California school district pension contributions on track to exceed $11 billion by 2023

California school districts are contributing $5.6 billion to CalSTRS and CalPERS during the current school year.  These contributions will total $6.7 billion in the next school year, and, according to CPC’s analysis of actuarial projections, they will reach $11.3 billion in the 2022-2023 school year.  Please check back on Tuesday for a more detailed analysis.

CalPERS actuarial analysis: https://www.calpers.ca.gov/docs/board-agendas/201704/financeadmin/item-8a-00.pdf

CalSTRS actuarial analysis: http://resources.calstrs.com/publicdocs/Page/CommonPage.aspx?PageName=DocumentDownload&Id=a73c0f09-405c-42a5-86d2-2587d6926e65

 

2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23
CalSTRS and CalPERS Total $5,618,181,228 $6,697,416,698 $7,886,655,302 $9,165,485,481 $10,246,568,417 $10,794,351,673 $11,290,014,803
CalSTRS
Payroll $31,303,000,000 $32,398,000,000 $33,352,000,000 $34,706,000,000 $35,920,000,000 $37,178,000,000 $38,479,000,000
Employer Base Contributions $2,582,000,000 $2,673,000,000 $2,766,000,000 $2,863,000,000 $2,963,000,000 $3,067,000,000 $3,175,000,000
Employer Supplemental Contributions $1,356,000,000 $2,002,000,000 $2,693,000,000 $3,429,000,000 $3,897,000,000 $4,034,000,000 $4,175,000,000
Total Employer Contributions $3,938,000,000 $4,675,000,000 $5,459,000,000 $6,292,000,000 $6,860,000,000 $7,101,000,000 $7,350,000,000
Total Employer Rate 12.58% 14.43% 16.37% 18.13% 19.10% 19.10% 19.10%
CalPERS
Payroll $12,098,079,119 $13,021,806,052 $13,412,460,234 $13,814,834,041 $14,229,279,062 $14,656,157,434 $15,095,842,157
Employer Normal Cost $997,121,741 $1,055,145,859
Unfunded Rate Contributions $683,059,487 $967,270,839
Total Employer Contributions $1,680,181,228 $2,022,416,698 $2,427,655,302 $2,873,485,481 $3,386,568,417 $3,693,351,673 $3,940,014,803
Total Employer Rate 13.89% 15.53% 18.10% 20.80% 23.80% 25.20% 26.10%

$100,000 Club: 86 Lifeguards Earn Over $100K Per Year

Nice Retirement! All L.A. County lifeguards earned total compensation of more than $100,000 last year.

Nice Benefits! Add in health and retirement, and 128 L.A. County lifeguards earned total compensation of over $100,000 last year.

Los Angeles County boasts the world’s largest professional lifeguard association. But most of the association’s 850 guards work seasonally. The incomes of the 150 year-round lifeguards can seem surprisingly rich to anyone raised on the hit 1990s TV show, Baywatch – or anyone who worked as a summer lifeguard at the local pool.  

Getting the exact number of Los Angeles County lifeguards was a bit of a challenge. We called up the Los Angeles County Fire Department. They transferred us to the Lifeguard Division in Manhattan Beach. That’s where we learned there are about 850 lifeguards but just 150 full-time lifeguards. The state controller’s website shows about 750 seasonal workers and about 120 full-timers. Transparent California shows over a thousand total lifeguards in 2015.

Here’s the list of the 10 highest paid lifeguards in LA County, which includes total pay and benefits. This list was pulled from the State Controller’s Office and Transparent California:

Name Job Title Total Pay and Benefits
Adam Uehara Captain $314,899.69
Daniel Douglas Captain $297,355.93
Fernando Boiteuz Assistant Chief $287,064.96
Steve Moseley Chief $278,033.31
Terry Yamamoto Section Chief $265,972.43
Kenichi Ballew-Haskett Captain $239,342.29
Remy Smith Captain $225,417.38
Jeffrey Horn Captain $225,211.22
Erik Albertson Section Chief $223,103.25
Michael McIlory Captain $220,720.37

There are 93 “Lifeguard Specialists” who earn an average total compensation of $148,000. At least 86 lifeguards earn salaries in excess of $100,000. Add in other benefits, and 128 lifeguards earn total compensation above $100,000. While we don’t know the details about lump pay and “other pay”, some individuals make excessive amounts in those categories.  You can see each lifeguard’s pay here.

The cost between the full-time and seasonal lifeguards is massive. The average total wages for a full-time lifeguard is $115,995, while a seasonal lifeguard is $14,092. The average full-time lifeguard has a benefit package of $47,281. A seasonal lifeguard has a benefits package of $2,046.

Though there is not much accumulated overtime in the group, one captain earned base pay of $114,204 – and clocked $125,864 in overtime.

American Federation of Teachers Costly Staff Spending

Dropout Nation recently reported on the American Federation of Teachers’ 2015-2016 financial disclosure to the U.S. Department of Labor. As you would expect, the nation’s second-largest teachers’ union spent big on influencing Democratic presidential nominee Hillary Clinton and her apparatchiks, as well as pouring heavily into what should be like-minded advocacy and nonprofit groups.

But AFT’s big spending doesn’t just end with political campaigns and co-opting minority as well as hardcore progressive groups. The union even spends big on its own staff and operations.

Start with AFT President Rhonda (Randi) Weingarten, whose paychecks put her in the top five percent of the nation’s income earners even as she engages in class warfare rhetoric. The union paid Weingarten $497,311 in 2015-2016, just a couple hundred dollars more than she pulled down in the previous year.

Also well-paid by the union is Loretta Johnson, who serves as its secretary-treasurer; her $358,225 in 2015-2016 was a grand or so higher than in the previous year. Meanwhile Mary Catherine Ricker, the former Saint Paul Federation of Teachers boss who now serves as the union’s number two (and in the process, serving as an obstacle to United Federation of Teachers boss Michael Mulgrew’s ambitions to succeed Weingarten as head of the national union), was paid $311,311, a 5.4 percent increase over her pay in 2014-2015.

Altogether, the AFT’s top three leaders collected $1.2 million last fiscal year, a slight increase over the $1.1 million paid to them by the union in 2014-2015.

Also making bank are AFT’s staffers, though there are slightly fewer of them this time around. Two hundred twenty-two staffers earned more than $100,000 in 2015-2016, seven fewer than the 229 in the previous year. Three out of every five staffers at AFT national headquarters earn six-figure sums. Among the union’s high-paid mandarins: Michelle Ringuette, the former Service Employees International Union staffer who is now Weingarten’s top assistant, made $230,736, while Michael Powell, who serves as Weingarten’s mouthpiece, earned $240,647. Kristor Cowan, the AFT’s chief lobbyist, earned $186,293, while Kombiz Lavasany, another operative who oversees Weingarten’s money manager enemies’ list, earned $184,158.

Supporting these high salaries is an ever-declining rank-and-file base. AFT counts 675,902 full-time rank-and-filers on its roster in 2015-2016, a 3.4 percent decline over the 699,739 members on the roster in the previous fiscal year. [Dropout Nation does not call them members because in  nearly every case, AFT and its affiliates use state laws to force teachers to join.] This marks the third straight year of declines and the fifth year of decline within the past six.

The union also experienced a 1.5 percent decrease in the number of half-time rank-and-filers (or school employees making less than $18,000 a year); a seven percent decline in one-quarter rank-and-filers (nurses and state government employees whose unions are affiliated with AFT); and a 2.7 percent decline in the number of one-eighth rank-and-filers. Seems like the union’s once-successful effort to strike affiliation deals with nursing and other government employee unions, an effort that put it in competition with the much-larger Service Employees International Union, has fallen to seed.

Even worse for AFT: Its effort to increase the number of so-called associate members who pay directly into national’s coffers, continues to be in free-fall. AFT counts just 49,984 such members on its rolls in 2015-2016, a 14.5 percent decline over the previous year. This shouldn’t be shocking. After all, AFT cannot provide associate members any real assistance in terms of negotiating teachers’ contracts or addressing work rules. Besides, the associate members can’t even vote in union elections.

As a result of these declines, AFT’s counts just 1.5 million rank-and-filers and voluntary members, a 4.3 percent decrease over the previous year.

The good news for AFT is that the death of U.S. Supreme Court Associate Justice Antonin Scalia earlier this year assured that there was a tie vote on Friedrichs vs. California Teachers Association; his vote would have likely led to the overturn of Abood v. Detroit Board of Education, the five-decade-old ruling that gives AFT the ability to compel teachers pay dues regardless of their desire for membership. As your editor noted two years ago, the end of compulsory dues laws could cost AFT 25 percent of its membership and $36 million in revenue (based on 2012-2013 numbers), a hit for which the union isn’t likely ready to address.

The other good news for AFT is that it hasn’t affected revenue. The $192 million in dues and other agency fees (in the form of a so-called per-capita tax collected from locals and affiliates) generated by the union in 2015-2016 is 21 percent higher than in the previous fiscal year. AFT’s overall revenue of $328 million (including loan proceeds) is unchanged from 2014-2015.

This time around, the union didn’t have to borrow as heavily as it has in previous years to keep operations afloat; it borrowed just $55 million in 2015-2016, half the level of borrowing in the previous year. Overall, the union has borrowed $477 million over the past five years. The union did sell more of its investments in order to make due; the union sold $29 million of its portfolio in 2015-2016, more than double the investment sales in the previous year. Without the loans and investment sales, AFT’s revenues were just $244 million, a 15 percent increase over levels in 2014-2015.

But the bad news is that AFT may still lose revenue. One reason: The abolishing of collective bargaining and forced dues collections in Wisconsin, Tennessee, and Michigan. This has resulted in AFT losing teachers who realize that they don’t have to pay into unions that don’t represent their interests.

Another problem for the union: More of its affiliates and locals are either merging with those of the National Education Association or striking affiliation agreements with it. Membership declines forcing such mergers is one reason. But as seen in California, where the AFT’s United Teachers Los Angeles has struck a joint affiliation deal with NEA, the AFT’s larger locals are realizing that such triangulation gives them stronger influence over education policy at state and local levels.

But the gains for the big locals (who honestly don’t need AFT affiliation anyway) means both lost revenue for AFT as well as the ability to keep locals from straying away from the party line. [There’s also that pesky matter of being forced into a merger with NEA, a matter long-discussed among hard-core traditionalists.] Given the rancor from AFT rank-and-filers over strong-arm moves by national to remove wayward leaders in locals such as Detroit, expect more large locals to strike joint affiliation agreements or even break away from the national union in the near-future.

The consequences of efforts to abolish collective bargaining and joint affiliations by locals don’t just hurt AFT’s ability to use money to preserve influence. It also harms its ability to pay for the high costs of employing so many six-figure staffers.

While benefit costs have barely budged (remaining at $17 million), AFT’s general overhead costs increased by 4.8 percent within the past year. The good news for AFT is that it was able to offset some of those expenses with a 10.8 percent decrease in so-called union administration expenses. Meanwhile AFT’s post-retirement obligations increased by six percent (to $38 million) in the past year.

Luckily for the AFT, its staffers and leaders pay into definedcontribution retirement plans used by the rest of the private and nonprofit sectors. A funny thing given its opposition to efforts by school reformers and others to move away from the virtually-insolvent defined-benefit pensions championed by Weingarten and the union. Hypocrisy is like that sometimes.

About the Author: RiShawn Biddle is Editor and Publisher of Dropout Nation — the leading commentary Web site on education reform — a columnist for Rare and The American Spectator, award-winning editorialist, speechwriter, communications consultant and education policy advisor. More importantly, he is a tireless advocate for improving the quality of K-12 education for every child. The co-author of A Byte at the Apple: Rethinking Education Data for the Post-NCLB Era, Biddle combines journalism, research and advocacy to bring insight on the nation’s education crisis and rally families and others to reform American public education. This article originally appeared in Dropout Nation and is republished here with permission from the author.

Put Public Employees on Secure Choice and Social Security

“The state shall not have any liability for the payment of the retirement savings benefit earned by program participants pursuant to this title.” – California State Senator Kevin De Leon, August 7, 2016, Sacramento Bee

This quote from Senator De Leon, one of the main proponents of California’s new “Secure Choice” retirement program for private sector workers, says it all. Because De Leon’s comment reveals the breathtaking hypocrisy and stupefying innumeracy of California’s legislature.

Let’s start with hypocrisy.

De Leon is careful to protect private sector taxpayers from having to bail out their new state administered “secure choice” retirement plan, but no such safeguard has ever been seriously contemplated for the state administered pension plans for state and local government workers. These plans, using official numbers, are underfunded by about $250 billion. If you don’t assume California’s 92 state and local government worker pension systems can earn 7.5% per year, they are underfunded by much more – at least a half trillion.

Underfunded government worker pensions are the real reason why Prop. 55 is offered to voters to extend the “temporary” “millionaires tax” till 2030. That will raise about $6 billion per year. Underfunded local government worker pensions are also the reason for 224 local tax increases proposed on this November’s ballot, which if passed will collect another $3.0 billion per year. And it isn’t nearly enough.

The following table, excerpted from a recent California Policy Center study, shows how much California’s state and local government pensions systems have to collect per year based on various rates of return. At the time of the study, the most recent consolidated data available was for 2014. As can be seen – at a rate of return of 7.5% per year, state and local agencies have to put $38.1 billion into the pension funds. And at a rate of return of 6.5% per year, which CalPERS has already announced as their new “risk free” target rate, they have to turn over $52.3 billion per year. How much was actually paid in 2014? Only $30.1 billion.

20160516-cpc-ring-pension-liabilities

To summarize, in 2014 the pension funds collected $8.0 billion less than they needed if they think they can earn 7.5% per year. But following CalPERS lead, they’re lowering their projected rate of earnings to 6.5%, which means they were $22.2 billion short. There are 12.8 million households in California. That equates to at least $1,734 in additional taxes per household per year just to keep state and local pensions solvent.

And it gets worse. Because in order to ensure this new “Secure Choice” program doesn’t get into the same financial predicament that California’s government pension systems confront, the “risk free” rate of return they intend to project is not 7.5%, or 6.5%, or even 5.5%. No, they intend to initially invest the funds in Treasury Bills, which currently pay at most 2.5%. In an analysis of Secure Choice’s proposed costs and benefits performed last April, we express what using a truly “risk free” rate of return portends for California’s private sector workers vs. public sector workers. These estimates are based on all participants, public and private, contributing 10% to the fund via withholding.

Public sector:  Teachers/Bureaucrats, 30 years work  –  pension is 75% of final salary.

Public sector:  Public Safety, 30 years work – pension is 90% of final salary.

Private sector:  “Secure Choice,” 30 years work – pension is 27.6% of final salary.

There are two reasons for this gigantic disparity. First, public pension funds collect far more than 10% of salary. While the employee rarely pays more than 10% via withholding, the employer – that’s YOU, the taxpayer – typically kicks in another 20% to 40% or more, that is, a two-to-one up to a four-to-one employer matching contribution. Second, to justify the optimistic projections that make such generous pensions appear feasible, public pension funds have assumed a “risk free” rate of return of 7.5% per year.

Which brings us to innumeracy.

During the fiscal year ended 6/30/2015, CalPERS earned a whopping 2.4%. That stellar performance was followed in fiscal year ended 6/30/2016 by a return of 0.6%. It doesn’t take a Ph.D economist to know that California’s pension funds are going to need to greatly increase their annual collections. It only takes horse sense. But even horse sense eludes California’s innumerate lawmakers.

So here’s a modest proposal. Why not freeze the employer contributions into California’s state and local employee pension funds at 20% of salary (that’s a two-to-one match on a 10% contribution via withholding), and then, constrained by those fixed percentages, lower all benefits, for all participants, on a pro-rata basis to restore solvency. Better yet, why not enroll every state and local government employee in the Secure Choice program? Either way, “the state shall not have any liability for the payment of the retirement savings benefit earned by program participants.”

Along with this modest step towards dismantling the excessive privileges of these unionized Nomenklatura who masquerade as California’s public “servants,” why not enroll all state and local government employees in Social Security? Because California’s public servants make far more, on average, than private sector workers, and because Social Security benefits are calibrated to pay relatively less to high income participants, this step will financially stabilize the program.

Senator De Leon, are you listening? When it comes to state administered programs, all of California’s workers, public and private, should get the same deal.

 *   *   *

Ed Ring is the president of the California Policy Center.

Vernon, California: More Public Employees Than Residents

Vernon, California is so famous for its history of corruption that it was the municipal star of season two of HBO’s “True Detective” series. Now the tiny L.A. County city can claim another achievement: Vernon is the only California city with more public employees than residents.

Vernon’s 210 residents are served by 271 city employees, according to data on the California state controller’s website.

No. 2 Irwindale is a distant second – though just a 30-minute drive (could be hours – depends on traffic in L.A.’s tortuous downtown) from Vernon. In that East Los Angeles County city, there’s one government employee for every one of Irwindale’s 1,415 residents. San Francisco is the only major city on the Top 10, with one government employee for every 22.7 residents.

Here’s the Top 10:

 

top10cities Most Public Employees

 

Public employees in Vernon earn an average of $107,848 (plus benefits of $37,571). That’s much higher than nearby hegemon, Los Angeles, where public employees average $83,356 (plus benefits of $12,620).

Several top Vernon officials earn salaries in excess of $300,000:
Mark Whitworth (City Administrator): $402,335
Daniel Calleros (Police Chief): $361,644
Michael Wilson (Fire Chief): $361,359
Carlos Fandino Jr. (Director of Gas and Electric): $324,354
Andrew Guth (Fire Battalion Chief): $304,243

While many of Vernon’s city employees continue earn six-figure salaries, the average city resident earns far less. Per capita income in 2010 was $19,973. Median household income in 2010 was $38,500 – down dramatically from 2000, when it was over $60,000. According to the 2010 U.S. Census, 5% of the population lived below the federal poverty line. In 2000, it was 0%.

How does the city fund that dramatic gap in income? By taxing utilities for industry in the city. But because Vernon’s utility rates are among the highest in California, many businesses are moving out. That’s going to put pressure on city officials to trim public services – or to capitulate to the logic of history and become part of a neighboring city. How about Bell?

Conor McGarry is a fall Journalism Fellow at California Policy Center. Andrew Heritage contributed data analysis. Source: California state Controller’s Office.

Unfunded Pension Costs Driving Huntington Beach to Become More Like Ferguson, MO

It’s been 19 months since the U.S. Department of Justice released its scathing report on the Ferguson Police Department. Chief among the DOJ’s findings: Ferguson’s law enforcement practices were “shaped by the city’s focus on revenue rather than public safety needs.” Nearly every policing activity – including tickets, misdemeanor fines and court fees – was seen as an income opportunity.

That model led to tension between police and citizens, disrupting families and the community. When a white police officer shot and killed Michael Brown, a black 18-year-old, on August 9, 2014, a city balancing on a knife’s edge toppled quickly into chaos.

Now what might be called Ferguson’s worst practices have been brought to Huntington Beach.

Last month, as the Orange County Register reported, the City Council approved a plan to hire a city prosecutor to handle misdemeanors.

“A significant number of misdemeanors go unprosecuted,” City Attorney Michael Gates told the Register, adding that the prosecutor will “add a lot of teeth to our laws.”

“There will be a whole class of crimes that will now be prosecuted where the DA may not have gotten to them,” Gates said. “We will prosecute every one of them until conviction.”

This comes on the heels of a proposal pushed through the council last year to substantially raise city fees and fines. Confronting a rising price tag for compensation for police and firefighters, then councilman, now mayor, Jim Katapodis put forward the plan as a means to cover the cost, and additional police officers.

Parking in front of a handicapped ramp will now cost you $356, an incredible jump from its former cost of $55. A glass container on the beach? Skateboarding? They’ll cost you $175 each, up from $125. There are others.

It’s not entirely surprising that Katapodis’ main public policy objective has been to increase the number of law enforcement officers to pre-recession numbers. He has spent his professional career in and around law enforcement. Police and fire unions have been staunch supporters, first backing Katapodis in 2010, when he ran for City Council while still an LAPD sergeant. According to Katapodis, adding more sworn officers is essential to ensure a safe city and should come at whatever cost necessary.

But over the last few years violent crime has been falling. And suspending basic accounting – adding more officers at higher pay – has driven Huntington Beach’s finances into the red.

City Council member Erik Peterson, who voted against the fee increases, said he didn’t understand how the city can start paying salaries without knowing how much they’ll receive from the increased fees.

In fact, H.B. owes $300 million on pensions for its retired city workers. That number was high enough to warrant a 2013 Moody’s investigative review. That review didn’t lead to a downgrade, but it’s a red flag.

In H.B., the Police Department is being expanded literally at the expense of the public, setting police against residents in a struggle not for public safety but for revenue. Critics say the mayor and City Council majority don’t even know how much revenue that parasitic system will generate. It’s equally clear they haven’t considered its costs. It cost Ferguson almost everything.

Matt Smith is a graduate student at Princeton Seminary, and a Journalism Fellow at the California Policy Center in Tustin.

The Case for Limited Government is Now Stronger Than Ever

I have studied U.S. and California politics in particular since the mid-1990s, and believe the case for limited government is stronger now, than at any other time in history.

A series of emerging trends have coalesced to produce a political environment that makes it very unwise to try to enact sweeping policy change in today’s political environment (with the exception of an outright repeal of failed government programs).

A major treatise could be written on the subject, but here are some of the key considerations that led me to this conclusion.

First, there has been a noticeable decline in the quality of our elected leaders. To put it bluntly, many politicians are just in it for themselves and purport to pursue the public’s interest only as a means to their own ends.

The ramifications of this trend are huge and have served to give public interests more power over the political process and make it impossible in many cases to enact legislation that is within the public’s interest.

Second, the country’s political economy has gotten increasingly complex which makes it more difficult than ever to craft responsible public policy that is capable of addressing a policy problem not only today, but over a significant time period.

Third, the increasing polarization in the electorate, and reflected in U.S. governing bodies, make it extremely difficult, and more commonly impossible, to substantially revise a public policy once it has been approved.

Many examples could be provided to prove the validity of these assertions, but let’s look at a few case studies.

At the federal level, there is no better recent example than Obamacare. The policy was sold as being the best of all worlds expanding coverage, reducing costs, and improving the business climate in the process.

The only thing Obamacare has done well is expand coverage, but this has come at a great cost in the form of double digit annual cost increases on individuals, business, and government itself.

Without question, the program needs some major fixes to restore at least short-term viability and there are no signs that the political consensus needed to bring such change could be achieved. The result is a government program that is completely unsustainable, but has nonetheless provided health coverage to tens of millions more Americans which makes it impossible for anyone to advocate an outright repeal without a replacement.

Obamacare is looking like another example of a major government program that was enacted with very good intentions, but cannot be made sustainable over the long-run due to the huge complexity of the issue and the inability of the U.S. Congress to come anywhere close to the consensus needed to reform it. Two other examples: Social Security and Medicare, both unsustainable, yet almost politically untouchable.

At the state level, the pension crisis is an excellent example which holds ramifications for the long-term health of state government that equal or exceed Obamacare, Social Security, and Medicare combined.

The Public Employee Pension Crisis has the potential to entirely bankrupt the State of California

The Public Employee Pension Crisis has the potential to entirely bankrupt the State of California and all of its public agencies. Stanford University had measured the unfunded pension liabilities at $950 billion in 2013, but more recent estimates peg the debt at around $1.5 trillion for 2016.

 

In California, the level of retirement benefits provided to public employees is unaffordable to most public agencies in California, and is not currently being covered through contributions raised from public employers, and to a far less extent public employees.

The result is a massive run up is debt for nearly all state and local public agencies in California. In 2013, the total debt for unfunded pension liabilities was estimated at $950 billion, according to Stanford University. But more recent calculations for 2016, peg the debt at $1.5 trillion 50% higher due to major investment losses and soaring benefit costs.

Public pension debt alone in California is currently estimated to equal $77,000 per household in 2013, according to Stanford University’s pension tracker.

Despite the magnitude of the current pension crisis, there are only a handful of California Legislators who will even publicly admit that the pension crisis is a major issue in California. This is due to the fact that the state’s public employee unions control the California Democratic Party, and the Democrats run the California State Legislature.

The state’s pension crisis has the potential to bankrupt the State of California and nearly all of its public agencies, but there is not the faintest sign of a political consensus that will even admit that there is a major problem here, let alone consider a solution.

Furthermore, absent changes to the state’s pension system it makes no sense to further increase state and local tax revenues (i.e. tax and fee increases) since these increased revenues will simply go to fund overly generous and unsustainable public employee benefit costs which are increasing at 10-25% per year on average.

Private conversations with Republican legislators, who are the minority, indicate that they understand the issue and the need for reform but there is nothing to be gained by them going out on the issue short of a critical mass for reform.

Democrat legislators, on the other hand, support the status quo because the public employee unions bankroll their campaigns and the Democratic Party, and most if not all have already signed pledges to the state’s public employee unions to only increase public employee compensation, regardless of the consequences for the state.

Although the necessity for Pension Reform in CA seems to be obvious, many legislators seem unwilling & therefore unable to address the issue, largely due to the strong influence of Public Employee Unions when it comes to campaign financing of many within the state legislature.

Although the necessity for Pension Reform in CA seems to be obvious, many legislators seem unwilling & therefore unable to address the issue, largely due to the strong influence Public Employee Unions possess when it comes to campaign financing of many within the state legislature.

 

The state’s unsustainable public pension system is another example of a large government program gone bad, but nothing can be done to fix it given the circumstances of the state’s current political environment.

One last case study regarding the need for limited government is the state’s regulatory climate, which has an obvious parallel at the federal level but I will confine my discussion to the State of California.

The State of California’s regulatory climate is credited with being a key factor, along with high taxes, for encouraging more than 10,000 businesses to relocate out of state in recent years.

In a recent Inside Source interview with Stanford University Economics Professor Roger G. Noll, Noll states that California’s regulatory policies and practices are deeply flawed, but not necessarily enough to “drag Silicon Valley to Texas.”

Noll said most California legislators lack the capacity and inclination to craft responsible regulatory policy and that most regulation considered by the California Legislature is deeply flawed.

“We have pretty much a bankrupt system, it is rare to have a bill that is well crafted,” Noll stated.

Yet this does not stop the Democrat Legislature from developing bill after bill that seeks to regulate the California economy in almost every way imaginable. The sad truth is that the vast majority of this legislation is deeply flawed and will do more harm to the state’s business climate while providing little if any public benefit other than a political sound byte.

Moreover, most Democrats develop and pass regulatory legislation as a means to advance their careers and the policy agendas of their supporters, as opposed to advancing the public interest.

Thus, we have a Democrat majority whose primarily occupation is advancing their own agenda, as opposed to the public’s interest, without regard for the long-term consequences for the state’s business climate and economy.

If the Legislature cannot craft legislation in such as way that is beneficial and cost-effective it should just leave the issue alone, which brings us full circle to the need for limited government.

The increased complexity of the economy has dramatically increased the number of issues that can be regulated as well as the potential for harmful effects from poorly crafted legislation, which has become the rule in California, not the exception.

In other words, the best thing the California Legislature can do on most regulatory issues is do nothing. But political motivations necessitate the opposite due to a decline in the quality of our public leaders, primarily if not exclusively California Democrat politicians.

Then California Treasurer Bill Lockyer (D) saw this trend in 2010, noting that most of the legislation considered and passed in the California State Assembly is “junk” but lawmakers “move it along” to keep the special interests happy.

Lockyer also chastised the Democrat Legislature for its inability to address the state’s pension crisis because of who elected them (i.e. public employee unions) stating that it will “bankrupt the state” if nothing is done.

In short, government has reached a point in California, as well as at the federal level, where politicians cannot address the most important issues (i.e. failing government programs) due to political realities, but commonly do the wrong things in the areas where they can act.

The only solution is limited government. First, we must prevent more government programs from going on the books that will inevitably become unsustainable or unworkable, but impossible to fix. And second, we must limit politicians from advancing their own private agendas through legislation that actually does more harm than good.

About the Author: David Kersten is an expert in public policy research and analysis, particularly budget, tax, labor, and fiscal issues. He currently serves as the president of the Kersten Institute for Governance and Public Policy – a moderate non-partisan policy think tank and public policy consulting organization. The institute specializes in providing knowledge, evidence, and training to public agencies, elected officials, policy advocates, organization, and citizens who desire to enact public policy change.

Proposition 13 Is Safe — For Another Few Weeks

The Legislature is in adjournment, and with lawmakers at home campaigning for reelection, they are unable to engage in their favorite pastime of undermining Proposition 13 and its protections for California taxpayers.

However, this time out is only a brief respite from the Sacramento politicians’ inexorable pursuit of taxpayers’ wallets, the ferocity of which matches the dedication and intensity of a bear going after honey.

This December, after the election, lawmakers will reconvene to kick off the next two-year legislative session. During the just completed session, with great effort, taxpayer advocates were able to blunt a number of major efforts to modify or undermine Proposition 13, and, as surely as Angelina and Brad will be appearing on the covers of the supermarket tabloids, these attacks on taxpayers will begin anew when the Legislature is back in session.

Bills will be introduced to make it easier to raise taxes on property owners as well as to cut the Proposition 13 protections for commercial property, including small businesses. There may even be an effort to place a surcharge on all categories of property, an idea that was put forward by authors of an initiative that nearly collected enough signatures for placement on this year’s November ballot.

Accompanying the legislative fusillade will come the usual arguments that local government, or schools, or infrastructure, or the homeless, or the elderly, or (fill in the blank with the program or cause of your choice), or all of the preceding, need more money.

Government at all levels has become a militant special interest and its Prime Directive is to increase revenue – to take in more taxpayer dollars that is – and more is never enough.

California appears to have become a state constantly looking for new mechanisms of generating more revenue from its taxpayers in order to fund what is already the countries most compensated  public employees.

California appears to have become a state constantly looking for new mechanisms of generating more revenue from its taxpayers in order to fund what is already the countries most compensated public employees. If the Legislature ever successfully removes the protections associated with Proposition 13, Proposition 218, and the Right to Vote on Taxes Act, the fiscal burden upon CA taxpayers could be enormous.

 

The dirty little secret behind why government has changed from a service entity, dedicated to meeting the needs of its constituents, to a rapacious overlord, is that since being granted virtually unfettered collective bargaining rights in 1977, California’s state and local government workers have become the highest compensated public employees in all 50 states. With the high pay comes high union dues, collected by the employing entity and turned over to the government employee union leadership. These millions of dollars can then be used as a massive war chest to elect a pro-union majority in the Legislature and on the governing bodies of most local governments. And since these elected officials’ political futures are dependent on the goodwill of their union sponsors, there are almost no limits on what they will be willing to do to extract more money from taxpayers to be shoveled into ever increasing pay, benefits and pensions for government workers. (Government employee pension debt is several hundred billion dollars).

Literally, the only protections that average folks have from a total mugging by state and local governments are Proposition 13 and Proposition 218, the Right to Vote on Taxes Act. These popular propositions put limits on how much can be extracted from taxpayers by capping annual increases in property taxes, requiring a two-thirds vote of the Legislature to raise state taxes and guaranteeing the right of voters to have the final say on local tax increases.

It is easy to see why these taxpayer protections are despised by the grasping political class and their government employee union allies. This is also why taxpayers will have to work hard to preserve them.

Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization, dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.

Average Costa Mesa Firefighter Makes Nearly $250,000 Per Year. Why? Pensions.

Does that fact have your attention? Because media consultants insist we preface anything of substance with a hook like this. It even has the virtue of being true! And now, for those with the stomach for it, let’s descend into the weeds.

According to payroll and benefit data reported by the City of Costa Mesa to the California State Controller, during 2015 the average full-time firefighter made $240,886. During the same period, the average full-time police officer in Costa Mesa made $201,330. In both cases, that includes the cost, on average, for their regular pay, overtime, “other pay,” the city’s payment to CalPERS for the city’s share, the city’s payment to CalPERS of a portion of the employee’s share, and the city’s payments for the employee’s health and dental insurance benefits.

And if you think that’s a lot, just wait. Because the payments CalPERS is demanding from Costa Mesa – and presumably every other agency that participates in their pension system – are about to go way up.

We have obtained two innocuous documents recently delivered to the City of Costa Mesa from CalPERS. They are entitled “SAFETY FIRE PLAN OF THE CITY OF COSTA MESA (CalPERS ID: 5937664258), Annual Valuation Report as of June 30, 2015,” (click to download) and a similar document “SAFETY POLICE PLAN OF THE CITY OF COSTA MESA (CalPERS ID 5937664258), Annual Valuation Report as of June 30, 2015,” (click to download). Buried in the bureaucratic jargon are notices of significant increases to how much Costa Mesa is going to have to pay CalPERS each year. In particular, behold the following two tables that appear on page five of each letter:

Projected Employer Contributions to CalPERS  –  Costa Mesa Police

20160920-uw-calpers-fire

Projected Employer Contributions to CalPERS  –  Costa Mesa Firefighters

20160920-uw-calpers-fire

In the rarefied air of pension arcana, pension systems can get away with a lot. If you’re a glutton for punishment, read these notices from CalPERS in their entirety and see if, anywhere, they bother to explain the big picture. They don’t. The big picture is this:  For years CalPERS has underestimated how much they are going to pay in pensions and they have overestimated how much their investments will earn, and as a result they are continuously increasing how much cities have to pay them. This notice is just the latest in a predictable cascade of bad news from pension systems to cities and other agencies.

Coming down to earth just a bit, consider the two terms on the above charts, “Normal Cost %” and “UAL $.” It would be proper to wonder why they represent one with a percentage and one with actual dollars, but rather than indulge in futile speculation, here are some definitions. “Normal Cost” is how much the city pays (never mind that the city also pays a portion of the employee shares – we’ll get to that) into the pension system if it is fully funded. The reason pension systems are NOT fully funded is because, again, year after year, CalPERS underestimated how much they would pay out in pensions to retirees and overestimated how much they would earn. Read this disclaimer that appears on page five of the letters: “The table below shows projected employer contributions…assuming CalPERS earns 7.5 percent every fiscal year thereafter, and assuming that all other actuarial assumptions will be realized….”

And when the “Normal Cost” payments aren’t enough, and the system is underfunded, voila, along comes the “UAL $,” that bigger catch-up payment that is necessary to restore financial health to the fund. “UAL” refers to “unfunded actuarial liability,” the present value of all eventual payments to retirees, and “UAL $” refers to the payments necessary to reduce it to a healthy level. Notice that for firefighters this catch-up payment is set to increase from $4.2M in 2017 to $6.8M in 2022, and for police it is set to increase from $5.8M in 2017 to $10.1M in 2022. This is in a small city that in 2015 employed an estimated 125 full-time police officers and 75 full-time firefighters.

As always, it must be emphasized that the point of all this is not to disparage police or firefighters. No reasonable person fails to appreciate the work they do, or the fact that they stand between us and violence, mayhem, catastrophe and chaos. And it is particularly difficult for those of us who are part of the overwhelming majority of citizens who appreciate and respect members of public safety to have to disclose and publicize the facts of their unaffordable pensions.

The following charts, using data downloaded from the CA State Controller, put these costs into perspective:

Average and Median Employee Compensation by Department
Costa Mesa – Full time employees – 2015

20160920-uw-costamesa-ftcomp2015bydept

In the above chart, before sorting by department and calculating averages and medians, we eliminated employees who worked as temps or only worked for part of the year. This provides a more accurate estimate of how much full-time workers really make in Costa Mesa. Bear in mind that most part-time employees still receive pension benefits, as will be shown on a subsequent chart. As it is, during 2015 the average full-time police officer in Costa Mesa was paid total wages of $121,636, about 15% of that in overtime. But they then collected another $79,694 in city paid benefits, including $59,337 paid by the city towards their pension, AND another $11,562 that the city paid towards their pension that the State Controller vaguely describes as “Defined Benefit Paid by Employer.” Total 2015 police pay:  $201,330.

Also on the above chart, one can see that during 2015 the average full-time firefighter in Costa Mesa was paid total wages of $150,227, about 32% of that in overtime. They then collected another $90,659 in city paid benefits, including $72,202 paid by the city toward their pension, and as already noted, another $10,440 that the city paid toward the employee’s share of their pension. Total 2015 firefighter pay: $240,886.

To distill this further, the following chart shows, per full-time employee, just how much pensions cost Costa Mesa in 2015 as a percent of regular pay.

Average Employer Pension Payment as % of Regular Pay
Costa Mesa – Full-time employees – 2015
20160920-uw-costamesa-pension-as-percent-of-reg-pay

As the above chart demonstrates, employer payments for full-time employee pensions during 2015 already consumed a staggering amount of budget. For police, every dollar of regular pay was matched by 80.5 cents of payments by the city to CalPERS. For firefighters, every dollar of regular pay was matched by a staggering 94.4 cents of payments by the city to CalPERS.

The next chart shows the impact this has on the City of Costa Mesa budget. Depicting total payroll amounts by department, it compares the same variables, total employer pension payments as a percent of total regular pay. As can be seen, the percentages are nearly the same, despite this being for the entire workforce including temporary and part-time employees, some who may not have pension benefits (most do), and many who do not receive top tier pension formulas which the overwhelming majority of full-time public safety employees still receive. As can be seen, for every dollar of regular police pay, CalPERS gets 75 cents from the city, and for every dollar of firefighter pay, CalPERS gets 92 cents from the city.

Total Employer Pension Payment as % of Regular Pay
Costa Mesa – All active employees; full, part-time and temp – 2015
20160920-uw-costamesa-empl-pension-pmt-as-percent-of-reg-pay

At this point, the impact of CalPERS stated rate increases can be fully appreciated. And because this article, already at nearly 1,000 words, has violated every rule of 21st century social media engagement protocols – keep it short, shallow, simple, and sensational – perhaps the next paragraph should be entirely written in bold so it is less likely to be lost in the haze of verbosity. Perhaps a meme is in here somewhere. Perhaps an inflammatory graphic that shall animate the populace. Meanwhile, here goes:

Once CalPERS’s announced increases to the “unfunded payment” are fully implemented, instead of paying $10.9M per year for police pensions, Costa Mesa will pay $15.2M per year, i.e., for every dollar in regular police pay, they will pay $1.04 toward police pensions. Similarly, instead of paying CalPERS $6.4M per year for firefighter pensions, Costa Mesa will pay $9.1M per year, i.e., for every dollar in regular firefighter pay, they will pay $1.30 towards firefighter pensions.

Wow.

So just how much do Costa Mesa’s retired police and firefighters collect in pensions? Repeatedly characterized by government union officials as “modest,” shall we report and you decide? The following table, using data originally sourced from CalPERS and downloaded from Transparent California, are the pensions earned by Costa Mesa retirees in 2015. Excluded from this list in order to present a more representative profile are all pre-2000 retirees, since retirement pensions were greatly enhanced after the turn of the century, and it is those more recent pensions, not the earlier ones, that are causing the financial havoc. Also excluded because the benefit amounts are not representative and the retirement years are not disclosed, are all “beneficiary” pensions, which survivors receive.

Average Pensions by Years of Service
Costa Mesa retirees – 2015

20160920-uw-costamesa-pensions

While these averages are impressive – work 30 years and you get a six-figure pension – they grossly understate what Costa Mesa public safety retirees actually get. There are at least four reasons for this: (1) The data provided doesn’t screen for part-time workers. Many retirees may have put in decades of service with the city, but only worked, for example, 20-hour weeks. They would still accrue a pension, but it would not be nearly as much as it would be if they’d worked full time. (2) Nearly all full-time employees are also granted “other post-employment benefits,” primarily health insurance. It is reasonable to assume that for public safety retirees, the value of these other post employment benefits is at least $10,000 per year. (3) Because CalPERS did not disclose what department retirees worked in during their active careers, this data set is for all of Costa Mesa’s retirees. That means it includes miscellaneous employees who receive pensions that are, while very generous, are not nearly as good as the pensions that public safety retirees receive. (4) While recent reforms have begun to curb this practice, it has been common at least through 2014 for retirees to purchase “air time,” wherein for a ridiculously low sum they are permitted to claim more years of service than they actually worked. It is common for retirees, for example, to purchase five years of air time, so when their pension benefit is initially calculated, instead of multiplying, for example, 20 years of service times a 3.0% multiplier times their final salary, they are permitted to claim 25 years of service.

All of this, of course, is dense gobbledygook to the average millennial Facebook denizen, or, for that matter, to the average politician. To be fair, it’s hard even for the financial professionals hired by the public employee unions to acknowledge that maybe 7.5% (or even 6.5%) annual investment returns will not continue for funds as big as CalPERS, or that history is no indicator of future performance. And even if they know this, they’re under tremendous pressure to keep silent. So the normal contribution remains too low, and the catch-up payments mushroom.

Finally, to be eminently fair, we must acknowledge that since modest bungalows on lots so small you have to choose between a swing set or a trampoline for the kids are now going for about a million bucks each in most of Orange County, making a quarter million per year ain’t what it used to be. But there’s the rub. Because until the people who work for the government are subject to the same economic challenges as the citizens they serve, it is very unlikely we’ll see any pressure to lower the cost of living. Everything – land, energy, transportation, water, materials, etc. – costs far more than it should, thanks to deliberate political policies and financial mismanagement that creates artificial scarcity. But hey – artificial scarcity inflates asset bubbles, which helps keep those pension funds marginally solvent.

Cost-of-living reform, if such a thing can be characterized, must accompany pension reform. What virulent meme might encapsulate all of this complexity?

 *   *   *

Ed Ring is the president of the California Policy Center.

A Need for Public Sector Collective Bargaining Reform

California business leaders are unanimous in their desire for the California Legislature to proactively improve the state’s business climate, as opposed to only enacting policies that will further hinder economic growth.

But it is far less understood how to actually get to a place where the Legislature both acknowledges that there are major issues with the state’s business climate and works with business leaders to advance solutions.

I have thought long and hard about this issue and believe that public sector collective bargaining reform should be among the top priorities, if not the top priority for the business community to improve the state’s business climate. 

The short answer about why reform is needed is that the state’s current system of collective bargaining locks in high-cost government and prevents meaningful government reforms that will both increase efficiencies and make the state more hospitable to business.

On the surface, the major issues with the state’s business climate are policy-related, namely high-taxation and onerous government regulation.

But the root causes of the state’s poor business climate are really political in nature, and therefore need political solutions.

Most business leaders in California continue to be astonished at how out of touch the California Legislature is with business community and business climate issues.  And again, the root cause of this aloofness is a political problem—the California Legislature is controlled by Democrats who are closely tied to their pro-labor base, namely the state’s public employee unions.

So to move the needle on business climate issues in the California Legislature, political pressure must be applied to the state’s public employee unions.   Ideally, the business community needs to level the political playing field between business and labor and perhaps the best way to do this is through public sector collective bargaining reform.

Governor Arnold Schwarzenegger saw the nexus between union issues and the California economy in the mid-2000s, but his political approach largely failed because he tried addressing the policies without first addressing the political power of the state’s public employee unions.

Governor Arnold Schwarzenegger was not able to instill the new Pro-Business Policies he desired on account of not first addressing the power that the state’s public employee unions possessed.

 

Pro-business policy change is not possible in the current political environment because the state’s public employee unions are too powerful and can almost always unilaterally defeat all attempts to make the state more business friendly.

Thus, the road to improving the state’s business climate must start with political reform, and I believe public sector collective bargaining reform is the best way to get there.

After all, the establishment of collective bargaining rights for public employees in California is what created the state’s public employee unions to begin with, and gave rise to their ascent to become the most powerful political interest in California.

In 1968, the California Legislature passed the Meyer-Milias-Brown Act, which established collective bargaining for California’s municipal and county employees.  Collective bargaining rights were extended to school districts in 1976, state government employees in 1978, and higher education employees in 1979.

I have served as an expert witness and participant in dozens of major sets of public sector labor negotiations around California over the last six years, including the 2013 labor standoff for the Bay Area Rapid Transit District (BART) and the lead expert witness in labor arbitration for the City of San Francisco over the last two rounds of negotiations.

Based on my experience, I believe that the state’s collective bargaining system is “broken” and serves to lock in unaccountable, unsustainable and high-cost government.

Collective bargaining also serves to empower the state’s public employee unions as the preeminent political force in California by allowing them to not only control government operations at the bargaining table, but also control government through the political process at both the state and local, primarily by giving large sums of political contributions.

The state’s collective bargaining rights were put into place to provide a “reasonable method of resolving disputes regarding wages, hours, and other terms of conditions of employment between public employers and public employee organizations,” according to the Meyers-Milias-Brown Act.

But the actual effect has been to give public sector unions almost unilateral control over both state and local government operations, as well as the state’s political system.

Since every major change to government organization and operation must either be made in the California Legislature, at the ballot box or in collective bargaining—public sector unions are effectively able to even prevent the most common sense reforms such as teacher tenure, merit pay, right to work, and civil service reform.

The state’s collective bargaining process is also deeply flawed and essentially “corrupt” due to unchecked conflicts of interest in the process.  It is standard practice for local elected officials to recuse themselves from votes on legislation that impacts businesses or groups that are contributors to their campaigns, but this standard does not apply to public sector unions.

Public sector unions are legally allowed to make large campaign contributions to the elected officials who are in charge of the collective bargaining process and who ultimately decide what pay and benefit increases public employees are awarded.  The result is a continuous increase in the salaries, benefits and perks of public employees that far exceed their private sector counterparts and any reasonable standards of just public compensation.

Real public sector collective bargaining reform would serve to both control the cost of government, which is essential to limiting the state’s tax burden, as well as limit the ever increasing war chest of campaign contributions afforded to the public sector unions by curbing union dues, which are based on the continuous upward spiral in public employee wage and benefit costs.

The current process is also hugely expensive and inefficient and represents a huge transfer of wealth from the state’s public agencies to law firms and labor attorneys who are key participants in the collective bargaining process.

Thus, collective bargaining reform holds the key to improving the state’s business climate both by controlling the cost of government, and helping level the political playing field between the business community and public sector unions in the state’s political process, which will serve to produce a more business-friendly political environment.

About the Author: David Kersten is an expert in public policy research and analysis, particularly budget, tax, labor, and fiscal issues. He currently serves as the president of the Kersten Institute for Governance and Public Policy – a moderate non-partisan policy think tank and public policy consulting organization. The institute specializes in providing knowledge, evidence, and training to public agencies, elected officials, policy advocates, organization, and citizens who desire to enact public policy change.

A Labor Day Update on the California Economy

Labor Day 2016 continues to show improving conditions within California’s economy.  The Legislature has just concluded a session that is being described as one of the most progressive ever for environmental and labor union policies. And Governor Brown is looking at over 700 new laws on his desk. His signature or veto will directly impact the fate of our job growth for years to come.

California Economy Continues Transformation

The revised June job numbers show that since the recovery began in February 2010, our state has regained  2.3 million nonfarm jobs.  Our seasonally adjusted unemployment rate of 5.4% while higher marginally from prior months, put us at levels not seen since before the recession in the summer of 2007.  We see the benefits of this every day. New cars are on the road. New housing and home renovations are underway. The malls and restaurants are busy. It should and does feel good.

But the Governor and policymakers are entrusted with the responsibility to look deeper at the numbers to  prepare for the future. This shows that the pace of the recovery in California remains low by historical patterns, reflecting conditions in the country as a whole. Real GDP has grown at an average annual rate of 2.7% since the recovery began, below the 4% growth seen during 1987-2000 and higher levels experienced in years before.  Nonfarm jobs which had been expanding at an annual rate of 3.0% in 2014 and 2015, have slowed to an annualized rate of 2.2% in the first half of 2016.

To put our low current growth rates into historic perspective, California in February 1975 was also in an economic recovery period, again under Governor Jerry Brown.  In the following 76 months, the state created 2.4 million jobs, representing a 32% increase.  The 2.3 million jobs—virtually the same number—created in the 76 months since February 2010 are at only 16%.

In their latest projections, both Department of Finance and Legislative Analyst expect jobs growth to slow further in the coming years, with Finance showing 1.0% by 2018 and 2019 and LAO around 1.5%.  These differences are small but important.  For the state budget, they translate into a projected deficit by 2019-20 in the case of the Finance numbers, or an $11 billion surplus in the case of LAO’s.

For many Californians, these are more than just mere numbers.  They mean the difference between having the opportunity at a job that will help their household afford the growing cost of living in our state, or continued reliance on state programs for their basic needs.  The types of jobs being created are equally important—whether they offer the paths to upward mobility and whether future generations will continue to experience a California better than those in the past.

Middle Class Wage Jobs Impacted the Most

The key to California’s past promise as a land of upward economic opportunity lay in the diversity of our workforce and our jobs.  No matter their background, the wide range of jobs at differing wage levels gave workers especially Latinos and African-Americans the opportunities to move up in life, gain skills, and compete for jobs producing income sufficient to own a home, educate their children, and save for retirement.  The state budget focused on these aspirations through investments in roads and other infrastructure and in affordable education and skills training regardless of an individual’s educational level. State policies served to promote housing supply rather than escalating housing costs.  Affordable energy was seen as a competitive edge for middle class jobs, not as a public policy priority to be phased out as quickly as possible.

The upward path has narrowed for many as the recovery has restructured the economy to jobs creation primarily in the higher and lower wage industries.  Middle class jobs in manufacturing remain 183,000 below the pre-recession high in 2007; construction jobs are off 140,000.  In contrast, lower-paying Individual & Family Services jobs—primarily state supported, minimum wage In-Home Supportive Services jobs—are up nearly 200,000.

Population Still Growing Faster than Jobs . . . Contributing to Poverty

The good news on our  2.3 million jobs gained since 2010 still mostly serve to rebuild those lost during the recession. Comparing to the pre-recession highs, real growth in the economy shows a net gain of 950,000 nonfarm jobs and 1.1 million additional persons employed.  Population in this period grew much faster—total population by 2.7 million and as the state aged, working age population by 3.4 million.

One of the most immediate consequences of this slower jobs growth has been a steep drop in the labor force participation rate.  While this rate now appears to be stabilizing at around 62% of the working age population, it is doing so near the historic lows previously seen in 1976.  The California rate also remains below the national average, in spite of the state having a relatively younger population and higher pressures to continue working into retirement age due to the state’s significantly higher costs of living.

On a numbers level, California is still short about 1 million jobs and 1 million persons employed to achieve the same population based levels that existed prior to the recession.

On an individual level, this slower jobs growth translates into relatively fewer persons per household being employed than prior to the recession, a factor that directly translates into lower household income, consequent higher poverty levels, and a lower household ability to afford the state’s high housing costs and other high costs of living.

Our Economic Growth Engine is the Bay Area

Economic growth within California remains highly focused within the Bay Area.  With just under 20% of the state’s population, the Bay Area alone contains:

  • 45% of net nonfarm job gains since the pre-recession high
  • 52% of net job gains since the pre-recession high in Professional & Business Services, the primary growth industry for higher wage jobs
  • 45% of net employment gains since the pre-recession high
  • 27% of total personal income, and 32% of the net increase in total personal income 2007-2014
  • 40% of state personal income tax paid, and 52% of the net increase in tax paid 2007-2014 

    The staggering job growth occurring in the Bay Area appears to statistically overshadow the deteriorating business climate that is seen in the rest of the state’s economy as a result of unrelenting expansion of regulation, fees, and taxes since 2000.  

     

A California economy without the Bay Area would look considerably different:

  • Instead of 2.3 million, created only 1.6 million nonfarm jobs since February 2010, or less than the 1.8 million jobs created in this period by Texas — a state with a population 13% smaller than California outside the Bay Area.
  • Instead of 5.9%, a June unemployment rate of 6.3% (seasonally unadjusted) — tied for the 6th highest rate in the nation.
  • Instead of 16.4%, a 2014 poverty rate of 17.9% vs. the US average of 15.5% — California outside the Bay Area is home to 91% of the net increase in persons living in poverty 2007-2014.
  • Instead of $49,985, a 2014 per capita income of $45,292 — below the US average of $46,030.

Even within the portions of California outside the Bay Area, significant differences exist between the interior and coastal regions.  Among the nation’s 387 top metropolitan areas (MSAs), 8 California MSAs ranked in the areas with 10 highest unemployment rates in June.  Ten California MSAs were in the highest 20.

Challenge for Labor Day 2017:  Broaden Economic Growth for All Californians

The Governor, the Legislature and all Californians are rightfully proud of our return to being the 6th largest economy in the world as measured by GDP.  This is a testament to the economic resilience of Californians and the enormous ingenuity, determination and drive coming from California employers large, medium and small.

Distribution of this growth remains heavily uneven as the state continues to splinter into a two-tier economy and risks evolving into a two-tier society.  The economic divide growing between the Bay Area and the rest of the state should be no surprise.  The Bay Area industries leading this growth are the least regulated in the state, and challenges to their continued growth comes less from market forces and technological barriers, and more from governments and competitors that want to rein them in with the same 19th Century regulatory models applied to the rest of the economy.

The remainder of the state’s economy, instead, has been subjected to an unrelenting expansion of regulation, fees, and taxes since 2000.  The low level of jobs growth is in large part a reflection of the increasing costs of doing business in this state and the increasing costs and restrictions associated with providing jobs.  As businesses have had to shift spending and investments to regulatory compliance rather than efficiency and capacity, the jobs creation rate along with the business creation rate itself have declined.

California has never depended on a single industry to meet the economic aspirations of its people.  We cannot.  We are too diverse.  We have some of the highest rates of educational attainment in the country, but also the nation’s highest percentage—17.9%–of adults with less than a high school education.  The hollowing out of middle class wage jobs—in particular middle class wage jobs that have been the hardest hit by the state’s growing regulations—limits the upward mobility options for much of our population.  The high cost of housing and the increased barriers to commuting caused by the condition of our roads has also reduced the mobility of labor and restricted the ability of many to access jobs even where they are being created.

The 2016 legislative session just completed with major new laws focused on the transformation of our energy sector and our whole economy through new climate change policies. The foundation of these policies is based on the argument that  “green jobs” creation will replace and surpass the hundreds and hundreds of thousands of good paying middle class jobs that will be phased out in our energy and manufacturing sectors. Currently, after 4 decades of compounding regulations, green jobs in California still comprise at most 2% of our jobs under the most generous of estimates.  It is now up to the oversight of the Legislature to determine how much and how fast we are willing to impact the other 98% on which our workers and our households depend.

These are the challenges that are now in front of our state policymakers. Will we see policies that accept the current growth trends and simply attempt to make the current failures more tolerable? Will we see policies that instead of reforming housing policies to reduce the costs for all, will at best alleviate costs for a very few? Will we see policies that assume unemployment and underemployment are now a permanent feature of our state rather than reforms to create growth engines in other parts of the state?

We hope 2017 will bring a broader discussion on the economy we can offer to future generations.

About the Author: Rob Lapsley is president of the California Business Roundtable, a nonpartisan organization comprised of the senior executive leadership of the state’s major companies employing over half a million Californians. Before he was named president in 2011, he was vice president and state political director for CalChamber. He served in the US State Department as special assistant to the US ambassador to Spain during the Iraq War. He was chief of staff to California secretary of state Bill Jones and served as undersecretary of state from 1995 to 2001. He has served on the PPIC Statewide Survey Advisory Committee since 2011.

Court Pension Decision Weakens ‘California Rule’

The one thing some pension reformers say is needed to cut the cost of unaffordable public pensions: give current workers a less costly retirement benefit for work done in the future, while protecting pension amounts already earned.

It’s allowed in the remaining private-sector pensions. But California is one of about a dozen states that have what has become known as the “California rule,” which is based on a series of state court decisions, a key one in 1955.

The pension offered at hire becomes a “vested right,” protected by contract law, that cannot be cut, unless offset by a new benefit of comparable value. The pension can be increased, however, even retroactively for past work as happened for state workers under landmark legislation, SB 400 in 1999. 

Last week, an appeals court issued a ruling in a Marin County case that is a “game changer” if upheld by the state Supreme Court, said a news release from former San Jose Mayor Chuck Reed, who wants to put a pension reform initiative on the 2018 ballot.

Mayor Chuck Reed considered it a “game-changer” when a Marin County Court rejected the rigid interpretation of the California Rule of vested rights, ruling that although an employee has a vested right to a pension, their only right is to a ‘reasonable pension,’ one without benefit spiking

 

Justice James Richman of the First District Court of Appeal wrote that “while a public employee does have a ‘vested right’ to a pension, that right is only to a ‘reasonable’ pension — not an immutable entitlement to the most optimal formula of calculating the pension.

“And the Legislature may, prior to the employee’s retirement, alter the formula, thereby reducing the anticipated pension. So long as the Legislature’s modifications do not deprive the employee of a ‘reasonable’ pension, there is no constitutional violation.”

The ruling came in a suit by Marin County employee unions contending their vested rights were violated by a pension reform enacted in 2012 that prevents pension boosts from unused vacation and leave, bonuses, terminal pay and other things.

These “anti-spiking” provisions apply to current workers. The major part of the reform legislation, including lower pension formulas and a cap, only apply to new employees hired after Jan. 1, 2013, who have not yet attained vested rights.

The California Public Employees Retirement System expects the reform pushed through the Legislature by Gov. Brown to save $29 billion to $38 billion over 30 years, not a major impact on a current CalPERS shortfall or “unfunded liability” of $139 billion.

Similarly, legislation two years ago will increase the rate paid to school districts to the California State Teachers Retirement System from 8.25 percent of pay to 19.1 percent, while the rate paid by teachers increases from 8 percent of pay to 10.25 percent.

The limited teacher rate increase followed the California rule. The new benefit offsetting the 2.5 percent rate hike vests a routine annual 2 percent cost-of-living adjustment, which previously could have been suspended, though that rarely if ever happened.

While mayor of San Jose four years ago, Reed got approval from 69 percent of voters for a broad reform to cut retirement costs that were taking 20 percent of the city general fund. A superior court approved a number of the measure’s provisions.

But a plan to cut the cost of pensions current workers earn in the future by giving them an option (contribute up to an additional 16 percent of pay to continue the current pension or switch to a lower pension) was rejected by the court, citing the California rule.

In a settlement of union lawsuits, Reed’s successor locked in some retirement savings but dropped an appeal of the option. Reed, a lawyer, thinks the California rule is ill-founded and likely to be overturned if revisited by the state supreme court.

He has pointed to the work of a legal scholar, Amy Monahan, who argued that by imposing a restrictive rule without finding clear evidence of legislative intent to create a contract, California courts broke with traditional contract analysis and infringed on legislative power.

“California courts have held that even though the state can terminate a worker, lower her salary, or reduce her other benefits, the state cannot decrease the worker’s rate of pension accrual as long as she is employed,” Monahan wrote.

In the ruling last week, Justice Richman describes the setting for the reform legislation: soaring pension debt after the financial crisis in 2008-09 and a Little Hoover Commission report in 2011 urging cuts in pensions current workers earn in the future.

He cites several court rulings in the past that conclude cuts in pensions earned by current workers are allowed to give the pension system the flexibility needed to adjust to changing conditions and preserve “reasonable” pensions in the future.

Some of the court rulings cited allowed changes in retirement ages, reductions of maximum possible pensions, repeals of cost-of-living adjustments, changes in required service years, pensions reduced from two-thirds to one-half of salary, and a reasonable increase in pension contributions.

“Thus,” Richman wrote, “short of actual abolition, a radical reduction of benefits, or a fiscally unjustifiable increase in employee contributions, the guiding principle is still the one identified by Miller in 1977: ‘the governing body may make reasonable modifications and changes before the pension becomes payable and that until that time the employee does not have a right to any fixed or definite benefits but only to a substantial or reasonable pension.’”

Richman’s ruling makes several references to a unanimous state Supreme Court decision in 1977 in Miller v. State of California. He said the foundation of the unions’ constitutional appeal is a “onetime variation” in one word in another ruling.

“To be sustained as reasonable, alterations of employees’ pension rights must bear some material relation to the theory of a pension system and its successful operation, and changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages,” the state Supreme Court said in Allen v. City of Long Beach (1955).

Richman said a 1983 state Supreme Court decision (Allen v. Board of Administration) changed “should” have a comparable new advantage to “must,” citing two other State Supreme Court decisions that said “should” and an appeals court decision that said “must.”

In a decision a month later, he said, the Supreme Court used “should” while referring to a comparable new benefit and has continued to use “should” in all rulings since then.

“It thus appears unlikely that the Supreme Court’s use of ‘must’ in the 1983 Allen decision was intended to herald a fundamental doctrinal shift,” Richman said, citing two rulings that “should” is advisory or a recommendation not compulsory.

The 39-page decision written by Richman and concurred in by Justices J. Anthony Kline and Maria Miller makes other points in its rejection of a rigid view of the California rule and pension vested rights.

“The big question for pension reformers is whether or not the California Supreme Court will agree,” Reed said in a news release from the Retirement Security Initiative. “If it does, the legal door will be open for Californians to begin to take reasonable actions to save pension systems and local governments from fiscal disaster.”

There was no immediate word from the Marin Association of Public Employees and other county employee unions last week about whether the appeals court decision will be appealed to the Supreme Court.

About the Author: Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. He is currently a Publisher for CalPensions.com.

Average "Full Career" CalPERS Retirement Package Worth $70,000 Per Year

“‘What makes the ‘$100,000 Club’ some magic number denoting abuse other than the claims of anti-pension zealots?’ said Dave Low, chairman of Californians for Retirement Security, a coalition of 1.6 million public workers and retirees.”

This quote from a government union spokesperson, and others, were dutifully collected as part of Orange County Register reporter Teri Sforza’s eminently balanced reporting on the latest pension data, in her August 8th article entitled “The ‘100K Club’ – public retirees with pensions over $100,000 – are a growing group.”

In the article, Sforza’s team evaluated data released by Transparent California on 2015 CalPERS pensions, and reported the number of pensioners receiving $100,000 or more per year was 3.5% of total retirees, up from 2.9% in 2013. That truly does seem like a low percentage, but it ignores two key factors, (1) the total retiree pool includes people who only worked a few years and barely vested a pension, and (2) the total retiree pool includes people who worked many decades, sometimes 30 or 40 years or more, but they only worked part-time during their lengthy careers.

So if you restrict your pool of participants to those who worked a full career, and retired within the last 10 years, what percentage of those retirees would belong to the $100,000 club? As it turns out, there are 75,279 CalPERS retirees who worked more than 25 years and less than 35 years, retiring after 2006. And as it turns out, 9,763 of them, or 13%, are receiving pensions in excess of $100,000 per year.

Moreover, CalPERS doesn’t report the value of retirement health benefits and other retirement benefits, which almost certainly exceed $10,000 per year. If you make this reasonable assumption, you now have 14,901 CalPERS retirees, or 19% of our 75,279 pool of full career retirees, receiving a retirement package worth over $100,000 per year. Worth noting – we didn’t have the data necessary to screen the part-timers out of this pool. If we did, the numbers would be higher.

So if you use the appropriate denominator, the “$100 Club” isn’t 3.5% of the pie, it’s 19%, but so what? It’s still not a very big slice. Here’s where the flip-side of “full career pension” comes into play. Most people don’t work 25-35 years in public service. But most of them do vest their pension benefits, which can be vested in as little as five years. What happens when someone quits after five years, and only goes on to collect, say, a $20,000 per year pension? Someone else is hired, they work five years, and they also qualify to eventually collect a $20,000 per year pension. Then someone else, and then someone else – until you have three or four (or more) people who are all going to receive a $20,000 per year pension – for a job that one person could have performed if they’d stayed with the agency for a full career.

This is a critical point to understand. The significance of “full career” pensions is this: The taxpayer will fund pensions at that level of generosity, even if the benefit is split among multiple partial career participants – people who presumably worked elsewhere (where they also saved for retirement) during the majority of their careers. Should you expect a $100,000 per year pension if you only worked for five years? Of course not. But that’s what taxpayers are funding – whether it goes to one person, or to five people who worked a few years each to collectively fill one person’s full-career position in government.

This is why, when you are considering whether or not pensions are fair and affordable, the full career average pension is the only relevant measure. So what is the full career average?

For CalPERS in 2015, participants with between 25 and 34 years of work who retired in the last ten years, on average, received a pension of $60,277.  Add to that the value of their retirement health benefits and other retirement benefits and the average was probably closer to $70,000 per year.

Just for comparison, for Orange County (OCERS) retirees in 2015, participants with between 25 and 34 years of work who retired in the last ten years, on average, received a pension of $73,628.  Add to that the value of their retirement health benefits and other retirement benefits – information which OCERS also refuses to provide – and the average was probably over $80,000 per year. As for the OCERS “$100,000 Club”? Within the pool of full career retirees as described, and accounting for retirement health benefits, 31% of them were members. Nearly one in three.

Public sector spokespersons frequently point out that public employees don’t get Social Security. Actually, about half of them do get Social Security, but never mind that detail. Because the maximum Social Security benefit, which one must wait until they are 68 years old to receive, is a whopping $31,668 per year.

Calling critics of this double standard “anti-pension zealots” is lazy rhetoric. The problem with defined benefits is not that they exist. The problem is that we have set up a system where public employees operate under a set of retirement benefit formulas and incentives that are roughly four times better than what private sector workers can expect. Yet these private sector workers pay the taxes to fund these pensions and bail them out when the investment returns falter.

 *   *   *

Ed Ring is the president of the California Policy Center.

Ballot Box Budgeting Wreaks Havoc on California Budget, Beware of Props. 51, 55, and 56

As a professor of public budgeting and someone who has worked their entire career analyzing public budgets, I can say that ballot box budgeting wreaks havoc on the California budget process and taxpayer interests.

Yet it is something that voters are so accustomed to doing that most average voters don’t even know what “ballot box budgeting” is.

In short, ballot box budgeting is the practice of making major budget decisions at the ballot box.  And unlike the normal budget process, these decisions are commonly written into the California Constitution, and not subject to change in any way short of another ballot measure.  

The result is that funds are locked in to being spent for a particular purpose regardless of other budget needs and priorities, and commonly lack the same accountability and oversight that the rest of the California budget is subject to through the legislative process.

There are three measures on the November 2016 ballot that represent ballot box budgeting at its worst, and should be rejected—Proposition 51 School Bonds, Proposition 55 School Funding, and Proposition 56 Tobacco Tax Increase.  There is one other measure, Proposition 64 Marijuana Legalization and Tax, which represents ballot box budgeting, but is less egregious and is worthy of consideration on its policy merits given that marijuana is not currently legal and therefore not taxed at all but should be considered on policy grounds.

The reality is that nearly all initiatives have some type of budget impact, but initiatives that allocate a significant dollar amount of public funds should generally be looked at with great skepticism, particularly those that raise taxes or reallocate existing public funds in some way.

Another common element in ballot box budgeting is a “pay to play” element, characterized by a situation where special interests sponsor a ballot measure that allocates public funds that benefit their private financial interest.   All four initiatives mentioned above have a significant “pay to play” element, that should be considered as well, and viewed with great skepticism.

In generally all such cases, initiatives are sold as being crafted in the “common good” or for the “public interest” but the real motivation is to benefit the private interests that raised the money to quality the measure and run a support campaign.

For example, Prop. 51 authorizes $9 billion in general obligation bonds for construction of K-12 public schools.  The construction of school facilities is done through a process at the local level, with state bond funds providing a state match, but this local process has come under great fire in the media recently, largely due to California Treasurer John Chiang’s efforts.

Treasurer Chiang has stopped short of criticizing Prop. 51 specifically but he has came down hard on the local municipal bond process as being a “pay to play” process that “rips-off taxpayers,” according to Treasurer Chiang’s press release.

Chiang says this “pay to play” process rewards special interests including developers, bondholders, and construction companies who offer to fund local bond campaigns in exchange for lucrative contracts, which are “no bid” contracts in many cases.

 

Treasurer Chiang believes the municipal bond process is designed to “rip off tax-payers”

 

“Not only are these “pay-to-play” arrangements unlawful, they rip off taxpayers and endanger the integrity of school bonds,” Treasurer John Chiang declared, noting that between 2012-15 K-12 school districts issued $43.8 billion in long-term debt.

Without cleaning up this “corrupt” process, Prop. 51 essentially puts $9 billion in public funds at risk for misallocation by school districts and public agencies.  And will subject taxpayers to huge future costs, for spending with questionable public benefits given the process through which these bonds are issued under the current system.

Of course, the same special interests who benefit from this “pay to play” process are the primary proponents of Prop. 51, and are putting up millions of dollars to lock in these lucrative contracts for public bond spending.  A number of local districts are also proposing local bonds on the November 2016 ballot to provide a local match for these highly questionable public projects.

Prop. 55 is the example of another measure which might appear legitimate on its face because it raises money for “schools” and “health programs.”   But should also be rejected on ground of being a terrible case of “ballot box budgeting” and “pay to play” corruption of the state’s initiative process.

Prop. 55 extends the Prop. 30 (2012) income tax increases taxes on individuals and small businesses, which expire at the end of 2017, for another 12 years until 2030.  The effort is being sold as being a legitimate effort to fund schools and health care because Prop. 30 is something that the Governor, Legislature and business community agreed on back in 2012.

But Prop. 55 is not the same as the deal cut back in 2012, and should be rejected.  First, Prop. 55 is much more expensive, nearly twice as expensive as Prop. 30—and represents an $8-11 billion tax increase, as opposed to a $6.5 billion annual hit from Prop. 30.  Secondly, the measure is not “temporary,” and results in a broken promise Governor and Legislature made to voters in 2012—that’s why Governor Brown says he will not endorse Prop. 55.

Lastly, Prop. 55 adds a significant “pay to play” element as well by giving private hospital interests a piece of the action.  Specifically, Prop. 55 locks in another $2 billion in funding for “health programs,” which did not even exist in Prop. 30, and is a pure handout to the hospital interests which have already contributed more than $21 million to the Yes on Prop. 55 Campaign.

Public employee union interests get the bulk of the funds, estimated at $75 billion over 12 years, in salary and benefit spending primarily but the public generally does not view them as being the same type of “special interest” as purely private interests.  Yet, these public employee union interests have put up another $18 million thus far to support Prop. 55, and stand to reap huge rewards for their members and dues increases if Prop. 55 passes.

From a ballot box budgeting perspective, both Prop. 55 and the Prop. 56 $2 per pack tobacco tax increase are terrible budget policy because they lock in significant expenditure of public funds that will be allocated outside of the state’s annual budget process without regard to actual need or other pressing spending priorities.

Prop. 55 locks in $8-11 billion in spending with the bulk going for education, but another $2 billion going to “health care” programs—again not allocated according to need or the accountability standards under the state’s annual budget process which subjects all public spending to annual review.  Prop. 56 locks in another $1-1.4 billion in health care spending that will be allocated outside the state’s budget process.

Voters are encouraged to reject Propositions 51, 55, and 56 on grounds that they are terrible examples of “ballot box budgeting,” in which special interests put up millions of dollars, even tens of millions of dollars, to try to pass “public interest” measures with the expectation of a big payday at taxpayer expense for the years to come.

About the Author: David Kersten is an expert in public policy research and analysis, particularly budget, tax, labor, and fiscal issues. He currently serves as the president of the Kersten Institute for Governance and Public Policy – a moderate non-partisan policy think tank and public policy consulting organization. The institute specializes in providing knowledge, evidence, and training to public agencies, elected officials, policy advocates, organization, and citizens who desire to enact public policy change.

The Pension Monster and How Much It’s Costing You to Keep It Fed

Why haven’t Mayor Eric Garcetti and City Council President Herb Wesson followed up on the recommendation by the LA 2020 Commission to “establish a Commission on Retirement Security to review the City’s retirement obligations in order to promote an accurate understanding of the facts” and make “concrete recommendations on how to achieve equilibrium on retirement costs by 2020?”

Why?  Because these two ambitious politicians fear alienating the campaign funding leaders of the City’s unions who do not want a public discussion of the facts surrounding the City’s ever increasing annual contributions to the City’s two massively underfunded pension plans that are forcing the City to scale back on basic services.

Over the last ten years, the City’s contribution to its two pension plans (Los Angeles City Employees Retirement System and the Los Angeles Fire and Police Pension System) has tripled to $1.1 billion, up from $350 million in 2005.  As a result, pension contributions now chew up 20% of the City’s $5.6 billion budget, up from less than 10% in 2005.

 

Are Mayor Eric Garcetti and City Council President Herb Wesson afraid of discussing with union leaders the prospect of LA’s growing unfunded liability?

 

This $750 million increase in pension contributions has forced the City to cut back on basic services such as public safety and the repair and maintenance of our streets, sidewalks, and parks.  The City has even resorted to placing an ill-conceived $1.2 billion bond measure on the November ballot to fund supportive housing for the homeless.

Unfortunately, it is only going to get worse as the City, its pension plans, and their fiscally irresponsible, Garcetti appointed Commissioners are banking on an overly optimistic rate of return of 7½% on the combined investment portfolio of $33 billion.

But the stock and bond markets are not cooperating as demonstrated by this year’s less than 1% return on CalPERS (California Public Employees’ Retirement System) $300 billion investment portfolio.

If the City’s pension funds earned this meager 1% as compared to the targeted 7½%, it would result in an investment shortfall of an estimated $2.7 billion, an amount equal to about half of the City’s annual budget.  This “loss” will increase the unfunded pension liability as of June 30, 2016 to almost $11 billion, representing a funded ratio of an unhealthy 74%.

However, if the investment rate assumption was a more reasonable 6½% as recommended by knowledgeable investors such as Berkshire Hathaway’s Warren Buffett, the unfunded pension liability would jump to over $16 billion, representing a dangerously low funded ratio of 66% and almost three times the City’s annual budget.

Over the next five years, the City’s two pension plans will rack up an additional shortfall of over $5 billion if the rate of return on their investment portfolios is 6½%, a much more likely outcome than the targeted return of 7½%.

But rather than recognizing this combined shortfall of $7.9 billion over the next five years, the City has cooked up a scheme to amortize these losses over a 20 year period, reducing the hit to the City’s budget.

Even with this scheme, the City’s pension contribution is expected to increase by more than 50% over the next five years to $1.7 billion, representing 27% of the City’s projected General Fund budget.

Garcetti and Wesson, along with Budget Committee Chair Paul Krekorian and Personnel Chair Paul Koretz, will tell us they made significant reforms to LAFPP in 2011 and LACERS in 2013 and 2015.  But these cosmetic amendments are nickels and dimes and did not address the overly optimistic investment rate assumption of 7½% and the unsustainable post-retirement medical benefits.

This pension time bomb is a weapon of mass financial destruction where we will burden the next generation of Angelenos with tens of billions of unsustainable debt. This will destroy their standard of living and their environment.

It is time for Garcetti, Wesson, and the members of the City Council to get off their fat asses, put on their big boy pants, and begin to address this problem by establishing an independent, well-funded Committee for Retirement Security.

Only then will we be able to begin the hard task of developing a solution where the City and its future will not be devoured by the pension monster.

Cross-posted at City Watch LA

About the Author: Jack Humphreville is a LA Watchdog writer for CityWatch, President of the DWP Advocacy Committee, Ratepayer Advocate for the Greater Wilshire Neighborhood Council, and Publisher of the Recycler

Teachers Union Hits Taxpayers with ‘Money Club’ Again

The California Teachers Association has just dropped $10 million into its campaign to extend the “temporary” income tax hike voters approved when they passed Proposition 30 in 2012. Proposition 55, which will appear on this November’s ballot, would extend the highest income tax rates in all 50 states for another dozen years.

Four years ago, the muscular union, called by many in Sacramento the “Fourth Branch of Government,” spent over $11 million to convince voters to increase sales and income taxes. The campaign, paid for by government employee unions and led by Gov. Jerry Brown, repeatedly promised voters the higher taxes would last only a few years and then go away.

These ultra-high tax rates are scheduled to end in 2018 and union leaders are panicking. If the tax increase ends, there may be less money to fund increases in member pay and benefits.

Spending big money on politics is not unusual for the deep pocketed CTA which receives its funding from mandatory dues. Those dues, withheld from members’ paychecks whether they like it or not, can total more than $1000 a year for a single teacher. Recall that CTA laid out $58 million in opposing several worthy reform measures in a 2005 special election including one reform that would have capped state spending. Union leaders like a guaranteed cash flow so it should come as no surprise if they put out an additional $10 million, or more, to support the Proposition 55 income tax extension. For backers of Proposition 55, spending millions in return for billions of tax dollars is considered a bargain.

The campaign will, no doubt, target low information voters with messages about how, “it’s for the children.” It is standard operational procedure for tax promoters to use children as human shields when advancing a tax increase tied to education. Not to be mentioned is that the union’s interest is solely in increasing pay and benefits, including generous pensions, for members who are already paid more than $20,000 above the national average. And don’t forget that a national education union leader once famously said “when school children start paying union dues, that’s when I’ll start representing the interests of children.”

The California Teachers Association has spent $10 million dollars into extending the Prop. 30 “temporary tax”

 

Some will argue that ultra-high taxes should be maintained because public employees deserve to be well paid. They are. According the Department of Labor, California is the state with the best paid state and local government employees.

Our state is running a multi-billion-dollar surplus, yet Proposition 55 backers want to continue the ultra-high taxes that are already pushing businesses, and the jobs they provide, to relocate out of state. And it’s not just businesses. The list of high wealth individuals including professional athletes and entertainers who have bailed out of California is a mile long.

But the deleterious impact of high taxes is wholly lost on the union bosses. Their attention is, no doubt, on the latest news from the California State Teachers’ Retirement System. The second-largest U.S. public pension fund earned a paltry 1.4 percent return on investments in the fiscal year just ended, missing its target of 7.5 percent for the second straight year.  This raises questions about the fund’s management and whether or not it will be able to meet its obligation to 896,000 current and retired teachers.

Of course, taxpayers remain the guarantor of all public employee pensions so, in all fairness, the Proposition 55 income tax extension could come to be called the “pension tax.” And the teachers union is prepared to use its massive “money club” on voters to make sure Proposition 55 passes and the taxpayers’ dollars are there.

Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.

The Consequences of Weak Pension Earnings

Several reporters have asked about the consequences of CalPERS’s weak investment earnings. Although CalPERS has not issued an actuarial report since June 30, 2014, one can draw an inference that its Unfunded Liability has grown about $50 billion since then, to $140 billion. Here is how you get there:

Start from this chart on page 120 of CalPERS’s 2015 annual report:

The “Actuarial Accrued Liability (AAL)” in column three shows pension liabilities as of 6/30/14 were $395 billion, up from $210 billion nine years earlier. That’s a 7.27% annual growth rate, which makes sense since pension liabilities grow at the discount rate (7.5%), less any amortization. Assuming the same 7.27% growth rate, AAL as of 6/30/16 should have climbed to roughly $454 billion.

The “Actuarial Value of Assets” in column one shows assets as of 6/30/14 were $301 billion. CalPERS earned 2.4% in the 2015 fiscal year and 0.61% in the most recent fiscal year ending 6/30/16. (CalPERS also received pension contributions from employers and employees but, as indicated on page 42 of its annual report, in 2015 those were less than benefit payments. Let’s give CalPERS the benefit of the doubt and assume that contributions = benefit payments and therefore the impact on Assets was neutral.) This would mean that Assets as of 6/30/16 should have climbed to roughly $310 billion.

$310 billion in Assets less $454 billion in AAL = $144 billion in Unfunded AAL (UAAL), up $51 billion from $93 billion in UAAL as of 6/30/14 (see column four).

Every $1 of UAAL translates into about $3 of cuts to public services (because UAAL’s accrue interest at 7.5%). Hence, $51 billion of additional UAAL translates into about $150 billion of additional cuts. These numbers are by their nature rough but they should provide a sense of the magnitude. CalPERS should endeavor to report on a timely basis.

 

CalPERS only obtained a 0.61% return on investments for fiscal year 2016 despite establishing pension promiseS based on a 7.5% interest

 

NB: It’s important to note that UAAL can grow significantly even when CalPERS has good years. Look again at the chart. The UAAL in column four more than tripled to $93 billion even though CalPERS earned a very respectable 6.6% annual return on investment during that period. Indeed, during the last five years of that chart CalPERS earned 12.5% per annum and the stock market doubled yet the UAAL grew $44 billion. As explained here, CalPERS must earn much more than its expected rate of return to shrink the UAAL.

PS: If you are looking for someone to blame, don’t point the finger at CalPERS’s investment staff. They are not responsible for markets reverting to the mean and they had plenty of good years before the last two years. And don’t blame government employees and retirees. They did not cause this problem. You should blame your elected officials and pension fund board members. Together they are responsible for hiding the true size of pension promises at the time they are made and failing to properly fund those promises when they are made. They are continuing to do so — and thereby creating new UAAL’s every day.

About the Author: David Crane is a Lecturer in Public Policy at Stanford University, SIEPR Research Scholar and president of Govern For California. From 2004 – 2010 he served as a special advisor to Governor Arnold Schwarzenegger and from 1979-2003 he was a partner at Babcock & Brown, a financial services company. Crane also serves as a director of Building America’s Future, California Common Sense and the University of California’s Investment Advisory Group. Formerly he served on the University of California Board of Regents and as a director of the California State Teachers Retirement System, California High Speed Rail Authority, California Economic Development Commission, Djerassi Resident Artists Program, Environmental Defense Fund, Legal Services for Children, Jewish Community Center of San Francisco, Society of Actuaries Blue Ribbon Panel on the Causes of Public Pension Underfunding, and Volcker-Ravitch Task Force on the State Budget Crisis.

Government Unions Benefit from the Asset Bubble that Harms Workers

Earlier this month the California Policy Center released a study that provided additional evidence that the U.S. stock indexes are overvalued by approximately 50%, along with calculations showing the impact of a major downward correction on the solvency of California’s state and local government pension systems. Stocks are now at unsustainable bubble valuations.

Not covered in this study, but equally overvalued, are bonds, which pension systems misleadingly categorize as “fixed income” investments in their portfolio disclosures. CalPERS even went so far as to trumpet their success in earning a 9.29% return on “fixed income” investments in their most recent press release – a healthy return that offset losses elsewhere and allowed them to earn a marginally positive return of 0.61% last year. But “fixed income” investments usually refers to bonds, and bonds are also at unsustainable bubble valuations.

Here’s why bonds are overvalued today: Whenever new bonds are issued at lower fixed rates of interest than the bonds that were issued before them, then those older bonds that pay higher fixed rates of interest can be sold for more money than their original price. This is because on an open market, buyers will price a resold bond at a value calculated to equalize returns. When rates go down for new bonds, the prices for existing bonds go up. The problem is that back in the 1980’s, bonds were being issued at rates as high as 16%, and today, they’re being issued at rates close to zero. After a thirty year ride, interest rate drops can no longer be used to elevate the value of bond portfolios.

At a macroeconomic level, every possible investment in the world is overvalued today, because central banks have lowered interest rates to zero in a desperate attempt to continue a decades long disease in which they have spent more than they’ve collected. Governments got to borrow money for next to nothing, and assets kept appreciating. But the binge is almost over, and unlike the savvy super-rich, pension funds can’t just take their winnings off the table.

New Bond Issues, Rates by Nation – June 2016 (red = negative)
20160719-UW-NegativeYieldsNegative coupon bonds, a desperate experiment that isn’t going to end well.

This is all tedious drivel, however, if you are a unionized public employee in California. Your retirement security is guaranteed by “contract.” It’s the result of deals cut between union “negotiators” and the politicians they make or break. As a government employee in California, if you’ve worked 30 years, the average annual retirement benefit you can expect if you retire this year is worth over $70,000. To honor that expectation, CalPERS is already mid-way through their latest reassessment, a 50% increase to their collections from participating agencies. And if there is a 50% market correction (“fixed income” and equity), expect them to double or even triple their collections from taxpayers.

If you are a private citizen trying to prepare for retirement today after, say, 45 years of work and saving, good luck. Because there is no safe investment left in the world. And while you are likely to have to cope with, for example, suspended dividend payments on stocks that are down 50%, expect your taxes to go up in every imaginable category – sales, property, income, and hidden taxes embedded in your utility bills and phone bills. It will be “for the children” and “for public safety.” And if there’s a vote required to increase the tax, it will usually pass, because most voters don’t pay property tax, or income tax, or if they do, the taxes are indirectly assessed and invisible to them.

This is the oppressive hoax that government unions have perpetrated on the working families they claim they want to protect. They have exempted their own members, government workers, from the consequences of a corrupt financial system where they are leading partners. When governments spend more than they make and have to borrow money, central banks lower interest rates to make it easier to work the payments into the budget. At the same time, lower interest rates goose the value of stocks and bonds, helping the pension funds claim they can earn 7.5% per year. And when the house of cards collapses, taxpayers bail out the banks and the government pension funds.

The next time a spokesperson for a government union speaks disparagingly about Wall Street corruption, remember this: They are partners with Wall Street. They support overspending for their own compensation and benefits, creating deficits that have to be covered by taxes and borrowing. Their pension funds demand high returns, and the bankers comply, with rates that encourage borrowing and deny ordinary people the ability to save. Now that interest rates have hit zero and are even going negative in an exercise of monetary chicanery that has no rival in history, the end is near.

Public sector union leaders need to start remembering they represent public servants, not public overlords who are exempt from the reality that you can only spend as much as you earn. As it is, these union leaders are the overpaid mercenaries of capitalism at its most corrupt.

 *   *   *

Ed Ring is the president of the California Policy Center.

Pensions and Taxes Increase While Labor Unions go Unchallenged

In January 2015, the Manhattan Institute’s Steve Malanga, writing in the Wall Street Journal about public pension costs gulping down tax raises, quoted me saying that no matter what local politicians tell voters, when you see tax increases, think pensions.

To paraphrase Ronald Reagan: Here I go again!

Recent accounts indicated that the California Public Employees’ Retirement System (CalPERS) unfunded pension liabilities have increased because CalPERS investment revenue has dropped. Yesterday on this site, David Kersten cited the dramatic increase of CalPERS unfunded liabilities rising from $93 billion two years ago to $150 billion today.

More to the point, Sacramento Bee columnist Dan Walters wrote, “CalPERS has been demanding hundreds of millions of dollars in additional contributions from state and local governments – hitting cities particularly hard…”

 

Despite a 42% growth in California’s general fund budget compared to 2011, the state continues to propose new tax increases and extensions.

 

With the obligation for more local taxes going to cover pension costs is it just a coincidence that so many tax increase measures are popping up on local ballots?

I don’t think so.

Sure, there will be specific reasons that local governments say they need more tax revenue. More for police or transportation or the homeless, they will say. The governments would have more revenue for those services if they did not have greater obligations for underfunded pensions.

It’s not like revenues have declined recently in government coffers. The state general fund budget is up 42% since Jerry Brown came into office in 2011. Local governments also are enjoying revenue increases, but the call for more taxes keep coming.

Take San Francisco, which could see 8 different tax increases on the November ballot. We just learned that property tax collections in the City by the Bay dramatically increased 9%. And, the city government still needs all that revenue from 8 new tax increases?

Money in government budgets is fungible to some extent. If you cover specific agency costs with a targeted tax increase, that frees up general fund money for other items, including pensions.

 

Nathan Brostrom, Chief Financial Officer for the University of California, told the Sacramento Bee that tuition hikes could be avoided if the state would assist in funding its retiree costs. He explained that the school believed it was not getting what was promised from the Prop. 30 tax hikes.

 

When the University of California declared a shortage of money a couple of years ago much angst surrounded the need to raise already high tuitions. What was the money needed for? As I wrote at the time, the UC’s chief financial officer told the Sacramento Bee that tuition hikes could be avoided if the state helped with retirement costs.

It wasn’t only the university system that saw money diverted for retirement costs. The aforementioned article by Steve Malanga in the Wall Street Journal was subtitled: Remember that ‘temporary’ tax hike for California schools? Most is now going to public worker retirements.

Ironic that the extension of those temporary taxes, Proposition 55, is on the ballot while the retirement system sputters—or is it?

As David Kersten pointed out in his column, “California Democratic politicians are too tied to their base which is the public employee unions, and are unable to make decisions that will benefit the state’s future and prevent financial catastrophe.”

That’s consistent with what I heard from one prominent Democrat who wondered with a state budget increase of more than a third over five years why so many state agencies say they don’t have enough money. The politician answered the question by saying it was because of pension and health care costs and that the majority Democrats would not take on the unions over that issue.

Too bad. That means it falls to the taxpayers. Either they pay up or reform the system on their own.

About the Author: Joel Fox is Editor of Fox & Hounds and President of the Small Business Action Committee. This article originally appeared in Fox & Hounds and appears here with permission.

CalPERS Sinks Further into Fiscal Insolvency

Orange County Register reporter Teri Sforza quietly released a story  that blows the whistle on another fiscal bombshell of bad news at the California Public Employees’ Retirement System (CalPERS).

The story states that according to unofficial preliminary numbers from CalPERS the fund lost about 2% of its market value in the 2015-16 fiscal year that just ended–which represents an estimated $28.5 billion increase in the fund’s unfunded liabilities, according to my rough calculations.

The fund assumes a 7.5% per year annual return despite the fact that no investment officer in the country believes that is achievable in the current environment.

Stanford Professor Joe Nation estimates CalPER’s total unfunded liabilities have increased to an estimated $150 billion, compared to $93 billion just two years ago, according to the Orange County Register report.

 

CalPERS investments returned 2.4% for fiscal year 2015, far below its 7.5% target.

 

And if one assumes a more realistic 4% rate of return (a “Treasury” or “risk-free” rate) the funded liability for Calpers alone is now $412 billion, or the equivalent of three state general fund budgets, Nation said.

For anybody who knows the numbers, and I do, CalPERS is speeding down the track toward financial catastrophe but none of the state’s leading Democrats will even acknowledge that there is a major problem here.

And this ignorance of the problem by California Democrat politicians is perhaps what is most upsetting to me and the small community of pension reform advocates that fully understand the magnitude of the problem and what this means for the state’s future.

The lone voice in the legislature for reform continues to be Sen. John Moorlach (R-Costa Mesa) who has a significant background in public finance and accounting.

“What has me baffled is that this is causing me great anxiety, but it does not seem to have the same impact on my colleagues in Sacramento,” Moorlach said.

Inside sources say most if not all California Republican State Legislators in Sacramento understand the magnitude of the problem but there is not much to be gained politically by going out on the issue prior to a critical mass being reached for reform.

The true culprit for this code of silence in the Legislature is the state’s powerful public employee unions, their political threats, failed logic, and propaganda on the issue.

Dave Low, chairman of Californians for Retirement Security, says the pension reformers are a case of “crying like Chicken Little about how the sky is falling,” according to the Orange County Register report.

Low and the state’s public employee union bosses are playing a dangerous game here that will inevitably blow up in their face and result in major financial hardship, lost benefits, and jobs for their public employees at some point in the not so distant future.

Low won’t even acknowledge a problem with the escalating liabilities, and this is the same position taken by the California Democrat Legislature.

This is an unconscionable policy position to anyone who cares about the future of our state and illustrates why the California Democrat Party is no longer fit to lead California.

California Democrat politicians are too tied to their base which is the public employee unions, and are unable to make decisions that will benefit the state’s future and prevent financial catastrophe.

This whole facade is rapidly deteriorating and the problem will soon become so big that nobody will be able to ignore it.

The only question, is whether it will be too late to save the State of California and its local governments from financial disaster at this point, or whether we will first cross a point of no return that permanently saddles our public agencies and state taxpayers with trillions of dollars in debt that we cannot afford to pay.

About the Author: David Kersten is an expert in public policy research and analysis, particularly budget, tax, labor, and fiscal issues. He currently serves as the president of the Kersten Institute for Governance and Public Policy – a moderate non-partisan policy think tank and public policy consulting organization. The institute specializes in providing knowledge, evidence, and training to public agencies, elected officials, policy advocates, organization, and citizens who desire to enact public policy change.

California Pensions Take Above-Average Tax Bite

California pension funds take a bigger share of tax revenue than the national state average, a research website shows. Why the growing costs are outpacing the norm is not completely clear.

A prime suspect for some would be overly generous pensions, particularly what critics say is an “unsustainable” increase for police and firefighters widely adopted to match a big increase given the Highway Patrol by SB 400 in 1999.

The Public Pension Database does not have information on the formulas that determine pension amounts, like the Highway Patrol’s “3 at 50” or three percent of final pay for each year served at age 50.

One problem is the wide range of pension formulas, made even more complex by a recent national wave of cost-cutting reforms. Under a California reform three years ago, most new hires must pay more toward their pensions and work longer and retire at an older age to earn the same pension as workers hired before the reform.

 

Keith Brainard is the Research Director for the National Association of State Retirement Administrators (NASRA)

 

“Trying to compare plan benefits in one state with another state has become complicated,” said Keith Brainard, research director for the National Association of State Retirement Administrators.

Brainard started the database now operated jointly by NASRA and the Center for Retirement Research at Boston College and the Center for State and Local Government Excellence.

Several web-based seminars have been held to show how the “big data” can be used by researchers, government officials, media, and others. Trends and patterns can be identified, comparisons made, and the findings displayed in charts.

A chart on the database shows the amount of tax revenue taken by California public pensions was slightly below the national average in 2001. Then from 2003 to 2005 the California pension tax bite climbed well above the national average, maintaining a gap that by 2013 was about a third higher.

In rough terms, the public pension share of California tax revenue in fiscal 2013 was 8 percent by fiscal 2013 compared to a national average of 6 percent.

 

Source: Public Plans Database and Census of Governments.

Source: Public Plans Database and Census of Governments.

 

 

In an interview, Brainard mentioned two factors for the above-average share of tax revenue taken by California pensions. Most California government workers, including teachers and many police and firefighters, do not receive Social Security.

Only 40 percent of state and local government employees in California receive Social Security, according to the database. The Social Security coverage in some other large states: New York 99 percent, Florida 95 percent, and Texas 47 percent.

The cost of using the federal Social Security program to provide part of the retirement benefit (6.2 percent of pay each from the employer and the employee) would not show in data about the share of tax revenue taken by state and local pensions.

Another factor: The period covered by the research begins around 2000 when the three big state pension funds were spending a “surplus” from a stock-market boom not only on increased benefits but on lower employer contributions.

The California Public Employees Retirement System, which covers about half of all non-federal government workers in the state, sponsored the retroactive SB 400 rate increase for all state workers and dropped employer rates to near zero in 1999 and 2000.

Then as the stock market dipped, CalPERS had to begin raising employer rates not only to cover pension increases (AB 616 in 2001 authorized a bargaining menu for local government employees) but also to regain funding lost by the big employer rate cuts.

In addition to CalPERS, the California plans in the database include the California State Teachers Retirement System, the University of California Retirement System, the Los Angeles County Employees Retirement Association, and 11 other local systems.

The data covers most of the public pension members in California, but far from all of the pension systems. An annual report from the state controller lists 131 separate California retirement systems, many of them relatively small.

California systems in the database, with two major exceptions, paid their full Annual Required Contribution (ARC) to cover the annual or “normal” cost of pensions earned each year and the large debt from previous years, the “unfunded liability.”

Debt often is created when pension fund investments, expected by big California funds to earn 7.5 percent a year, fall short of the target, which critics contend is overly optimistic. Among other factors that can create debt is longer than expected life spans.

The California State Teachers Retirement System is listed on the database as paying only 50.9 percent of the ARC in 2013. Unlike other systems, CalSTRS could not raise employer rates. Now long-delayed legislation two years ago to pay the full ARC will more than double school rates by 2020, cutting deep into budgets.

CalSTRS spent its small and brief “surplus” around 2000 on several benefit increases and rate cuts. The pension fund was shorted when a quarter of the teacher contribution, 2 percent of pay, was diverted for a decade into a supplemental 401(k)-style individual investment plan for teachers with a guaranteed minimum return.

Three years ago, a Milliman actuarial report said if CalSTRS had kept its 1990 structure without the rate and benefit changes around 2000, pensions would have been 88 percent funded instead of 67 percent. A much smaller rate increase could have closed the funding gap.

The UC Retirement Plan is listed on the database as paying 63.9 percent of the ARC. A large surplus prompted the plan to give employers and employees a remarkable two-decade contribution “holiday.”

Most made no payments to the UC pension fund from 1990 to 2010. The surplus, driven by investment returns and other factors, peaked with a 156 percent funding level in 2000.

As painful rates were set to resume in a time of tight budgets, a UC task force said in 2010 that if normal cost contributions had been made during the two decades, the system would have been 120 percent funded instead of 73 percent.

CalPERS has not calculated how much of its current funding gap results from the pension increases and rate cuts during the surplus years. But a CalPERS chart showed that SB 400 accounted for 18 percent of the state worker employer contribution increase between 1997 and 2014.

Nearly half of the state worker contribution increase, 46 percent, was due to investment gains and losses, demographic and actuarial changes, and higher employee contribution rates. Payroll increases accounted for 31 percent of the change.

Critics say the SB 400 “3 at 50” formula has the most impact in local government, where police and firefighters are a major part of the budget. The big cities (Los Angeles, San Francisco, San Diego, San Jose, and Oakland) have their own pension systems and are not in CalPERS.

Public pensions have not recovered from huge investment losses during the recession. The Center for Retirement Research reported last monththat the 160 plans in the Public Pension Database were 74 percent funded last year, 72 percent under new accounting rules.

The Center’s report showed that from 2001 to 2015 the CalPERS funding level dropped from 111.9 percent to 74.5 percent. During the same period, the CalSTRS funding level fell from 98 to 67 percent and UC funding plunged from 147.7 to 81.7 percent.

About the Author: Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. He is currently a Publisher for CalPensions.com.

New Labor Agreement Projects to Widen Structural Deficit in Los Angeles

In August, the Los Angeles Times awarded Mayor Eric Garcetti a C for his performance during his first two years in office.  While Garcetti received a B+ on his Vision, his overall ranking was dinged by a C- on Leadership and D on Political Courage.

Unfortunately for all Angelenos, the “smooth on the podium” Garcetti has not shown leadership or political courage when addressing our cash strapped City’s budget, its lunar cratered streets, its massive $15 billion in unfunded pension liability, and its antiquated management information systems.

One of the major financial goals of the City over the past decade has been to eliminate its Structural Deficit, where the growth in expenditures (primarily personnel costs – salaries, benefits, and pension contributions) exceeds the increase in tax revenues.  And of course, Garcetti pledged to eliminate the Structural Deficit as part of his Back to Basics program where the City would “live within its financial means.” 

But the political rhetoric is not consistent with reality as the City is now projecting a cumulative four year deficit in the range of $300 million, in large part because of a new labor agreement with the City’s civilian unions. This deal with the campaign funding management of the civilian unions turned a projected surplus of $68 million in 2020 into a deficit of $100 million, a negative swing of $168 million.

This $300 million cumulative deficit does not include any money for the City’s ambitious homeless initiative, the systematic repair of our lunar cratered streets, the proper funding its pension plans and management information systems, the “goal” of hiring of 5,000 new employees, or any new labor contracts for the City’s 32,000 employees.

 

Mayor Eric Garcetti pledged to eliminate LA’s structural deficit, but instead seems to be increasing it.

 

However, these deficits are very difficult to comprehend as projected revenues over Garcetti’s first eight years (July 1, 2013 to June 30, 2021) in office are anticipated to increase by 35%, or $1.6 billion.  This shows that our City has a spending addiction, a problem that the mayor has refused to address.

Garcetti’s lack of leadership and political courage was evident by the fact that he was missing in action when the LA 2020 Commission recommended two finance related reforms.  These reforms included the adoption of a three year budgeting cycle and the establishment of an Office of Transparency and Accountability to oversee our city’s precarious finances.

The LA 2020 Commission also suggested the formation of a Commission on Retirement Security to review, analyze, and make recommendations to stabilize our City’s seriously underfunded pension plans.  As it is, the financial demands of the City’s two pension plans threaten to devour our City’s future and burden the next two generations of Angelenos with tens of billions of obligations. But where was our Back to Basics mayor?

The Mayor has also failed to develop a comprehensive operational and financial plan to repair and maintain our streets, some of the worst in the nation.  At the same time, the City receives a kickback of over $200 million a year from the Metropolitan Transportation Authority to help maintain our streets and transportation systems.  Instead, our mayor is crowing about fixing 2,400 miles of streets a year.  But this pothole filling strategy is just a band aid that does not address our thousands of miles failed streets and neglected alleys.

Garcetti tell us that he wants LA to be the best run big City in America.  But this is not in the cards unless the City is willing to devote the significant resources to update City Hall’s antiquated management information systems with new enterprise software systems that are necessary to run complex organizations in this ever changing world.

Mayor Garcetti has been blessed by an improving economy that has resulted in a huge increase in revenues.  But he has squandered this opportunity to stabilize the City’s finances by failing to address the Structural Deficit, our failing infrastructure, our seriously underfunded pension plans, and our antiquated management information systems.

Mayor Garcetti has failed us and as a result, he has flunked Budget and Finance and deserves the failing grade of D.

About the Author: Jack Humphreville is a LA Watchdog writer for CityWatch, President of the DWP Advocacy Committee, Ratepayer Advocate for the Greater Wilshire Neighborhood Council, and Publisher of the Recycler

How Public Officials Can Reduce the Burden of Unionized Firefighters

What started in Stanton, California as an anomaly is spreading quickly across North Orange County – the push to create local sales taxes in order to pay off the rising pay and benefits of public employees.

Stanton voters passed a one-percent sales tax in 2014, giving residents in one of OC’s poorest cities the county’s highest sales tax. But in the last several days, the enthusiasm for this most regressive of taxes has spread to Westminster, Fountain Valley and La Palma, and always for the same reason: public employee compensation.

Stanton councilmember David Shawver is elated, perhaps because he’s no longer alone. “The 2014 sales-tax increase saved the city of Stanton’s life,” Shawver told the Orange County Register last week. “The tax will be a really big thing for Westminster. They will see a regeneration of their community.”

In those cities, as in Stanton, the same dire warnings are broadcast from City Hall: The end is near. We’ve cut every other city service imaginable, and if you don’t pay more in sales taxes now, you’ll lose vital public-safety services – the police and firefighters who represent the thin line between civilization and Darwinian struggle.

When asked about this problem, many city officials respond that for all their apparent authority, they’re really impotent. They’re trapped by the rising pay and benefits of government workers, especially those who are unionized, and especially those in unions of police and firefighters.

A Stanton official told me there’s no way to change the cost of sheriff’s deputies and firefighters. The county sets the rate – averaging around $236,000 per year for firefighters and $189,000 for deputies. Stanton just pays.

“There’s absolutely nothing we can do about that,” the official said.

That’s absolutely wrong. The City of Stanton and its neighbors have an amazing opportunity in the midst of their crisis. And the U.S. military provides part of the answer.

20160630-CPC-SwaimFirefighters
U.S. Navy Firefighters in action
(Source: U.S. Navy)

For years, the U.S. has run on the assumption that a relatively small number of career professionals can mass-produce the world’s most powerful soldiers, sailors, Marines and airmen. In 16 weeks or less, for example, the Army outfits, trains and deploys men and women around the world. It arms them with life-saving and death-dealing equipment and techniques. It counts on them to carry out their missions in the most dangerous conditions imaginable. Bravery, loyalty and resilience are standard.

In exchange for this exceptional demand, we nevertheless pay our service people very little – about $1500 per month. After four years, most enlistees are discharged and pursue other careers. The military expects that only a few will stay on to rise through the ranks of officers and noncommissioned officers who oversee the recruitment, training, support and management of new trainees. Their leadership is invaluable, but the military may at its discretion decide to reduce benefits – even retroactively – or terminate employment.

The Department of Defense isn’t perfect. The scandal over veterans’ health care, the bloat, the crony-capitalist contracts and the politicians’ ham-fisted use of force are real. But if we can train 18-year-olds to handle lethal force and million-dollar equipment in a combat zone, we can train young people to put out fires – or, as is more likely in Orange County, to respond to medical emergencies.

We could pay these firefighters well, better than their military counterparts. And at the end of four years, we could thank them for their service and let them pursue their bliss – to sign on as firefighters in wealthier cities still wedded to the old model. Or they could move on to work or college. It would be cheaper to spend more – to pay for their health care and offer tuition support for several years, for instance – than to turn them into careerists.

Instead, for decades, we’ve chosen to hire high school graduates who win the firefighting lottery. Thousands apply for just a few openings anywhere. The reason for the long lines: The winners will work a few days per week in exchange for about $236,000 per year, early retirement and annual pensions of about 90 percent of their highest annual pay.

You’d have to be a millionaire to clock that kind of income in retirement. But our cities and counties hand it out as standard procedure.

Our elected officials can rarely see a way out.

That’s why Stanton – and Westminster, La Habra, Fountain Valley, Garden Grove, Placentia and hundreds of other California cities – are so deeply troubled. For decades, police and firefighters have backed (with their time and money) political candidates who deliver on the promise to sign off on higher pay and benefits. The sweetheart deals have driven countless Orange County cities toward insolvency.

Stanton can survive if it innovates. And, sure, it may seem a long-shot to expect that the city councilmembers elected to represent government employees will have the courage to represent the people instead. But there’s an old saying about necessity as the mother of invention – or as they say in bureaucratic circles, urgency functioning as the distaff progenitor of creativity.

 *   *   *

Will Swaim is the VP of Communications at the California Policy Center.

Fresno Cop Deals Blow To SEIU… And Everyone Shakes Hands

I met Eulalio Gomez in Bakersfield earlier this year. The correctional officer from Fresno was part of an MLK Day gathering of public sector union reformers, and I was there to document.

Each California employee present had spent time and resources challenging their unions in one form or another. They came to compare war wounds and most had battle fatigue. Bolstered by the support of their peers, they went back into their respective corners of the state to continue their battles.

Six months later, Gomez is among the first to run a victory lap. An election spearheaded by Gomez has caused Fresno County’s largest union to lose members to the new, 900-member Fresno County Public Safety Association, which just won the right to represent workers formerly of the Service Employees International Union. 

Gomez, the association president, says his group is just focused on members.

“Wages and benefits only,” he says.

“We fought to obtain our independence and self-governance. In a free market, consumers are free to buy a service they like. No one should be forced to pay for a service they no longer want. I determined that they had poor customer service and were not accountable to members.”

According to a website statement from SEIU Local 521 president, Riley Talford, the SEIU is “disappointed (but) ready to stand together as a united coalition of workers to build a better future for all Fresno County employees.”

As a Californian from back in the day, those thoughtful words indicate mud-slinging is so passe.

I caught up with Eulalio, and we had a chat.

 

 

Eulalio Gomez – President of the Fresno County Public Safety Association

 

 

HSC: “What happened?”

EG: “We had a decertification election from SEIU in Fresno. Two elections occurred in eight months, and we won both of them. We are a union that represents members, without social agendas. We don’t want to fund ‘black lives matters’ and immigration reform events.”

HSC: “How do you as a Mexican-American explain to critics that you’re not racist in not supporting social justice agendas?”

EG: “It’s simple: I’m not racist. The fundamental issue is that is has nothing to do with the employees of the County of Fresno. If folks want to be part of it, that’s not a problem for me. But they should fund it out of their own pocket like everyone does extracurricular activities. Our group is largely sheriff correctional officers and the movement has caused a degrading of perception to members of the public against uniformed personnel; it has caused acrimony at law enforcement officials, creating anarchy and often inciting violent acts against the law enforcement community.”

HSC: “How do you explain ‘bad apples’ don’t represent everyone?”

EG: “We do acknowledge there are some issues with our brothers and sisters on the streets, but that does not represent law enforcement as a whole. People should be judged by their individual actions not by the uniforms they wear. So it’s almost like people believe if you’re in a uniform, you’re bad.”

HSC: “To the kid on the street, who says he’s being judged for his color, how do you respond?”

EG: “I believe you’re judged by your actions and not by the color of your skin… We should all follow the same rules.”

HSC: “In Bakersfield, you told me you’re doing this for your children.”

EG: “Yes because I’m doing this to make our community safer… we address local issues only. At the end of the day, all the money generated from the Fresno County Public Safety Association will stay right here locally. It won’t be going to D.C.”

HSC: “What would you like to tell Californians?”

EG: “If you are a public sector employee disenfranchised with your representation, take control of your future and change it and get involved. Either remove it or change it.”

HSC: “How long have you been fighting to create your own union?”

EG: “Five years.”

HSC: “What did you tell your children about your fight?”

EG: “I showed them the flyers that were being dispersed at my job calling me a ‘bad apple,’ ‘liar,’ and I explained to them why. I explained they are willing to use all avenues to stop the loss of dues. They understood the politics. I affiliate as an independent: I don’t want to be labeled, and I don’t want to be forced to support an issue based on my affiliation. We all have our own minds and can determine what’s best for ourselves and our family.”

HSC: “Are people starting to call you the Erin Brokovich of ‘Choose Your Union?’”

EG: “No. That title goes to a DMV clerk named Mariam Noujaim. She’s from Egypt, and I just love her tenacity and her personality and ‘break the door down’ attitude. I respect her for challenging her union on transparency and competition. She works hard and she doesn’t care if the doors are not open, she goes through the door.”

HSC: “Isn’t that the American way?”

EG: “Indeed.”

About the Author: Heidi Siegmund Cuda is a former Investigative Producer for Fox 11 News in Los Angeles and the Creator and Host of the Economic Series, “Saving the California Dream.” She is currently producing and hosting the series, “Ripoff Report Investigates.”