Why Pension Reform Matters to Business

Every year, the Valley Industry and Commerce Association , or VICA, compiles legislative priorities based on responses from our members. Year-in and year-out, our members’ biggest priority is public pension reform – reform that raises the retirement age, bans abusive practices such as “spiking” and “double dipping” and ensures that public employees pay their fair share of pension costs. VICA is a business advocacy group, and at first glance, pension reform seems like a misplaced priority. However, a fiscally sound local and state government yields strong benefits for businesses. Likewise, when a state’s pension program is 27 percent underfunded – as the Center for Retirement Research at Boston College estimates is the average for states nationwide – then those governments turn to revenue generation: higher property taxes, higher business taxes and taxes on specific industries. This is why VICA has been such a strong proponent of the latest pension reform agreement between the City of Los Angeles and the International Brotherhood of Electrical Workers, the union that represents workers at the Los Angeles Department of Water and Power. The current plan defers the union’s 2 percent cost-of-living raises from Oct. 1, 2013 to Oct. 1, 2016. It also creates a new DWP retirement tier for new hires, which will all contribute 7 percent to the pension and caps the pension at 80 percent of salary. Importantly, the agreement prevents reciprocity between the Los Angeles City Employees’ Retirement System and the Water and Power Employees Retirement Plan. Reciprocity is when a worker who moves from one system to the other and has the total number of years worked in both systems reflected on his or her pension. The recent influx of DWP employees taking advantage of this has created a $183 million pension burden for the department. Additionally, entry-level salaries will be reduced for 34 classifications of jobs within the department; the sick policy will be revised to require a doctor’s note for illnesses exceeding three days. Even with our support for the agreement on the table, VICA would like to see the negotiations go further in the future. However, we need to take action now and the current agreement is something that all sides can approve. Critics can moan that the agreement must do more, but look at the numbers: The cost-of-living deferral is estimated to save the DWP $400 million during the first four years and up to $4.1 billion in the next 30 years. It is estimated that the proposed settlement regarding reciprocity will eliminate the city’s liability of approximately $180 to $210 million to the DWP pension fund. The proposed agreement amendments will save an estimated $464 million during the agreement’s term (fiscal years 2016 and 2017), or more than $6 billion over 30 years. The city’s leaders – Mayor Eric Garcetti, Council President Herb Wesson and the City Council – have made a move that saves billions. How often do Angelenos get to say that? If no negotiation had occurred, then DWP workers would have received raises starting Oct. 1, 2013, resulting in rate hikes due to those financial obligations. Constant stalemates do nothing to improve the city’s financial health and we applaud the stakeholders for making compromises that can move this city closer to a reformed pension system. While this isn’t necessarily a business-centric issue, the results are good for business. A Los Angeles budget with more flexibility can fix more streets, invest in infrastructure and begin to scale back its business tax without fear of a financial catastrophe. A fiscally stable city with a handle on their financial obligations is more attractive to businesses looking to relocate. If the second-biggest city in the country takes steps to reign in its pension obligations, then other municipalities and states are capable of reining in their retirement structures. We hope that the state can take a page from the city’s book and continue reforming its colossal pension system for the betterment of businesses and residents alike. The Valley Industry and Commerce Association (VICA) is a business advocacy organization based in Sherman Oaks that represents employers throughout the Los Angeles County region at the local, state and federal levels of government.