly hired and current city workers.  The latter change was the more controversial:  Current employees could stay in the existing plan with its generous benefits – but they would be required to share the cost of the plan’s unfunded liability by contributing as much as 16% of their salary.  (This came on top of the 8-to-11% employee contribution they were already making).  Alternatively, those employees could opt into a new plan that provided less generous benefits.  The city estimated that these and other changes mandated by Measure B would save $68 million annually.

The public employee unions denounced the measure and vilified Reed personally.  “It takes a certain mayor and City Council to say we’re just going to renege on what we promised people,” the head of the police union said.  “They don’t have a whole lot of honor.”  In response, Reed noted that, “There’s a difference between being a liberal and progressive and being a union Democrat.  If you drain money out of services and pour them into retirements, people suffer.”

The voters sided with Reed, and Measure B passed with 70% of the vote.  Public employee unions and retirees then sued; a trial was held, and a decision is expected by the end of the year.

Rahm-Emanuel  Reed is not the only big-city Democratic mayor pushing for pension reform.  Nor is he the most prominent.  That distinction belongs to Rahm Emanuel, President Obama’s former chief of staff who was elected mayor of Chicago in 2011.

When Emanuel took office, the city’s public employee pension plans faced $19.5 billion in unfunded liabilities, and pension costs were expected to eat up 22% of the city budget in the near future.  To attack this problem, Emanuel presented a reform package to the Illinois legislature, which sets the terms of Chicago’s pension plans, that included raising the retirement age, suspending annual cost-of-living increases, raising employee contribution rates, and offering a hybrid plan for new hires.  The reforms were projected to reduce unfunded liabilities by 40 per cent.

“Our taxpayers can’t afford to choose between pensions and police officers, pensions or paved streets or pensions and public health,” Emanuel said. “Without pension reform, we’ll be forced to mortgage our children’s future to pay for our past.”

The public employee unions condemned the proposal.  “The city failed to fund this all along, and now Mayor Emanuel has made it clear that he is going after the hard-working men and women on the Chicago Police Department to make up for that,” the head of the police union said.  “He’s trying to stiff us out of our pay.”  And the Mayor’s proposal, as well as similar efforts by Illinois’s Democratic governor, Pat Quinn, thus far have stalled in the legislature.

This has not deterred Emanuel from moving forward in areas under local control.  This May, he announced that the city would phase out its 55% subsidy for retiree health care premiums, a move that would save $108.7 million a year.  (In Alameda, the City has subsidized 100% of the cost of medical benefits for police and fire retirees.  Beginning in January 2014, retirees will be required to pick up a small fraction of annual cost increases).  Retired city employees immediately brought a class action suit, which is still pending, but Emanuel was non-plussed.  “There’s another way to upset people, which is to saddle ‘em with a half-billion dollars worth of costs with no way to pay it,” he said.

Gina-Raimondo  Finally, there’s Gina Raimondo, the treasurer of the State of Rhode Island.  A political novice, Raimondo decided to run for office after reading that the state’s fiscal crisis might force cutbacks in library hours and bus service.  Raimondo’s advisers urged her to “stay away” from the pension reform issue during the campaign.  She ignored their advice and was elected with 62% of the vote.

When Raimondo became state treasurer, Rhode Island’s unfunded liability for public employee pensions was $6.8 billion, and the state soon would be spending 20 cents of every tax dollar on pensions.  She kept her campaign promise and got the Democratic-controlled legislature to pass a bill that shifted all workers – including current employees — from defined benefit pensions into hybrid plans, increased the retirement age, and suspended annual cost-of-living raises.  The law immediately reduced the state’s unfunded pension liability by $3 billion and cut the annual required contribution by $275 million.

In arguing for her proposal, Raimondo emphasized that pension reform was necessary to protect public services.  As she explained, “I would talk to social workers or social-service agencies who, when I started to talk about pensions, would ask ‘Why should I care about pensions?’ And I said, ‘Because if you don’t, your whatever it is, homeless shelter, is going to lose X thousand of dollars of funding.”

The state’s public employee unions lobbied legislators to oppose the plan.  As the teachers’ union leader put it, “Labor has carried the Democratic Party’s water for a very long time.”  Raimondo nevertheless persevered, and, in the end, 77 of 94 Democratic legislators voted for reform.  The unions’ response was  – all together now – to sue.  The judge sent the case to mediation.

So there you have it.  Three politicians, all stalwart Democrats serving in Democratic strongholds.  All smart enough to recognize that a problem exists.  All decisive enough to act to fix the problem.  All brave enough to incur the wrath of the public employee unions by asking them to share in the solution.

Running through these three examples is a common theme about how to accomplish pension reform:

  • Don’t bash the public employee unions for causing the crisis.  Not only is blaming the unions politically unwise, it’s factually unjustified.  As Mayor Emanuel said, “None of the public employees or none of the taxpayers has done anything wrong,” he said.  “They’ve done everything required of them.  Everybody else, in my view, has either kicked the can down the road or not taken responsibility, so therefore we have to do it.”
  • Don’t pretend the problem can be wished away.  It’s tempting for a politician to say, Right now, everything’s fine. We have a balanced budget and a reserve.  Why worry about the future?  But that’s irresponsible.  A lot of “people say we’ve done pension reform when all they’ve done is tweaked something,” Raimondo said.  “This problem will not go away, and I don’t know what people are thinking.  By the nature of the problem, it gets bigger and harder the longer you wait.”
  • Lay out the facts.  The public will get the message.  “We focused on math, not politics,” Raimondo said.  “Very early on, that was the tagline – this is about math, not politics.”
  • Emphasize the consequences of doing nothing or doing too little.  The only way to keep public employee retirement benefits at their current level is to raise taxes – which no voter likes – or cut services.  And, pretty soon, after you get rid of all the services that might be considered amenities, you’ll have to start trimming services that are undeniably necessities.  “So we were faced two years ago with what is described . . . as ‘service delivery insolvency,’ which is we’re cutting the services so much we’re essentially ineffective as a city at delivering services to our people,” Mayor Reed said.  “And so rather than just continue on that path we decided that we would take action.”  Similarly, Raimondo commented, “That was my mantra the whole time: Progressives care about public services.”
  • Remind public employees that, regardless of what their union leaders may say, pension reform helps them, too.  Unfunded liabilities represent a very real risk to the ability to provide benefits to future retirees.  As Mayor Emanuel put it in a letter to public employees, “If we follow along the current path, we know we will confront two stark choices: Either the city’s pension payments will squeeze its ability to offer the essential services you provide, or each of our pension funds will go bankrupt, leaving you and your families without retirement security.”

Fair warning:  The actions taken by our three reformers have not earned universal acclaim.  As we have noted, all three are facing lawsuits brought by the public employee unions.  And none of them is likely to enjoy backing from those unions in his or her next run for office.

But the voters haven’t deserted them.  It’s difficult to tie an approval rating to a single issue, but the fact is that Mayor Reed has a 55 per cent approval rating; Mayor Emanuel a 50 per cent approval rating, and Treasurer Raimondo a 56 per cent rating.  (By way of comparison, Mayor Jean Quan of Oakland has a 23 per cent rating, and, in the latest poll, even President Obama was down to 43 per cent).  And all three are considered possible candidates for higher office.  Indeed, Raimondo already is running neck and neck in the race for the 2014 Democratic nomination for governor.

The next election for mayor of Alameda is a year away.  To those considering a run –- including the incumbent – we commend the stories of Mayors Reed and Emanuel and Treasurer Raimondo.  Wouldn’t it be something if the latest profile in courage is written right here in Alameda?

Sources:

City of Alameda budget: 2013-06-11 staff report re FY 2013-14 & FY 2014-15 budget; 2013-06-11 FY 2012-3 thru FY 2014-15 budget summary

Mayor Chuck Reed: SJ Mercury News article (06-24-12) on Reed; City Journal article on Reed (05-30-2012); CityWatch interview with Reed (07-23-13)

Mayor Rahm Emanuel: Chicago Sun Times article on Emanuel (05-08-12); Chicago Tribune article on Emanuel (05-10-12); Chicago Sun Times article on Emanuel (05-16-13); Chicago Tribune op-ed by Emanuel (07-14-13); Chicago Sun Times article on Emanuel (09-26-13); New York Times article on Emanuel (08-05-13)

Treasurer Gina Raimondo: WSJ article on Raimondo (03-25-12); WP article on Gina Raimondo; National Journal article on Raimondo; Bloomberg article on Raimondo (01-10-12)

About Robert Sullwold

Partner, Sullwold & Hughes Specializes in investment litigation
This entry was posted in Budget, City Council, Pensions and tagged , , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s