BART 'Tentative Deal' Solidifies Unsustainable Public Employee Compensation
It was with great surprise that I learned yesterday that Bay Area Rapid Transit management had reached a “tentative deal” with the BART unions that would increase worker wages by 10.8% over four years starting in mid-2017, according to a San Francisco Chronicle report.
The “tentative deal” comes more than one year before the end of the union’s current June 30, 2017 contract expiration date, and should be viewed with great skepticism by the public, ratepayers and taxpayers – even union members themselves.
I’ve examined and analyzed the BART budget closely for a number of years, and served as an expert analyst on the union side for the 2013-14 contract negotiations. I have since declined all union work because my research shows that public sector unions are leading the State of California and its local agencies down a dangerous path of financial insolvency, and even bankruptcy. In the end, union members may find themselves without pensions.
Unsustainable Costs Should Be Addressed in Any Reasonable Deal
There are several forces to understand before diving into financials that clearly show BART is still on an unsustainable and unaffordable financial course. When everything else fails, the only backstop will be ratepayers and California taxpayers.
State Sen. Steve Glazer (D) has repeatedly called for a renegotiation of the union’s existing contract which awarded them a 15.4% pay increase over the four years from 2013 to 2017. That deal includes employee bonuses, and doesn’t require significant cost-sharing to stem the unsustainable cost of benefits, namely pension, health care, and retiree health care costs.
Glazer has been rebuffed on several occasions by both the unions and the BART management, who appeared to have no interest in revisiting the contract in advance of 2017. But that all changed recently. First, the BART board and management are intent on passing a $3.5 billion bond to improve the aging system’s infrastructure. That November 2016 ballot measure, apparently popular with voters, will require a two-thirds vote for passage. That high hurdle means that any significant opposition campaign could sink the bond and send the district back to the financial drawing board.
The board and district management have implemented a full-court press to support the bond. BART Board member Zackary Mallet says he’ll be the “first to concur that BART’s labor rules and benefits are out of control” but says voters should pass the bond anyway because it’s the right thing to do, according to a San Francisco Chronicle report. Others, including Glazer, are not as forgiving. They believe BART’s unsound management and financial practices should be corrected before giving them more public money, particularly of the magnitude represented in the mega-bond.
The new deal is intended to help bolster support for the bond measure, which shows flagging support in Contra Costa County in particular, where BART riders are still fuming over the BART stoppages of 2013. What has not been discussed publicly: the possibility that a near-term recession, widely predicted by experts and economists, is pushing BART union leaders to lock in a contract now while the popular outlook is still upbeat. This wage deal is really the best deal they could possibly get, and likely to only deteriorate with time as the economic news worsens.
Thus, the unions are apparently supporting a 10.8% increase over four years starting in mid-2017. The BART district is refusing to release any additional details on the costing of the wage increase, or other provisions related to the settlement until it is presented to the BART board. Another consideration is that the public debate appears to be turning an increasingly skeptical eye to the facade that CalPERS and the public unions are putting up about the business as usual approach to the mounting public employee benefit debt problems that plague California state and local governments.
District officials won’t say much about the deal, but they do say it includes a no-strike clause through 2022. This is perhaps the only positive aspect of the deal. But unions often threaten strikes even when they operate under a no-strike agreement. Knowing that, the current deal gives away the store.
District Needs to Get Back on Sustainable Financial Footing
In short, this tentative deal should be rejected because it does nothing to get BART back on long-term sustainable finances. The key issue here is that the district’s labor costs are still projected to significantly outpace district revenues–and that will crowd out all other district spending – including infrastructure.
An inside look at BART’s financials in the context of the tentative deal shows that much more work needs to be done at the bargaining table, or in the California Legislature, to get BART truly back on track. Passage of the bond will only postpone the inevitable financial disaster.
The figures below show that wage costs associated with the 4-year deal are estimated to be about $204 million over four years. This is based on the conservative estimate that 1% of districtwide salary equals about $3.5 million annually, and includes adjustments for wage and benefit inflation.
Deal Does Nothing to Address Mounting Pension and Health Care Liabilities
In the context of BART’s overall finances, $204 million does not seem like much, and it is not in the overall scheme of things. But this deal is significant when looked at over the long-term, especially when one considers where the money could be better spent to help return the district to a sustainable financial position. The biggest shortcoming of the deal is that public employee benefit costs are growing at unsustainable rates, and the deal does nothing to reel in these costs. The deal does nothing to follow the precedents set by Governor Jerry Brown at the statewide bargaining table, which requires some reasonable cost-sharing for health care costs.
As illustrated by the table below, the biggest looming liability are the mounting pension liabilities for both miscellaneous and safety plans at BART. Officially, the district is only reporting an unfunded liability of $877 million, according to Stanford University data. This is a significant liability, but the actual market-rate liability is estimated to be many times that. The true exposure of BART’s pension plans is $3.1 billion–yes, nearly the entire cost of the district’s $3.5 billion.mega-bond. This calculation uses a 3.723% discount rate, instead of the unrealistic 7.5% discount rate used by CalPERS, which is consistent with what a consensus of economists, including those at Stanford University, believe to be a reasonable estimate of what CalPERs investment returns are likely to average on an annual basis.
Source: Stanford University, www.pensiontracker.org
The tentative deal does nothing to address this mounting pension liability. And appears to leave the current bogus swap agreement in place from the 2013 contract agreement which required BART employees to contribute 4% to their pension, but then more than compensated them in addition wage increases to pay for the increased contributions. This may look good in the media, and give BART board members a sound-byte for requiring employees to have some skin in the game, but actually does nothing to reduce the district’s costs and curb mounting liabilities.
So that’s one thing that any significant agreement should do–require all BART employees to make a “real” contribution towards their retirement benefits. Of course, they would rather strike than agree to this, and district management would not be likely to drive a hard bargain because they would be forced to pay the same contribution, under the “me-too” clause that provides managers the same deal that public employees get–a true conflict of interest that few people talk about.
According to the district’s 2015 CAFR report, the district’s actuarially determined contribution for the miscellaneous plan was $32.8 million in 2015, up from $28.28 million in 2014–a $4.52 million or 16% increase. Similarly, for BART’s safety plan the district’s actuarial contribution increased to $9.5 million in 2015, up from $7.4 million in 2014–an increase of $2 million or 27.3%. Needless to say, this hidden cost increase came on top of a significant wage increase in both 2014 and 2015.
As illustrated by the table below, the employer contribution rates for both the safety and the miscellaneous plans show no signs of abating anytime soon. The safety rates are particularly alarming, reaching 69.3% of salary in fiscal year 2022, about the highest I have seen for any public agency in California. This means that for every dollar of salary paid, the district must contribute 70 cents for pension–a ridiculously high figure that could approach or exceed 100% some day, particularly in the context of another prolonged recession.
Source: BART District
By way of comparison, BART’s major revenue sources – passenger revenue and sales tax revenues which compose about 80% of total district revenues – average 3-7% annual growth during good economic times, and significantly less during poor economic times, according to a review of BART budget reports. BART’s bonded debt for capital purposes represents about $1.1 billion, of which pension and retiree health care debt represents $430 million or 37.3%, according to the Manhattan Institute. According to the new Stanford University figures, the actual pension debt could be as much as six times bonded debt–completely out of line with a capital and investment heavy public agency such as BART which has $6 billion in net assets from its vast rail network. This huge debt load will crowd out the ability of the district to invest in infrastructure projects in the decades to come.
Secondly, after pension benefits, the district has a significant and growing liability for unfunded retiree medical benefits, which totaled $61.4 million for 2015. The district’s annual required contribution for retiree health care was $26.2 million for 2015. As illustrated by the table below, medical costs for current employees totaled $69 million for 2016 and tend to increase at a rate of about 10% per year, according to district budget documents. Current and retired BART employees are only required to pay $137 per month toward health care costs in 2016, which is a “token” amount that amounts to about $5.7 million per year in employee cost-sharing. This increases by a very small factor each year, which completely disregards the districts actual cost increases and what it would take to pay off its unfunded retiree health care liabilities.
A 2.8% of payroll contribution by BART employees for retiree health care (CA Governor’s proposal) would raise an estimated $10 million annually–nearly double what they are currently contributing. But California State employees contribute are typically responsible for paying 20% of their medical insurance costs (current employee), which for BART would equate to another $14 million in contributions. At minimum, the district should have required cost-sharing in line with the Governor’s precedent in the areas of retiree health care (2.8% of payroll) and current employee medical (20% of total costs)–which would raise about $25 million annually, and be estimated to more than offset 50% of the costs of the wage increase proposed in the “tentative deal.”
Again, these costs pale in comparison to the real elephant in the room which is the pension costs and mounting unfunded liabilities–which have not been addressed in any real way, and are not likely to be at any time in the future short of a statewide ballot measure. A true employee pick-up of 4% of payroll toward retirement would be estimated to raise $14 million annually, and requiring employees to pay their full 7% share would raise about $25 million. By running these numbers, one quickly sees that the lack of any significant cost-sharing in the “tentative agreement” equals or exceeds the value of the estimated $204 million price tag of the 10.8% proposed wage increase.
The tables below provide a good summary of the key public employee benefit cost areas and their projected cost increases over the next several years. In a nutshell, they show no signs of slowing down, and employees are not slated to provide any significant cost sharing similar to the Governor’s recent proposals for the statewide units.
Additional Perks for BART Employees
It is a little known fact that the BART contracts are also loaded with additional perks and benefits that would bring additional cost savings, and make them more in-line with the industry standard and the norm in the private sector.
BART employees get an astounding six weeks of vacation after 20 years of service! One only has to work at BART for a year to get 3 weeks of vacation, and eight years to get four weeks of vacation. Employees with 15 years of service get five weeks of vacation. These types of vacation allowances are unheard of in the private sector, and significantly more than the 1-2 days per month typically awarded in the public sector.
BART employees also get 13 holidays per year, which is another 2 weeks of off-time including 2-3 floating holidays and “employee’s birthday,” according to a review of the contracts. So, employees with 20 years of service get more than two full-months off per year of paid leave. This comes in addition to sick leave of one day per month.
This exorbitant amount of leave has created another large unfunded liability for the district called “compensated allowances” and leads to increase labor costs and hiring to backfill all the leave time. The district’s compensated allowances unfunded liability totaled $62 million in 2015, up from $59.4 million in 2014, according to the district’s 2015 CAFR report.
This vacation time is hugely valuable in terms of financial benefits to employees, and subsequent costs to the district, and should be viewed as dramatically out of line with industry best practices. Perhaps acceptable by European standards, but not usually seen in the United States.
By my back of the envelope calculations, each day off for the entire district staff costs about $2 million in wages and benefits, so eliminating the “personal floating holidays” and “birthday day off” would raise $6 million annually. For public sector unions, it is common for more than 80% of public employees to have 10 years of service or more, so the vast majority of BART employees get four weeks of vacation another 13 work days off in holidays. Pretty nice gig.
Of course, BART management gets all these days off two, so it is unlikely that this leave time is ever even brought up as a potential item at the bargaining table.
To sum up, the BART “tentative deal” is a typical product of California’s failed system of public sector collective bargaining. It is a result that is not based on what the agency can afford, or what is even reasonable, but the maximum of what the public agency can financially shoulder over the short-term, all long-term debt and mounting liabilities aside. And represents the product of management that has no incentive to reel in costs because they get the same deal the unions get.
Little or no effort went into achieving any type of cost-sharing because it would be rejected by the unions, and bring on an escalating negotiation battle, a battle that the BART district and board so badly lost the last time around. A battle that even included the death of two BART employees as management took a brief turn running the trains themselves in an effort to prepare for a prolonged standoff and threat of a second labor strike.
About the Author: David Kersten is an expert in public policy research and analysis, particularly budget, tax, labor, and fiscal issues. He currently serves as the president of the Kersten Institute for Governance and Public Policy – a moderate non-partisan policy think tank and public policy consulting organization. The institute specializes in providing knowledge, evidence, and training to public agencies, elected officials, policy advocates, organization, and citizens who desire to enact public policy change