Posts

California Fire Districts are Morphing into Retirement Plans

The East Contra Costa Fire District (ECCFD) has financial problems because it pays more for retirement benefits than it does in salaries to current employees. With most of its staff eligible to retire on the 3% at 50 formula and at least two current retirees receiving more than $100,000 annually, the district is functioning as more of a retirement plan than as a firefighting unit. Rather than economize on its pension benefits, district leadership has closed fire stations and made repeated attempts to extract more taxpayer funds.

Actuaries for the Contra Costa County Employees’ Retirement Association (CCCERA) have calculated a 130% pension contribution rate for ECCFD firefighters for the upcoming 2017-18 fiscal year. This means for every dollar the ECCFD pays in firefighter salaries, it must pay $1.30 to the pension fund. Of the $12.9 million the district plans to spend in 2017-18, $4.6 million is earmarked for retirement related expenses, which include health insurance as well as pension contributions.

District officials have tried to address ECCFD’s spending problem by trying to raise more revenue.  In 2012, voters rejected the district’s proposed $197 parcel tax by a 56-44 margin. Despite this defeat, the district was able to temporarily reopen a couple of its shuttered fire stations with a $7.8 million federal grant. After exhausting the grant funds in 2014, ECCFD returned with hat in hand to area voters. In March 2015, officials mailed ballots to 38,529 area homeowners asking them to approve a $95 per year assessment. Only about one quarter of the ballots were returned, and 53% of those voting rejected the proposal.

Having failed to acquire new revenue through a tax increase, district officials are pushing to obtain a greater share of the one percent ad valorem tax that property owners currently pay. Any such adjustment would require legislation at the state level. In a September 2016 letter to State Senator Steve Glazer, ECCFD Fire Chief Hugh Henderson argued that the current allocation system was biased against agencies, like his, that were formed after the passage of Prop 13.

As the East Bay Times recently reported, ECCFD have prevailed upon the Oakley City Council to endorse an increase the district’s allocation, which is now 7.5%.  Other area officials are less supportive. Six school superintendents have written their own letter opposing the change. Each dollar of new revenue for ECCFD under a reallocation would reduce the amount of tax revenue available to the school districts, cities and other special districts within ECCFD’s area:  it is truly a zero-sum game.

Taking money away from schools to pay firefighter pensions may seem hard-hearted to the independent observer, but ECCFD couches it as a public safety issue.  In his letter to Senator Glazer, Henderson notes that, with only three stations, the district cannot respond to most fires within the recommended timeframes of four minutes for urban areas and eight minutes for suburban/rural areas. Of course, much of rural California is more than eight minutes away from a fire station – so East Contra Costa is not unique in that respect.

It is also worth noting that suburban and rural fire districts do not respond to that many fires. Although ECCFD does not provide a breakdown of its 6875 service calls in 2016, statistics are available from a neighboring district.  In San Ramon Valley, fires and explosions accounted for just 2.5% of the department’s calls.  False alarms made up 7%.

The overwhelming majority were calls for medical assistance such as transportation to a local hospital. Clearly this is an important function, but it is less obvious that it needs to be carried out by public safety officers eligible to retire in their 50s at up to 100% of final compensation.

While ECCFD has an extraordinarily high pension cost burden, other Contra Costa County fire districts are not far behind as shown in the following table:

District FY 2018 Pension Contribution Rate for Safety Officers Pension Plan Funded Ratio (as of 6/30/16)
Contra Costa County Fire Protection District 77.46% 81.54%
East County Fire Protection District 130.36% 70.89%
Moraga-Orinda Fire Protection District 70.17% 78.77%
Rodeo-Hercules Fire Protection District 86.23% 63.59%
San Ramon Valley Fire Protection District 83.14% 79.70%

Sources: CCERA Retirement Board Agenda Package, October 20, 2016; author’s calculations.

Because all five systems are well below fully funding, there will be further upward pressure on contribution rates in the coming years. It is also worth noting that both the Contra Costa County FPD (CCCFPD) and Moraga-Orinda FPD (MOFPD) districts are also servicing pension obligation bonds. For CCCFPD, debt service on its bonds was $11.9 million in 2015, representing almost 10% of the district’s revenue.

Back at ECCFD, Chief Henderson will no longer have to worry about finding new revenue to offset the district’s unsustainable pension burden.  He retires later this month at the age of 54 – on a pension that will be well over $100,000 annually.

Editor’s Note:  An earlier version of this piece referred to a pension cap of 90% of final salary. While a 90% cap applies to CalPERS pensions, the cap for CCCERA and other county plans is 100%.  If a public safety employee on the 3% at 50 formula works at least 33-1/3 years he or she can retire on full salary.

Marc Joffe is the Director of Policy Research at the California Policy Center.  Marc would like to thank Kris Hunt and Wendy Lack of the Alliance of Contra Costa Taxpayers for their contributions to this analysis.

Problems With California’s “Secure Choice” Pension Plan

Editor’s Note: In this article, author Jon Coupal describes most of the problems with California’s “Secure Choice” pension plan for private sector workers, but he omits a big one: The plan is designed using realistic financial assumptions, i.e., relatively high contribution rates and relatively low rate-of-return assumptions, and a very modest retirement benefit formula. Put another way, “Secure Choice” is everything that government employee pensions are not. Unlike public sector pension funds, the Secure Choice fund will generate perennial surpluses. And where will those surpluses go? Perhaps to bail out the government worker pension funds? Here’s the difference in benefits: (1) Public sector: Teachers/Bureaucrats, 30 years work – pension is 75% of final salary. (2) Public sector: Public Safety, 30 years work – pension is 90% of final salary. (3) Private sector: “Secure Choice,” 30 years work – pension is 27.6% of final salary (learn more). Isn’t that special?

California’s “Secure Choice” program sounds harmless enough: A voluntary program — at least for now — that would enroll private sector employees who currently don’t have a retirement plan into a state-run retirement savings account.

When the initial program was announced in 2012 with authorizing legislation, taxpayers were skeptical. Now that the program is even closer to fruition, there is greater reason to be concerned. The good news, however, is that the U.S. Congress is now threatening to pull the plug on this foolish endeavor.

The first question is why is this program even needed? While many public employees don’t pay into Social Security (most receive generous public retirement benefits instead) workers in the private sector do receive Social Security. One might complain that Social Security benefits are inadequate but, because the program is backed by the federal government (which has the power to print money) the benefits promised are almost certain to be forthcoming. Not only that, under federal law, there are many programs to assist private-sector workers whose employers don’t offer 401(k) or other employer-based plans. These include individual retirement accounts, both traditional and Roth IRAs. For workers without an employer retirement plan, there are generous limits on how much can be saved tax deferred.

Given all the existing retirement programs authorized under federal law and managed by the private investment firms, why on earth would California want to adopt a massive new government program? The short answer is that progressives desperately desire to control every aspect of the economy, leaving no room for the private sector. Never mind that investment firms — of which there are thousands to choose from — offer competitive returns and efficient management of retirement accounts. Progressives truly believe that government can do it better.

But better than what? The California Public Employees’ Retirement System, which is carrying an unfunded liability of close to a trillion dollars, has a history of corruption and gross mismanagement.

Progressives also see Secure Choice as a means to crowd out private firms which attempt to maximize returns for their investors while public-sector retirement funds engage in “social engineering,” investing in speculative industries and firms, many of which require government subsidies to survive. At the same time, these public funds eschew well-performing investments such as in the oil industry. This might explain, in part, why the investment returns of California’s public employee retirement funds badly underperform.

Then there is the cost to taxpayers. While the program is ostensibly voluntary, the startup costs of the program exceed $100 million. Taxpayers didn’t have much of a choice in seeing their dollars spent on this questionable program. We suspect that most Californians would prefer that money to go to projects that are truly public in nature such as highway maintenance and fixing dams. Finally, there is the risk to taxpayers in the event Secure Choice goes bankrupt. Defenders claim that this can’t happen but we recall officials in Stockton, Vallejo and San Bernardino saying the same thing.

The good news is that the days of Secure Choice may be numbered because of the political sea change in Washington. It is important to understand that the program would not even be legal were it not for regulations issued by the Obama administration. State programs such as Secure Choice were never authorized by Congress. Rep. Tim Walberg, R-Mich., chairman of the subcommittee on Health, Employment, Labor and Pensions, sponsored a resolution that most believe nullifies the Obama administration’s regulations. Just last week, that resolution passed on a party line vote meaning that Secure Choice and other similar state programs are now on life support.

California has enough problems to deal with. There is no need for it to get into the private retirement plan business.

Jon Coupal is president of the Howard Jarvis Taxpayers Association.