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Did CalPERS Fail to Disclose Costs of Historic Bump in Pension Benefits?

How would you feel if someone told you they’d just increased your retirement benefit by 50%, took five years off the age you’d have to be when you could retire and collect this benefit, and then told you there would be almost no additional cost because the stock market was roaring? In California, that’s what happened in December 1999. “You” were “ALL PUBLIC AGENCIES,” and their countless thousands of public employees, and “someone” was the biggest public employee retirement system in the state, CalPERS. Click here to read the agency’s 12/23/1999 analysis.

Then how would you like it, two years later, after the market had “corrected,” you were told, via a CalPERS board resolution, that an “exception” had been made to generally accepted actuarial accounting standards, and you could choose to value your savings that had been set aside to pay for your retirement benefits at a value 10% greater than the actual market value of those assets at the time? That’s what happened in June 2001. Click here to read that 6/06/2001 letter.

Did CalPERS comply with the law when they did this?

Today, we’re left to wonder whether those actions violated state law. California Government Code Section 7507 requires that an enrolled actuary notify elected officials of the actual costs of any benefit increase.

Here is an excerpt from Section 7507:

The Legislature and local legislative bodies shall secure the services of an enrolled actuary to provide a statement of the actuarial impact upon future annual costs before authorizing increases in public retirement plan benefits. An “enrolled actuary” means an actuary enrolled under subtitle C of Title III of the federal Employee Retirement Income Security Act of 1974 and “future annual costs” shall include, but not be limited to, annual dollar increases or the total dollar increases involved when available.

The California Policy Center recently re-released a policy brief entitled “Did Your Agency Comply with the Law When Increasing Pension Formulas?” That policy brief provides clear instructions to any local elected official or local activist who would like to gather and view for themselves possible evidence of 7507 violations in their city or county.

The stakes are high. Senate Bill 400, enacted in 1999, increased pension benefit formulas by roughly 50 percent for California Highway Patrol officers. Over the next five years or so, nearly every state agency, city, and county in California followed suit, not only for their police and firefighters, but for all public employees regardless of their job description. The ongoing financial impact of this on civic budgets has been severe, and there is no end in sight.

Back in 1999, pension expenses as a percent of total operating budgets in California averaged around 3 percent. Today they average over 11 percent. Depending on how fast agencies are required to pay down the unfunded liabilities on their pension obligations, and depending on how pension investments perform over the next several years, pension expenses as a percent of total operating budgets in California could rise to over 30 percent.

With rare and incremental exceptions, all attempts so far to reform pensions – and so restore financial sustainability and robust services to California’s public agencies – have been thwarted. Reformers continue to challenge these special interests in court, but progress has been slow and expensive, with no rulings of any significance.

Did CalPERS comply with the law when they offered their agency clients the option to greatly increase pension benefits? Did they comply with California Government Code Section 7507?

Using Pacific Grove as an example of CalPERS’ followup, here’s the “Contract Amendment Cost Analysis – Valuation Basis: June 30, 2000,” in which a CalPERS actuary presented to Pacific Grove’s elected officials three distinct values for the assets they had invested with CalPERS, and gave them the liberty to choose which one they’d like to use. The higher the value they chose for their existing assets, the lower the cost from CalPERS to pay for the benefit enhancements they were contemplating.

Option 1: “No increase in actuarial value of pension fund assets.”

Option 2: “Actuarial value of assets increased by twice the increase in the present value of benefits due to this amendment, limited to 100% of market value of assets.”

Option 3: “Actuarial value of assets increased by twice the increase in the present value of benefits due to the amendment, limited to 110% of market value of assets.”

In plain English, the CalPERS actuary is inviting the elected officials to pick from three differing calculations of how much money they’ve already set aside to cover future retirement payments. The difference between “actuarial value of assets” and “market value of assets” is what creates this wiggle room. While the pension fund investments may have a well-defined market value at any point in time, in order to avoid having to continually adjust how much needs to be contributed into the fund by the employers each year, a “smoothing” calculation is applied that takes into account the market values in previous years.

Obviously, based on the above three choices, how assets get “smoothed” is a subjective exercise. Otherwise there would only be one option. So guess which option was chosen by the City of Pacific Grove? Evaluating the table on page 4 of the 6/30/2000 CalPERS cost analysis provides hints.

Option 1: Employer contribution will be 25.1% of payroll.

Option 2: Employer contribution will be 20.0% of payroll.

Option 3: Employer contribution will be 6.2% of payroll.

Pacific Grove selected option 3. Is that any surprise? Consider this absurdity: CalPERS left it up to these elected officials to enact their benefit enhancement, and then told them the cost to do so could vary by over 400 percent. Of course they picked the low payment option.

Did this disclosure comply with California Government Code Section 7507? Despite the presence of disclaimers dutifully included by CalPERS, arguably it did not. CalPERS offered Pacific Grove three alternative valuations for their pension fund investments, and then presented three very different payment requirements depending on which option they chose. The diligent reader will investigate these documents in vain for additional evidence that CalPERS offered Pacific Grove – or any of its other participating agencies – a usable “statement of the actuarial impact upon future annual costs.”

Even the actuary who wrote the analysis for Pacific Grove hedged his bets. In the “Certification” section on page 5, the actuary wrote, “The valuation has been prepared in accordance with generally accepted actuarial practice except that [italics added], under a CalPERS Board resolution, an increased actuarial value of assets may be substituted for the actuarial value of assets that would have been produced by the current and generally accepted actuarial asset smoothing method described in the annual report.”

What CalPERS did was to offer public agencies the option to “smooth” upwards the value of the assets they’d set aside to cover those enhanced retirement benefits they’d awarded during the stock market bubble. They persisted in these tactics to enable agencies that had not yet enhanced their benefits to do so, in order to “compete” with other agencies and retain employees.

Not only were these asset values smoothed, of course. The payments demanded each year by CalPERS were also smoothly increased. Smoothly and inexorably, with no end in sight.

REFERENCES

CalPERS notice to All Public Agencies, 12-23-1999 – “New 3% @ 55 and 3% @ 50 Formulas, and Change in Benefits Cap for Safety Members”
http://calocalelectedofficials.org/wp-content/uploads/CalPERS-December-23-1999-Letter-Regarding-3-at-50-to-Agencies.pdf

CalPERS notice to All Public Agencies, 6/06/2001 – “New CalPERS Board Resolution Concerning Value of Assets Used in Calculation of Cost of Contract Amendments”
http://calocalelectedofficials.org/wp-content/uploads/CalPERS-July-6-2001-Letter-to-Agencies.pdf

CalPERS analysis for City of Pacific Grove – “Contract Amendment Cost Analysis – Valuation Basis: June 30, 2000
http://calocalelectedofficials.org/wp-content/uploads/Pacific-Grove-CalPERS-3-at-50-Cost-Estimate.pdf

CLEO Policy Brief – “Did Your Agency Comply with the Law When Increasing Pension Formulas?”
https://calocalelectedofficials.org/determine-city-county-complied-law-increasing-pension-formulas/

California Senate Bill 400, enacted 1999
http://www.leginfo.ca.gov/pub/99-00/bill/sen/sb_0351-0400/sb_400_bill_19990929_chaptered.html

CLEO Policy Brief – “Coping With the Pension Albatross” – provides links to sources for historical and projected escalation of pension costs as a percent of operating budgets
https://calocalelectedofficials.org/coping-pension-albatross/

Court Pension Decision Weakens ‘California Rule’

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

San Jose City Council Capitulates to Police Union Power

“He told the class to take advantage of the academy, and then find jobs elsewhere. The police union tries to get us to leave the department.”
–  Anonymous source to NBC Bay Area, television report “Another San Jose Police Recruit Says Union Tried to Get Cadets to ‘Find Jobs Elsewhere’,” Oct. 28, 2014 (excerpt begins at 1:38 in report).

A precedent setting new development in San Jose last week provides abundant evidence of just how powerful local government unions really are in California. As reported today in San Jose Inside and elsewhere, an embattled city council has tentatively approved a new contract with San Jose’s police union that awards them “a 5 percent ‘retention’ bonus and an 8 percent raise over the next 16 months. In addition, former officers who return to the force in the next year can claim a 5 percent signing bonus.”

More significantly, at the same time, the San Jose City Council has tentatively agreed to drop their appeal of a court ruling that overturned a key part of a San Jose pension reform, a reexamination of the so-called “California Rule.” As pension expert Ed Mendel reported yesterday in PublicCEO, “The “California rule” is a series of state court decisions widely believed to mean that the pension offered on the date of hire becomes a vested right, protected by contract law, that can only be cut if offset by a new benefit of comparable value.

In practical terms, this means that pension benefit formulas, according to the California Rule, cannot even be trimmed for future work performed by existing employees. San Jose’s pension reform Measure B, passed by 70% of voters in 2012, presented city employees with a choice – they could either contribute an additional 16% towards their pension benefits via payroll withholding, or they could accept lower pension benefit accruals from then on. Nothing they had earned to-date would have been taken away from them.

Despite legal opinions that claim the California Rule is not well established law, and despite that the California Rule is contrary to the law governing public sector pensions in most states, and contrary to all law governing private sector pensions everywhere, San Jose’s local elected officials have capitulated.

THE INHERENT HYPOCRISY OF THE ‘CALIFORNIA RULE’

It is difficult to overstate just how hypocritical the union’s position is on the issue of modifying pension benefit formulas. Because the problems with pensions began back in 1999, when SB 400 raised pension benefit accruals per year for the California Highway Patrol. Within a few years, most every agency in California followed suit. And these pension benefit enhancements were applied retroactively to the date of the employees’ hire.

That is, starting in 1999, agencies changed the pension benefit formula so that, for example, police and fire pension accruals were not just increasing from 2% to 3% per year from then on, but retroactively to the day each employee was hired. So someone who would have earned a pension equivalent to 2% of their final salary times the years they worked would now earn a pension equivalent to 3% of their salary times the years they worked, even if they were going to retire within the next year or two.

What San Jose Measure B tried to do was not roll back pension benefits from 3% per year to 2% per year for years already worked. It only tried to reduce the benefit accrual, prospectively, for years still to be worked. And even that was too much for these unions.

THE DEVASTATING COSTS OF SAN JOSE’S POLICE/FIRE RETIREMENT BENEFITS

If taxpayers could afford to pay these pension benefits, there might be a stronger argument to preserve them. But San Jose’s independent Police and Fire Department Retirement Plan, according to their most recent financial report, is not in great shape financially. Keeping it afloat requires staggering sums of money from taxpayers that are only going to increase each year. Here are highlights:

(1) The plan as of 6-30-2014 (most recent data available) was 77.5% funded (page 114). This means that instead of earning their officially projected annual return on investment of 7.125% per year, just to avoid becoming more underfunded, they will have to earn 9.2% per year. Just to stay even. That is their so-called “risk free” rate of return.

(2) The fund truly is “risk free” to participants, because the taxpayers pay most of the expense and cover the losses when the market fails. In FYE 6-30-2014, police and fire employees contributed $21.1 million into their retirement fund, and taxpayers (the City of San Jose) contributed $123.6 million (page 69), nearly six times as much. How many “six to one” matching contributions are out there for corporate 401K plans?

(3) The unfunded liability for the SJ Police and Fire Retirement Plan was $806 million (page 114) as of 6-30-2013 (most recent actuarial data), equal to 436% of payroll. Or looking at this another way, the city’s pension contribution was $123.6 million, whereas their “covered payroll” was $184.6 million. That is, for every dollar San Jose pays to put police and firefighters on the street, they have to pay 67 cents to the pension fund.

(4) It’s not just pensions. The SJ Police and Fire Retirement Plan includes city funded retirement health insurance benefits. How’s that fund doing? As of 6-30-2013 (most recent data), that plan was 11% (eleven percent) funded, with an unfunded liability of $625.5 million (page 65).

(5) If you consolidate the financial data for San Jose’s Police and Fire Retirement Plan’s pension and healthcare (OPEB) plans, the most recent statements indicate they are 67% funded, with a total unfunded liability of $1.4 billion. If San Jose were to responsibly reduce their total unfunded liability for public safety retirement benefits, they would be paying far more than 67 cents for every dollar of payroll.

THE MISLEADING EMPHASIS ON AN EXODUS OF OFFICERS

Throughout this battle between fiscal realists and the police union in San Jose, the police have maintained that officers were leaving the city to work elsewhere or to retire. There’s no question that their ranks have thinned, perhaps alarmingly. According to SJ Inside, “the agency [currently has] 943 sworn officers out of a budgeted 1,109 positions.” And historically San Jose’s police department has had as many as 1,400 officers. But is the union thwarting efforts to fill the ranks?

Several news reports suggest that could be the case – starting with the local NBC television affiliate’s report quoted earlier. That anonymous source corroborated what another person stated publicly. According to the San Jose Mercury guest column entitled “San Jose police recruit: Union told class to quit right away for good of the department,” former police academy cadet Elyse Rivas writes:

“On the first day of the academy, our orientation included the opportunity to meet Jim Unland, the Police Officers Association’s president. In no uncertain terms, he blamed Measure B for the departure of hundreds of officers — and he told us that it would be better for the department and for us if we would just quit, right then and there. He said that our employment with the department did not help the POA’s cause in proving Measure B was killing the department’s recruitment capabilities. He urged us to find jobs elsewhere.”

Reached for comment earlier today regarding developments in San Jose, former Mayor Chuck Reed agreed with the substance of these allegations. Not only did he confirm reports of union representatives discouraging academy recruits from taking jobs with the department, but he also described other ways they thwarted recruitment:

There were reports of recruiting events held in the San Jose police union offices where they invited police recruiters in from other cities to encourage active San Jose police officers to take these jobs in other cities.

Reed also said “when we were trying to hire officers, we wanted to bring in retired police officers in to do the background checks so we could keep our active officers on the beat – but the union urged retirees to refuse to accept the work.”

In any case, Reed pointed out that the city had determined to reduce the size of the police force back in 2010, well before voters approved Measure B, saying “the police department headcount went down from 1,400 to 1,100 before there was any pension reform.” Reed believes that an ideal headcount for the San Jose police department would not require returning to 1,400, and that getting to the budgeted 1,109 positions would be a good first step.

SO HOW MUCH DO SAN JOSE’S ‘UNDERPAID’ POLICE OFFICERS MAKE?

Getting timely and accurate information on public pay is difficult because financial reports from public entities take a long time to produce and often omit important data. The most recent payroll records publicly available for the city of San Jose are for 2013. According to a search on Transparent California of San Jose city employees with “Police” in their job title, in 2013 there were 260 of them who made over $250,000 in pay and benefits, and an astonishing 806 who made over $200,000 in pay and benefits. Here’s the link:  San Jose city employees, 2013, with “Police” in their job title.

Pension information for San Jose’s retired police officers is complicated by the fact that the data includes firefighters along with police officers. Moreover, the average full-career pension estimates are understated because a significant percentage of the current participants retired before pension benefits were enhanced in San Jose – a process of “continual enhancement” that continued up until 2008. Using 2014 data acquired by Transparent California, the estimated average full career pension for a San Jose police/fire retiree is $99,116 – with guaranteed 3% per year cost-of-living increases. The number for recent, post-2008, full-career retirees is undoubtedly much higher. Here is a 2014 roster of all of San Jose’s police/fire retirees – note that individual retirement health benefits (unfunded liability of $625 million) were not provided – certainly adding a value of at least another $10,000 per year.

Are San Jose’s police officers underpaid? The average veteran officer makes pay and benefits worth well over $200,000 per year. Add to that the likely 5% “retention bonus, and the 8% raise over the next sixteen months per the tentative new agreement. You decide.

The personal attacks and confrontational tactics employed by the San Jose police officers union against their political opponents do not reflect well on the fine men and women who staff that department, who perform work of vital importance to society. Whether or not they intentionally urged officers to quit (or never join) the San Jose police force is almost irrelevant, despite abundant evidence that suggests they did. Because their real transgression against the people of San Jose, the taxpayers, the elected officials, and public safety itself, is to insist on levels of pay and benefits for their officers that are far more than the city can afford.

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

RELATED POSTS

Why Pension Reform is Inevitable, and How Reforms Can Benefit the Economy, July 21, 2015

Retiree with $183,690 Annual Pension Attacks Pension Critics, June 9, 2015

Pension Reform is Bad for Wall Street, and Good for California, April 14, 2015

Is Deficient Recruiting the Real Reason for Police Understaffing in San Diego?, January 20, 2015

Conservatives, Police Unions, and the Future of Law Enforcement, January 6, 2015

Police Unions in America, December 9, 2014

Government Employee Unions – The Root Cause of California’s Challenges, June 3, 2014

Conservative Politicians and Public Safety Unions, May 13, 2014

How Much Does Professionalism Cost?, March 11, 2014  (The Kelly Thomas Story)

How Public Sector Unions Skew America’s Public Safety and National Security Agenda, June 18, 2013

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

 

 

 

Reports on Public Insolvency Incomplete Without Employee Compensation Data

On Sept. 23rd the New York Times published an in-depth report on how the cost of public employee pensions is causing budget challenges in San Jose, California. Entitled “Struggling, San Jose Tests a Way to Cut Benefits,” this article ran over 1,500 words and was filled with examples of city workers who are struggling financially.

Referring to city employees who face having more pay withheld from their paychecks to fund their pension benefits, the authors provide quotes:

“They’re kind of encouraging us to leave.”

“I’m leaving as soon as I get my 25 years in.”

“What they’re doing is destroying what had been a great police department.”

“I have to sell my house.”

While replete with quotes, however, the NYT only chose to share one statistic with its readers:

“San Jose now spends one-fifth of its $1.1 billion general fund on pensions and retiree health care, and the amount keeps rising.”

Since the New York Times is unwilling to put the challenges facing San Jose’s city employees into an appropriate financial perspective, here is some data gathered from a California Public Policy Center study entitled “San Jose, California – City Employee Total Compensation Analysis,” published last year, that used 2011 payroll data supplied by the City of San Jose:

Average Annual Pay, 2011, San Jose City Employees:

Police:  Direct Pay (incl. overtime avg. $7K) = $112K, Employer paid benefits = $67K.  Total compensation = $179K,

Fire:  Direct Pay (incl. overtime avg. $10K) = $125K, Employer paid benefits = $77K.  Total compensation = $203K.

Rest-of-Workforce (incl. overtime avg. $2K) = $81K, Employer paid benefits = $39K.  Total compensation = $120K.

Overall Total Compensation: All Departments = $150K.

Now let’s compare that to the average worker in Silicon Valley, currently one of the hottest economies on earth, using Bureau of Labor statistics  data from May 2012:

Workers in the San Jose-Sunnyvale-Santa Clara Metropolitan Statistical Area had an average (mean) hourly wage of $33.50 in May 2012, about 52 percent above the nationwide average of $22.01,” and, “Annual wages have been calculated by multiplying the hourly mean wage by a ‘year-round, full-time’ hours figure of 2,080 hours.

This means that direct pay for the average worker in San Jose is $69K per year. Add to that employer contributions of 9% for social security and medicare, 5% for health insurance (probably generous), and 3% for a matching 401K (as if every company has one), and you get total compensation averaging $81K. And of course this average is skewed upwards because within those figures are included a local, state and federal public employee workforce representing at least 15% of all workers.

So police officers, firefighters, and bureaucrats who work for the city of San Jose are upset because they make, on average, $150K per year, in a city where the average worker makes (at most), $81K per year. They are making about twice as much as the citizens they serve. Is something wrong with this picture?

What about the average home price? After all, apparently some of San Jose’s city workers – along with thousands of other people in the private sector who also bought overpriced real estate – may have to sell their homes. An article published by the San Jose Mercury on August 9, 2013, is self-explanatory: “Average Silicon Valley home tops $1 million.”

The message here? NOBODY can afford to live in San Jose. The only way the average worker can buy a home in San Jose is to go into debt up to their eyeballs for the rest of their life. If you want to buy a house in San Jose and stay there, expect to pay off your mortgage before you retire. That’s the way it is. And even then, of course, only if the unions representing municipal workers don’t figure out how to raise property taxes.

San Jose’s public sector workers may be disgruntled because San Jose’s mayor, city council, and voters have decided to confront the costs of their pensions. But if these employees take jobs elsewhere, their relief may be short-lived. Because what San Jose is going through is going to hit every city and county in California. And by being first to tackle this issue – should they succeed, that is – San Jose’s city government is going to emerge in financially sound condition ahead of the pack. They may very likely avoid bankruptcy and a complete collapse of their pension system. Cities and counties that wait may not be so fortunate.

It is probably accurate to state that not one public safety employee, anywhere, who is currently retired or about to retire, expected to accrue their retirement benefit under a 3% per year multiplier back when they entered public service. Because SB 400 that enabled the first fully retroactive 3% benefit was passed back in 1999, which is relatively recently. Although San Jose began to modestly enhance pension benefit formulas as early as 1991, even those hires would only be completing their 22nd year of work. To no longer be able to accrue retirement benefits at the 3% per year rate from now on – unless agreeing to more withholding to pay for it – is not much to ask.

Any reporter who reports on public employees facing pay and benefit cuts, who doesn’t also report just how much those pay and benefits are worth, is not doing their job. And they need to report averages that are restricted to full-time workers, that include ALL employer paid benefits. That rule should apply whether they write for the New York Times, or the Campbell Press.

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

Reforming Public Sector Unions and Public Sector Pensions is NOT “Anti-Worker”

An incoming email responding to last week’s UnionWatch editorial “Los Angeles Police Union Attacks CPPC Study” included the following statement:

“While you profess not to dislike public employees, it is clear that you disliking public employee unions.  Interesting—so you might like a public employee or two individually, you just dislike when those individuals organize to work for better working conditions or pay.  Which goes hat in hand with your desire to make public employee pension plans seem so expensive that they are terminated.” 

This invites a response.

Our concerns about public employee unions are primarily based on the fundamental differences between unions in the public sector vs. unions in the private sector. There’s nothing wrong – in principle – when “individuals organize to work for better working conditions or pay.” But if those individuals work for the government, there are plenty of problems. We are seeing the result of this throughout California and the rest of the United States.

Public employees work for an entity that funds its operations not by selling competitively priced products to willing buyers, but by assessing taxes that must be paid under threat of imprisonment. And public employees are managed by elected officials, not business owners, elected officials whose campaigns – especially at the state and local level – are funded by public employee unions.

Unionized government workers demand wage and benefit increases from bosses they elected, paid for by government entities that don’t have to earn a profit but can simply take money from other citizens. It is difficult to imagine how a system set up this way can possibly avoid getting dangerously out of control.

As we explore in-depth in our post “The Preexisting Political Advantage of Government Workers,” even if public employees were prohibited from engaging in collective bargaining, they would still have tremendous influence over the political process. After all, it is difficult to find citizens who have a greater stake in how our state and local government is managed than government employees – they have far higher rates of voter turnout, they are far more likely to run for office, and they are far more organized. If government workers were not unionized, they would still be able to effectively lobby for better working conditions or pay.

As it is, with rare exceptions, public employee unions have taken over our state and local governments. A timely example of their power is AB 822, reported on by CalWatchDog’s Katy Grimes in her recent report “Assembly bill would stall local pension reform efforts.” Along with bills already passed to impede the state initiative process, and bills already passed to impede the municipal bankruptcy process, now we have a bill proposed in the California legislature that will impede the ability of voters to modify pension benefits. This is legislation by and for the unions.

AB 822 is offered in direct response to local pension reform initiatives passed by supermajorities in San Jose and San Diego. Which brings us back to our incoming email.

“Which goes hat in hand with your desire to make public employee pension plans seem so expensive that they are terminated.”

The biggest irony here is that if pensions aren’t reformed, i.e., if benefits aren’t reduced in equitable and sustainable ways, they will be terminated by default. In an ideal scenario, pension benefits would all be simply reduced to the formulas that applied prior to 1999 when the California state legislature passed SB 400 to retroactively increase California Highway Patrol pensions by 50%. In the cascade of copycat legislation and contract revisions that followed over the next several years, California’s state and local governments planted the seeds of financial disaster.

Pension reformers are not trying to make pensions “seem” expensive. As they are currently structured, even if 7.0% average annual rates of return for the next 30 years can be achieved, they are expensive. And for every 1.0% that rate of return drops, annual pension contributions have to increase by 10% of payroll.

The problem with trying to have an honest discussion about pensions is compounded because public sector unions aren’t the only defenders of the status-quo. The pension bankers themselves are making billions in fees every year, and they aren’t about to advocate changes. In general, the financial sector is hugely empowered precisely because of unionized government overspending – they invest the government pension money, and they issue bonds to cover government deficits. Remember this, the next time a spokesperson for the California Teacher’s Association urges you to “blame Wall Street.”

To advocate reform – an equitably reduced, financially sustainable defined benefit for public employees, and a set of reasonable regulations to curb the currently unchecked power of public sector unions – is in no way an attack on public sector employees, or retirement security, or even unions themselves.

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UnionWatch is edited by Ed Ring, who can be reached at editor@unionwatch.org.