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Pension reform: Long Beach claims leadership in reducing risk

Long Beach Mayor Bob Foster says changes in union contracts and improved investments have reduced the city's unfunded pension liability.
Long Beach Mayor Bob Foster says changes in union contracts and improved investments have reduced the city's unfunded pension liability.
Sharon McNary/KPCC
Long Beach Mayor Bob Foster says changes in union contracts and improved investments have reduced the city's unfunded pension liability.
Steven James, president of the Long Beach Police Officers Association, says his members were the first of the city unions to agree to put more of their paycheck into their pensions.
Sharon McNary/KPCC
Long Beach Mayor Bob Foster says changes in union contracts and improved investments have reduced the city's unfunded pension liability.
Long Beach City Councilman Gary DeLong wants the city to be able to change the future pension benefits of current city workers, in the same way the private sector can negotiate such changes.
Sharon McNary/KPCC

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With the approval of recent union contracts, Long Beach officials claim theirs is the largest city in the giant California Public Employees' Retirement System (CalPERS) to achieve pension reform.

In Long Beach, they define pension reform as getting most of their employees to put at least 8 percent of their paychecks into their pension accounts (9 percent for police, firefighters and lifeguards). Until recently, most city employees paid just 2 percent. But as union contracts came up for renewal, workers agreed to increase their pension contributions, which were mostly covered by city-provided raises.

Under those contracts, future hires will have to work more years for lower pension benefits.

Long Beach police employees agreed to increase their pension contributions four years ago, using money the city gave them instead of a raise.
"My members were the first to step up to do it here in Long Beach, one of the first to do it anywhere in the state," said Long Beach Police Officers Association President Steve James.

About 85 percent of the city's workers — including firefighters and the city's large rank-and-file union — made the change a few years ago. This month, four more unions followed in agreeing to make larger pension contributions, representing eight of the city's nine unions. A similar contract for the ninth union, representing city management, is due for council review next month.

Long Beach Mayor Bob Foster is proud to have achieved the change without having to go to the voters or court.
"I would have personally taken this issue to the ballot in Long Beach," Foster said during a recent interview in his City Hall conference room. "We chose to try to do this at the collective bargaining table. I think our strategy has not only borne fruit — I think it's actually been very efficient."

Long Beach is taking the steps to reduce its unfunded pension liability. That's the amount of money an agency has promised to pay in pensions, but doesn't have enough projected income to cover.

Foster says that Long Beach's unfunded liability was above $1 billion just a year ago, but changes in union contracts and improvements in investment returns have reduced it to $700 million, an amount the city should be able to pay off in 25-to-30 years.

He likens it to a mortgage:  "No one should take it as, 'Oh my god, it's over a billion dollars and we can't pay that.' The truth is, if you take corrective action, you can pay it," he said.

Long Beach got into that billion-dollar hole in the same way many other cities and local governments in California did — by relying on assumptions about pension investments that turned out to be wrong.

In 2000, during a rise in the stock market, Long Beach's pension obligations were "superfunded," meaning its investments were returning so much that CalPERS advised the city it could take a pension holiday and skip paying into the system for a few years. The city resumed funding its pension account in 2004, but when the economy stalled in 2008, its investments were underperforming, and the unfunded portion ballooned to more than a billion dollars.

The experience of Long Beach  is a scenario likely to be repeated in cities across the state  in coming years.

Many California cities have promised workers far more in pensions than they can deliver. Attempts in San Jose and San Diego to reduce public employee retirement packages have ended up in court.

The California Taxpayers Association estimates state and local governments have racked up $138 billion worth of unfunded pension obligations. California's watchdog agency, the Little Hoover Commission, put it at $240 billion and bluntly said that "Pension costs will crush government."
While some view the problem of unfunded pension obligations in California as a manageable issue, other estimates have it as high as a half-trillion dollars.

A group of mayors recently proposed the Public Pension Reform Act of 2014, a ballot initiative that would let voters and public agencies change future benefits of current workers. The proposal would have to get substantial public support to reach the ballot.
Long Beach City Councilman Gary DeLong says he is inclined to support it.
"You should not be able to take anything away from somebody that they've already earned, but you can change it on a going-forward basis," he said. "It makes absolutely no sense to me why you can do that in the private sector but you can't do it in the public sector."

Long Beach police union president Steve James often helps his members assess their retirement scenarios. He said a statewide pension initiative — cutting future pension earnings for today's workers — would put his members' retirement planning into turmoil.
"I'm getting a bunch of people asking if they should retire now to avoid any problems that may come as a result of this initiative, because they don't understand it and they're scared of it," he said.

The bond rating firm Moody's helps investors understand the risk of lending money to cities. Eric Hoffman, Moody's lead analyst tracking California local governments, says unfunded pension liability is part of their evaluation.
"Long Beach's unfunded pension burden is definitely on the high side," Hoffmann said.
He describes Long Beach's  burden as more than three times its annual operating expenses, about the same as in Los Angeles. But it's not as high as San Jose, which he calls an outlier, with a pension burden of more than four times its operating costs.
The higher the burden, the lower a city's pension bonds are rated, which makes it more expensive to borrow money and leaves less cash to pay for salaries and city services.
"Well, there's no question it's a challenge for local governments. Their revenues have not been growing at the same rate as their obligations," Hoffmann said.