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Coping With the Pension Albatross

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.

REFERENCES

Pension Math: Public Pension Spending and Service Crowd Out in California, 2003-2030
https://siepr.stanford.edu/sites/default/files/publications/17-023.pdf

How pension costs reduce government services, Ed Mendel, CalPensions, 10/09/2017
https://calpensions.com/2017/10/09/how-pension-costs-reduce-government-services/

Forget the scary pension future; study confirms the crisis is hitting now, Steve Greenhut, California Policy Center, 10/10/2017
http://californiapolicycenter.org/forget-scary-pension-future-study-confirms-crisis-hitting-now/

The Coming Public Pension Apocalypse, and What to Do About It
http://californiapolicycenter.org/the-coming-public-pension-apocalypse/

How Fraudulently Low “Normal Contributions” Wreak Havoc on Civic Finances
https://calocalelectedofficials.org/fraudulently-low-normal-contributions-wreak-havoc-civic-finances/

What is the Average Pension for a Retired Government Worker in California?
http://californiapolicycenter.org/what-is-the-average-pension-for-a-retired-government-worker-in-california/

California’s Public Sector Compensation Trends
http://californiapolicycenter.org/californias-public-sector-compensation-trends/

Average Full Career Pension by City (all CalPERS employers), Transparent California
http://transparentcalifornia.com/pensions/2016/calpers/employers/?s=-average

Public Agency Actuarial Valuation Reports by CalPERS Agency
https://www.calpers.ca.gov/page/employers/actuarial-services/employer-contributions/public-agency-actuarial-valuation-reports

Pension Reform – The San Jose Model
https://calocalelectedofficials.org/pension-reform-san-jose-model/

Pension Reform – The San Diego Model
https://calocalelectedofficials.org/pension-reform-the-san-diego-model/

Reforming Binding Arbitration
https://calocalelectedofficials.org/reforming-binding-arbitration/

Marin County Discloses Debt Balances on Property Tax Bills

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.

RECOMMENDATIONS

(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.

REFERENCES

Marin County Board of Supervisors, 7/30/2013 Minutes (ref. item 3, page 1)
http://marin.granicus.com/MinutesViewer.php?view_id=33&clip_id=6714&doc_id=c40ad825-4c42-1031-bc96-29b50f2ba9d1

Marin County Board of Supervisors, Meeting Archives
https://www.marincounty.org/depts/bs/meeting-archive

Marin County Citizens for Sustainable Pension Plans
http://marincountypensions.com/index.html

Marin County 2015-2016 Consolidated Annual Financial Report
https://www.calpers.ca.gov/docs/forms-publications/cafr-2016.pdf

Marin County Archive of Consolidated Annual Financial Reports
https://www.marincounty.org/depts/df/financial-reports

Transparent California, 2016 salary and benefit payments for Marin County
http://transparentcalifornia.com/salaries/2016/marin-county/

How Fraudulently Low “Normal Contributions” Wreak Havoc on Civic Finances

Back in 2013 the City of Irvine had an unfunded pension liability of $91 million and cash reserves of $61 million. The unfunded pension liability was being paid off over 30 years with interest charged on the unpaid balance at a rate of 7.5% per year. Irvine’s cash reserves were conservatively invested and earned interest at an annual rate of around 1%. With that much money in reserve, earning almost no interest, the city council decided use some of that money to pay off their unfunded pension liability.

As reported in Governing magazine, starting in 2013, Irvine increased the amount they would pay CalPERS each year by $5M over the required payment, which at the time was about $7.7M. With 100% of that $5M reducing the principal amount owed on their unfunded liability, they expected to have the unfunded liability reduced to nearly zero within ten years, instead of taking thirty years. Here’s a simplified schedule showing how that would have played out:

CITY OF IRVINE, 2013  –  PAY $5.0 MILLION EXTRA PER YEAR
ELIMINATING UNFUNDED PENSION LIABILITY IN TEN YEARS

This plan wasn’t without risk. Taking $5 million out of their reserve fund for ten years would have depleted those reserves by $50 million, leaving only $11 million. But Irvine’s city managers bet on the assumption that incoming revenues over the coming years would include enough surpluses to replenish the fund. In the meantime, after ten years they would no longer have to make any payments on their unfunded pension liability, since it would be virtually eliminated. Referring to the above chart, the total payments over ten years are $127 million, meaning that over ten years, in addition to paying off the $91 million principal, they would pay $36 million in interest. If the City of Irvine had made only their required $7.7 million annual payments for the next thirty years, they would have ended paying up an astonishing $140 million in interest! By doing this, Irvine was going to save over $100 million.

Four years have passed since Irvine took this step. How has it turned out so far?

Not so good.

Referring to CalPERS Actuarial Valuation Report for Irvine’s Miscellaneous and Safety employees, at the end of 2016 the city’s unfunded pension liability was $156 million.

Irvine was doing everything right. But despite pumping $5M extra per year into CalPERS to pay down the unfunded liability which back in 2013 was $91M (and would have been down to around $64M by the end of 2016 if nothing else had changed), the unfunded liability as of 12/31/2016 is – that’s right – $156 million.

Welcome to pension finance.

The first thing to recognize is that an unfunded pension liability is a fluid balance. Each year the actuarial projections are renewed, taking into account actual mortality and retirement statistics for the participants as well as updated projections regarding future retirements and mortality. Each year as well the financial status of the pension fund is updated, taking into account how well the invested assets in the fund performed, and taking into account any changes to the future earnings expectations.

For example, CalPERS since 2013 has begun phasing in a new, lower rate of return. They are lowering the long-term annual rate of return they project for their invested assets from 7.5% to 7.0%, and may lower it further in the coming years. Whenever a pension system’s rate of return projection is lowered, at least three things happen:

(1) The unfunded liability goes up, because the amount of money in the fund is no longer expected to earn as much as it had previously been expected to earn,

(2) The payments on the unfunded liability – if the amount of that liability were to stay the same – actually go down, since the opportunity cost of not having that money in the fund is not as great if the amount it can earn is assumed to be lower than previously, and,

(3) the so-called “normal contribution,” which is the payment that is still necessary each year even when a fund is 100% funded and has no unfunded liability, goes up, because that money is being invested at lower assumed rates of return than previously.

That third major variable, the “normal contribution,” is the problem.

Because as actuarial projections are renewed – revealing that people are living longer, and as investment returns fail to meet expectations – the “normal contribution” is supposed to increase. For a pension system to remain 100% funded, or just to allow an underfunded system not to get more underfunded, you have to put in enough money each year to eventually pay for the additional pension benefits that active workers earned in that year. That is what’s called the “normal contribution.”

By now, nearly everyone’s eyes glaze over, which is really too bad, because here’s where it gets interesting.

The reason the normal contribution has been kept artificially low is because the normal contribution is the only payment to CalPERS that public employees have to help fund themselves via payroll withholding. The taxpayers are responsible for 100% of the “unfunded contribution.” CalPERS has a conflict of interest here, because their board of directors is heavily influenced, if not completely controlled, by public employee unions. They want to make sure their members pay as little as possible for these pensions, so they have scant incentive to increase these normal contributions.

When the normal contribution is too low – and it has remained ridiculously low, in Irvine and everywhere else – the unfunded liability goes up. Way up. And the taxpayer pays for all of it.

Returning to Irvine, where the city council has recently decided to increase their extra payment on their unfunded pension liability from $5 million to $7 million per year, depicted on the chart below is their new ten year outlook. As can be seen (col. 4), just the 2017 interest charge on this new $156 million unfunded pension liability is nearly $12 million. And by paying $7 million extra, that is, by paying $20.2 million per year, ten years from now they will still be carrying over $35 million in unfunded pension debt.

CITY OF IRVINE, 2017  –  PAY $7.0 MILLION EXTRA PER YEAR
REDUCTION OF UNFUNDED PENSION LIABILITY IN TEN YEARS

This debacle isn’t restricted to Irvine. It’s everywhere. It’s happening in every agency that participates in CalPERS, and it’s happening in nearly every other public employee pension system in California. The normal cost of funding pensions, which employees have to help pay for, is understated so these employees do not actually have to pay a fair portion of the true cost of these pensions. If this isn’t fraud, I don’t know what is.

It gets worse. Think about what happened between 2013 and 2017 in the stock market. The Wall Street recovery was in full swing by 2013 and by 2016 was entering so-called bubble territory. As the chart below shows, on 1/01/2013 the value of the Dow Jones stock index was 13,190. Four years later, on 12/31/2017, the value of the Dow Jones stock index was up 51%, to 19,963.

Yet over those same four years, while the Dow climbed by 51%, the City of Irvine’s unfunded pension liability grew by 71%. And this happened even though the City of Irvine paid $12.7 million each year against that unfunded liability instead of the CalPERS’s specified $7.7 million per year. Does that scare you? It should. Sooner or later the market will correct.

DOW JONES INDUSTRIAL AVERAGE
PERFORMANCE FOR THE PAST FIVE YEARS, 2013-2017

While the stock market roared, and while Irvine massively overpaid on their unfunded liability, that unfunded liability still managed to increase by 51%. Perhaps that normal contribution was a bit lower than it should have been?

Irvine did the right thing back in 2013. CalPERS let them down. Because CalPERS was, and is, understating the normal contribution in order to shield public sector workers from the true cost of their pensions. The taxpayer is the victim, as always when we let labor unions control our governments and the agencies that serve them.

REFERENCES

CalPensions Article discussing CalPERS recent polices regarding pension debt repayments:
https://calpensions.com/2017/09/25/calpers-considers-paying-down-new-debt-faster/

Irvine 2017-18 Budget – discussion of faster paydown plan on UAAL
http://legacy.cityofirvine.org/civica/filebank/blobdload.asp?BlobID=29623

Irvine Consolidated Annual Financial Report FYE 6/30/2016
http://legacy.cityofirvine.org/civica/filebank/blobdload.asp?BlobID=28697

Irvine – links to all Consolidated Annual Financial Reports
http://www.cityofirvine.org/administrative-services-department/financial-reports

CalPERS search page to find all participating agency Actuarial Valuation Reports
https://www.calpers.ca.gov/page/employers/actuarial-services/employer-contributions/public-agency-actuarial-valuation-reports

CalPERS Actuarial Valuation Report – Irvine, Miscellaneous
https://www.calpers.ca.gov/docs/actuarial-reports/2016/irvine-city-miscellaneous-2016.pdf

CalPERS Actuarial Valuation Report – Irvine, Safety
https://www.calpers.ca.gov/docs/actuarial-reports/2016/irvine-city-safety-2016.pdf

Governing Magazine report on Irvine
http://www.governing.com/columns/public-finance/col-irvine-california-plans-prepay-pension-bill.html

Pension Reform – The San Jose Model

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.

REFERENCES

City of San Jose, “Alternative Pension Reform Act,” 2016 (full text)
http://sanjoseca.gov/DocumentCenter/View/59737

City of San Jose, Alternative Pension Reform Act Ballot Measure – references for voters, 2016
http://www.sanjoseca.gov/index.aspx?nid=3208

City of San Jose, Framework Agreement summarizing Alternative Pension Reform Act, 2015
http://www.sanjoseca.gov/DocumentCenter/View/46068

City of San Jose, “Sustainable Retirement Benefits and Compensation Act,” 2012 (full text)
http://www.sanjoseca.gov/DocumentCenter/View/5166

City of San Jose, Measure B (Sustainable Benefits and Compensation Act) – references for voters, 2012
http://www.sanjoseca.gov/index.aspx?NID=5187

Ballotpedia – San Jose Pension Modification Agreement, Measure F (November 2016)
https://ballotpedia.org/San_Jose,_California,_Pension_Modification_Agreement,_Measure_F_(November_2016)

Ballotpedia – San Jose Pension Reform, Measure B (June 2012)
https://ballotpedia.org/San_Jose_Pension_Reform,_Measure_B_(June_2012)

San Jose Mercury News, August 25, 2015 – San Jose council approves Measure B settlement
http://www.mercurynews.com/2015/08/25/san-jose-council-approves-measure-b-settlement/

Pension Reform – The San Diego Model

Beginning around 2009 it became clear to civic leaders and councilmembers that the City of San Diego faced serious financial challenges. A San Diego County Grand Jury in that year released a report that recommended the city file for bankruptcy. The report cited the underfunded City’s pension system as the primary underlying cause of their budget deficits. By June 2009, the City of San Diego’s independent pension system was only 66.5% funded. By 2012, the systems unfunded liabilities were well over $200 million. Apart from bankruptcy, the only solution available to San Diego was pension benefit reform.

In June 2012, voters in the City of San Diego voted 66% to 34% to enact sweeping reforms to that city’s pension benefits. The coalition that promoted this reform included advocates for taxpayers, fiscal conservatives, and local business and trade associations that wanted to improve the financial health of the city. Since then, these reforms have been challenged repeatedly in court, but thus far the entirety of the pension reform package has been upheld. Here is a checklist of things to consider for local pension reformers in other cities and counties in California:

1 – The Reform Cannot Attack “Vested Rights”:

“Vested” benefits in California under current law require public employees to receive whatever benefits they were promised when they were hired. This means that even future benefits for existing employees cannot be changed. San Diego’s reform made certain to only affect future retirement benefits for new hires. San Diego’s reform also enacted a salary cap on existing employees, which did not violate vested rights. These two steps, putting new employees onto 401K plans that will not generate unfunded liabilities, and putting a cap on pension eligible salaries for existing employees, significantly reduced the amounts the City of San Diego has to contribute to their pension fund in order to keep it solvent.

2 – Rely on a Citizen’s Ballot Initiative:

Because most city councils and county boards of supervisors are populated by local elected officials whose campaigns are overwhelmingly funded by public employee unions, it is almost impossible to rely on them to enact pension reform. But a citizen’s initiative bypasses these beholden officials and relies on local activists and concerned citizens to research, write, qualify for the ballot, and campaign for meaningful reform.

3 – Prepare to Spend Between $5 and $10 per Signature to Qualify a Measure for the Ballot:

Or more! Signature gathering almost never can be 100% completed by volunteers, and professional firms are almost universally relied upon to make up the difference. In San Diego, supporters of the reform initiative spent about $1.1 million to gather 94,000 signatures – over $10 per signature.

4 – Expect Relentless Harassment From Public Unions:

One of the reasons it costs so much to obtain signatures is because the anti-initiative forces mount well organized opposition to signature gathering efforts. Tactics used in San Diego or elsewhere in California include (a) sending people to pace in front of the signature gatherer’s table, intimidating anyone who may want to sign the petition, (b) following signature gatherers home and photographing them in an attempt to intimidate them, (c) circulating flyers and sponsoring media campaigns that present misleading information – in San Diego the anti-initiative forces paid for a radio campaign that suggested people who signed petitions might have their identity stolen, (d) deliberately having people sign the petitions using fraudulent names in order to cause the entire body of petitions to be invalidated during the verification process.

5 – Be Prepared to Repeatedly Defend the Reform in Court:

San Diego’s reform was challenged before it went onto the ballot by opponents who argued it violated the “meet and confer” rule, wherein city officials have to talk with union representatives before changing conditions of their contract. This challenge first went to the Public Employee Relations Board, packed with gubernatorial appointees who are all former labor activists. PERB, predictably, upheld the opponents accusations, but in court the judge overruled PERB and permitted the initiative to stay on the ballot. The initiative survived other pre and post ballot legal challenges, but still faces one more round, sometime in either 2017 or early 2018, at the California Supreme Court.

What reformers did in San Diego succeeded because the language of the initiative minimized the potential for legal challenges, and it succeeded because there was a critical mass of committed reform minded activists, business associations, and politicians who were prepared to stay in the fight for years. Here is the language of San Diego’s Proposition B:

PENSION REFORM – SAMPLE LANGUAGE

BALLOT TITLE
Amendments to the San Diego City Charter Affecting Retirement Benefits

BALLOT SUMMARY
This measure would amend the San Diego City Charter to make changes to retirement benefits. The measure would:

From its effective date until June 30, 2018:

1. Limit a City worker’s base compensation used to calculate the employee’s pension benefits to Fiscal Year 2011 levels.

2. Require that any new job classification be created only after specific findings are made that the new classification “is necessary to achieve efficiencies and/or salary savings” by consolidating job duties or creating a more efficient service delivery method.

3. Define the terns the City must use when it begins negotiations with the City’s labor unions for their contracts, unless the City Council overrides those terms with a two-thirds vote.

Provide all new hires at the City, except for sworn police officers, with a defined contribution plan modeled after a 401 (k) plan in place of a defined benefit pension plan.

Provide contributions for employees participating in the new defined contribution plan, in order to compensate for the lack of Social Security provided to City workers. The City’s maximum contribution for general City employees would be 9.2 percent of ah employee’s salary; the maximum contribution for uniformed public safety officers would be 11 percent of their salaries.

Authorize the City Council to enroll police officers in either the defined benefit or the defined contribution plan. The maximum payment to a sworn police officer hired after the measure goes into effect, under the defined benefit pension plan, would be based on the officer’s highest three years of pay, and capped at 80 percent of the average of those years.

Eliminate the defined benefit pension plan prospectively for elected officials (Mayor, City Attorney and City Councilmembers).

Eliminate, to the extent allowed by law, pension benefits for City officers or employees convicted of a felony related to their employment, duties or obligations as a City officer or employee. This may be reversed if the conviction is overturned.

Eliminate, unless otherwise allowed by law or agreement, the requirement of a majority vote by employees or retirees in the retirement system for changes that affect their benefits.

Require the City to contribute annually to the defined benefit pension plan an amount substantially equal to that required of the employee for a normal retirement allowance, but not contribute in excess of that amount.

Provide disability benefits for defined contribution plan participants who have a work-related disability.

Require the Retirement System to submit an actuarial study to the Mayor and Council regarding the impact on the pension plan “of any increases in proposed compensation or benefits” in an initial Council proposal.

Require the City to annually publish the amounts paid to City retirees, but redact their names.

REFERENCES

Ballotpedia – San Diego Pension Reform Initiative, Proposition B (June 2012)
https://ballotpedia.org/San_Diego_Pension_Reform_Initiative,_Proposition_B_(June_2012)

Ballotpedia – Pension reform: San Jose and San Diego Voters Weigh in
https://ballotpedia.org/Pension_reform:_San_Jose_and_San_Diego_voters_weigh_in

City of San Diego – Text of 2012 Proposition B
https://www.sandiego.gov/sites/default/files/legacy/city-clerk/elections/city/pdf/retirementcharteramendment.pdf

San Diego Union-Tribune, April 11, 2017 – Appeals court vindicates San Diego’s 2012 pension cutbacks
http://www.sandiegouniontribune.com/news/politics/sd-me-pension-appeal-20170411-story.html

San Diego Union-Tribune, May 22, 2017 – [Union] Appeal says ruling that vindicated San Diego pension reform could create statewide problems
http://www.sandiegouniontribune.com/news/politics/sd-me-pension-appeal-20170522-story.html

KPBS San Diego, July 27, 2017 – San Diego Pension Reform Headed for California Supreme Court
http://www.kpbs.org/news/2017/jul/27/san-diego-pension-reform-prop-b-supreme-court/

In Search of Heroes

California is not just any “blue state.” By many measures, California is a blue nation. It boasts the world’s sixth largest economy, isolated from the rest of the nation by mountains and deserts that were virtually impassable before modern times. It is blessed with diverse industries, abundant natural resources, and the most attractive weather in North America. California is nearly a nation unto itself.

And it is an occupied nation. California is ruled by a coalition of monopolistic businesses, public sector unions, and the environmentalist lobby. These Occupiers control a Democratic super-majority in the state legislature, as well as nearly all of California’s major cities, counties and school boards. To enrich and empower themselves, the Occupiers have oppressed California’s dwindling middle class and small business sectors, and condemned millions more to poverty and dependence.

For the average working family, no state in America is harder to live in than California. It has the highest cost-of-living, the highest taxes, the most onerous regulations, one of the worst systems of public education, congested freeways and failing infrastructure.  It will take heroic efforts to turn this around. And heroic efforts require heroes.

In the face of this overwhelming power, this alliance of oligarchs and government bureaucrats that has conned voters into embracing their servitude, where do you begin? What steps can you take? How do you rescue education, cut taxes, encourage new homes and new infrastructure, and save small businesses from crippling regulations?

As it turns out, a lot has been done in select locales, where heroes stepped up and successfully fought for reforms. And if those reforms could be replicated in other cities and counties, things would begin to change. To borrow a quote from Winston Churchill, if small local reforms began to spread across this great state, it would “not be the beginning of the end, but it would be the end of the beginning.” Here are some examples:

(1) Turning failing schools into charter schools:

As recently reported by CPC general counsel Craig Alexander, in 2015 parents at the Palm Lane Elementary School of the Anaheim City School District turned in far more signatures than needed under the Parent Trigger Law. The goal of the law and the parents at Palm Lane was to convert a public school that had failed their children for over a decade into a charter school. But the district, as a pretext to denying the Parent’s Petitions, improperly disallowed many signatures. It took a few years for parent volunteers and pro-bono attorneys, all of them heroically volunteering their time, to fight in court. But on Friday, April 28, 2017, the Court of Appeals issued a 34-page opinion that upheld in full the trial court’s ruling in favor of the parents and against the Anaheim Elementary School District. The Appeals Court found the trial court’s initial ruling, including the court’s findings of the bad faith tactics of the district, was correct in all aspects. Palm Lane Elementary school will start the 2017-2018 school year as a charter school.

(2) Stopping secret negotiations between cities and counties and public sector unions:

It wasn’t easy, but a few years ago, heroic progress was made. Orange County, Costa Mesa, and Fullerton all adopted so called “COIN” ordinances. COIN stands for “civic openness in negotiations.” This prevented elected officials from approving sweetheart deals with the government unions whose campaign contributions got them elected, all behind closed doors with minimal opportunities for public review. And to explain what happened next, one may borrow a quote from Tolkien: “Sauron’s [the Occupiers] wrath will be terrible, his retribution swift.” California’s union-controlled legislature passed a law they termed “CRONEY” (Civic Reporting Openness in Negotiations Efficiency Act), which mandates government agencies with COIN ordinances make public all negotiations with private vendors involving contracts over $250,000. There’s no comparison, of course. Private vendors disclose proprietary cost information in negotiations, and public entities are already required to take multiple bids in a competitive process. By contrast, public sector compensation, benefits and work rules are by definition not proprietary, they are public. And public sector unions, regrettably, have no competitors.

(3) Reforming financially unsustainable pension benefits:

If someone told you that they were going to invest their money, but if that money didn’t earn enough interest, they were going to take your money to make up the difference, would you think that was fair? Of course not. But that’s how a couple of million unionized public sector workers are treating the rest of us. California’s annual pension costs have risen from 3% of all state and local government revenue (i.e., “taxes”) to nearly 10% today, and there is no end in sight. But heroes are out there. In June 2012 voters in San Diego and San Jose passed pension reform initiatives. In both cases, to borrow some Star Wars terminology, “The Empire [The Occupiers] Strikes Back.” After relentless attacks in court, San Diego’s reforms were left largely intact, and San Jose’s were severely undermined, although some important provisions were preserved.

The people who fought for these reforms are too numerous to mention. They are all heroes. Some of them, like San Jose mayor Chuck Reed, San Diego councilmember Carl DeMaio, Costa Mesa mayor Jim Righeimer, and California state senator Gloria Romero, were elected officials whose courage has earned them the permanent enmity of the Occupiers. Other heroes, far more numerous, were the citizens, parents, and activists who dedicated countless hours to these causes.

Turning California back into a place where ordinary citizens can afford homes and get quality public education is not going to be easy. But there is no chance unless heroic individuals band together and fight the Occupiers, one issue at a time, one city at a time, one school district at a time.

Over the next several months, the California Policy Center intends to find more examples of heroic local reforms. It is our intention to not only compile these stories, but for each of them, distill them to the essential steps that were taken, so that these winning formulas can serve as an example to others.

We are in search of heroes. Contact us. Tell us your story.

 *   *   *

Ed Ring can be reached at ed@calpolicycenter.org.

 

Public Safety Unions and the Financial Apocalypse

Imagine for a moment that two premises are beyond serious debate: (1) That there will be another financial crisis within the next five years that will equal or exceed the severity of the one experienced in 2009, and (2) That the political power of public safety unions will prevent local governments from enacting pension reforms sufficient to avert a financial disaster when and if the next financial crisis hits.

What will these public safety unions do?

It’s distressingly easy for politicians to dismiss both of these premises, but since for the moment we’re not, imagine the following: Major European banks have declared insolvency because their debtors have all defaulted on payments, the Chinese stock market has collapsed because their export markets are shrinking instead of growing, and the deflationary contagion reaches American shores. Across the nation, speculative buying is replaced by panic selling. Housing prices fall, defaults accumulate, and the pension funds lose half their value overnight. In a cascading cycle reminiscent of 1929, deflation sweeps the global economy.

Meanwhile, pension reform has been limited to incremental adjustments to the pension benefits for new employees. Millions of retirees and active public safety workers still expect pensions that are roughly equivalent to the amount they made at the peak of their careers. But the money won’t be there.

How will public safety unions use their political power to address this challenge?

If the present is any indication, the solutions won’t be pretty. In San Jose and San Diego, public safety unions lead the charge to roll back local pension reforms enacted by voters. In counties across California, public safety unions lead the charge to undermine in court the reforms enacted by the State Legislature in the Public Employee Retirement Act of 2014. That’s all fine while the economic bubble continues to inflate. But what do we do when it pops? What do we do when there’s no money?

When challenging public safety unions to exercise their political power to advocate on issues other than law and order or their own compensation and benefits, a reasonable response is that public safety unions, like any government union, shouldn’t be involved in politics. The problem with that response is that they already are. Government unions, and their partners in the financial community, are a major cause of the economic bubble we’re experiencing. Their insatiable appetite for high returns, 7% or more, compels the financial engineering that creates unsustainable economic growth. When the crash comes, government unions will blame “Wall Street.” But in reality, they will share the blame, because they didn’t want to admit that their pension benefits relied on unsustainable rates of economic growth.

If there is another economic crash, public safety unions will face a choice. They can use their political power to strip away every remaining service that local government performs that isn’t related to public safety, raise taxes, and support “fees” on everything from green lawns to vehicle miles driven. They can support the creation of an authoritarian, oppressive state, raising revenue through rationing and regulating our water, energy, land use, home improvement, etc., at levels that make today’s annoying excesses seem trivial. They can hide behind environmentalism and egalitarianism to tax the last bits of vitality and freedom out of ordinary productive citizens. They can even hide behind faux libertarian ethics to charge exorbitant fees for rescue services, or profit from draconian applications of asset forfeiture laws. If they do this, it may be enough for them. But the price on society will be hideous.

There is an alternative.

Public safety unions can recognize that sustainable economic growth occurs when people have fewer impediments to running their private businesses. They can recognize that large corporations use regulations to eliminate their smaller competitors, and that excessive regulations of land, energy and water are the reasons that California has such a high cost of living. They can recognize that competitive resource development and cost-effective infrastructure development can only be achieved when the environmentalist lobby and their allies – the corporate and financial elites – are confronted and forced to accept less crippling restrictions.

Better yet, public safety unions can begin to recognize these political precepts NOW, before the financial apocalypse. Along with hopefully accepting more pension reforms instead of always fighting them, these unions can also protect their members’ futures by fighting for economic reform and more rational environmentalist restrictions. The sooner these reforms are adopted at the state and local level, the more resilient our economy will be when the economic implosion occurs. If pension benefit cuts are inevitable, because the money isn’t there anymore, with economic and environmentalist reforms the cost-of-living will also be cut.

America’s excessive public employee pension benefits have created a four trillion dollar monster, pension funds ravaging the world in search of high returns during the late stages of a credit expansion that has granted present growth at the expense of future growth. The day of reckoning is coming. Public safety unions can help prepare, for their own sake as well as for the sake of the citizens they are sworn to protect.

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Ed Ring is the president of the California Policy Center.

RELATED POST:
The Coming Public Pension Apocalypse, and What to Do About It

City of San Jose's Capitulation to Public Safety Unions is Complete

If someone told you that they were going to invest their money, but if that money didn’t earn enough interest, they were going to take your money to make up the difference, would you think that was fair?

When it comes to pensions for local government workers, that’s what’s happening all over California. San Jose’s story provides a particularly lurid example. Back in 2007 the San Jose Police and Fire Department Retirement plan was 97.8% funded (SJPF CAFR 2006-07, page 37). Back then, the annual contribution to the pension fund was $62.7 million, with the employees themselves contributing $16.1 million through payroll withholding, and the city contributing not quite three times as much, $46.6 million (SJPF CAFR 2006-07, page 40).

Last year, the San Jose Police and Fire Department Retirement plan was 79.3% funded (SJPF CAFR 2014-15, page 119). The annual contribution to the pension fund had ballooned up to $150.0 million, with the employees themselves contributing $20.7 million through payroll withholding, and the city contributing over six times as much, $129.3 million (SJPF CAFR 2014-15, page 73).

No wonder the City of San Jose put Measure B on the ballot in 2012, and no wonder voters passed it by a margin of 69% to 31%. But that wasn’t the end of it.

The unions embarked on a multi-year campaign in court. As reported here in August 2015 in the post “San Jose City Council Capitulates to Police Union Power,” the relentless union counter-attack eventually exhausted the will of the City Council. Facing an uphill battle against judges who themselves receive government pensions, they decided not to appeal the court’s overturning of a key part of the voter approved reform – one that would have allowed reductions to pension benefit accruals for future work.

Never forget that these are the same pensions that the unions lobbied politicians to enhance retroactively back in the late 1990’s and early 2000’s.

Earlier this month, in a final ruling that is almost anti-climactic, Santa Clara County Superior Court Judge Beth McGowen denied a legal attempt to stop the city from completely repealing the pension reform initiative voters approved in 2012.

Politicians come and go. Government unions, by contrast, have continuity of leadership, a massive and uninterrupted source of cash from taxpayer funded government worker paychecks, and unwavering resolve. This not only allows them to negotiate from a position of almost unassailable strength, and fight an endless war of attrition in the courts, but it also allows them to control the narrative. The narrative that the public safety unions used in their fight with pension reformers in San Jose was aggressive, to say the least.

From the start they demonized San Jose mayor Chuck Reed, who spearheaded reform efforts, accusing him of being more interested in his political future than the safety of the citizens. It wasn’t unusual back then, or in the years thereafter, to see bumper stickers with a simple message, “Chuck Reed is a bad person.”

The union also claimed they were unable to recruit because San Jose’s pay and benefit package was not competitive with other cities. But according to a report by NBC’s Bay Area affiliate, police union representatives told recruits to “take advantage of the academy, then find jobs elsewhere.”

But how underpaid and uncompetitive is San Jose’s pay and benefit package for their public safety employees? If you view the 2014 pay and benefits for San Jose’s city employees on Transparent California, you will see that 76 of the top 100 paid positions are either police or fire; they are 160 of the top 200 paid positions. What about averages and medians?

Using State Controller data, and not even screening out positions such as “accountant II,” or “Analyst II,” within the police and fire departments, the median total pay and benefits in 2014 for San Jose’s full-time firefighters was $214,669, and for full-time police it was $233,070. Properly fund their pensions and their retirement health benefits, and their median pay is easily over a quarter-million per year. And what about those pensions? How much are they?

Once again, Transparent California data for the San Jose Police and Fire Retirement Plan shows just how high these pensions can get. They estimate the full-career pension (30 years service or more) at $112,425 per year – NOT including health insurance benefits. That is corroborated by the “Average Benefit Payment Amounts” from the retirement plan’s CAFR (SJPF CAFR 2006-07, page 152) which shows the average 2014 pension benefit for retirees with 26-30 years service at $107,280, and for 30+ years at $115,884.  If you review the Transparent California pension data for San Jose’s public safety retirees by name, you will find 758 of them are collecting pensions – not including retirement health insurance benefits – in excess of $100,000 per year.

Which brings up another noteworthy topic – disability pensions. Of the 2,215 San Jose public safety retirees and beneficiaries as of June 30, 2015, 894 of them have retired under a “Service Connected Disability” (SJPF CAFR 2006-07, page 150). Once you adjust for beneficiaries (codes 5, 6, and 8 on table), this represents 49.8% of the retirees. Is it actually possible that half of all police and fire retirees are disabled from on the job injuries? How is this being verified? What are the criteria? The IRS grants significant tax benefits to public safety retirees with service disability pensions.

The financial condition of San Jose’s police and fire retirement system is dramatically worse today than it was ten years ago. The combined assets of their pension fund and their retirement health (OPEB) fund are now $3.1 billion, against liabilities of $4.6 billion – a funded ratio of 67%. And the unions who call the shots are making it abundantly clear that when the money runs short, you’re going to pay.

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Ed Ring is the president of the California Policy Center.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Practical Reforms to "Right-Size" Government Unions

Rolling back the power of government unions in a state like California is almost impossible. Their power has been unchallenged for so long that they now virtually control the state legislature, and their grip on local politicians extends to nearly every city, county, school district and special district.

But there have been reforms in some places, and they can serve as examples for municipalities throughout the state. Several Orange County cities have tried transparency ordinances of variable effectiveness. San Jose has restricted the use of binding arbitration. Voters in San Jose and San Diego have both passed pension reform measures. Cities scattered throughout California have grappled with unions over project labor agreements and prevailing wage laws. And in the courts, reformers have won the first round in the Vergara case, which challenges union work rules governing teacher dismissals, layoff preferences and tenure requirements.

Against the remorseless advance of the government union agenda, these and other measures are decidedly incremental. They are often overwhelmed by deceptive union measures that carry the reform label but are actually reactionary shams, designed to turn back the clock. Or they are challenged in court by an avalanche of suits and counter-suits designed to eviscerate reforms that voters overwhelmingly supported.

The game is rigged, but the nonpartisan hunger for quality public education and civic financial health is universal. Sooner or later, the will of the people will always prevail. Here then is a partial list of public sector union reforms that have been tried, or should be tried, in every city and county in California:

(1)  “Right-to-Work” for all government workers:

This would forbid government unions from getting a government employee fired simply because they didn’t want to join a union. Right-to-work is especially compelling in government organizations, where altruistic individuals who want to become public servants may not wish to financially support the political agenda of their union. Because government unions negotiate over work rules that determine how we manage our public institutions, virtually all union activity is inherently political. Right-to-work in government organizations therefore not only forces unions to be more accountable to their members, but is based on an employee’s constitutional right to free speech.

(2)  “Worker’s Choice” for all government workers:

This law takes right-to-work a step further, and should be implemented in tandem with right-to-work. One objection that unions make to right-to-work laws is that it allows those workers who did not join the union to become “free riders” who enjoy the alleged benefits of union representation but don’t pay any dues. “Worker’s Choice” allows workers under a collective bargaining agreement to opt-out and represent themselves individually in their wage and benefit negotiations with their employer. Something that professionals throughout the private sector do as a matter of course.

(3)  Union Recertification:

This would require government unions to regularly hold a “recertification” election, preferably once every year. The election would require secret ballots and participation by a quorum (usually a majority) of employees in the collective bargaining unit. Most government employees in California started working long after the unions took over. They should be able to decide if they want a union to continue to represent them. Recertification, like right-to-work and worker’s choice, is a practice that would ensure greater accountability by unions, because if they lose the annual election, they would be decertified and could not represent those workers until regaining their approval in an election to be held at least a year later.

(4)  Reduced Scope of Collective Bargaining:

This reform is recommended in order to provide elected officials the latitude to equitably balance the interests of taxpayers and government workers. It gives them the latitude to cope effectively with budget deficits caused by economic downturns that have already affected private sector workers. Limiting negotiations on compensation to current benefits, for example, would mean that elected officials retain the authority to modify pension benefit formulas. Not only budget issues but work rule issues could be restricted under this reform. For example, “last-in-first-out” layoff rules which favor seniority over merit could be scrapped.

(5)  Pension Reform:

The most likely way to implement effective pension reform – which, ironically, is the only way to rescue the defined benefit plan for government workers – is to revise the California constitution via a state ballot initiative. Such a reform, at the least, would give elected officials or voters the right to reduce pension benefit accruals earned by active employees for future work. It would require active employees to pay 50% of their normal contribution, calculated at a rate of return permissable under ERISA statutes, i.e., a truly “risk-free” rate of return. It would impose stricter curbs on spiking and double dipping that would be harder to circumvent in court. And it would provide tools to be implemented to ensure system solvency in a financial state of emergency, such as suspension of COLAs for retirees (retroactively if necessary), retroactive reduction in pension benefit annual accruals for active workers, raising of the pension-eligible retirement age, and a ceiling on benefits.

(6)  “Paycheck Protection”:

This would require unions to obtain permission, preferably annually, before deducting the political portion of their dues from worker paychecks. California’s government workers currently assert their right to not pay the political portion of their dues – notwithstanding the argument that ALL dues paid to a government union are used for essentially political purposes – via a cumbersome “opt-out” process. This reform would change that to an annual “opt-in” process, making it much easier for government workers to avoid having to support the political agenda of their unions.

(7)  “Dues Checkoff”:

Under this reform, government payroll departments would no longer be required (or allowed) to withhold union dues from government employee paychecks and turn that money automatically over to the union. Instead unions would be required to bill and collect dues without relying on payroll withholding, just like other membership organizations. This is particularly justified in the case of government unions, under the assumption that the government should not be acting as a collection agent for a private organization.

(8)  Clarification of “Public Employee”:

This is an interesting reform that can be interpreted in two ways. On one hand, by broadening the description to include government contractors, then in conjunction with other reforms, appropriate regulations restricting inappropriate union activity can be extended, for example, not only to home health care workers, but to construction contractors whose unions negotiate for project labor agreements and prevailing wage agreements. On the other hand, narrowing the description of what constitutes a public employee can counter the aggressive expansion of government unions in states such as California where there are virtually no checks on government union power. Either way, the principle governing the application of this reform would be that unions that operate in the public sector should be subject to more restrictions than those unions that operate in the private sector.

(9)  Transparency in Negotiations:

Lost on most voters is the fact that government unions epitomize the so-called abuses of the elite establishment. Powerful corporate and financial interests make deals with government unions in an Alliance of The Big. More regulations drive out innovative commercial competition at the same time as they expand unionized government. Transparency in negotiations, obviously, means that unions have to disclose their wage and benefit demands for public review. But it means much more than that. Disclosure of their financial and operating reports, their membership dues, their internal leadership election processes. And more than anything, a spotlight on how government unions collude with the most powerful and corrupt among the private sector elites they claim they are protecting us from.

(10)  Ban on Political Activity:

Public employee unions, if they should exist at all, should not be permitted to use their resources to conduct any sort of political lobbying or campaigning. There is an inherent conflict between the agenda of unionized government and the public interest. Government unions, by definition, want to increase their membership and want to increase the pay and benefits of their membership. That causes more government to trump good government. It causes more spending to trump efficient spending. At its root, it means that failure of government programs constitutes success for government unions, because their solution is inevitably to call for more government spending. Political activity by government union should be illegal.

Perhaps the most important point to be made in the context of these ten recommendations is that they are utterly nonpartisan. Unions in the public sector bear little relation to unions in the private sector, for reasons that are well documented: They don’t operate in agencies that have to make a profit, which limits how much private sector unions can ask for from their employers. They elect their own bosses through massive campaign spending, something unheard of in the private sector unions whose management is determined by shareholders. And they run the government, which allows them to make common cause with the most powerful and corrupt among the private sector elites. What part of this is partisan?

Californians of all political persuasions are going to eventually have to face the reality that government unions are the reason our schools are failing students and parents, and the reason we can’t balance our budgets and control our debt. These reforms are all ways to begin to reduce the power of government unions, which will be a giant step towards making California’s state and local governments truly accountable to the interests of all workers – not just government workers.

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Ed Ring is the president of the California Policy Center.

The Hypocrisy of Public Sector Unions

During the industrial age, labor unions played a vital role in protecting the rights of workers. Skeptics may argue that enlightened management played an equally if not greater role, such as when Henry Ford famously raised the wages of his workers so they could afford to buy the cars they made, but few would argue that labor unions were of no benefit. Today, in the private sector, the labor movement still has a vital role to play. There may be vigorous debate regarding how private sector unions should be regulated and what restrictions should be placed on their activity, but again, few people would argue they should not exist.

Public sector unions are a completely different story.

The differences between public and private sector unions are well documented. They operate in monopolistic environments, in organizations that are funded through compulsory taxes. They elect their bosses. They operate the machinery of government and can use that power to intimidate their political opponents.

Despite these fundamental differences in how they operate, public unions benefit from the still common perception that they are indistinguishable from private unions, that they make common cause with all workers, that they are looking out for us. This is hypocrisy on an epic scale.

Hypocrites regarding the welfare of our children

The most obvious example of public sector union hypocrisy is in education, where the teachers unions almost invariably put the interests of the union ahead of the interests of teachers, and put the interests of students last. This was brought to light during the Vergara case, which the California Teachers Association (CTA) claimed was a “meritless lawsuit.” What did the plaintiffs ask for? They wanted to (1) modify hiring policies so excellence rather than seniority would be the criteria for dismissal during layoffs, (2) they wanted to extend the period before granting tenure which in its current form permits less than two years of actual classroom observation, and (3) they wanted to make it easier to dismiss teachers who were incompetents or criminals.

When the Vergara case was argued in court, as can be seen in this mesmerizing video of the attorney for the plaintiffs’ closing arguments, the expert testimony he referred to again and again was from the witnesses called by the defense! When the plaintiffs can rely on the testimony of defense witnesses, the defendants have no case. But in their appeal, the defense attorneys are fighting on. Using your money and mine.

The teachers unions oppose reforms like Vergara, they oppose free speech lawsuits like Friedrichs vs. the CTA, they oppose charter schools, they fight any attempts to invoke the Parent Trigger Law, and they are continually agitating for more taxes “for the children,” when in reality virtually all new tax revenue for education is poured into the insatiable maw of Wall Street to shore up public sector pension funds. No wonder education reform, which inevitably requires fighting the teachers unions, has become an utterly nonpartisan issue.

Hypocrites regarding the management of our economy

Less obvious but more profound are the many examples of public union hypocrisy on the issue of pensions. To wit:

(1)  Public pension systems don’t have to comply with ERISA, which means they are able to use much higher rate-of-return assumptions. Private sector pensions are required to make conservative investments and offer modest but financially sustainable pensions. Public pensions operate under a double standard. They make aggressive investment assumptions in order to reduce required contributions by their members, then hit up taxpayers to cover the difference.

(2)  One of the reasons you haven’t seen the much ballyhooed extension of pension opportunities to all workers in California is because the chances they’ll offer a plan where the fund promises a return of 7.0% per year are ZERO. Once they’re forced to disclose the actual rate-of-return assumptions they’re prepared to offer, and why, the naked hypocrisy of the public sector pension plans using higher rate-of-return assumptions will be revealed in terms everyone can understand.

(3)  When the internet bubble was still inflating back in the late 1990’s, and stock values were soaring, public sector unions didn’t just agitate for, and receive, enhancements to pension benefit formulas. They received benefit enhancements that were applied retroactively. Public pensions are calculated by multiplying the number of years someone worked by a “multiplier,” and that product is then multiplied by their final salary (or average of the last few years salary) to calculate their pension. Retroactive enhancements meant that this multiplier, which was increased by 50% in most cases, was applied to past years worked, increasing pensions for imminent retirees by 50%. Now, with pension funds struggling financially, reformers want to decrease the multiplier, but not retroactively, which would be fair per the example set by the unions, but only for years still to be worked – only prospectively. And even that is off the table according to the unions and their attorneys. This is obscenely hypocritical.

(4)  Take a look at this CTA webpage that supports the “Occupy Wall Street” movement. What the CTA conveniently ignores is that the pension systems they defend are themselves the biggest players on Wall Street. In an era of negative interest rates and global deleveraging, public employee pension funds rampage across the globe, investing over $4.0 trillion in assets with the expectation of earning 7.0% per year. To do this they condone what Elias Isquith, writing for Salon, describes as “shameless financial strip-mining.” These funds benefit from corporate stock buy backs, which is inevitably paid for by workers. They invest with hedge funds and private equity funds, they speculate in real estate – more generally, pension systems with unrealistic rate-of-return expectations require asset bubbles to continue to expand even though that is killing the middle class in the United States. This gives them common cause with the global financial elites who they claim they are protecting us from.

(5)  In America today most workers are required to pay into Social Security, a system that is progressive whereby high income people get less back as a percentage of what they put in, a system that is adjustable whereby benefits can be reduced to ensure solvency, a system that never speculates on the global investment market. You may hate it or love it, but as long as private citizens are required to participate in Social Security, public servants should also be required to participate. That they have negotiated for themselves a far more generous level of retirement security is hypocritical.

The hypocrisy of public sector unions isn’t just deplorable, it’s dangerous. Because public unions have used the unfair advantages that accrue when they operate in the public sector to acquire power that is almost impossible to counter. Large corporations and wealthy individuals are the natural allies of public sector unions, especially at the state and local level, where these unions will rubber-stamp any legislation these elite special interests ask for, in return for support for their wage and benefit demands. Public unions both impel and enable corporatism and financialization. They are inherently authoritarian. They are inherently inclined to support bigger government, no matter what the cost or benefit may be, because that increases their membership and their power. They are a threat to our democratic institutions, our economic health, and our freedom.

And they are monstrous hypocrites.

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Ed Ring is the president of the California Policy Center.

How the Tax System Favors Government Workers and Punishes Independent Contractors

The 2016 tax filing deadline is now just one month away. Which makes it timely to point out how unfair our tax system is to middle class workers who want to prepare for their retirements. It is also timely to explain how there is a completely different set of retirement rules, far more favorable, that apply to unionized government workers.

If you are a member of the emerging “gig economy,” or a sole proprietor running a small business, or an independent contractor, and if you are reasonably successful, then you paying nearly 50% of every extra dollar you earn in taxes. The following table shows the marginal tax burden for independent contractors who earned more than $81.5K and less than $118.5K in 2015:

Marginal Tax Rate for Independent Contractors
(for 2015 earnings > $81.5K and < $118.5K)

20160301-UW-ER-TaxRates

The challenges posed by this reality bear closer examination. Let’s say, for example, that someone in this category needs to earn more money, and they have an opportunity to earn a few extra bucks by taking on a side project. For these earnings, they will pay 25% federal, 8% state, 12.4% Social Security (as employee and employer), and 2.9% Medicare. And by the way, the employee’s portion of their Social Security contribution is NOT tax deductible. What if they decide to put that money into a 401K?

According to current tax law, private sector taxpayers can only defer up to $18,000 of their income into a 401K, up to $24,000 if they are over the age of 50. Contrast this to the unionized public employee’s pension fund.

If the payments into a public employee’s retirement account exceed $24,000 per year – which they usually do – they remain tax deferred. A California Policy Center study (ref. table 4) examining 2011 compensation for City of San Jose employees showed that the average employer contribution for a police officer’s pension (not even including whatever they may have also contributed via withholding) was $53,222 in 2011, more than twice the amount they would have been able to avoid paying taxes on if they were private citizens. For San Jose firefighters it was even more, their average employer pension contribution was $62,330 in 2011. And even for the miscellaneous employees, the city’s contribution exceeded the tax deferred amount allowed private citizens, averaging $26,164 – again, not including whatever pension contributions these employees may have paid themselves through withholding. San Jose’s case is typical.

So why aren’t public employees paying taxes on whatever annual pension contribution they make in excess of $18,000, or $24,000, depending on their age? Because there is NO practical limit on how much can be contributed into a defined benefit plan while still avoiding taxes. The IRS created the limit on how much you can put into a 401K in order to discourage people creating “abusive tax shelters.” But they did not apply this moral standard to defined benefit pensions.

Meanwhile, there’s not only a ceiling on how much the taxpayer can put into their 401K, but, of course, there’s NO guarantee that those 401K investments will perform. When a middle class self-employed person confronts a 48.3% marginal tax rate, if they can afford it, they are pretty much compelled to put money into their 401K. Then they can watch the S&P 500 and knock on wood. Since the S&P 500 is currently at the same level it was at back in June 2014, with governments and consumers across the world engulfed in maxed-out debt which renders them unable to continue to consume at the rates they used to, and global overcapacity idling shipping from Rotterdam to the Strait of Malacca, they’d better knock very hard indeed.

As for the pension funds for unionized government workers? If they become underfunded, though faltering investment returns, or retroactive benefit enhancements, or “spiking,” private citizens make up the difference through higher taxes and reduced services.

One final injustice must be noted: Once the private sector independent contractor retires, if they’re lucky they’ll collect around $25,000 per year in exchange for a lifetime of giving 12.4% of their gross income to the Social Security fund. And if that, plus their S&P 500 savings account’s 2.5% per year dividend income isn’t enough to live on, they’ll have to keep working. But wait! If that work earns them more than $15,710 per year, their Social Security benefit is cut by $1.00 for every $2.00 they make.

Let’s recap. A middle class private sector independent contractor pays a 48.3% tax on any income they earn between $81,500 and $118,500, which includes a 12.4% payment into Social Security on 100% of that income. Half of that 12.4% isn’t even deductible. If they invest money in a retirement account, there is at most a $24,000 ceiling on how much they can invest per year. If their retirement account tanks, there’s no bail-out. And if they still have to hold a job after they’ve finally qualified for full Social Security benefits after 45 years of work, there is a 50% tax on that benefit for every dollar they earn in excess of $15,710 per year.

By contrast, a unionized government worker in California collects a pension that averages – for a 30 year career – well over $60,000 per year (ref. here, here, here, and here). At most they contribute 12% into their pension fund via payroll withholding, in most cases much less. Their pension fund earns 7.5% and if it does not, the taxpayers bail it out. And when they retire, if they want to go back to work, there is NO penalty whatsoever assessed on their pension income.

Ensuring reasonable retirement security for Americans against the headwinds of unsustainable debt and an aging population is one of the great challenges of our time. And the biggest obstacle to finding solutions is that American workers do not adhere to the same set of rules. There is rather a continuum of rules, with unionized government workers at one privileged extreme, and independent contractors – those glibly lauded members of the “gig economy,” at the opposite end, paying for it all.

This is the context in which we have recently witnessed the irresistible alliance of Wall Street pension bankers and government union leadership annihilate the latest attempt at pension reform in California. Tax season brings it home in all its bitter glory.

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Ed Ring is the president of the California Policy Center.

The Mechanics of Pension Reform – Local Actions

Part 2 of 2…

Introduction

In Part One, I enumerated reforms needed at the state level. That list was in part plugging up the “cheats” used to run up the statewide pension deficit of about a trillion dollars. Employee unions control the state legislature, the attorney general, all executive offices and all retirement administrators; therefore I prefaced Part One with an opinion that reform at the state level was and is basically a pipe dream.

20160111-UW-Moore

Picturesque Pacific Grove is being destroyed by government unions.

This part will discuss reform at the county and city level only, simply because I have not researched education and special districts sufficiently to include them.

Premise

This analysis is based on the conclusion that current local government defined benefit pension plans are under 50% funded based on market analysis.

The common lament about pension deficits is that it was caused by the 2008-09 investment crash. But most PERL Agencies were under water after the 2001-02 high tech stock market crash. Most pension bonds were issued in exchange for pre 2008 pension unfunded deficits or to fund pension enhancements (Marin and Sonoma counties, for example).

Vallejo filed for Chapter 9 in 2008, before the crash with a market pension deficit of about $400M.

Pacific Grove went from a zero deficit in fiscal 2001 to 2002, to a nineteen million dollar deficit in 2004 to 2005. About 50% of the pension deficit was in the 2%@55 plan for non safety employees and the other 50% for the 3%@50 safety employees. Non-safety 2%@55 plans suffered substantial pension deficits again after the 2008-to 2009 crash and all PERL plans had an additional deficit from poor results in 2013-14. It had a good return for fiscal year 2014 to 2015, but recent results (June 2015 to date) are catastrophic. Based on the size of the 2%@55 deficits, that level of benefits is unsustainable and if it was the highest level of benefits, it would still break all but the very richest agencies.

Contribution rates have doubled and tripled; yet the PERS estimate of the funding level for PERL plans as of fiscal year end 2012-13 is 70.5%, using its assumptions. But financial experts using fair market assumptions – those used competitively – estimate the funded level at well less than 50%, a funded level that PERS has stated was beyond saving.

Based on the above, it is mathematically probable that PEPRA which grants a defined benefit as high as 2.7% at various ages of eligibility will go down like the Titanic, in spite of its prospective limits on the size of maximum benefits. If 2%@55 plans are under water; it means that 2.7% at age 57 plans must fail. PEPRA is a palliative measure that has delayed curative reform.

In CERL agencies, much of its pension debt, including pension bonds, was created between 2002-07, after it had incurred a deficit in 2001-02. In Sonoma county a phony lawsuit about calculating pensionable salary was created. Plaintiffs and defendants then contrived a settlement of the lawsuit that circumvented the public notices of CERL and Govt. code 7507, to grant every full time employee a 3% benefit at some age (between 50 and 60). The reason it was important for the staff to avoid the notice statutes was because compliance would have shown that the increased annual budget costs of the pension enhancements would have violated Article XVI, section 18 of the state constitution, which required a 2/3 vote of the people to approve the enhancements. (The Orange county debt limitation case did not involve the issue of increased annual budget costs, and that is why it lost).

Marin had a similar experience as documented in a precise 2015 grand jury report. The pension deficits in Marin and Sonoma are about a billion dollars each. In each county, the agency lawyers, the supervisors, the unions and staff, the sheriff, DA, et al took no action on the grand jury reports. They had a duty to set aside the illegally adopted pension increases, but did not. The ratification of the illegal pensions was unanimous.

Except for a chapter 9 that modifies pensions and other post-retirement benefits, there is no way out of the financial demise of Sonoma and Marin county and all but the very richest local entities.

Chapter Nine is a Game Changer

Until Judge Klein (in the Stockton Chapter 9) produced a total analysis that showed that employee’s pensions are modifiable in a chapter 9, PERS and the unions claimed pensions were untouchable for a variety of tenuous reasons.

Article I. Section 8 of the U.S. Constitution says “The Congress shall have the power…To establish uniform Rules of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States;.” Judge Klein went on to clearly define how pursuant to a Plan of Adjustment in a Chapter 9, pension contracts could be rejected and the obligations modified in a fair and equitable manner along with all of the creditors. Judge Rhodes in the Detroit bankruptcy agreed . The Supremacy clause applies to a chapter 9 and is still the law per the two judges and all neutral experts on the matter. Pensions do not have a special status in a Chapter 9.

In his decision, Judge Klein said: “..it is doubtful that CaLPERS even has standing to defend the City pensions from modifications. CaLPERS has bullied its way about in this case with an iron fist insisting that it and municipal pensions it services are inviable. The bully may have an iron fist, but it turns out to have a glass jaw.”

Karol Denniston, a bankruptcy attorney and chapter 9 expert (SQUIRE Patton Boggs), who followed the Stockton bankruptcy carefully, in one of her several writings about the Stockton decision said: “Klein’s opinion provides a handy road map of how to put pensions on the bargaining table thus creating a more balanced approach to restructuring. That means pensions get talked about at the front end of a case and not at the back end. It also means a city can tackle its restructuring plan by looking at all of the significant liabilities, including a plan that really works.”

“..including a plan that really works.” The elements totally lacking in the Vallejo, Stockton and San Bernardino bankruptcies. Those chapter 9’s were union controlled political bankruptcies that intentionally used all of the available assets to pay for a bankruptcy, while protecting its employee’s million dollar pensions. As of 6/30/2013, San Bernardino had a fair market unfunded pension liability of about $1.05B and was 43.4% funded; Vallejo a $650M unfunded pension liability and 45% funded, and Stockton a $1.3B pension liability. The new losses for the succeeding two years will be daunting. Imagine another recession!

The Political Landscape for Chapter 9 Filings

In all cities and counties you hear the refrain: “another loss like that one and the city or county will be bankrupt.” Therein lies the problem; taxpayers view a chapter nine as worse than slashing services, raising taxes and fees, with a future doomed to more cuts, taxes and fees. Because the three municipal bankruptcies to date were “rigged” in favor of city staff and the unions, the public lacks an example of a successful chapter 9.

Therefore, the first bona-fide chapter nine will be critical so that it will encourage other agencies to negotiate from a position of strength. Cities and counties must comply with Myers, Milias and Brown, but any deal that leaves the agency in a defined benefit plan is off the table. If that goal is achieved, there is much to talk about.

The key issue is the level of adjustment to be made to pensions so that employees and retirees will receive a reasonable pension? Unless the taxpayers are convinced that retirees and employees are not taken advantage of, it will not support a bona-fide chapter 9 in bankruptcy.

Pension Adjustments in a Pre-chapter 9 Settlement or in a Plan of Adjustment Must Be Fair and Equitable

Government agencies usually do not belong to the Social Security system. Additionally, PERS and CERL systems do not have an insured component to fill in for pensions modified in a bankruptcy. In chapter 11’s and 7s, canceled pension benefits are often replaced by the federal pension insurance system. So modifying pensions in a chapter 9 is a serious business and must not only appear to be fair, but in fact be fair.

On the one-hand an egregious PERL and CERL system has already caused massive tax increases and prop. 218 fees with a dramatic drop in the number of employees and service levels. As a game-wrecker, prop. XIII dwarfs it by comparison. On the other hand, retirees are not entitled to million dollar annuities, but should receive reasonable pensions for their service. Mathematically, the status quo is not an option. Convincing taxpayers that the modifications are essential but fair is the key to electing a legislative majority with the support to negotiate pension reform from a position of strength. That strength is the right to modify pensions in a chapter 9.

The opposition to a chapter 9 will be massive. In addition to PERL and CERL, the unions will invest millions in opposition. More importantly, the agency lawyers, managers and administrators will use agency monies for store-bought legal opinions that pretend that modifying pensions along with other debt is illegal and bad (like Pacific Grove, Sonoma and Marin county regarding illegal pension adoptions). So if a reform majority is elected, it must replace those who fight for the status quo no matter what. Current attorneys, managers/administrators must go to be replaced by contract experts during the financial emergency.

In order to elect a legislative majority of pension reformers, a lengthy public relations plan is an absolute prerequisite. That program must analyze the outstanding liability for pensions, including pension bonds, and then postulate reasonable modifications for the affected retirees and employees.

Older retirees with lower pensions should not suffer modifications. The younger retirees with massive retirements should be cut to as much as 2 times the social security maximum (about $60,000 per year). The goal is to provide a reasonable retirement for those affected, and to arrive at a plan of adjustment that permits a city or county to repair its roads, sewers, water systems, etc. while providing amenities for every age group (senior, recreational, library, etc) without a separate levy or fee in addition to property, sales and franchise taxes.

In cities like Pacific Grove and counties like Marin and Sonoma, the press is a huge problem. In Monterey County no news source understands the magnitude of the pension conundrum.

In Marin and Sonoma, the issue is treated superficially by the press, but the news media does not portray the magnitude of the deficits together with the illegality of it all so that the reader understands that taxpayers have been defrauded to the tune of a billion dollars. Without a chapter 9 the pension deficits will grow in Sonoma and Marin to one and a half and then two billion dollars and so on. Only chaos can follow such incredible juvenile behavior by all involved. Even reform groups fail to shout out the critical nature of the problem. If the ordinary taxpayer understood the situation, electing competent legislative majorities and reform would follow.

In Monterey County, if you asked a city council member about the size of the city pension deficit, it would be confused. In Pacific Grove they would admit that it was bad, but believe it is curable. But if you told a member of the Carmel council that the city pension debt per household was $24,000, it would be curious about whether that was good or bad. Carmel has so much revenue, it does not concern itself about whether it gets its money worth. My point is that the prospect for pension reform varies from agency to agency, but there is NO avenue to inform the citizens of Seaside, Salinas, Pacific Grove and other communities of the continuing decline in the quality of life in their community; and that a bona fide chapter 9 could make them free. Therefore Reform groups must educate the press, but also provide bi-weekly or monthly pamphlets by mail to citizens so that they can use their vote to defend against the pension tsunami by electing bona fide pension reformers to their city council (or board of supervisors in counties). It will require a sizeable flow of cash.

Paying For a Chapter 9

According to a reliable source, the legal costs in the Stockton chapter 9 exceeded $15M. Costs for experts added a significant sum. For a residential entity like Pacific Grove (15,599 residents) it could be as much as $6M. If a city has pension and other bonds that will be modified in the bankruptcy, the annual payments may be a source of funds to pay for the bankruptcy. Because a modification of pensions or OPEB is contemplated, cash from those sources may be available.

There has not been a bona fide chapter 9 in California; therefore, a material modification of pensions lacks guidelines; but it will be based on federal bankruptcy principles, not state law. According to one highly qualified chapter 9 expert it is important that the PERL or CERL contracts NOT be terminated until after the 9 filing in order to prevent a lien claim by the pension plans.

Qualifying For a Chapter 9

In California, a municipality, like a city or county, is qualified for chapter 9 treatment if it is “insolvent” and “desires to effect a plan to adjust such debts” and has complied with Government code section 53760 et seq. That section provides for a choice to pursue a neutral evaluation process in an attempt to obtain a compromise, or, the local public entity may declare a state of emergency pursuant to Government code Section 53760.5.

Generally, the local agency will qualify if it can show it is “unable to pay its debts, or unable to pay its debts as they come do” (cash insolvency). Cash insolvency may include charges that are not immediately due, but are imminent, such as increases in annual pension contributions and annual pension bond payments, sewer debts, etc. Unfunded pension liabilities will probably not carry the day, except to the extent they will become cash obligations through rate increases. This is a complex area, beyond the scope of this article, except to again make the point that local entities need experts that are not subject to the bias and influence of staff; otherwise, the advice from staff will be, “you can’t touch our pensions” and it will advise a “rigged” chapter 9 like Vallejo, Stockton and San Bernardino.

Alternatives to a Bona fide Chapter 9

Insolvency may be delayed by massive salary reduction, staff and service cuts, new taxes and fees and so on; but such a process cannot promote sufficient financial healing to permit a reasonable level of services at a reasonable cost, or avoid massive deficits. Stockton had a $7M deficit for 2014. So much for its chapter 9.

The “police power” rule of contract law is theoretically available. That rule provides that the state police powers allow modification of contracts when it is necessary to protect the general public welfare. And if that power is extant, does it extend to local agencies? I don’t have the answer, except to note that the California government as now constituted would never use the power, and if attempted by a local agency, the cost for legal representation by reformers is too great.

A better choice is “The Kern Doctrine.” In Kern v City of Long Beach and later in Allen v City of Long Beach, the California supreme court determined that a Charter provision granted employees a vested pension right and in Allen, concluded that the right extended to “work not yet performed.” But in doing so, especially in Kern it noted its second rule, that in a case where the pension system was financially broken, the local entity could make reasonable modifications to vested rights and no off-set was required. In Kern it noted several examples that it had permitted; in one case it allowed a benefits reduction from 2/3 of salary to 1/2 for all employees who had not yet retired. In Allen, the court noted that in that case the financial integrity of the pension system was not in question, so any reductions in pensions required a corresponding off-set. Then it immediately noted again that it was NOT a case where integrity of the system was in issue, thereby reaffirming the Kern doctrine that vested rights could be modified without off-set to save the pension plan..

Hundreds of local entities now have pension plans that are broken with no chance to pay the benefits promised. In 2014, Moody’s released a statement that Vallejo was again insolvent because of pension promises and needed to go into a new chapter 9 to shed pension obligations. It warned that Stockton and San Bernardino needed to shed pension obligations or would again become insolvent after its chapter 9.

There is now a “perfect storm “ for pension reduction under the “Kern Doctrine,” but most lawyers simply do not understand it because they read Allen, without reading Kern. Kern gives an example of the exercise of the police powers by a local entity to protect the public welfare. Entities with impossible pension deficits, like Oakland, San Jose, Pacific Grove, Salinas, King City, Marin and Sonoma counties, etc., etc. could modify pensions for employees to save their plans from insolvency. Read Kern!

Anticipating the Opposition’s Tactics

The gimmick used by Stockton to justify not modifying pensions in its Chapter 9 bankruptcy was a claim that it would be unable to recruit and retain safety and other experts, particularly police; and it already had a raging crime fest on its hands. In fact, it had depleted its police department because of raging pension costs arising from excessive million dollar pensions and the 2008 to 2009 financial crash. Ironically, its manager spread the theme that Stockton could not hire and retain qualified people across the board without the million dollar pensions; then he retired? He was hired by San Bernardino to spread the same theme for its bankruptcy.

Despite claims that police departments cannot recruit new officers without 3%@50 pension benefits, there are over 150 local entities in California with police receiving a 2%@50 pension and they fill positions readily. Until about 2003, almost all local agencies were 2%@50 and there was an overflow of qualified applicants. The age 50 level is much too low, but it is there, created by greed. The claimed shortage arose because of the fraudulent adoption of 3%@50 in 1999; now they naturally seek a 3%@50 annuity and refuse to believe that it has destroyed representative government.

More troubling about the claimed police shortage are allegations that police departments like San Jose discourage applicants and certification schools to create a shortage. But the critical component of the police shortage theme is the inability to gain the truth about the number of applicants for open positions. Somehow it was learned that Stockton had numerous applications for its police force. To counter, its manager wrote a guest editorial in the Sac Bee and said only one in a hundred certificated police applicants could qualify as a Stockton police officer (Yes,he really said that!).

Additionally thousands of police officers were laid off after the financial crisis. Where are they? If you make a records request about applications for open positions, you will feel you are on a railroad by the response. The key is to make the staff produce its evidence of a shortage and that objection should go away. If not, can they really argue that the entity must go broke to maintain the status quo! No. To the extent that high crime cities have a genuine component to its shortage, it will need an on-the-job training plan to fill vacancies at an affordable cost. Ex MPs are a good source for the program.

The other response to pension modification goes to the heart of the public reluctance and lack of information about the issue. The benefits were promised and now they are to be reduced. There are many arguments that should mitigate that reluctance:

(1)  The assets in the DB plan belong to the employees and will not be used except to pay pensions. If a plan is 30% unfunded, the 70% will provide a reasonable retirement if the defined benefit plan is eliminated going forward;

(2)  Pensions exceeding 2%@55 and 2%@50 for safety, were obtained by PERS and local entity fraud;

(3)  Compared to social security, the pensions are much too high, by three to four times;

(4)  Compared to the private sector, the pensions are too high;

(5)  The pension promises were based on unrealistic market returns;

(6)  Each employees union representative was part of the pension scam and unions control PERS;

(7)  Per the California Supreme court employees are only entitled to a “reasonable” pension, not a specific formula;

(8)  Spiking and other illegal activities contributed to the crisis;

(9)  The cost of pensions has curtailed government services, contribute to rising crime and is a dagger to education. Even community colleges can no longer meet demand;

(10)  Deficits compound at 7.5% a year. There is no revenue defense to that fact, so services will continue to suffer due to a lack of funds because of increased pension costs;

(11)  After the defined benefit plan is discontinued in whole or part, employees will be part of the social security system, plus a defined contribution plan, a hybrid system providing fair and financially sustainable retirement security;

(12)  Thanks to the work of Dr. Joe Nation, director of The Stanford Institute For Economic Policy Research and the financial reporting of David Crane of “Govern for California,” reformers have two sources of accurate information about the true state of the pension crisis; impeaching charts used by PERS to mislead the public about the irremediable nature of the pension deficits.

Opponents of reform may respond that Prop. 13 contributed to the crisis. But since prop. 13, sales taxes have increased by 6% and income taxes by 5% and more than make up for lost revenue. If we assume that without Prop. 13 property taxes would be 2% rather than the 1% limit (a doubling), property values would drop proportionally because the higher tax eliminates purchase money. If opponents blame Prop. 13, and they will, polls indicate that voters oppose repealing Prop. 13. Given a choice they will cancel the defined benefit plans and save their communities.

Would a bona fide Chapter 9 that eliminated the entity defined benefit plan reduce its borrowing power going forward? Pension bonds and unfunded pension deficits would be reduced and deficits eliminated, providing cash flow going forward. Entities could fix infrastructure with bond money and the bondholders would have confidence in re-payment because of the improved balance sheet. Using Sonoma County as an example: would bond issuers rather lend to it with its billion dollar pension deficit, or with much of that deficit eliminated?

SUMMARY

(1)  Defined benefit pension plans for government employees are mathematically destined to fail;

(2)  The three chapter 9’s to date did not modify pensions and according to Moody’s, Vallejo is once again insolvent and Stockton and San Bernardino will suffer the same fate for failing to modify pensions in its chapter 9 cases;

(3)  The law is clear that California local entities may modify pensions and other post employment benefits in a chapter 9 plan of adjustment;

(4)  If a local entity has great voter support for pension reform, it may reduce pensions pursuant to the supreme court’s “Kern Doctrine” in order to restore some vital services without a chapter 9; but PERL and CERL administrators may oppose such a plan, forcing a chapter 9.

(5)  Because there has not been a chapter 9 in California wherein a local entity has requested pension modification, there is new legal ground that must be covered, but that is the nature of legal solutions. In the case of pension deficits, a chapter 9 in bankruptcy modifying pensions as part of a plan of adjustment is the only solution. There is no other conceivable reform that can scratch the surface of the problem.

(6)  Modifications to pensions must be fair, taking into account that SB 400 was adopted based on fraudulent representations about its cost.

 *   *   *

Read part one “The Mechanics of Pension Reform – State Actions,” December 22, 2015

Read Kern v City of Long Beach, and Allen v City of Long Beach.

*   *   *

About the Author:  John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34749) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. John graduated from San Jose State College with majors in Political Science and Economics (summa cum laude). He then received a JD from The Stanford School of Law and practiced business and trial law for 40 years before retiring. In 1987, he was the founding partner of a Sacramento law firm that he formed in 1987 to take advantage of the increased bankruptcies brought about by the Tax Act of 1986. Although he did not file and manage bankruptcy cases, he represented clients in numerous litigation matters before the bankruptcy court, including several cases before judge Klein, the current judge of the Stockton bankruptcy case. He is an admirer of Judge Klein, for his ability and accuracy on the law. As managing partner, he understood the goals of bankruptcy filings and its benefits and limitations.

Note to readers:  During 2012 author John Moore published the “final” chapter of “The Fall of Pacific Grove” in an four part series published between October 20th and November 9th:

The Fall of Pacific Grove – A Primer on Vested Rights
 – The Final Chapter, Part 1, October 20, 2015

The Fall of Pacific Grove – The City’s Tepid Defense of the Vested Rights Lawsuit
– The Final Chapter, Part 2, October 27, 2015

The Fall of Pacific Grove – The Judge’s Ruling
– The Final Chapter, Part 3, November 2, 2015

The Fall of Pacific Grove – The Immediate Future
– The Final Chapter, Part 4, November 9, 2015

During 2014 author John Moore published the first chapter of “The Fall of Pacific Grove” in an eight part series published between January 7th and February 24th. For a more complete understanding of the history, read the entire earlier series:

The Fall of Pacific Grove – How it Began, and How City Officials Fought Reform
 – Part 1, January 7, 2014

The Fall of Pacific Grove – How City Thwarted Reform, and CalPERS Squandered Surpluses
 – Part 2, January 14, 2014

The Fall of Pacific Grove – CalPERS Begins Calling Deficits “Side Funds,” Raises Annual Contributions
 – Part 3, January 21, 2014

The Fall of Pacific Grove – Outsourcing of Safety Services Causes Increased Pension Deficits
 – Part 4, January 28, 2014

The Fall of Pacific Grove – Anti-Pension Reform Mayor Claims to Favor Reed Pension Reform
 – Part 5, February 3, 2014

The Fall of Pacific Grove – Privately Owned Real Property are the Only Assets to Pay for Pensions
 – Part 6, February 11, 2014

The Fall of Pacific Grove – The Cover-Up by the City After the Hidden Actuarial Report Surfaced in 2009
 – Part 7, February 18, 2014

The Fall of Pacific Grove – Conclusion: The “California Rule” Cannot Stand

A Pension "Pledge" for State Politicians

Earlier this week, noted pension reformer John Moore published “The Mechanics of Pension Reform,” listing specific principles of pension reform. Moore’s article focuses on state policy; he intends to focus on local pension reform policies in a later article. The list he has produced for state legislators is quite detailed; here’s is a partial summary of highlights:

1 – Change control of public employee pension boards to politically neutral private institutions. Currently, government union operatives exert nearly absolute control over California’s 81 state and local government employee pension systems.

2 – Limit the total annual pension contribution by any government entity to a fixed percentage of pension eligible salary.

3 – Differentiate between annual salary and pension eligible salary to lower overall contributions. Stop counting annual wage increases as pension eligible.

4 – Eliminate collective bargaining for government workers.

5 – Prohibit legislative bodies from granting vested contract rights to pensions.

6 – Require agency in-house counsel to advocate exclusively for the broader public interests of the legislative body, rather than for the staff and unions.

7 – Prohibit any agency to link their salary increases to that of other agencies.

8 – Require the chief financial officer of any agency to report directly to the legislative body, autonomous of the agency manager.

9 – Start practicing accrual based accounting in conformity with virtually all other economic entities.

10 – Investigate post-employment disability claims with a goal of eliminating abuses.

11 – Lower the exit fees required for agencies to leave pension systems. The liability calculations employed typically assume rates-of-return less than half rate used for official actuarial calculations.

12 – Remove automatic indemnification of agency officers from gross financial negligence, so they are subject to the same rules that apply to private sector executives.

How many politicians in California would pledge to fight for these pension reform policies?

Moore’s experiences as a bankruptcy attorney, and now as a retiree living in Pacific Grove, have made him an expert eyewitness to what pension abuse is doing to California. Read Moore’s two earlier series of articles on the topic, one published in 2014 “The Fall of Pacific Grove,” and a more recent update published this year “The Final Chapter – The Fall of Pacific Grove,” for an account of how that city faces financial calamity because of out-of-control pension promises.

California’s government unions, along with their partners in the financial community, have spent millions to defend the pension system as it is. The uncertainty inherent in any financial projections that attempt to frame the issue make it hard for reformers effectively communicate the urgency of their position, even if they did have sufficient financial backing to mount a serious campaign for reform. Moore understands this, and has based his prescriptions for reform on a fundamental assumption: Change will come when elected politicians – who have the courage to play hardball with government unions – hold governing majorities in California’s cities and counties. Wherever that occurs, Moore’s prescriptions are viable.

For example, Moore, along with many other legal experts, does not believe that pension reform efforts in court have been exhausted. In particular, he repeatedly cites cases where cities and counties violated due process when approving pension benefit enhancements. All of these improperly adopted enhancements can be challenged in court. Moore also points out – more of this will appear in his next article – that cities and counties may not have the authority to revise “vested” pension benefits, but they can cut current benefits and cut staffing. If necessary, Moore recommends cities and counties engage in draconian cuts in the areas of personnel management where they have latitude, because if they have the courage to do this, in response the unions will be forced to accept reasonable modifications to their pension benefits.

How many politicians in California would be willing to be this tough?

One of the biggest misconceptions spread by government unions is that all pension reformers want to eliminate the defined benefit. This is false. The problem with government pensions is that they are not financially sustainable or fair to taxpayers. In California that began with Prop. 21, passed in 1984, which greatly loosened restrictions on investing in stocks, enabling much higher and much riskier rate-of-return projections, followed by SB 400, passed in 1999, that started the process of retroactively increasing pension benefit formulas for what eventually became nearly all of California’s state and local government workers.

If Prop. 21 and SB 400 had not passed, or, for that matter, if California’s government worker pension systems merely had to conform to ERISA, which sets responsible limits on the financial behavior of private sector pension funds, California’s government pension systems would be financially sustainable.

*   *   *

Ed Ring is the executive director of the California Policy Center.

The Mechanics of Pension Reform – State Actions

Part 1 of 2…

Since the passage of SB 400, adopted by the California Legislature in 1999 (93 for, 7 against), pension deficits have steadily grown in California. According to the Stanford Institute for Economic Policy Research, as of the end of 2015, credible estimates of the total unfunded pension obligations owed by California’s state and other government agencies now approach $1.0 trillion.

Reform groups support pension reform and voters generally back pension reform initiatives by a 75% vote; but usually, state and agency lawyers pollute the process to defeat the reforms. In Pacific Grove and San Jose, clearly legal pension reform initiatives were defeated. In Marin and Sonoma county, Grand Juries determined pension increases of about a billion each were illegally adopted, but the sheriffs, district attorneys and boards of supervisors simply purchased “as requested” legal opinions that ignored the reports and said everything looked “OK” to them.

At the state and agency level, there will not be curative pension reform without the election of a pension reform majority of each legislative body. This analysis will outline an agenda, first at the state level and later, separately, at the agency level, specifically describing reforms required prospectively at the state level and setting forth remedial steps available to local agencies. Obviously, legislative body majorities must be elected to adopt the curative action.

The Need for Pension Reform at The State Level:

The current Ca. Government pension system is a classical “Blue Sky System,” a term defined by U.S. Justice McKenna in Hall v. Geiger-Jones Co.:

“The name that is given to the law indicates the evil at which it is aimed…’speculative schemes which have no more basis than so many feet of blue sky’…. ‘the sale in fly by night schemes’”

Unfortunately, the state can and has enacted a pension system for government workers, including the legislature, that is NOT subject to its own Blue Sky Laws and could not comply with its own enactments controlling the private sector:

1. All applicable evidence proves that the financial assumptions for government pensions are and have been impossible to achieve since SB 400 to-date. If marketed by a private investment company, the state would shut it down. The state attorney general should take vigorous action against pension administrators, but is openly supportive of the blue sky nature of the system;

2. The system is managed by administrators who openly support a goal of growing pensions for union workers. They are controlled by Boards that were elected by the Unions. Their definition of reform is greater contribution rates;

20151221-UW-Moore-CalPERS1
The infamous Hotel CalPERS  –  you can check in, but you can’t check out.

3. Retirement Boards routinely violate section 17 (b) of Article XVI of the State constitution which says: “The members of the retirement board of a public pension or retirement system 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 (my emphasis)…” If retirement boards had obeyed this dictate, there could be no pension crises. It is the duty of the state to assure retirement board compliance in minimizing employer contributions;

4. Government unions in the state of California have become too powerful. FDR was emphatically opposed to collective bargaining in government affairs: “collective bargaining with public-employee unions takes much of the decision making authority over government functions away from the people’s representatives and transfers it to union officials, with whom the public has no authority.” At present, public-employee unions dominate the state legislature, the executive branch (including pension boards), the attorney-general, every local legislative body, sheriff or other elective position. Why? Because the average citizen has no idea about the decline in and cost of government services since the enactment of Meyers-Milias-Brown, California’s collective bargaining scheme. One thing is for certain, the cost of union controlled government services proves that “new development” is a financial loser, requiring a larger police, fire and administrative services regime, leading to larger uncontrollable deficits.

5. As an example of what FDR feared consider the fact that the Unions run the California employee retirement systems. You and I don’t get to vote for the various retirement boards. Imagine if social security and medi-care were managed by a board composed of seniors: certainly they would expect retirement benefits comparable to those of government union members; $50K, $60K even up to $300K per year.

6. Why are voters so uninformed? With the notable exception of the Contra Costa Times, newspapers have foregone any pretense of journalism. Why aren’t they all like the Times? Because it takes research. In Monterey county, where I live, every news source simply repeats the skewed tales of pro-union city managers, administrators and bent government lawyers. If a citizen provides them with documentary evidence of illegal government activity, the press then gives the last word, truthful or not, to the government agent.

The Mechanics of Pension Reform at the State Level:

It is difficult to be optimistic about pension reform at the state level. Neither the Republicans, nor the Democrats have a pension reform platform that meets the requirement of Article XVI, section 17 (b) that retirement boards minimize pension contributions. The state legislature will not enact laws requiring a balanced pension system. The attorney general will not act to prosecute institutional untruthfulness per Penal code sec. 85. The press, whether intentional or not, is a handmaiden for union dominated government that has decimated government service. Since government unionism, California has declined from first to near bottom in education, infrastructure, and most importantly, quality of life for the middle class. Any responsible parent should encourage their children and grandchildren to move to a fairer government where a middle class citizen can afford a home, decent schools and safety. For those of us able to stay, it is time for a new approach. I don’t claim to be the perfect person to set forth first principles of reform. I am doing so only because no one else has, or seems likely to do so.

REFORMS

Because the unions are so strong at the state level, it is imperative that reform groups demand that candidates specify the pension reforms they would initiate and support.

In the case of a candidate for the legislature, or state office, would he or she support state sponsored initiatives, referendums, or laws that:

1. Replaced retirement boards with politically neutral private institutions to manage government pension plans;

2. Limited government pension plans to outlaw annual deficits. Any apparent deficit would require a reduction in benefits to eliminate the deficits;

3. Limited the annual pension contribution by any government entity to a fixed percentage, say 10% of salary;

4. Limited annual salary increases for pension purposes to 0% of salary until current deficits are eliminated;

5. Neutralized the power of unions by doing away with statewide unions for government workers. Local unions would be allowed and may propose working conditions (pay, medical, vacations, etc.); but without collective bargaining. After listening to the unions proposals and after public comment, the legislative body would enact working condition statutes;

6. Prop 218 would be amended to stop the current abuse of creating a new tax to provide that which was paid by current revenues, but have been depleted by pension and other retirement costs.

7. Legislative bodies would be prohibited from granting staff, employees and legislative bodies, vested contract rights related to pensions, insurance of all kind and any other work-related benefit;

8. Validation actions for the issuance of bonds, including pension bonds, pursuant to the authority of Government code 53511 shall restrict the scope of validation judgments to protect the bond holders from the relief for matters specifically stated in the summons published in the action. A judgment purporting to grant relief in excess of matters specified in the summons shall not be entitled to collateral estoppel, or res judicata or enforcement;

9. In all matters between staff, employees and the city council, agency lawyers shall only advise the legislative body, and shall do so consistent with the applicable law. In such circumstance, agency lawyers shall have a duty only to the agency through its legislative body. Currently, agency lawyers advocate for staff and unions, ignoring its duty of loyalty to the agency;

10. Government code, section 7507 shall add a provision that states that compliance with the statute has always been mandatory and shall continue to be mandatory;

11. Government code 7507 shall add a provision requiring the chief financial officer of any agency to certify that the annual costs for any contemplated pension increase will not violate the debt limitation set forth in Article XVI of the state constitution. Note: In the Orange county pension bond, debt limit case, the court found that the potential to cause deficits did not violate the debt limit, but the issue concerning the annual costs as a violation was not presented;

12. No agency shall link salary increases to that of other agencies and all such legislative provisions now in effect are void;

13. The chief financial officer of any agency shall be hired and replaced by the agency’s legislative body. In addition to its current duties, it shall advise the legislative body of the soundness of any proposal related to employee and staff compensation. Said position shall be autonomous of the agency manager or administrator. Presently, agency financial officers often risk their jobs if they do not recommend game the system” schemes;

14. The current practice of annual cash budgets shall be supplemented with an accrual method budget. The accrual method budget shall expense all items that are necessary for the agency to provide a good level of service, but have been omitted from the cash budget because of a lack of revenues. For example, a county like Sonoma may have $200M in deferred road maintenance; in the accrual method, that sum will be shown as an expense. The agency legislative body shall determine the correct level of service for every agency department, and to the extent there are insufficient revenues to provide that level of service, the insufficient revenues shall be shown as an accrued expense. The purpose of the accrual budget is to show the actual financial condition of the agency, but also to help an agency qualify for a chapter 9 in bankruptcy;

15. The current practice of obtaining a post-employment disability so that up to 50% of pension payments are tax free shall be the subject of an investigation by the state legislature with the goal of eliminating abuses of said practice. Evidence indicates that a high percentage of safety employees who were able to perform normal services up to their date of retirement then magically become disabled for tax benefit purposes;

16. The current practice of borrowing proposition 218 funds and other restricted funds shall be prohibited. Such practice is and shall constitute evidence of a debt violation;

17. Ventura county attempted to terminate its CERL program and make new hires subject to a defined contribution or employee funded plan. PERL and CERL agencies may make limited terminations of its pension plans (LT). In that case it may create a defined contribution plan for new hires and said hires shall not be in the defined benefit plan; but the agency may remain in the defined benefit plan for pre-LT employees. The purpose is to allow the agency to continue to work its way out of its deficit making annual contributions at the current income rate, not the termination rate. The termination rate is so punitive, it prevents agencies from terminating. This provision shall not create pension or other benefit vested rights;

18. Agency staff (attorneys, administrators, managers and finance officers) shall not be granted indemnity for their acts of gross negligence and criminal conduct. Currently such grants are commonplace.

SUMMARY

Most reasonable citizens appreciate the place of unions in the private sector. Arms-length bargaining between management and union leaders has passed the test of time, albeit not without turmoil. On the other hand, there has been and cannot be arms-length bargaining in government: both agencies staff and the unions have acted in concert to grant themselves incredible salaries and benefits. Agency attorneys have given up all pretense of any duty to the agency or taxpayers. Mathematically, the system cannot continue. For reform to succeed, it is necessary to demand that candidates for local legislative and state office, take a position on substantial reforms. Without substantial curative reforms, the quality of life in California will continue to decline.

In Part Two, I will discuss the mechanics of reform at the agency level, particularly at the city and county level. Unlike reform at the state level, local agencies have tools to initiate reforms that will preserve the quality of life in the jurisdiction. It will still require the election of true reformers, but your city or county can be saved from the mockery of the parasitic governance that now prevails. Voters are anxious and will vote for the reforms, and for candidates, that will cure the current “blue sky” pension system. But candidates must run on these concrete reforms; otherwise. As they say: “pension reform is 25 years away, and always will be.”

*   *   *

About the Author:  John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34749) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. John graduated from San Jose State College with majors in Political Science and Economics (summa cum laude). He then received a JD from The Stanford School of Law and practiced business and trial law for 40 years before retiring. In 1987, he was the founding partner of a Sacramento law firm that he formed in 1987 to take advantage of the increased bankruptcies brought about by the Tax Act of 1986. Although he did not file and manage bankruptcy cases, he represented clients in numerous litigation matters before the bankruptcy court, including several cases before judge Klein, the current judge of the Stockton bankruptcy case. He is an admirer of Judge Klein, for his ability and accuracy on the law. As managing partner, he understood the goals of bankruptcy filings and its benefits and limitations.

Note to readers:  During 2012 author John Moore published the “final” chapter of “The Fall of Pacific Grove” in an four part series published between October 20th and November 9th:

The Fall of Pacific Grove – A Primer on Vested Rights
 – The Final Chapter, Part 1, October 20, 2015

The Fall of Pacific Grove – The City’s Tepid Defense of the Vested Rights Lawsuit
– The Final Chapter, Part 2, October 27, 2015

The Fall of Pacific Grove – The Judge’s Ruling
– The Final Chapter, Part 3, November 2, 2015

The Fall of Pacific Grove – The Immediate Future
– The Final Chapter, Part 4, November 9, 2015

During 2014 author John Moore published the first chapter of “The Fall of Pacific Grove” in an eight part series published between January 7th and February 24th. For a more complete understanding of the history, read the entire earlier series:

The Fall of Pacific Grove – How it Began, and How City Officials Fought Reform
 – Part 1, January 7, 2014

The Fall of Pacific Grove – How City Thwarted Reform, and CalPERS Squandered Surpluses
 – Part 2, January 14, 2014

The Fall of Pacific Grove – CalPERS Begins Calling Deficits “Side Funds,” Raises Annual Contributions
 – Part 3, January 21, 2014

The Fall of Pacific Grove – Outsourcing of Safety Services Causes Increased Pension Deficits
 – Part 4, January 28, 2014

The Fall of Pacific Grove – Anti-Pension Reform Mayor Claims to Favor Reed Pension Reform
 – Part 5, February 3, 2014

The Fall of Pacific Grove – Privately Owned Real Property are the Only Assets to Pay for Pensions
 – Part 6, February 11, 2014

The Fall of Pacific Grove – The Cover-Up by the City After the Hidden Actuarial Report Surfaced in 2009
 – Part 7, February 18, 2014

The Fall of Pacific Grove – Conclusion: The “California Rule” Cannot Stand

How the Pension Reactionaries Mislead the Public

re·ac·tion·ar·y, rēˈakSHəˌnerē, adjective
1. (of a person or a set of views) opposing political or social liberalization or reform.
–  Source:  Google search “what is a reactionary”

When it comes to civic financial health and quality public education, “reactionary” is a word with increasingly bipartisan connotations. But the other qualities connoted by the word all still apply; shrill and divisive rhetoric, an almost militant unwillingness to acknowledge any of the opposition’s arguments, and, of course, an unyielding position favoring the status-quo, no matter how untenable.

Pension reactionaries embody all of these characteristics. For the most part, they are also hypocrites. Because their devastatingly effective campaigns against pension reformers are funded not only by public employee unions, but also by powerful elements of those same Wall Street financial interests those unions routinely deride. They employ distortions of fact, they demonize reformers, and they employ inversions of logic.

Let’s examine some of the misleading arguments and tactics of the pension reactionaries, in no particular order:

(1) Identify key reformers, demonize them, then accuse anyone who advocates reform of being their puppets.  Pension reformers have been the victims of character assassination for years. The more they represent an effective threat, the more potent the attacks leveled against them: John Arnold, a “hedge fund billionaire,” Charles and David Koch, the “conservative billionaire brothers,” and, of course “Wall Street” whose alleged shenanigans are said to pose the real threat to the solvency of these funds. The fallacy here, notwithstanding the vicious and unfounded attacks that have tainted these individuals, is that whether or not pensions are financially sustainable or equitable to taxpayers has nothing to do with who some of the reformers are. And what about liberal democrats who advocate pension reform, such as San Jose mayor Chuck Reed, Chicago mayor Rahm Emanuel, Rhode Island governor Gina Raimondo, and countless others? Are they all merely puppets? Absurd.

(2)  Assume if someone advocates pension reform, they must also want to dismantle Social Security. While there are plenty of pension reformers who have a libertarian aversion to “entitlements” such as Social Security, it is wrong to suggest all reformers feel that way. Social Security is financially sustainable because it has built in mechanisms to maintain solvency – benefits can be adjusted downwards, contributions can be adjusted upwards, the ceiling can be raised, the age of eligibility can be increased, and additional means testing can be imposed. If pensions were adjustable in this manner, so public sector workers might live according to the same rules that private sector workers do, there would not be a financial crisis facing pensions. There is no inherent connection between wanting to reform public sector pensions and wanting to eliminate Social Security. It is a red herring.

(3)  Public sector pension plans would be financially healthy if they had not been invested in risky derivatives, especially mortgages. This is a clever inversion of logic. Because if pension funds had not been riding the economic bubble, making risky investments, heedless of historical norms, then public employee unions would never have been mislead by these fund managers to demand and get unsustainable enhancements – usually granted retroactively – to their pension benefit formulas. The precarious solvency of pension funds today is entirely dependent on asset bubbles. Most of these funds still have significant positions in private equity investments, which are opaque and highly volatile, and despite recent moves by some major pension funds to vacate hedge fund investments, they still comprise significant portions of pension fund portfolios. What the pension reactionaries either don’t understand or willfully ignore is a crucial fact: if pension funds did not make risky investments, they would have to bring their rate-of-return projections down to earth, and their supposed solvency would vaporize overnight.

(4)  Weakening pensions is a choice, not an imperative. The crisis is political, not actuarial. This really depends on how you define “weakening.” If you weaken the benefits, you strengthen the solvency. The fundamental contradiction in this logic is simple: If you don’t want pension funds to be entities whose actions are just like those firms located on the proverbial, parasitic “Wall Street,” then they have to make conservative, low risk investments. But if you make low risk investments, you blow up the funds unless you also “weaken” the benefit formulas.

To drive this point home with irrefutable calculations, refer to the California Policy Center study “Estimating America’s Total Unfunded State and Local Government Pension Liability,” where the impact of making lower risk investments that yield lower rates of return is calculated. If, for example, state and local public employee pension funds in the United States were to lower their rate-of-return to a decidedly non-“Wall Street,” low-risk rate of return of 4.33% (the July 2014 Citibank Pension Liability Index Rate, used in the study – it’s even lower today), and invest their $3.6 trillion in assets accordingly, their aggregate unfunded liability would triple from today’s estimated $1.26 trillion to $3.79 trillion. The required annual contribution (normal plus unfunded) would rise from the estimated $186 billion to $586 billion. The alternative? Lower benefits.

The pension reactionaries willfully ignore additional key points. They continue to claim public sector pension benefits average only around $25,000 per year, ignoring the fact that pension benefits for people who spent 30 years or more earning a pension, i.e., full career retirees, currently earn pensions that average well over $60,000 per year. Public safety unions still spread the falsehood that their retirees die prematurely, when, for example, CalPERS own actuarial data proves that even firefighters retire today with a life-expectancy virtually identical to the general population.

Reactionary propagandists who oppose urgently needed pension reform should recognize that it is bipartisan, it is a financial imperative, and it is a moral imperative. They need to recognize that the sooner defined benefits are adjusted downwards, the less severe these adjustments are going to be. They need to understand that for many reformers, converting public employees to individual 401K plans is a last resort being forced on them by political, legal and financial realities, not an ulterior motive. They need to stop demonizing their opponents, and they need to stop stereotyping every critic of pensions as people who want to destroy retirement security, including Social Security, for ordinary Americans. And if they wish to defend Social Security, then they should also be willing to apply to pension formulas the tools built into Social Security – including its progressive formulas whereby highly compensated workers receive proportionally less in retirement than low income workers. Ideally, they should support requiring all public workers to participate in Social Security, so that all Americans earn – at least to the extent it is taxpayer funded – retirement entitlements according to the same set of formulas and incentives.

 *   *   *

Ed Ring is the executive director of the California Policy Center.

REFERENCE

Estimating America’s Total Unfunded State and Local Government Pension Liability
California Policy Center study, September 2014

How CalPERS has Created a Ticking Time Bomb

During the Stockton bankruptcy Judge Klein called CalPERS the “bully with a glass jaw.” Klein meant that CalPERS, as a servicing company, has no standing in the bankruptcy because the pension obligation is between the public agency and their employees and retirees.
Read more

Will California Voters Support Pension Reform?

A bipartisan coalition led by former San Jose Mayor Chuck Reed and former City Councilman Carl DeMaio have filed a pension reform ballot measure in California. The group seeks to qualify the measure for a possible November 2016 vote by California voters.

The California Policy Center examined polling conducted by a variety of sources and CPC also commissioned its own polling study through the polling firm Penn Schoen Berland. CPC’s poll utilized online interviews in English and Spanish from August 17-21, 2015 among n=1,002 likely voters in California.

Overwhelming Public Support for Pension Reform

CPC’s review of a number of statewide polls conducted in recent years confirms that California voters have shown overwhelming support for pension reform.

A statewide poll issued by the Public Policy Institute of California in September found that 72 percent of likely voters say public pension costs are a problem and 70 percent say voters should make decisions about retirement benefits. As in previous PPIC polls, 70 percent favor giving new government employees a 401(k)-style plan rather than a pension. The change has strong bipartisan support: Republicans 74 percent, independents 69 percent, and Democrats 65 percent.

The CPC poll used several questions to examine voters knowledge of and assessment of issues facing state and local government pension funds – as well as the level of compensation and benefit packages provided to government employees.

(1) Would you say the financial health of the pension funds for state and local government employees in California are in a better place, worse place, or about the same place as they were ten years ago?

(%) California
Likely Voters
Better place 14
Worse place 46
About the same place 25
Don’t know 15

(2)  As far as you know, are CalPERS and CalSTRS in debt or do they have a surplus?

(%) California
Likely Voters
In debt 30
Have a surplus 16
Don’t know / unsure 55

(3)  As far as you know, on average, are state and local government employees…?

(%) California
Likely Voters
Paid more than employees in the private sector 41
Paid less than employees in the private sector 34
About the same 25

(4)  As far as you know, on average, do state and local government employees…?

(%) California
Likely Voters
Get bigger pensions than employees in the private sector 60
Get smaller pensions than employees in the private sector 19
About the same 21

 *   *   *

Attorney General’s Title and Summary Impacts Support

In August, the DeMaio and Reed blasted Attorney General Kamala Harris for issuing what they called a “biased” Title and Summary of the pension reform measure the coalition filed. The Title and Summary is what voters actually see on the ballot and the Attorney General has a Constitutional obligation to provide a fair and accurate description.

Putting aside the debate over whether the Title and Summary is fair and accurate, the polling shows the Attorney General’s Title and Summary from a polling perspective does indeed have a major negative impact on the ballot proposal.

In March 2015, the coalition conducted its own poll of California voters that demonstrated solid support for the concepts contained in the ballot proposal – specifically asking this question:

Would you vote yes – in favor of, or no – against a ballot measure that would give voters the right to reform pension benefits for state and local government workers, would require voter approval before obligating taxpayers to guarantee lifetime pensions benefits for new state and local government employees, and would require new government employees to contribute at least half the cost of their retirement benefits?

California Voter Support for Pension Reform

20151116-CPC-DeMaio

CPC’s poll used the Title and Summary provided by the Attorney General – with the Title and Summary crafted by the AG resulting in less support for the measure.

PUBLIC EMPLOYEES. PENSION AND RETIREE HEALTHCARE BENEFITS. INITIATIVE CONSTITUTIONAL AMENDMENT. Eliminates constitutional protections for vested pension and retiree healthcare benefits for current public employees, including those working in K-12 schools, higher education, hospitals, and police protection, for future work performed. Adds initiative/referendum powers to Constitution, for determining public employee compensation and retirement benefits. Bars government employers from enrolling new employees in defined benefit plans, paying more than one-half cost of new employees’ retirement benefits, or enhancing retirement benefits, unless first approved by voters. Limits placement of financial conditions upon government employers closing defined benefit plans to new employees. Summary of estimate by Legislative Analyst and Director of Finance of fiscal impact on state and local government: Significant effects—savings and costs—on state and local governments relating to compensation for governmental employees. The magnitude and timing of these effects would depend heavily on future decisions made by voters, governmental employers, and the courts.

California Voter Support for Pension Reform
Using Attorney General’s Title & Summary

(%) California
Likely Voters
Vote yes to support 36
Vote no to oppose 33
Undecided 32

 *   *   *

Many Arguments in Favor of Pension Reform Poll Well

After testing the Title and Summary, CPC polled arguments that might be used by proponents of pension reform to justify major changes in state and local pension benefits.

(%) California Likely Voters

 

Much more likely Somewhat more likely Somewhat less

likely

Much less

likely

Many government employees are abusing the system to spike their pensions. In 2013, one former assistant fire chief in Los Angeles collected a government pension of $983,000. In San Diego, a former city librarian now collects $234,000 annually, and a politician in that same city started cashing full-pay pension checks at age 32. Last year alone, over 41,000 retired state and local government employees cashed pension checks of $100,000 or more! This proposal would end abuses like these. 52 27 12 9
This proposal does not take away any pension benefits lawfully earned by government employees. The proposal simply prevents any spiking of pensions going forward and also reforms benefits for any newly hired government employees going forward. It will not affect current retirees. In this way, we are fixing our pension problem while protecting the seniors and families who depend on current benefits. 47 40 8 5
Backroom deals by politicians created the California pension crisis. Politicians take campaign contributions and support from powerful government unions and in return, politicians give the unions sweetheart deals that mean bigger pension benefits. Politicians have even voted to spike their own pensions. This proposal provides a “check” on state and local politicians by requiring voter approval of any future pension deals. With this proposal, voters will be able to stop the politicians from doing backroom pension deals that taxpayers can’t afford. 47 31 13 9
If you are concerned about public safety you should support this pension reform proposal. If we don’t reform government pensions now, many cities and counties will be forced to cut police and fire services to divert our tax dollars to bail out government pension funds. For example, the Oakland Police Department no longer responds to 44 different crimes as a result of cutbacks that were necessary to fund pensions. Elsewhere in the state, fire stations have had to scale back hours of operation and in some cases close in order to pay rapidly rising pension costs. 44 40 8 8
Pension debt has grown exponentially in California, rising from $6.3 billion in 2003 to $198 billion in 2013. And when combined with unfunded liabilities for retiree healthcare programs, taxpayers owe almost $350 billion to fund future retirements for government employees. Without immediate action, the cost of government pensions will double in the next five years alone. This proposal will shrink the debt and save taxpayers billions. 44 34 14 7
Politicians and bureaucrats who run the government pension program are cooking the books and misleading the public. Last year the head of the pension program pled guilty to taking bribes and helping friends collect millions in a fraudulent investment scheme. The situation is getting worse as taxpayers lose billions from dubious investment decisions made by a board with significant conflicts of interest. This proposal would reform the government pension program, which is why the powerful elites who profit from the government pension program are opposing it. 44 30 15 11
Many government employees contribute nothing at all towards the costs of their pension benefits, leaving taxpayers to pick up the whole tab. This proposal would require new government employees to contribute at least half the cost of their retirement plans, similar to what most private sector employees have to contribute. 43 32 17 8
If you are concerned about quality education for our children you should support this pension reform proposal. If we don’t reform government pensions now, many cities and counties will be forced to cut after school programs, close libraries, and parks and recreation in order to divert our tax dollars to bail out government pension funds. For example, cities like San Jose had to restrict library hours of operation in order to pay for rapidly rising pension costs. 40 34 17 9
Mounting government pension debts have forced major cuts in important services. For example, pension contributions in Los Angeles have grown from 3% of the city’s overall budget to nearly 20% in just the last decade, crowding out other public needs. Already in cities and counties across California, higher pensions costs have meant cuts to after school programs, closures and brownouts at fire stations and cancellations of road repairs. With this pension reform proposal, we can generate savings to restore these important services. 39 34 20 7
Voters should take a close look at who opposes this pension reform proposal. One Sacramento union boss leading the charge against reform collects a pension of $183,690 annually. He says government employees trade off pay for a secure retirement. However, according to the Sacramento Bee newspaper, the average salary for employees like him is $163,000 annually plus health care and retirement at age 55. Those same union leaders are lying about this pension reform proposal because they want to keep their taxpayer-funded gravy train going. 39 29 18 15
Cities across California are being crushed under the weight of mounting pension debt. Because of pensions, major cities such as Vallejo, Stockton, and San Bernardino have already gone bankrupt, which resulted in massive cuts in important services such as police and fire protection. Unless we approve this pension reform proposal, many more cities throughout California will be forced to declare bankruptcy and make similar extreme cuts in our services. 38 36 16 9
Voters should take a close look who opposes this pension reform proposal. In 2012, the teachers unions blocked legislation that would have given local officials the power to fire teachers convicted of sexually abusing their own students even though this meant that sexually abusive teachers got to keep their jobs. Those same unions are lying about this pension reform proposal because they want to block the common-sense reform it would bring. 38 27 22 13
The pension reforms in this proposal are fair. The new benefits provided to government employees would be no better, and no worse, than the benefits provided to workers in the private and non-profit sectors. For police and fire, the measure provides a guarantee of death and disability benefits mirroring exactly what the US Military receives. 37 41 14 9
 

 *   *   *

Arguments in Opposition to Pension Reform Offer Mixed Bag of Results

(%) California Likely Voters
(among those who saw “anti” messaging first)
Much less

likely

Somewhat less

likely

Somewhat more likely Much more likely
This pension proposal is promoted and funded by Tea Party Republicans including a young billionaire Texan who is spending $50+ million dollars to take away from school bus drivers, teachers, nurses, and firefighters their hard-earned retirement benefits. He hates government so much that he wants to strip millions of middle and working class Californians of their retirement security. 53 19 17 11
This proposal to eliminate public pensions in California is led and funded by a Texas wheeler-dealer billionaire named John Arnold. Arnold is spending $50+ million dollars of his fortune to dismantle retirement plans for firefighters, nurses, and teachers. Moving California state and local government employees to 401(k) accounts would mean billions more for Arnold and his cronies to split in higher Wall Street fees. 48 21 19 13
Many public employees like teachers, police, and fire fighters do not receive Social Security or have very limited benefits. This proposal would eliminate their pensions and would undermine their ability to retire with dignity, as they will have no safety net if their 401(k) investments lose their value before or during their retirement through no fault of their own. 47 25 19 9
This pension reform proposal would likely eliminate the current death and disability benefits for new police, firefighters, and other public employees. It would be disgraceful to take these important protections away from families of police and fire fighters who make the ultimate sacrifice to protect Californians. 47 24 20 9
If enacted, this ballot measure will cost the taxpayers millions, or even billions for extra elections. Every contract at all levels of government could be on the ballot, costing school districts, cities, and counties millions of dollars to hold these elections. And it will unleash expensive lawsuits which will be litigated in the courts, with taxpayers footing the bill. 45 34 14 7
This proposal would eliminate state constitutional protections for current and future employees, breaking promises made to teachers, nurses, and firefighters by rewriting their pension benefits without negotiation. This would devastate middle class families who have contributed to these pension plans and have made long-term financial planning decisions based on the promises made to them when they were hired. 45 25 19 11
This proposal to eliminate public pensions in California is led and funded by greedy investors including America’s youngest Wall Street billionaire who made his stash out of the collapse of Enron. If a statewide pension-gutting proposal is passed in California, public sector employees will be moved to 401(k) plans, which would mean a windfall in investment fees for Wall Street. It’s as bad as when George W. Bush tried to privatize Social Security. 44 27 19 10
Pensions are important compensation for public employees, including those who work in K-12 schools, higher education, hospitals, and police protection.  Public employees earn an average of 7% less than their private sector counterparts. Adequate pensions also serve as valuable recruitment and retention tool. If we approve this proposal’s massive cuts in pension benefits, we will need to either pay government employees more or risk hiring less-qualified government employees, which will lead to lower-quality services. 38 26 20 16
This measure is part of an extreme agenda to eliminate collective bargaining for government employees in California. The proposal allows voters to increase or decrease compensation and retirement benefits of government employees without any negotiation or collective bargaining. This undermines the ability of the government and employees to negotiate and agree on contracts. These complex issues should be settled at a bargaining table, not the ballot box. 38 24 24 14
This proposal would take away vested benefits that were promised to current public employees. For example, a state employee with 8 years of service could lose retiree healthcare benefits she would have earned after 10 years under her current employment contract. This is unfair to workers and their middle-class families, especially single mothers, because many accepted lower as a tradeoff better retirement and healthcare plans. 37 32 20 11
This proposal exaggerates the pension problem. Public employees are not retiring to lavish and luxurious pensions. In 2012, California passed extensive pension changes that raised the retirement age for new workers and require all employees to pay half of their pension costs. Thanks to Governor Brown’s reforms, $100,000 plus pension payments have all but been eliminated. The average public employee pension is just $2,500 a month – hardly the gold-plated plan overhaul that the other side claims. 31 29 28 11

 *   *   *

Significant Support for Pension Reform After Title and Summary Is Explained

Among voters who were exposed to the case for pension reform immediately after the Title and Summary was provided, support shifted dramatically back in favor of the pension reform proposal.  CPC concludes that the Title and Summary as currently written confuses and scares voters, but once the proposal is clearly explained to voters, confident support returns.

(%) CA Likely Voters
Vote yes to support 63
Vote no to oppose 18
Undecided 19

 *   *   *

Pension Reform Likely to Have Major Impact on 2016 Elections

The presence of a pension reform issue in the midst of the 2016 elections in California could have a profound effect on both candidate races and the debate over a variety of tax increase measures being considered for the 2016 ballot.

(1)  In the November 2016 election, which of the following types of candidate would you be most likely to vote for?

(%) California
Likely Voters
A Democrat who opposes the proposal 24
A Democrat who supports the proposal 18
A Republican who opposes the proposal 12
A Republican who supports the proposal 20
None of the above 5
Not sure 22

(2)  If a candidate from a political party different from your own supported this proposal, would that make you…?

(%) California
Likely Voters
Much more likely to support that candidate 9
Somewhat more likely to support that candidate 23
Somewhat less likely to support that candidate 11
Much less likely to support that candidate 17
No difference 41

(3)  Some people say that we should approve tax increases on the wealthy and extend the temporary sales tax enacted in 2012, because the state still need that money to close the budget deficit. Without these funds, we will have to cut funding for schools and for other important public services.

Other people say that the politicians are only raising taxes to pump more money into these failing state and local government pension systems to continue unsustainable government pension payouts (including their own) with our tax dollars. None of this money will go to school funding. We should enact pension reform first before considering any more tax increases.

Which of the following comes closer to your view?

(%) California
Likely Voters
Approve tax increases  on the wealthy and extend 2012 tax increases 37
Enact pension reform first 32
Neither of the above 15
Unsure 17

 *   *   *

Voters Not Swayed Significantly By Groups on Pro and Con Side of Pension Reform

CPC evaluated voter views of a variety of groups that are likely to take positions both for and against pension reform proposals.

As it related to this proposal, how much would you trust the information you might receive from the following organizations or institutions?

(%) California Likely Voters A lot of trust /

very credible

Somewhat trust / somewhat credible Trust just a little / not very credible Do not trust at all / not at all credible
Police and firefighter unions 22 39 25 14
Teachers’ unions 18 35 23 23
CalPERS 13 35 33 19
Government employees’ unions 11 31 27 31
Public sector unions 11 30 34 25
California Chamber of Commerce 10 41 33 16

 *   *   *

About the Author:  Former San Diego city councilman and lifelong entrepreneur Carl DeMaio is now tackling state-wide fiscal reform policy. While on the City Council, DeMaio led the effort to cut red tape on small businesses, reform the city’s contracting processes to expedite infrastructure projects, and enact some of the toughest “Sunshine Law” open government requirements in the nation. In 2012, DeMaio crafted and led a citizens campaign to qualify and pass the “Comprehensive Pension Reform” Initiative – the first-of-its kind measure to switch San Diego from a Defined Benefit Pension Plan to a 401(k) retirement program. In 2003, DeMaio founded the American Strategic Management Institute (ASMI), which provides training and education in corporate financial and performance management. In late 2007, DeMaio sold both of his companies to Thompson Publishing Group. DeMaio holds a BA in International Politics and Business from Georgetown University.

Why Pacific Grove Matters to Pension Reformers

UnionWatch has just released the fourth and final installment of “The Fall of Pacific Grove – The Final Chapter,” written by John Moore, who is a retired attorney and resident of Pacific Grove. This four part series constitutes an extended epilogue to a eight part series on Pacific Grove which was published last year on UnionWatch. Links to all twelve installments appear at the conclusion of this post.

Moore’s earlier set of articles describe in detail how Pacific Grove slid inexorably towards insolvency by yielding, again and again, year after year, to pressure from local government unions to award unaffordable pension benefits to city employees. Pacific Grove’s challenges are a textbook case of how there is simply no interest group, anywhere, currently capable of standing up to the political power of government unions. This small city now faces the possibility of selling off every asset they’ve got, primarily real estate, to private developers to raise cash for the city’s perpetually escalating annual pension contributions. They face the possibility of rezoning to allow construction of huge tourist hotels that will destroy the quality of life for residents, in order to enable new tax revenue producing assets to help pay the city’s required pension contributions.

Anyone familiar with local politics knows that one of the only special interests with the financial strength to oppose government unions in small towns are land developers. This end-game, where public assets are sold to developers to generate cash for pension contributions ought to put to rest any remaining debate as to who runs our cities and counties. Of course developers aren’t going to oppose government unions. By extension, and in a disappointing twist of irony, why should any libertarian leaning private sector special interest oppose government unions? As these unions drive our public institutions into bankruptcy, private sector investors buy the assets of our hollowed out public institutions at fire sale prices.

In this new four part series, author John Moore challenges the so called “California Rule” that supposedly makes pension modifications – even prospectively – legally impossible. But he also summarizes another legal approach to reform, one that takes into account the lack of due process and the ignorance of specific commitments made in the original granting of financially unsustainable pension benefit enhancements. It is an approach that has many facets and can be utilized in many California cities and counties. Unfortunately, Moore also exposes why this approach to reform, while viable, was only tepidly attempted in Pacific Grove.

While anyone serious about pension reform should read Moore’s work in its entirety, one of his key points concerns the “California Rule.” He writes:

“Cases discussing state employee pension rights are not germane to the issue of whether a local agency’s employees have a vested pension right, because the discussions in the state employee cases assume that the employees have vested rights, while in non-state cases the issue is whether the legislative body granted a vested right.”

Moore’s point, delved into in great detail in part one, is that unless a lifetime (full career) annual pension benefit accrual at a specific rate is explicitly granted by a legislative body, the presumption is that it is not. This means that changing pension benefits for existing employees from now on, prospectively, in many of California’s cities and counties, is not a violation of the California Rule.

That is hardly encouraging, of course, to pension reformers in those cities and counties where lifetime pension benefits have been explicitly granted at a specific rate of annual accrual for the entire career of any currently working employee. But where Moore’s first point may not apply, his second point might find wide application. Because as Moore alleges in Pacific Grove, an allegation echoed by Californian pension reformers in assorted cities and counties from the Oregon border all the way to Mexico, lifetime pension benefit enhancements were granted without due process.

Whether it was on the basis of negligently optimistic financial projections, the lack of independent financial analysis, missing steps in the oversight, review and approval phases, and other violations of due process both before and after implementation, pension benefits enhancements rolled through nearly every one of California’s cities and counties between 1999 and 2005. Many of them were rubber stamped by politicians who had no idea what they were doing. And many of them violated due process every step of the way.

If pension reform weren’t necessary, then litigation wouldn’t be worth considering. But what’s happening to Pacific Grove will happen elsewhere, if it hasn’t already. In hundreds of cases across California, cities and counties are just one sustained market correction away from selling off their parks, libraries and parking garages to feed the pension systems. And unlike tiny Pacific Grove, many of these larger cities and counties have a sufficient budget to take another shot in the courts to avert that fate. They may save not only their civic financial health. With appropriate reforms, they will also save the pensions.

It is impossible to summarize Moore’s entire body of work in a few hundred words. Pension reformers are urged to review this gripping story of how powerful special interests are destroying his home town, take notes, and think about how some of his ideas may be applied where they live.

*   *   *

Ed Ring is the executive director of the California Policy Center.

Read the entire series – The Final Chapter:

The Fall of Pacific Grove – A Primer on Vested Rights
 – The Final Chapter, Part 1, October 20, 2015

The Fall of Pacific Grove – The City’s Tepid Defense of the Vested Rights Lawsuit
– The Final Chapter, Part 2, October 27, 2015

The Fall of Pacific Grove – The Judge’s Ruling
– The Final Chapter, Part 3, November 2, 2015

The Fall of Pacific Grove – The Immediate Future
– The Final Chapter, Part 4, November 9, 2015

During 2014 author John Moore published the first chapter of The Fall of Pacific Grove in an eight part series published between January 7th and February 24th. For a more complete understanding of the history, read the entire earlier series:

The Fall of Pacific Grove – How it Began, and How City Officials Fought Reform
 – Part 1, January 7, 2014

The Fall of Pacific Grove – How City Thwarted Reform, and CalPERS Squandered Surpluses
 – Part 2, January 14, 2014

The Fall of Pacific Grove – CalPERS Begins Calling Deficits “Side Funds,” Raises Annual Contributions
 – Part 3, January 21, 2014

The Fall of Pacific Grove – Outsourcing of Safety Services Causes Increased Pension Deficits
 – Part 4, January 28, 2014

The Fall of Pacific Grove – Anti-Pension Reform Mayor Claims to Favor Reed Pension Reform
 – Part 5, February 3, 2014

The Fall of Pacific Grove – Privately Owned Real Property are the Only Assets to Pay for Pensions
 – Part 6, February 11, 2014

The Fall of Pacific Grove – The Cover-Up by the City After the Hidden Actuarial Report Surfaced in 2009
 – Part 7, February 18, 2014

The Fall of Pacific Grove – Conclusion: The “California Rule” Cannot Stand
 – Conclusion, February 24, 2014

About John M. Moore:  Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34734) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. John graduated from San Jose State College with majors in Political Science and Economics (summa cum laude). He then received a JD from The Stanford School of Law and practiced business and trial law for 40 years before retiring. In 1987, he was the founding partner of a Sacramento law firm that he formed in 1987 to take advantage of the increased bankruptcies brought about by the Tax Act of 1986. Although he did not file and manage bankruptcy cases, he represented clients in numerous litigation matters before the bankruptcy court, including several cases before judge Klein, the current judge of the Stockton bankruptcy case. He is an admirer of Judge Klein, for his ability and accuracy on the law. As managing partner, he understood the goals of bankruptcy filings and its benefits and limitations.

CalPERS "Myths vs. Facts" Propaganda Will Not Change Reality

California’s largest state/local government employee pension system, CalPERS, has posted a page on their website called “Myths vs. Facts.” Included among their many rather debatable “facts” is the following assertion, “Pension costs represent about 3.4 percent of total state spending.”

This depends, of course, on what year you’re considering, and what you consider to be direct cost overhead for the state as opposed to pass-throughs from the state to cities and counties. But CalPERS overlooks the fact that most of California’s government workers who collect pensions do not work for the state, they work for cities and counties and school districts. As can be seen on the “view CalPERS employers” page on Transparent California, there are 3,329 distinct employer retirement pension plans administered by CalPERS, and the vast majority of these are not state agencies paid from the state budget, but local agencies.

In a study earlier this year, “California City Pension Burdens,” the California Policy Center calculated 2015 employer pension contributions as a percent of total revenue for California’s cities to be 6.85%, more than double the amount CalPERS implies is the average pension burden. But this hardly tells the whole story, because CalPERS is systematically increasing the amounts that their clients will have to contribute as a percent of payroll, and hence, as a percent of total revenue.

UnionWatch has obtained budget documents from Costa Mesa showing how the pension contributions as a percent of payroll will grow between their 2014/15 fiscal year and 2020/21. Over the next six years, as the chart below shows, Costa Mesa’s total payroll is projected to grow from $50.1 million to $54.6 million. Their pension contribution, on the other hand, will grow from $23.2 million to $33.0 million. That is, their pension contribution as a percent of total payroll will increase from 46.3% of payroll today, to 60.4% of payroll in 2020.

20151103-UW-Costa-Mesa

Costa Mesa’s pension burden as a percent of payroll is a bit higher than average, but not much. And in terms of the percentage increases to pension contributions announced by CalPERS, they are typical. California’s cities, based on CalPERS announced pension increases, can expect to add another 15% of payroll to whatever amount they are already sending to CalPERS each year.

For every dollar they pay their employees in salary, should California’s cities be sending, year after year, $.50 cents or more to CalPERS? That’s the best case. It assumes that CalPERS will continue to be able to realize annual returns on investment of 7.5%, on average over the next several decades. It also assumes they’ve got the demographic projections correct this time, and won’t have to contend with the otherwise happy eventuality of people living longer than their current projection of approximately 80 years. These are big assumptions.

And how much of this fifty cents (or more) on the dollar do the employees themselves pay as a percent of withholding? In many cases, up until recently, they paid nothing. Or if they did pay via withholding, at the same time as they became subject to that requirement, they received a raise to their overall salary of an equivalent amount. But under California’s 2012 Public Employee Pension Reform Act, employees will gradually be required to pay more for their pensions – with a ceiling of 8% for regular employees, and 12% for public safety employees.

If they paid the maximum via withholding, for a miscellaneous employee in Costa Mesa, that 8% equates to a 4-to-1 employer match today, rising to a 5-to-1 matching in 2020. Similar employer matching ratios will apply for public safety employees. How many companies, anywhere, provide 1-to-1 matching, much less 2-to-1, or more? 5-to-1 matching? It is unheard of. For good reason – it is absolutely impossible for a private company to afford this in a competitive economy.

Returning to the Myths vs. Facts page posted by CalPERS, they also assert that “The average CalPERS pension is about $31,500 per year.” This is profoundly misleading. It is based on the assumption that every CalPERS retiree worked a full career in government. Returning to the CalPERS Employers page on Transparent California, one can see a more accurate estimate of the “average pension,” because it is limited to the average for retirees who put in at least 30 years of work. Take a look. For Costa Mesa, the average 2014 pension for a full career retiree was $91,805.

If our cities could afford this, nobody would care, but they cannot. If Social Security, which withholds benefits until a participant, typically, has worked 45 years, could afford to be equally generous, nobody would care. But the average Social Security benefit is around $15,000 per year and even at that pittance, without major restructuring it will go broke.

One can debate forever regarding how much of a premium public employees should receive over private sector workers because they’re, on average, more educated, or take more risks in their jobs. But as it is, taxes are going up to pay pensions and benefits to government workers that are by any objective standard many times greater than what private citizens can ever hope to achieve. No premium, however much deserved on principle, should be this big.

The insatiable demand by CalPERS and other government pension systems for more money to keep these pensions intact does more than create financial stress to our cities and counties. It exempts public employees from the economic challenges that face everyone else. It takes away the sense of shared fate between private citizens and public servants. It undermines the social contract. It exposes a self-dealing, hidden agenda behind all new regulations. It erodes the credibility of laws, ordinances, codes, because perhaps they are merely there to generate revenue.

CalPERS and California’s other government pension systems have the financial wherewithal to lobby and run PR campaigns that dwarf that of reformers. But myths and facts are not defined in press releases. They are defined by reality. The reality is that California’s pension funds have increased their required contributions as a percent of municipal budgets by an order of magnitude in just the last 15-20 years, and there is no end in sight. If and when they can no longer seize public assets to force payment, bully compliant judges to overturn reforms, or find enough money from new taxes to save their financially shattered systems, they are going to have a lot of explaining to do – not only to the beleaguered taxpayers, but to their own members.

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Ed Ring is the executive director of the California Policy Center.

Pension Reform Requires Mutual Empathy, not Enmity

Attending a high school reunion after more than a few decades ought to be a memorable experience for anyone. Hopefully the occasion is filled with warmth and remembrance, rekindled friendships, stories and laughs. But as our lives develop and we build our adult networks based on shared values and common professions, a high school reunion offers something else; a unique opportunity to meet people we knew very well and still care about, whose lives all went in completely different directions.

My high school classmates chose a diverse assortment of careers. Some became engineers, some went into sales, some are entrepreneurs; some work in high-tech, some in aerospace, others in construction. And some are teachers, some are police officers, and some are firefighters. Without any exceptions I could observe, all of them made conscientious choices, all of them worked hard, all of them were responsible with their savings and investments. And now they’ve reached the age where whatever retirement plans they made are unlikely to change much.

How to ensure government pensions are not blown up by the next sustained market downturn is a complex challenge, complicated further by ideological divisiveness and political opportunism. On one side are powerful financial special interests in the form of the pension systems, and their government union allies. On the other side are poorly organized taxpayer activists whose grassroots strength, combined with fiscal reality, attract support from increasing numbers of local and state politicians. But caught in the middle are the people who served in government jobs, the overwhelming majority of whom did those jobs well, and have earned the right to retire with dignity. It’s personal.

Figuring out how to make government retirement benefits financially sustainable should be part of a bigger conversation, which is how all Americans are going to have the ability to retire with dignity. It is part of a conversation even bigger than that – how to nurture sustainable economic growth while coping with an aging population, environmentalist considerations, globalization, debt/GDP ratios at historic highs, and mushrooming new technologies that present unprecedented potential to eliminate human jobs. All of these mega-trends are this generation’s challenge, all of them are urgent, all of them are personal.

It’s easy to solve all of these challenges if you are willing to ignore reality and hew to an ideological pole-star. Libertarian answers to social and economic policy issues inevitably advocate privatization. Socialist theorists inevitably advocate state ownership. But both of these ideologies, in their most orthodox forms, are utopian. Libertarians envision a stateless, humane society based on personal liberty and private ownership. Socialists envision a stateless, humane society based on common ownership. If these extremes are so absurd, why is the center so uninviting?

It’s a long way from Silicon Valley to utopia, but in that fabled land, anchored by what was only referred to as San Jose back when we were high school students there, thoughtful futurists abound. Some think we shall all become independent contractors, linked by technology to virtual employment opportunities all over the world. They believe secure full time jobs will wither away entirely, and everyone will thrive as free agents in a wired world. Others think automation will eliminate so many jobs, and create so much abundance, that guaranteeing a minimum income to everyone will be feasible and necessary, whether they work or not. The conversation taking place among the Silicon Valley elite regarding the political economy of our future is helping to define that future as much as their innovative new products. It’s a conversation worth listening to without ideological blinders.

My classmates who chose careers in public service, just like my classmates who pursued careers in the private sector, are starting to retire. Just like everyone else – our friends, our families, our neighbors – they want answers, not ideology. They want constructive solutions, not controversial schemes. Is there enough room in the political center to permit a conversation that sticks to facts and practical solutions, or will the professional chorus of perennial opponents crush them, abetted by all those millions who are comforted by inflexible ideologies?

One ideologically impure, centrist way to save defined benefits would be to borrow concepts from Social Security. Reformed defined benefits would be (1) awarded according to progressive formulas, where the more someone makes, the less the pension benefit is as a percent of their final salary, (2) there is a benefit ceiling which no individual pension can exceed, (3) pension contributions in the form of employee withholding can be increased without commensurate increases to overall salary, (4) annual pension accrual multipliers, going forward for active workers, can be reduced depending on the system’s financial health, and (5) when necessary, pension benefits to existing retirees can be reduced, in order to maintain the overall financial health of the system. Often that can be as little as skipping a COLA.

When political professionals, volunteer activists, policymakers, commentators, analysts, or anyone else influencing the pension debate speak on the topic, they should imagine the following situation: With every word, they are looking into the eyes of two close friends or family members, two people nearing retirement, one of them about to collect a government pension, the other a taxpayer who will rely on Social Security supplemented by a lifetime of personal savings. People who didn’t create the financial challenges we collectively face. People we love.

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Ed Ring is the executive director of the California Policy Center.

What Happens When Public Unions Control Everything for Decades?

Editor’s Note:  California and Illinois have a lot in common. Both have diverse, resilient economies, both are large states with most of the population concentrated in urban areas, and both have been controlled for decades by public sector unions. The crucial difference, of course, is that at least in Illinois, there is a reform minded governor who is standing up to the unions. But will it matter? In this article by Mike Shedlock, including commentary by Michael Bargo, it is clear that the depth of government union power in Illinois will be hard to overcome, even by a charismatic governor who is committed to reform. One of the most noteworthy quotes in this article comes from Bargo, who contends that literally 100% of the property tax proceeds paid by residents of Chicago are required to make pension payments. One analyst estimated the total per capita state and local debt for a Chicago resident at $88,000. But this debt wasn’t incurred to “help the working class and poor.” It is primarily to pay for pensions. California’s teetering pension systems are one market downturn away from facing a situation just as dire as Illinois. The hypocrisy of the government union controlled politicians in Illinois, and California, is only matched by their unwarranted power.

Here is my post from two weeks ago, Emanuel Fiddles While Chicago Burns; Public Schools Over the Edge; 9% Cloud Tax on Data Streaming; Emanuel Eyes Property Tax Hikes. discussing the sorry state of affairs in Chicago.

Michael Bargo, writer for the American Thinker, provides additional commentary on this topic.

Here is a  lengthy snip from Bargo’s recent, well-written article Public Pensions Prove Zero Sum Economics.

One of the major appeals in Democrat presidential campaigns  is to explain to voters that they need Democrats in office to take money away from the rich. And since the rich own big corporations, they will pay workers as little as possible. This idea is what Barack Obama had in mind in 2008 when he said he will redistribute money to the working class and poor.

But so far this analysis has only been applied to the private sector; the “rich” who own stocks or run corporations. If public sector workers, particularly pensioners who are not working, are taking significant amounts of money from taxpayers, then this may also be seen  as contributing to the shrinkage of middle class incomes.

Of course, Illinois is not the only state dominated by high Democrat taxes and public sector spending but it serves as a good case study of what Democrats do when they have total control of budgets for decades.

The results are startling. Today, Chicago’s public sector unions are underfunded, according to the City itself, by $26.8 billion. This is just the City of Chicago. When the state debt is added, the total amount of debt owed by each Chicago household to the city and state rise, according to the Illinois Policy Institute, to $61,000. SEC Commissioner Gallagher stated the number is $88,000.

Pension payments to Chicago public union employees have become so high that today all the property taxes paid by the households of Chicago go exclusively to pensions. The operating expenses are paid by additional taxes on things from packs of cigarettes, to gasoline, sales tax, and cable TV bills. Given these facts about how Chicago’s property taxes are used, it’s not surprising that its new Republican governor wants to freeze property taxes to rescue the middle class’s paychecks from Democrats.

Illinois Democrats have indentured the taxpayers of the state to turn over historic amounts of their incomes to government, shrinking Illinois’ middle class.

All public debt creates taxation and the effects have an impact, sooner or later. The more time allowed for debts to go unpaid, the greater the amount of taxes eventually wasted on interest payments.

Chicago is now the slowest growing of all major cities. In 2014 Chicago only gained 82 people in population. Residents are fleeing Illinois, taking their purchasing power with them. Illinois is also the slowest state to recover from the recession.

Chicago households will have to pay, through taxes, muni bond and unfunded pension debt for decades to come. Far into their lifetimes, and the lifetimes of their children. Zero sum theory is true, but the lion’s share of the proof shows that government spending, not private sector investing, takes money from average Americans.

Zero sum theory has been used by Democrats as nothing but a rhetorical tool used to exploit voters’ emotions of envy and greed. But in the end, the greed is exercised by Democrats while taxpayers in Illinois find themselves deep into a hole of government-created debt.

The private Illinois Policy Institute has uncovered most of the facts used here, and often had to file FOIA requests. In some cases, they had to take state agencies to Federal court to find out how much they were earning, and how much debt they had accumulated. This is all planned, it is a strategy used by Democrats to con taxpayers into putting them into office; saying they want small class size and to help the elderly; while all along they were secretly passing huge public pension contracts and dumping the cost onto average middle class and poor taxpayers.

These facts show two things. One is that these payments are so high that all Chicago households are under a crushing debt burden that takes many thousands per year away from their household budgets. And secondly, these figures provide an opportunity to measure whether this transfer of wealth from households to public pensioners negatively impacts economic grow. Illinois has the most public debt, the lowest credit rating, and the slowest growth.

Who Really Runs Illinois?

Little or no legislation passes through the Illinois legislature without the approval of Michael Madigan.

Wikipedia notes Madigan has been a House member since 1971, and Speaker in all but two years since 1983.

Chicago Magazine named Madigan the fourth-most-powerful Chicagoan in 2012 and second in 2013 and 2014, calling him “the Velvet Hammer—a.k.a. the Real Governor of Illinois.

Rich Miller, editor of the Capitol Fax Illinois political newsletter, wrote “the pile of political corpses outside Madigan’s Statehouse door of those who tried to beat him one way or another is a mile high and a mile wide.

Taxes Not the Answer

The results of Madigan’s tenure as the long-serving “real governor” of Illinois are as follows:

  • Pension holes in the hundreds of billions of dollars
  • Budget deficits
  • Corruption
  • Business exodus
  • Private taxpayer exodus
  • High taxes
  • Shrinking middle class

Tax hikes are clearly not the answer. Illinois has a spending problem, not a revenue problem.

Unfortunately for Illinoisans, other than kowtowing to public union demands, raising taxes is about the only thing Madigan knows how to do.

The results of Madigan’s tenure speak for themselves.
Isn’t it time to try a new tack?

Here’s Where to Start 

  1. Bankruptcy legislation to allow municipal bankruptcies
  2. Pass Right-to-Work legislation
  3. Scrap prevailing wage laws
  4. Property tax freeze
  5. Freeze defined benefit pension plans
  6. Pension reform
  7. Fair redistricting
  8. Reform worker’s compensation laws

That’s a big list of things that needs to be done, and Madigan is on the other side of every one of them.

As I said at the top,  Emanuel Fiddles While Chicago Burns.

And at the state level, Madigan Fiddles While Illinois Burns.

About the Author:  Mike Shedlock is the editor of the top-rated global economics blog Mish’s Global Economic Trend Analysis, offering insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education, and a senior fellow with the Illinois Policy Institute.

Why Pension Reform is Inevitable, and How Reforms Can Benefit the Economy

“The six-year bull market is admittedly long in the tooth.”
CalSTRS Chief Investment Officer Chris Ailman, Sacramento Bee, July 17, 2015

If what Mr. Ailman really means is equity investments may not be turning in double digit returns any more, that makes the recent performance of CalSTRS and CalPERS all the more troubling. Because according to their most recent financial statements, CalSTRS only earned 4.8% last year, and CalPERS only earned 2.4%. That leaves CalSTRS 68.5% funded, and CalPERS 77% funded.

Are we at the top of a bull market? Take a look at this chart:

S&P 500, Last Twenty Years Through June 21, 2015

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The S&P index, which reflects U.S. equity trends reasonably well, enjoyed a five year bull market that crested in mid-2000, then another one that ran five years from September 2002 to October 2007, then this current bull market, which began 6.5 years ago. The bull market ending in September 2000 saw a 170% rise in the S&P, the one that peaked in October 2007 rose 90%, and this current one has yielded a 188% rise. So far.

Is today’s bull market “long in the tooth”? It sure looks that way.

There’s more to this, however, than the new reality of globalized, largely automated equity trading that condemns stock indexes to unprecedented volatility – or the graphically obvious fact that we’re at another peak.

There’s something stock traders call “fundamentals,” in this case creating economic headwinds that all the high-frequency trading and hedges in the world can’t avoid. About the same time that CalSTRS and CalPERS announced they missed their earnings targets, Reuters published this: “Calpers chief looks to cut volatility as fund enters negative cash-flow era.”

In plain English, this “negative cash-flow era” means that CalPERS has crossed a big line financially. They are now going to be selling more investments each year than they buy. They are going to be net sellers in the markets. While the superficial explanation for this is “baby boomer retirements,” that is incorrect. Government staffing is not directly driven by population demographics. In government, new hires replace retirees and headcounts trend upward. The real reason CalPERS is entering a negative cash flow era is because the retroactive pension benefit enhancements that started in 1999 and rolled through agency after agency for the next six years or so are now translating into large numbers of people retiring with these enhanced pensions, replacing earlier retirees who had modest pensions. Meanwhile, new hires are, increasingly, accepting more realistic reduced retirement promises, and paying proportionately less into the funds.

If CalPERS were the only pension fund becoming a net seller in the market, it wouldn’t really matter. But all the major pension funds, everywhere, are becoming net sellers. That’s nearly $4.0 trillion in assets under management in the U.S. that suddenly are shedding assets faster than they’re acquiring them. When supply rises, prices drop. This is a headwind.

There are other headwinds. If government staffing doesn’t directly reflect population demographics, the general population obviously does. Between 1980 and 2030 the percentage of Americans over 65 will rise from 11% to 22% of the total population. And ALL of these seniors will be net sellers of assets.

If that weren’t enough, there is the small matter of the United States – along with most of the rest of the world – arguably in the terminal phase of a long-term credit cycle. Total market debt as a percentage of GDP in the United States is over 300%, higher than it was in 1929. When interest rates fall to zero, playing the debt card to stimulate economic growth doesn’t work anymore. And when interest rates rise, asset values fall and debt service becomes untenable. We’ve painted ourselves into an economic corner.

In the face of this reality, unconcerned and all-powerful, the government union band plays on. Today the Los Angeles based City Watch published an early version of what will become an irresistible torrent of propaganda opposing the proposed Reed/DeMaio pension reform initiative. The title says it all “Measure of Deception: Initiative Would Gut Retirement Benefits for Millions of Californians.”

Take a look at the average full career CalPERS pension per former employer. Bear in mind the average public sector retirement age is 61, and that the average Social Security benefit is around $15,000 per year. Is there no middle ground between “gutting” and restoring financial sustainability?

Restoring pension systems to financial sustainability in the face of economic headwinds will require two major changes in policy. First, pension benefit plans would need to change in the following ways: (1) Increase employee contributions, (2) Lower benefit formulas, (3) Increase the age of eligibility, (4) Calculate the benefit based on lifetime average earnings instead of the final few years, and (5) Structure progressive formulas so the more participants make, the lower their actual return on investment is in the form of a pension benefit. Finally, enroll all active public employees in Social Security, which would not only improve the financial health of the Social Security System, but would begin to align public and private workers to share the same sets of incentives. Taking these steps will repair the damage caused by SB 400 in 1999, which set the precedent for retroactive pension benefit increases.

Second, completely change the investment strategy of public pension systems to return to lower risk investments. Along with choosing, say, high-grade corporate bonds over global hedge funds, these lower risk investments could include investment in revenue producing civil infrastructure. A thoughtful article recently published in Governing, “How Public Pensions Are Getting Smart About Infrastructure,” explores this possibility. Not only would massive investment by pension funds in revenue producing infrastructure create millions of jobs, repair neglected public assets, and constitute a low risk investment, over their life-cycle many of these projects actually produce excellent returns. Moving to lower risk investments will repair the damage caused by Prop. 21, narrowly passed in 1984, that “deleted constitutional restrictions and limitations on the purchase of corporate stock by public retirement systems.”

Given the financial headwinds they face, it is going to take courage and creativity to save defined benefits for public sector workers. But depending on what direction these reforms take, they have the potential to greatly benefit the overall economy.

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Ed Ring is the executive director of the California Policy Center.

CALIFORNIA POLICY CENTER PENSION STUDIES

California City Pension Burdens, February 2015

Estimating America’s Total Unfunded State and Local Government Pension Liability, September 2014

Evaluating Total Unfunded Public Employee Retirement Liabilities in 20 California Counties, May 2014

Evaluating Public Safety Pensions in California, April 25, 2014

How Much Do CalSTRS Retirees Really Make?, March 2014

Comparing CalSTRS Pensions to Social Security Retirement Benefits, February 27, 2014

How Much Do CalPERS Retirees Really Make?, February 2014

Sonoma County’s Pension Crisis – Analysis and Recommendations, January 2014

Are Annual Contributions Into CalSTRS Adequate?, November 2013

Are Annual Contributions Into Orange County’s Employee Pension Plan Adequate?, August 2013

A Method to Estimate the Pension Contribution and Pension Liability for Your City or County, July 2013

Moody’s Final Adopted Adjustments of Government Pension Data, June 2013

How Lower Earnings Will Impact California’s Total Unfunded Pension Liability, February 2013

The Impact of Moody’s Proposed Changes in Analyzing Government Pension Data, January 2013

A Pension Analysis Tool for Everyone, April 2012

A Challenge to Moorlach and Glazer – Build A Radical Center

On March 22, 2015, John Moorlach was officially sworn in as state senator for California’s 37th District. On May 28, 2015, Steve Glazer took the oath of office as state senator for the 7th District. Moorlach is a Republican serving mostly conservative constituents in Orange County. Steve Glazer is a Democrat serving mostly liberal constituents in Contra Costa County.

Different parties. Different constituents. You wouldn’t think these two men had much in common. But you’d be wrong.

John Moorlach and Steve Glazer have both distinguished themselves as politicians and candidates by doing something that transcends their political party identity or conventional ideologies. They challenged the agenda of government unions. As a consequence, both of them faced opponents who were members of their own party who accepted money and endorsements from government unions.

It wasn’t easy to challenge government unions. Using taxpayers money that is automatically deducted from government employee paychecks, government unions in California collect and spend over $1.0 billion per year. These unions spent heavily to attack Moorlach and Glazer, accusing – among other things – Moorlach of being soft on child molesters, and accusing – among other things – Glazer of being a puppet of “big tobacco.”

This time, however, the lavishly funded torrent of union slime didn’t stick. Voters are waking up to the fact that the agenda of government unions is inherently in conflict with the public interest. Can Moorlach and Glazer transform this rising awareness into momentum for reform in California’s state legislature?

Despite sharing in common the courage to confront California’s most powerful and most unchecked special interest, Moorlach and Glazer belong to opposing parties whose mutual enmity is only matched by their fear of these unions. With rare exceptions, California’s Democratic politicians are owned by government unions. Fewer of California’s Republican politicians are under their absolute control, but fewer still wish to stick their necks out and be especially targeted by them.

The good news is that bipartisan, centrist reform is something whose time has come. Democrats and Republicans alike have realized that California’s system of public education cannot improve until they stand up to the teachers unions. Similarly, with the financial demands of California’s government pension systems just one more market downturn away from completely crippling local governments, bipartisan support for dramatic pension reform is inevitable.

There are other issues where voters and politicians alike realize current policy solutions are inadequate at best, but consensus solutions require intense dialog and good faith negotiations. An obvious example of this is water policy, where the current political consensus is to decrease demand through misanthropic, punitive rationing, when multiple solutions make better financial and humanitarian sense. Supply oriented solutions include upgrading sewage treatment plants to reuse wastewater, building desalination plants, building more dams, increasing cloud seeding efforts, and allowing some farmers to sell their allocations to urban areas.

Imagine a centrist coalition of politicians, led by reformers such as Moorlach and Glazer, implementing policies that are decisive departures from the tepid incrementalism and creeping authoritarianism that has defined California’s politics ever since the government unions took control. How radical would that be?

Ultimately, forming a radical center in California requires more than the gathering urgency for reforms in the areas of education, government compensation and pensions, and, hopefully, infrastructure investment. Beyond recognizing the inevitable crises that will result from inaction, and beyond finding the courage to stand up to government unions, Moorlach and Glazer, and those who join them, will have to manifest and pass on to their colleagues an empathy for the beliefs and ideologies of their opponents.

Ideological polarities – environmentalism vs. pro-development, social liberal vs. social conservative, libertarian vs. progressive – generate animosity that emotionalizes and trivializes debate on unrelated topics where action might otherwise be possible. The only solution is empathy. The extremes of libertarian philosophy are as absurd as those of the progressives. The extremes of social liberalism can be as oppressive as an authoritarian theocracy. Economic development without reasonable environmentalist checks is as undesirable as the stagnant plutocracy that is the unwitting consequence of extreme environmentalism. And while government unions should be outlawed, well regulated private sector unions play a vital role in an era of automation, globalization, and financial corruption.

Despite being inundated with a torrent of slime by their opponents, John Moorlach and Steve Glazer took the high road in their campaigns. They are worthy candidates to nurture the guttering remnants of empathy that flicker yet in Sacramento, and turn them into a roaring, radical centrist fire.

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Ed Ring is the executive director of the California Policy Center.