How would you feel if someone told you they’d just increased your retirement benefit by 50%, took five years off the age you’d have to be when you could retire and collect this benefit, and then told you there would be almost no additional cost because the stock market was roaring? In California, that’s what happened in December 1999. “You” were “ALL PUBLIC AGENCIES,” and their countless thousands of public employees, and “someone” was the biggest public employee retirement system in the state, CalPERS. Click here to read the agency’s 12/23/1999 analysis.
Then how would you like it, two years later, after the market had “corrected,” you were told, via a CalPERS board resolution, that an “exception” had been made to generally accepted actuarial accounting standards, and you could choose to value your savings that had been set aside to pay for your retirement benefits at a value 10% greater than the actual market value of those assets at the time? That’s what happened in June 2001. Click here to read that 6/06/2001 letter.
Did CalPERS comply with the law when they did this?
Today, we’re left to wonder whether those actions violated state law. California Government Code Section 7507 requires that an enrolled actuary notify elected officials of the actual costs of any benefit increase.
Here is an excerpt from Section 7507:
The Legislature and local legislative bodies shall secure the services of an enrolled actuary to provide a statement of the actuarial impact upon future annual costs before authorizing increases in public retirement plan benefits. An “enrolled actuary” means an actuary enrolled under subtitle C of Title III of the federal Employee Retirement Income Security Act of 1974 and “future annual costs” shall include, but not be limited to, annual dollar increases or the total dollar increases involved when available.
The California Policy Center recently re-released a policy brief entitled “Did Your Agency Comply with the Law When Increasing Pension Formulas?” That policy brief provides clear instructions to any local elected official or local activist who would like to gather and view for themselves possible evidence of 7507 violations in their city or county.
The stakes are high. Senate Bill 400, enacted in 1999, increased pension benefit formulas by roughly 50 percent for California Highway Patrol officers. Over the next five years or so, nearly every state agency, city, and county in California followed suit, not only for their police and firefighters, but for all public employees regardless of their job description. The ongoing financial impact of this on civic budgets has been severe, and there is no end in sight.
Back in 1999, pension expenses as a percent of total operating budgets in California averaged around 3 percent. Today they average over 11 percent. Depending on how fast agencies are required to pay down the unfunded liabilities on their pension obligations, and depending on how pension investments perform over the next several years, pension expenses as a percent of total operating budgets in California could rise to over 30 percent.
With rare and incremental exceptions, all attempts so far to reform pensions – and so restore financial sustainability and robust services to California’s public agencies – have been thwarted. Reformers continue to challenge these special interests in court, but progress has been slow and expensive, with no rulings of any significance.
Did CalPERS comply with the law when they offered their agency clients the option to greatly increase pension benefits? Did they comply with California Government Code Section 7507?
Using Pacific Grove as an example of CalPERS’ followup, here’s the “Contract Amendment Cost Analysis – Valuation Basis: June 30, 2000,” in which a CalPERS actuary presented to Pacific Grove’s elected officials three distinct values for the assets they had invested with CalPERS, and gave them the liberty to choose which one they’d like to use. The higher the value they chose for their existing assets, the lower the cost from CalPERS to pay for the benefit enhancements they were contemplating.
Option 1: “No increase in actuarial value of pension fund assets.”
Option 2: “Actuarial value of assets increased by twice the increase in the present value of benefits due to this amendment, limited to 100% of market value of assets.”
Option 3: “Actuarial value of assets increased by twice the increase in the present value of benefits due to the amendment, limited to 110% of market value of assets.”
In plain English, the CalPERS actuary is inviting the elected officials to pick from three differing calculations of how much money they’ve already set aside to cover future retirement payments. The difference between “actuarial value of assets” and “market value of assets” is what creates this wiggle room. While the pension fund investments may have a well-defined market value at any point in time, in order to avoid having to continually adjust how much needs to be contributed into the fund by the employers each year, a “smoothing” calculation is applied that takes into account the market values in previous years.
Obviously, based on the above three choices, how assets get “smoothed” is a subjective exercise. Otherwise there would only be one option. So guess which option was chosen by the City of Pacific Grove? Evaluating the table on page 4 of the 6/30/2000 CalPERS cost analysis provides hints.
Option 1: Employer contribution will be 25.1% of payroll.
Option 2: Employer contribution will be 20.0% of payroll.
Option 3: Employer contribution will be 6.2% of payroll.
Pacific Grove selected option 3. Is that any surprise? Consider this absurdity: CalPERS left it up to these elected officials to enact their benefit enhancement, and then told them the cost to do so could vary by over 400 percent. Of course they picked the low payment option.
Did this disclosure comply with California Government Code Section 7507? Despite the presence of disclaimers dutifully included by CalPERS, arguably it did not. CalPERS offered Pacific Grove three alternative valuations for their pension fund investments, and then presented three very different payment requirements depending on which option they chose. The diligent reader will investigate these documents in vain for additional evidence that CalPERS offered Pacific Grove – or any of its other participating agencies – a usable “statement of the actuarial impact upon future annual costs.”
Even the actuary who wrote the analysis for Pacific Grove hedged his bets. In the “Certification” section on page 5, the actuary wrote, “The valuation has been prepared in accordance with generally accepted actuarial practice except that [italics added], under a CalPERS Board resolution, an increased actuarial value of assets may be substituted for the actuarial value of assets that would have been produced by the current and generally accepted actuarial asset smoothing method described in the annual report.”
What CalPERS did was to offer public agencies the option to “smooth” upwards the value of the assets they’d set aside to cover those enhanced retirement benefits they’d awarded during the stock market bubble. They persisted in these tactics to enable agencies that had not yet enhanced their benefits to do so, in order to “compete” with other agencies and retain employees.
Not only were these asset values smoothed, of course. The payments demanded each year by CalPERS were also smoothly increased. Smoothly and inexorably, with no end in sight.
CalPERS notice to All Public Agencies, 12-23-1999 – “New 3% @ 55 and 3% @ 50 Formulas, and Change in Benefits Cap for Safety Members”
CalPERS notice to All Public Agencies, 6/06/2001 – “New CalPERS Board Resolution Concerning Value of Assets Used in Calculation of Cost of Contract Amendments”
CalPERS analysis for City of Pacific Grove – “Contract Amendment Cost Analysis – Valuation Basis: June 30, 2000
CLEO Policy Brief – “Did Your Agency Comply with the Law When Increasing Pension Formulas?”
California Senate Bill 400, enacted 1999
CLEO Policy Brief – “Coping With the Pension Albatross” – provides links to sources for historical and projected escalation of pension costs as a percent of operating budgets
“A public employer shall provide all public employees an orientation and shall permit the exclusive representative, if applicable, to participate.”
– Excerpt from California State Assembly Bill AB 52, December 2016
In plain English, AB 52 requires every local government agency in California to bring union representatives into contact with every new hire, to “allow workers the opportunity to hear from their union about their contractual rights and benefits.” What’s this all about?
As explained by Adam Ashton, writing for the Sacramento Bee, “New California government workers will hear from union representatives almost as soon as they start their jobs under a state budget provision bolstering labor groups as they prepare for court decisions that may cut into their membership and revenue.”
Ashton is referring to the case set to be heard by the U.S. Supreme Court early next year, Janus v. American Federation of State, County, and Municipal Employees. A ruling is expected by mid-year. It is possible, if not likely, that the ruling will change the rules governing public sector union membership. In pro-union states like California, public sector workers are required to pay “agency fees,” which constitute the vast majority of union revenue, even if they laboriously opt-out of paying that portion of union dues that are used explicitly for political campaigning and lobbying.
Needless to say, this law is designed to allow union representatives to get to newly hired public employees as soon as they walk in the door, in order to convince them to join the union and pay those dues. But can anyone argue against union membership?
The short answer is no. To deter such shenanigans, SB 285, thoughtfully introduced by Senator Atkins (D-San Diego), adds the following section to the Government Code: “A public employer shall not deter or discourage public employees from becoming or remaining members of an employee organization.” Governor Brown signed this legislation on October 9th. So much for equal time.
So what can local elected officials do, those among them who actually want to do their part to attenuate the torrent of taxpayer funded dues pouring into the coffers of public employee unions in California? Can they provide the contact information for public employees to outside groups who may be able to provide equal time?
Once again, the answer is no. To deter access even to the agency emails of public employees, a new law bans public agencies from releasing the personal email addresses of government workers, creating a new exemption in the California Public Records Act. Those email addresses could be used by union reformers to provide the facts to public employees. How this all became law provides another example of just how powerful public sector unions are in Sacramento.
In order to quickly get the primary provision of AB 52 enacted, which allows union representatives into new public employee orientations, along with a provision to deny public access to public employee emails, both were added at the last minute to the California Legislature’s 2017-2018 budget trailer bill, AB 119. The union access to new employee orientations is Article 1. The denial of email access is Article 2.
So how are the unions preparing for the Janus ruling? By (1) making sure the union operatives get to new employees as soon as they begin working, (2) by preventing agency employers from saying anything to deter new employees from joining the unions, and (3) by preventing anyone else from getting the official agency emails for new employees in order to inform them of their rights to not join a union. That’s a lot.
So what can you do, if union reformers control a majority on your agency board or city council, and you in a position to try to oppose these unions?
First, examine the legal opinions surrounding the wording of SB 285, “A public employer shall not deter or discourage public employees from becoming or remaining members of an employee organization.” The words “deter” and “discourage” do not in any way preclude providing facts. Consider this preliminary opinion posted on the website of the union-controlled Public Employee Relations Board:
“One major concern I have is that the terms “deter” and “discourage” are not defined. What if an employee comes to an employer with questions about what it means to be a member of the union, and the employer provides truthful responses. For example, assume that the employer confirms that being a member will mean paying dues. What if that has the effect of deterring or discouraging the employee from joining the union?”
It is possible for employers to present facts regarding union membership without violating the new law. Find out what disclosures remain permissible, and make sure new employees get the information.
Another step that can be taken, although probably not by local elected officials, is to challenge the new law that exempts public agency emails from public information act requests. And apart from accessing their work emails, there are other ways that outside groups can communicate with public employees to make sure they are aware of their rights.
California’s public employee unions collect and spend over $1.0 billion per year. If the Janus vs AFSCME ruling takes away the ability of government unions to compel payment of agency fees, and imposes annual opt-in requirements for both agency fees and political dues, these unions will collect less money. How much less will depend on courage and innovative thinking on the part of reformers who want to rescue California from unionized government.
Get a state job and meet your labor rep: How state budget protects California unions, Sacramento Bee, June 21, 2017
AB 52, Public employees: orientation and informational programs: exclusive representatives, California Legislature
Janus v. American Federation of State, County, and Municipal Employees, Supreme Court of the United States Blog
SB 285, Atkins. Public employers: union organizing, California Legislature
2017-2018 budget trailer bill, AB 119, California Legislature
California Public Records Act, Office of the Attorney General
Fact Sheet – AB 52 (Cooper) & SB 285 (Atkins), California Labor Federation
Legislative Bulletin – California School Employees Association
SB 285: Public Employers Cannot Discourage Union Membership, Public Employee Relations Board
Public employee unions wield hefty Atkins stick [SB 285], San Diego Reader
Instead of the cross, the albatross
About my neck was hung.
– Samuel Taylor Coleridge, The Rime of the Ancient Mariner, 1798
In Coleridge’s famous poem, a sailor who killed an albatross has it hung around his neck as punishment. Since then, the albatross, which sailors used to consider good luck, has come to symbolize an oppressive burden. When it comes to ensuring the financial sustainability of California’s cities and counties, few burdens have become more oppressive than funding employee pensions.
A study issued earlier this month entitled “Pension Math: Public Pension Spending and Service Crowd Out in California, 2003-2030,” by the Stanford Institute for Economic Policy Research, offers comprehensive and visceral proof of just how big the pension albatross has become around the fiscal necks of California’s cities and counties, and how much bigger it’s likely to grow. Recent articles by pension expert Ed Mendel and political watchdog Steve Greenhut provide excellent summaries. To distill the “Pension Math” study to a few ominous and definitive quotations, here are two that describe how dramatically pension costs have eaten into California’s civic budgets:
“Employer pension contributions from 2002-03 to 2017-18 have increased at a much faster rate than operating expenditures. As noted, pension contributions increased an average of 400%; operating expenditures grew 46%. As a result, pension contributions now consume on average 11.4% of all operating expenditures, more than three times their 3.9% share in 2002-03.”
And the fun is just beginning:
“The pension share of operating expenditures is projected to increase further by 2029-30: to 14.0% under the baseline projection—that is, even if all system assumptions, including assumed investment rates of return, are met—or to 17.5% under the alternative projection.”
Back in 2016, the California Policy Center produced a study entitled “The Coming Public Pension Apocalypse, and What to Do About It.” In that study (ref. Table 2-C), the implications of adopting responsible paydowns of the unfunded liability (20 year straight-line amortization which CalPERS is now recommending), are explored, along with various rate-of-return assumptions. Quote:
“A city that pays 10% of their total revenues into the pension funds, and there are plenty of them, at an ROI of 7.5% and an honest repayment plan for the unfunded liability, should be paying 17% of their revenues into the pension systems. At a ROI of 6.5%, these cities would pay 24% of their revenue to pensions. At 5.5%, 32%.”
These are staggering conclusions. Only a few years ago, opponents of pension reform disparaged reformers by repeatedly asserting that pension costs only consumed 3% of total operating expenses. Now those costs have tripled and quadrupled, and there is no end in sight. What can local elected officials do?
The short answer is not much. At least not yet. The city of Irvine provides a cautionary example of how a city did everything right, and still lost ground. In 2013, Irvine’s city council resolved to eliminate their unfunded pension liability in 10 years by making massive extra annual payments out of their reserve fund. As reported in detail last week in the article “How Fraudulently Low “Normal Contributions” Wreak Havoc on Civic Finances,” here is the upshot of what happened in Irvine between 2013 and 2017:
“While the stock market roared, and while Irvine massively overpaid on their unfunded liability, that unfunded liability still managed to increase by 51%.”
There are plenty of ways for California’s cities and counties to get the pension albatross off their fiscal necks, except for one thing. The people who receive these generous pensions (the average pension for a full-career retired public employee in California, not including benefits, was $68,673 in 2015) are the same people who, through their unions, exercise almost absolute control over California’s cities and counties.
Spokespersons for public sector unions scoff at this assertion. “Politicians are mismanaging our cities and counties,” they allege, “blame the politicians.” And of course they’re right. Politicians do run our cities and counties. But these politicians have their campaigns funded by the public sector unions. Even when a majority of city council or county supervisor seats are won by politicians willing to refuse campaign contributions from public sector unions, any reforms they enact are reversed as soon as the unions can reestablish a majority. And if reformers can stay in control of a city or county through multiple election cycles, any reforms they enact are relentlessly fought in court by the unions. Meanwhile, California’s union controlled state legislature enacts law after law designed to prohibit meaningful reform.
This is the reality we live in. Californians pay taxes in order to pay state and local government employees a wage and benefit package that averages twice what private sector workers earn.
Here’s what can be done:
(1) Convince citizens to always vote against any candidate supported by a public sector union.
(2) Convince public sector union officials that the pension crisis is real so at least they will agree to minor reforms. The recent Stanford study, along with the recently introduced CalPERS agency summaries, should provide convincing leverage.
(3) Continue to implement incremental reform either through council action, local ballot measures, or in contract negotiations. They may include:
– lower pension formulas for new employees
– lower base pay in order to lower final pension calculations
– eliminating binding arbitration
For more ideas, refer to Pension Reform – The San Jose Model, Pension Reform – The San Diego Model, and Reforming Binding Arbitration.
(4) Support policies designed to lower the cost-of-living. California’s union controlled legislature has created artificial scarcity in almost all sectors of the economy, driving prices up and providing the justification for public employees to demand wages and benefits that allow them to exempt themselves (but not the rest of us) from the consequences of those policies.
(5) Wait for resolution of two critical court cases. The first is the case Janus vs. AFSCME, challenging the right of government unions to charge “agency fees” to members who opt out of membership. That case is set to be heard by the U.S. Supreme Court in 2018. The second is the ongoing court challenges to the “California Rule.” Attorneys representing California’s government unions claim the California Rule prohibits changing the formulas governing pension benefit accruals even for work not yet performed. California’s Supreme Court is set to hear this case after an appeals court rules on three cases – from Alameda, Contra Costa, and Merced counties. Both of these cases should be resolved sometime in 2018.
The Janus case could decisively lower the amount of money public sector unions currently manage to extract from dues paying public employees, which in California alone is estimated to exceed $1.0 billion per year. A successful challenge to the California Rule would pave the way for real pension reform. Current legal interpretations of the California Constitution bar reductions to pension formulas, even for work that has not yet been performed. This is the so-called “California Rule.” If that interpretation were overturned, pension benefit accruals for future work done by existing employees could be lowered to financially sustainable levels.
All in all, today the pension albatross weighs heavy on the fiscal necks of California’s public agencies, and it’s getting worse, not better. If there were easy answers, the problem would have been solved long ago.
Pension Math: Public Pension Spending and Service Crowd Out in California, 2003-2030
How pension costs reduce government services, Ed Mendel, CalPensions, 10/09/2017
Forget the scary pension future; study confirms the crisis is hitting now, Steve Greenhut, California Policy Center, 10/10/2017
The Coming Public Pension Apocalypse, and What to Do About It
How Fraudulently Low “Normal Contributions” Wreak Havoc on Civic Finances
What is the Average Pension for a Retired Government Worker in California?
California’s Public Sector Compensation Trends
Average Full Career Pension by City (all CalPERS employers), Transparent California
Public Agency Actuarial Valuation Reports by CalPERS Agency
Pension Reform – The San Jose Model
Pension Reform – The San Diego Model
Reforming Binding Arbitration
How would you like it if every time you received a property tax bill from your county assessor, you also received a notice that disclosed the amount of the county’s total debt, annual operating expenses, total unfunded liability for pensions, and total unfunded liability for retirement healthcare?
You might not like it, but you’d have a better understanding of what all those property taxes are paying for. And in Marin County, back in 2013, after years of effort by a local group of activists – Citizens for Sustainable Pension Plans – that’s exactly what happened.
Take a look at the copy of this “2016-2017 Property Tax Information” courtesy of Marin County, sent to one of their property owning taxpayers. Towards the bottom of the page, in the section entitled “MARIN COUNTY DEBT AND FINANCIAL DATA,” even the casual observer can quickly see that (as of 6/30/2015, the numbers are over a year behind) Marin County recognizes $549 million of debt on their balance sheet. The not so casual observer might have additional questions…
* * *
QUESTIONS RAISED BY “MARIN COUNTY DEBT AND FINANCIAL DATA”
For example, why does the total “Retiree Related Debt” of $746 million exceed the “Total Liabilities per Balance Sheet” of $549 million? While the 6/30/2015 Consolidated Annual Financial Report (CAFR) for Marin County does report total liabilities of $549 million on page 9, “Condensed Statement of Net Position,” there is no schedule anywhere in the remaining document that provides the details behind that number, making reconciliation impossible. A simple keyword search on the number “549” proves this.
Elsewhere in Marin County’s 6/30/2015 CAFR, on page 61 “Note 8: Long Term Obligations,” the balance payable on pension obligation bonds is disclosed at $103 million, which matches the amount disclosed on the property tax information. Since on this same chart in Marin County’s 6/30/2015 CAFR the “Total Long Term Obligations” are reported to be $286 million, it is reasonable to assume that Marin County’s non-retirement related debt is the difference, i.e., $176 million.
So what does this all mean to the non-casual observer?
It means that Marin County’s total long-term debt as of 6/30/2015 was $922 million, and $746 million of that was for earned but currently unfunded retirement obligations to county workers. That is, 81 percent – eighty-one percent – of Marin County’s long-term debt is to fulfill promises the supervisors made to provide pensions and healthcare to their retirees, but have not paid for. At 7%, just the annual interest on this $746 million is $52 million per year. Imagine what Marin County could do with an extra $52 million per year.
There’s more. The non-casual observer will note that just the interest on Marin County’s unfunded retirement obligations, $52 million per year, equates to 11.2% of their entire reporting operating expenses in the 2014-2015 fiscal year, $464 million. But Marin County doesn’t just have to pay interest on their unfunded retirement obligations, they have to pay them off.
In the private sector, compliant with reforms for which, inexplicably, public sector agencies are exempt, pension systems have to amortize (pay off) their unfunded liabilities within seven years. At that rate, at 7%, the payment on Marin County’s unfunded retirement liabilities would be $138 million per year. That would be the financially responsible thing to do.
Wait! There’s much more. After all, Marin County doesn’t have to just pay off their unfunded retirement obligations, they have to make ongoing payments, as a percent of payroll, for the future pension benefits their active employees earn every year they’re working. How much is that?
Learning how much Marin County spends on payroll is tough, even though it should not be. Their CAFR discloses costs per department, in some cases, but finding a simple “Total Costs for Employees” appears to be impossible.
Rather than wade through Marin County’s entire 224 page CAFR for FYE 6/30/2015, payroll information can be found on Transparent California. Going to their Marin County page and downloading the Excel spreadsheet readily reveals that in 2016 they spent $275 million on pay and benefits, roughly 60% of their total expenditures. Payments for benefits – mostly retirement but also for current healthcare – totaled $71 million of that. Needless to say, that $71 million is not nearly enough to pay for (1) current healthcare insurance plus (2) currently earned pension and (3) retirement healthcare benefits, along with (4) any sort of aggressive paydown of the debt for retirement benefits earned in prior years, but not funded at the time. Even if you add in the amount employees themselves contribute via withholding (Information on that? Somewhere. Good luck finding it).
If you’ve made it this far, braving this mind numbing arcana that obfuscates one of the greatest betrayals of the people by their government in American history, let’s break this down just a bit further.
Even on a 30 year repayment schedule, at 7%, Marin County’s unfunded retirement debt of $746 million would require an annual payment of $60 million. Coming out of $71 million, that leaves $11 million to work with (plus whatever employees contribute via withholding), to pay (1) current healthcare insurance AND (2) whatever new retirement healthcare benefits were earned in that year, AND (3) whatever new pension benefits were earned in that year. This amount paid to fund pension benefits earned in the current year, called the “normal contribution,” is usually expressed as a percent of payroll. According to Transparent California, Marin County’s base payroll in 2016 was $186 million. That means that if they were making just the bare minimum payments on their unfunded retirement liabilities, their total payments for currently earned benefits – normal pension contribution plus normal OPEB contribution, plus current year healthcare, plus whatever other benefits they offer – only amounted to 6% of payroll. Only six percent! There is no way that difference was made up via employee contributions.
Based on these numbers, it appears impossible that Marin County is adequately funding retirement benefits for their employees. Not even close. And it should be easy to coax these numbers from the reports available, and it should be easy for anyone with a reasonable amount of financial literacy to find these numbers and come to the same conclusion. It is not.
(1) Make a “Debt and Financial Data” disclosure mandatory on all property tax bills, in all California counties.
(2) Have this data include the following twelve numbers, with the expense subtotals showing the percentage of total expenses, and the debt balance subtotals showing the percentage of total debt:
- Total county expenditures,
- Total county expenses for payroll and benefits,
- Amount paid towards retirement healthcare (OPEB) earned in current year,
- Amount paid towards unfunded retirement healthcare (earned in previous years),
- Amount paid towards retirement pensions earned in current year,
- Amount paid towards unfunded retirement pensions (earned in previous years),
- Amount paid on pension obligation bonds,
- Amount paid for all other debt,
- Total debt,
- Total debt for healthcare,
- Total debt for pensions (unfunded pension liability),
- Total debt for pension obligation bonds.
(3) Include on county CAFRs for the same year a section that contains all of the above information, with a through reconciliation to the official financial statements and schedules, so even the casual observer can verify the accuracy (or at least the consistency) of all numbers reported on the property tax schedule.
Marin County Board of Supervisors, 7/30/2013 Minutes (ref. item 3, page 1)
Marin County Board of Supervisors, Meeting Archives
Marin County Citizens for Sustainable Pension Plans
Marin County 2015-2016 Consolidated Annual Financial Report
Marin County Archive of Consolidated Annual Financial Reports
Transparent California, 2016 salary and benefit payments for Marin County
California’s minimum wage is set to gradually increase to $15 by 2022, following in the footsteps of minimum wage pioneer city Seattle.
Unfortunately, the unintended consequences of Seattle’s minimum wage experiment are starting to show, both in deteriorating restaurant quality and in decreasing wages for low-income workers.
According to the latest study, Seattle’s 2016 minimum wage hike approved by the Seattle City Council appears to have pushed restaurants to deal with rising labor costs by cutting corners in hygiene. Researchers at Ball State University in Indiana concluded that overall restaurant health code violations increased by 6.4% and less severe violations increased by 15.3% with each dollar increase of the minimum wage.
Bad hygiene is gross, but it isn’t the only serious consequence of Seattle’s minimum wage increases. Researchers from the University of Washington published in June their finding that Seattle’s increase from $11 to $13 coincided with a decrease in actual wages for low income workers – the exact opposite of the policy’s intended result.
According to the study, the 2016 increase to $13 led to a 9% decrease in hours worked at low-income jobs, while hourly wages rose by 3%. This means that on average people in low-wage jobs earned around $125 less per month than they earned before. Instead of helping people in low wage jobs, significantly raising the minimum wage in Seattle has actually hurt their earning ability!
Pension reform in San Jose began in June 2012 when voters, by a margin of 69% to 31%, approved Measure B. Despite overwhelming support from voters, however, this vote triggered a cascade of union funded lawsuits which by 2015 had overturned several of the key provisions of the reform measure. Finally, in August 2015, the San Jose city council passed a compromise resolution that replaced Measure B with a scaled down reform; this was approved by voters in November 2016.
The provisions of this new pension reform measure should be of keen interest to local reformers everywhere in California, because they survived relentless attacks in court. While these reforms may not prove sufficient to completely solve the challenge to adequately fund pension benefits for city workers in San Jose, they are nonetheless significant. San Jose’s current unfunded pension liability now stands at just over $3.0 billion. These reforms are estimated to save $1.7 billion over the next ten years. Here are highlights:
HIGHLIGHTS OF SAN JOSE’S 2016 PENSION REFORM
1 – Voter approval required from now on:
Any retirement benefit – including pensions and retirement healthcare – cannot be enhanced as the result of negotiations between the city council and union leadership, unless those enhancements are first approved by voters.
2 – New employees will be subject to a reformed package of retirement benefits:
Employees hired after the following dates (Police, 8/04/2013; Fire, 1/02/2015; Misc., 9/30/2012) shall be deemed “Tier II” employees, with the following retirement benefits:
- Cost sharing: The city shall not pay more than 50% of the normal and unfunded payments due the pension system; this will be phased in by increasing the employee share of the unfunded payment at a rate of 0.33% of additional withholding of their pay per year.
- Age of eligibility: Police and firefighters shall be eligible for retirement benefits at age 57; miscellaneous employees at age 62.
- Cost of living adjustments: annual COLA increases to pensions shall be limited to the lessor of the CPI index or between 2.0% and 1.25%.
- Pension eligible compensation: Final compensation for purposes of calculating the pension shall be based on the average of the final three years of work, and (with some exceptions for police and firefighters) be limited to base pay only.
- Cap on pension benefit: Police and fire retiree pensions are capped at 80% of pension eligible salary, for miscellaneous employees the cap is 70% of pension eligible salary.
3 – “Disability” retirements awarded by independent panel.
4 – “Supplemental Payments” discontinued:
Prior to this reform, whenever investment returns in any given year exceeded the target percentage, supplemental payments were made to retirees. This practice took place even when the pension system was carrying a significant unfunded liability. This new provision even bars supplemental payments if the fund eventually exceeds 100% funding, in order to take into account the possibility that subsequent annual returns may again fall short of projections.
5 – Defined benefit retirement healthcare discontinued:
The defined benefit retiree healthcare plan is ended and instead a Voluntary Employee Beneficiary Association (VEBA) is established for new and current Tier 2 employees. The contribution rate will be 4% into the VEBA. Tier One employees can opt-in to the new VEBA, or keep their defined benefit healthcare plan with a contribution rate of 8% of payroll.
6 – Retirement contributions fixed:
Similar in intent to item #4, even if the pension system becomes more than 100% funded, there will be no lowering of the required employee contributions to the fund via payroll withholding – again, to take into account the possibility that subsequent annual returns may again fall short of projections.
7 – No retroactive benefits enhancements:
If retirement benefits are approved by voters, they are only to apply to work performed subsequent to the date of approval. If an employee transfers into a new job with the city that offers better retirement benefits than the job they vacated, these enhancements only apply to their work subsequent to their transfer.
PENSION REFORM – SAMPLE LANGUAGE
Section 1503-A. Reservation of Voter Authority.
(a) There shall be no enhancements to defined retirement benefits in effect as of January 1, 2017, without voter approval. A defined retirement benefit is any defined post-employment benefit program, including defined benefit pension plans and defined benefit retiree healthcare benefits. An enhancement is any change to defined retirement benefits, including any change to pension or retiree healthcare benefits or retirement formula that increases the total aggregate cost of the benefit in terms of normal cost and unfunded liability as determined by the Retirement Board’s actuary. This does not include other changes which do not directly modify specific defined retirement benefits, including but not limited to any medical plan design changes, subsequent compensation increases which may increase an employee’s final compensation, or any assumption changes as determined by the Retirement Board.
(b) If the State Legislature or the voters of the State of California enact a requirement of voter approval for the continuation of defined pension benefits, the voters of the City of San Jose hereby approve the continuation of the pension benefits in existence at the time of passage of the State measure including those established by this measure.
Section 1504-A. Retirement Benefits – Tier 2.
The Tier 2 retirement plan shall include the following benefits listed below. This retirement program shall be referred to as “Tier 2” and shall be effective for employees hired on or after the following dates except as otherwise provided in this section: (1) Sworn Police Officers: August 4, 2013; (2) Sworn Firefighters: January 2, 2015 and (3) Federated: September 30, 2012. Employees initially hired before the effective date of Tier 2 shall be Tier 1 employees, even if subsequently rehired. Employees who qualify as “classic” lateral employees under the Public Employees’ Pension Reform Act and are initially hired by the City of San Jose on or after January 1, 2013, are considered Tier 1 employees.
(a) Cost Sharing. The City’s cost for the Tier 2 defined benefit plan shall not exceed 50% of the total cost of the Tier 2 defined benefit plan (both normal cost and unfunded liabilities), except as provided herein. Normal cost shall always be split 50/50.In the event an unfunded liability is determined to exist, employees will contribute toward the unfunded liability in increasing increments of 0.33% per year, with the City paying the balance of the unfunded liability, until such time that the unfunded liability is shared 50/50 between the employer and employee.
(b) Age. The age of eligibility for service retirement shall be 57 for employees in the Police and Fire Retirement Plans and 62 for employees in the Federated Retirement System. Earlier Retirement may be permitted with a reduction in pension benefit by a factor of 7% per year for employees in the Police and Fire Retirement Plan and a reduction in pension benefit by a factor of 5% per year for employees in the Federated Retirement System. An employee is not eligible for a service retirement earlier than the age of 50 for employees in the Police and Fire Retirement Plan or age 55 for employees in the Federated Retirement System. Tier 2 employees shall be eligible for a service retirement after earning five years of retirement service credit.
(c) COLA. Cost of living adjustments, or COLA, shall be equal to the increase in the Consumer Price Index (CPI), defined as San Jose – San Francisco – Oakland U.S. Bureau of Labor Statistics index, CPI-Urban Consumers, December to December, with the following limitations:
1. For Police and Fire Retirement Plan members, cost of living adjustments applicable to the retirement allowance shall be the lesser of the Consumer Price Index (CPI), or 2.0%.
2. For Federated Retirement System members, cost of living adjustments applicable to the retirement allowance shall be the lesser of CPI or:
a. 1-10 total years of City service and hired after the effective date of the implementing ordinances of the revised Tier 2: 1.25%
b. 1-10 years total years of City service and hired before the effective date of the implementing ordinances of the revised Tier 2: 1.5%
c. 11-20 total years of City service: 1.5%
d. 21-25 total years of City service: 1.75%
e. 26 or more total years of City service: 2.0%
3. The first COLA adjustment will be prorated based on the number of months retired in the first calendar year of retirement.
(d) Final Compensation. “Final compensation” shall mean the average annual earned pay of the highest three consecutive years of service. Final compensation shall be base pay only, excluding premium pays or other additional compensation, except members of the Police and Fire Plan whose pay shall include the same premium pays as Tier 1 members.
(e) Maximum Allowance and Accrual Rate. For Police and Fire Plan members, service retirement benefits shall be capped at a maximum of 80% of final compensation for an employee who has 30 or more years of service at the accrual rate contained in the Alternative Pension Reform Settlement Framework approved by City Council on August 25, 2015. For Federated Retirement System members, service retirement benefits shall be capped at a maximum of 70% of final compensation for an employee who has 35 or more years of service at the accrual rate contained in the Alternative Pension Reform Settlement Framework approved by City Council on December 15, 2015, and January 12, 2016.
(f) Year of Service. An employee will be eligible for a full year of service credit upon reaching 2080 hours of regular time worked (including paid leave, but not including overtime).
Section 1505-A. Disability Retirements.
(a) The definition of “disability” shall be that as contained in the San Jose Municipal Code in Sections 3.36.900 and 3.28.1210 as of the date of this measure.
(b) Each plan member seeking a disability retirement shall have their disability determined by a panel of medical experts appointed by the Retirement Boards.
(c) The independent panel of medical experts will make their determination based upon majority vote, which may be appealed to an administrative law judge.
Section 1506-A. Supplemental Payments to Retirees.
The Supplemental Retiree Benefit Reserve (“SRBR”) has been discontinued, and the assets returned to the appropriate retirement trust fund. In the event assets are required to be retained in the SRBR, no supplemental payments shall be permitted from that fund without voter approval. The SRBR will be replaced with a Guaranteed Purchasing Power (GPP) benefit for all Tier 1 retirees. The GPP is intended to maintain the monthly allowance for Tier 1 retirees at 75% of purchasing power of their original pension benefit effective with the date of the retiree’s retirement. The GPP will apply in limited circumstances (for example, when inflation exceeds the COLA for Tier 1 retirees for an extended period of time). Any calculated benefit will be paid annually in February.
Section 1507-A. Retiree Healthcare.
The defined benefit retiree healthcare plan will be closed to new employees as defined by the San Jose Municipal Code in Chapter 3.36, Part 1 and Chapter 3.28, Part 1. Section 1508-A. Actuarial Soundness (for both pension and retiree healthcare plans).
(a) In recognition of the interests of the taxpayers and the responsibilities to the plan beneficiaries, all pension and retiree healthcare plans shall be operated in conformance with Article XVI, Section 17 of the California Constitution. This includes but is not limited to:
1. All plans and their trustees shall assure prompt delivery of benefits and related services to participants and their beneficiaries;
2. All plans shall be subject to an annual actuarial analysis that is publicly disclosed in order to assure the plan has sufficient assets;
3. All plan trustees shall discharge their duties with respect to the system solely in the interest of, and for the exclusive purposes of providing benefits to participants and their beneficiaries, minimizing employer contributions thereto, and defraying reasonable expenses of administering the system;
4. All plan trustees shall diversify the investments of the system so as to minimize the risk of loss and maximize the rate of return, unless under the circumstances it is not prudent to do so;
5. Determine contribution rates on a stated contribution policy, developed by the retirement system boards and;
6. When investing the assets of the plans, the objective of all plan trustees shall be to maximize the rate of return without undue risk of loss while having proper regard to the funding objectives of the plans and the volatility of the plans’ contributions as a percentage of payroll.
Section 1509-A. Retirement Contributions.
There shall be no offset to normal cost contribution rates in the event plan funding exceeds 100%. Both the City and employees shall always make the full annual required plan contributions as calculated by the Retirement Board actuaries which will be in compliance with applicable laws and will ensure the qualified status under the Internal Revenue Code.
Section 1510-A. No Retroactive Defined Retirement Benefit Enhancements.
(a) Any enhancement to a member’s defined retirement benefit adopted on or after January 1, 2017, shall apply only to service performed on or after the operative date of the enhancement and shall not be applied to any service performed prior to the operative date of the enhancement.
(b) If a change to a member’s retirement membership classification or a change in employment results in an enhancement in the retirement formula or defined retirement benefits applicable to that member, except as otherwise provided under the plans as of [effective date of ordinance], that enhancement shall apply only to service performed on or after the effective date of the change and shall not be applied to any service performed prior to the effective date of the change.
(c) “Operative date” would be the date that any resolution or ordinance implementing the enhancement to a member’s defined retirement formula or defined retirement benefit adopted by the City Council becomes effective.
City of San Jose, “Alternative Pension Reform Act,” 2016 (full text)
City of San Jose, Alternative Pension Reform Act Ballot Measure – references for voters, 2016
City of San Jose, Framework Agreement summarizing Alternative Pension Reform Act, 2015
City of San Jose, “Sustainable Retirement Benefits and Compensation Act,” 2012 (full text)
City of San Jose, Measure B (Sustainable Benefits and Compensation Act) – references for voters, 2012
Ballotpedia – San Jose Pension Modification Agreement, Measure F (November 2016)
Ballotpedia – San Jose Pension Reform, Measure B (June 2012)
San Jose Mercury News, August 25, 2015 – San Jose council approves Measure B settlement
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