How Much Have California Voters Recently Authorized to Borrow for School Construction?

Next year California voters may be asked to authorize the State of California to borrow another $9 billion to help K-12 school and community college districts pay for more educational construction. This $9 billion would be obtained by selling bonds to investors and paying it back – with interest – over several decades using the state’s general fund.

Polling has allowed the backers of this initiative to identify the most effective arguments for winning support among voters. Those arguments are listed as “findings and declarations” in the language of the bond measure itself. (See the Request for Title and Summary for Proposed Initiative.) They are cited in various opinion pieces that have appeared in newspapers. And the arguments are heard in the promotional patter of professional signature gatherers at shopping centers.

Most of the arguments are platitudes, facts presented without context, or anecdotes. And no one would know from the arguments that California voters have already approved borrowing about $150 billion in recent years for educational construction.

Voters have approved borrowing about $150 billion for California school construction since Prop 39 passed in 2000. This virtually unknown fact is worthy of highlighting in future public debates.

Recognizing that a lack of balanced factual information compromises the democratic process, the California Policy Center continues to collect, synthesize, and analyze data regarding California educational construction finance. “It’s for the kids and the veterans” is no longer sufficient information for voters considering authorization for the state to borrow another $9 billion.

The State of California alone has $56.7 billion in debt service accumulated from the last three statewide educational bond measures that authorized borrowing a total of $35,766,000,000. Community college districts and K-12 school districts have accumulated an additional $137 billion in debt service. The public needs to know what has already happened before deciding what will happen next.

Part of that understanding includes the impact of Proposition 39. Prop 39 inaugurated a new era of generous borrowing for educational construction in California. Approved by 53.4% of voters in the November 7, 2000 election, it reduced the voter approval threshold for educational construction bond measures (under certain conditions) from two-thirds to 55 percent.

This lowered obstacle encouraged local educational districts to take the risk of proposing many more bond measures at much higher amounts for voters to approve. As shown by the data below, dropping the voter threshold from 66.67% to 55% transformed the approval of educational bond measures from a 50-50 chance to a commonplace outcome.

The California Policy Center believes it is the first and only entity to painstakingly research and present an accurate and comprehensive record of all state and local educational construction bond measures considered by voters from 2001 through 2014.

Some Facts on Voter Consideration of Local and State Bond Measures for Educational Construction

See Appendix A – All California Educational Bond Measures Considered by Voters Since November 2000 Enactment of Proposition 39 – Ranked by Percentage of Voter Approval

See Appendix F – All California Educational Bond Measures Repurposed or Reauthorized Since November 2000 Enactment of Proposition 39 – Listed by Election Year

1. Since the passage of Proposition 39, voters in California have been asked 1147 times to authorize local K-12 school districts and community college districts to borrow a total of $124,350,056,744 for educational construction.

2. Of those 1147 bond measures, sixteen (16) were to reauthorize already approved bond authority totaling $730,365,000. If those bond measures are included with the 1131 bond measures to authorize new borrowing authority, the total amount California voters have been asked to authorize or reauthorize is $125,080,421,744.

In most of these 16 cases, school districts reauthorized bond measures during the late 2000s-early 2010s decline in assessed property values in order to circumvent tax and debt limits in state law and allow the further sales of bonds. These reauthorizations were usually depicted in a simple way to voters as continuing an already-approved construction program without increasing debt.

3. Since the passage of Proposition 39, voters in California have been asked three (3) times to authorize the state to borrow a total of $35,766,000,000 for educational construction.

4. What are the grand totals? Since the passage of Proposition 39, voters in California have been asked to authorize the State of California and local K-12 school districts and community college districts to borrow $160,116,056,744 for educational construction. If reauthorized bond authority is added to that amount, the total amount voters have been asked to authorize or reauthorize is $160,846,421,744. (That is $160.8 billion.)

Some Facts on Approval of Local and State Bond Measures for Educational Construction

See Appendix B – All California Educational Bond Measures Approved by Voters Since November 2000 Enactment of Proposition 39 – Ranked by Amount Authorized to Borrow

1. Voters approved 911 of the 1147 local educational bond measures, for a 79.42% approval rate for bond measures.

2. Voters approved $109,620,418,737 out of the $124,350,056,744 proposed to voters, for a 88.15% approval rate for the amount of bond authority.

The amount of authority approved by voters is a higher percentage than the number of bond measures approved by voters because larger bond measures proposed by larger educational districts passed at a higher rate than smaller bond measures proposed by smaller districts.

3. Voters approved all sixteen (16) bond measures (among the 1147 bond measures) to reauthorize bond authority that voters had already approved in early elections. If reauthorized bond authority is included, voters approved $110,350,783,737 out of the $125,080,421,744 proposed to voters, for a 88.22% approval rate for the amount of bond authority.

4. Voters approved all three (3) statewide educational bond measures, for a total of $35,766,000,000 to match with local educational bond expenditures.

5. What are the grand totals? Since the passage of Proposition 39, voters in California have authorized the State of California and local K-12 school districts and community college districts to borrow a grand total of $145,386,418,737 for educational construction. If reauthorized bond authority is added to that amount, the total amount voters have authorized or reauthorized is $146,116,783,737.

Some Facts on Rejection of Local and State Bond Measures for Educational Construction

See Appendix C – All California Educational Bond Measures Rejected by Voters Since November 2000 Enactment of Proposition 39 – Ranked by Amount NOT Authorized to Borrow

1. Voters rejected 236 of the 1147 local educational bond measures, for a 20.6% rejection rate for bond measures.

2. Voters rejected $14,729,638,007 out of the $124,350,056,744 proposed to voters, for a 11.85% rejection rate for bond authority. If reauthorization of bond authority is added to the amount proposed to voters, the rejection rate for bond authority is 11.78%.

The amount of authority rejected by voters is a lower percentage than the number of bond measures rejected by voters because, as noted above, larger bond measures proposed by larger educational districts passed at a higher rate than smaller bond measures proposed by smaller districts.

3. Of the 236 rejected local educational bond measures, 56 needed two-thirds voter approval and 180 needed 55% voter approval.

The 55% Voter Threshold Instituted by Proposition 39 Makes a Big Difference in Approving Bond Measures

See Appendix D – All California Educational Bond Measures Approved With a Two-Thirds Threshold Since November 2000 Enactment of Proposition 39 – Listed By Election Year

See Appendix E – All California Educational Bond Measures Approved With a 55 Percent Threshold Since November 2000 Enactment of Proposition 39 – Ranked by Percentage of Voter Approval

See Appendix G – All California Educational Bond Measures Approved by Voters Under 55% Threshold Since November 2000 Enactment of Proposition 39 – Results if Proposition 39 Had Not Been Law

See Appendix H – All California Educational Bond Measures Approved by Voters Under 55% Threshold Since November 2000 Enactment of Proposition 39 – Failures Under Two-Thirds Threshold

1. A cumulative approval percentage of 60.8% is calculated by dividing the total number of Yes votes by the total number of recorded votes for all 1147 local educational bond measures and the three state bond measures since Proposition 39 was enacted. Obviously 60.8% is higher than 55% and lower than two-thirds.

2. Of the 911 local educational bond measures approved by voters, 857 were approved with a 55% threshold and 54 were approved with a two-thirds (66.67%) threshold. Most of these bond measures under the two-thirds threshold were approved in 2001 and 2002, during the first two years after voters approved Proposition 39. Since the November 2008 election, voters have only approved two local bond measures for educational construction under the two-thirds threshold. In 2014 elections, only one bond measure was subject to two-thirds voter approval (a bond measure for Vallejo City Unified School District that failed because it received only 61.5% voter approval.)

The few educational districts that now propose bond measures that require two-thirds approval instead of 55% approval do so only to evade certain requirements in Proposition 39 or in state law. A common motivation is avoiding legislative requirements imposed in the California Education Code that limit the amount of bonds issued as a percentage of total assessed property value of the district and limit the amount of tax required to pay off the debt from the bond measure.

12. If the 857 bond measures approved under a 55% threshold were considered under the old Proposition 13 two-thirds threshold in place before Proposition 39, only 369 of the 857 local educational bond measures approved by voters would have passed, while 488 of those bond measures would have failed. Those 488 bond measures authorized educational districts to borrow $57,628,510,725.

1147 Local Educational Bond Measures: Results If Proposition 39 Wasn’t Law

Under Prop 39

If Prop 39 Not Enacted

Total Number of Bond Measures on Ballot

1147

1147

Total Amount Authorized to Borrow on Ballot (includes reauthorizations)

$125,070,421,744

$125,070,421,744

Number of Bond Measures Approved

911

423

Percentage of Bond Measures Approved

79.42%

36.88%

Total Amount Authorized to Borrow

$110,340,783,737

$52,712,273,012

Percentage of Bond Authorization Amount Approved

88.22%

42.15%

Comparison of Election Results: 55 Percent versus Two-Thirds Voter Approval

55% Approval Under Prop 39

Two-Thirds Approval

Total

Number of Bond Measures on Ballot

1037

110

1147

Number of Bond Measures Approved

857

54

911

Number of Bond Measures Rejected

180

56

236

Percentage of Bond Measures Approved

82.64%

49.09%

79.42%

Percentage of Bond Measures Rejected

17.36%

50.91%

20.58%

Where Do All the Jobs Come From?

You can be forgiven if you think that the government creates jobs. Politicians try to justify almost any policy as creating or protecting jobs. This is usually not true. Also, at what cost? If we bail out a failing company or keep open a government facility or military base that’s no longer needed, we are subsidizing the jobs that are retained by taxing others to cover the cost. How much per job? No one likes to discuss this as part of the approval process. Doesn’t raising taxes directly or indirectly discourage investments that create private sector jobs? Couldn’t the people whose jobs were “saved” find other employment?

If the government “creates” a new job or program, it has to raise taxes or fees on the private sector economy to pay for this new job or program. Yes, the government can increase its debt to pay for the job, however that just shifts the cost of the new position to future taxpayers.

The government can help or retard job creation. But, jobs are created by private sector individuals and businesses taking risks with their money and starting a business or expanding an existing business. Yes they benefit a great deal from government expenditures such as for education, R&D, and infrastructure. However, it still takes an individual or company to make a private sector investment to create a new job.

Without private sector investment and risk taking:

1. There wouldn’t be any new jobs.

2. There wouldn’t be any growth in the private sector economy, the source of all federal, state, and local government revenue via taxes and fees.

3. And, there wouldn’t be any productivity improvements. Increases in productivity are the source of our higher living standards. Without productivity improvements, we’d be no wealthier than or grandparents.

The U.S. has the world’s most productive work force according the OECD (Organization for Economic Co-operation and Development). This is due to three major factors: the skills and education of the workforce, the technology applied in a business or industry, and the investment per worker.

So, where do jobs come from?

Let’s focus on investment to start. Every job requires some investment from a building, to tools and machinery, to computer systems, investments in product development, marketing, and R&D. Without these investments even the smartest and most skilled employees wouldn’t have jobs.

In our capitalist system, these investments are largely made from the incomes and savings of private individuals and businesses. They may be the owners of a small business even a sole proprietorship, or someone who invests in startups such as through a venture capital fund, or one who invests in established businesses by buying a company’s stock or lending the company money thought a bank loan or by buying a bond issued by the company. All these investments are made by individuals and businesses from money they earned and saved. Some of these investments are through intermediaries such as pension funds, mutual funds, or via larger companies they have invested in.

Over time, savings equals investment. Government policies from taxation to rules and regulations can encourage or discourage saving and investment. Without investment, there are no new businesses, existing businesses don’t grow, and there are fewer jobs. Also, there is less tax revenues to fund essential government services, and unemployment increases if population growth exceeds the growth of the economy.

Even the lowly “hamburger flipper” needs business investment. To open a fast food restaurant that employees 25 or so people requires a substantial private investment. Just to qualify for a fast food franchise requires that a person have the financial resources to support the investment required. To be even considered for a McDonald’s franchise, you need a financial net worth of $750,000 or more. This means that you have savings excluding your home that’s at least $750,000. Otherwise you won’t qualify for the bank loans etc. needed to start a McDonald’s restaurant.

If you qualify, you need to take some substantial risks and put in a lot of effort. You may have to get some specific training at your expense. You have to find a location that’s approved by the franchise company and sign a lease to rent the property, usually for eight years or so. Then there’s the expense of outfitting the restaurant that could be $200,000 to $1.0 million or more. You may not have all this money so part of this cost would be from a bank loan that you are responsible for. After the restaurant is ready to open, you need to pay for the food and supplies, hire and train workers, and spend long hours managing a business that’s open seven days a week. If you hire others to do this for you, you’d have to pay them for their work.

All this is required to employ 25 or so low skilled workers who need jobs. The total investment could easily be $20,000 to $40,000 or more per job. Think of what it would cost for other more capital-intensive businesses such as a car dealership, a manufacturing company, a software company, a hospital, or other businesses that require more complex facilities, more expensive high-tech equipment, and other large investments.

Let’s not forget that every new job starts with a private sector investment. Discouraging savings and investment is a jobs killer and also reduces future tax revenues.

*   *   *

About the Author:

William Fletcher is a business executive with interests in public finance and national security. He retired as Senior Vice President at Rockwell International where most of his career was spent on international operations and business development for Rockwell Automation. Before joining Rockwell, he worked for Bechtel Corporation, McKinsey and Company, Inc., and Combustion Engineering’s Nuclear Power Division, and was an officer and engineer in the U.S. Navy’s nuclear program. His international experience includes expatriate assignments in Hong Kong, Europe, the Middle East, Africa and Canada. In addition to his interest in California’s finances, he is involved in organizations dealing with national security and international relations. Fletcher is a graduate of Tufts University with a BS degree in Engineering and a BA degree in Government. He also graduated from the U.S. Navy’s Bettis Reactor Engineering School.

Debt and Tax Limits Always Waived When School Districts Want to Borrow More Money

Research by the California Policy Center now allows the People of California to see – for the first time – a chart listing all California K-12 school district requests to the state for waivers to sell bonds for school construction. These waivers allow school districts to circumvent state laws meant to protect property owners from excessive public debt and taxes.

State law allows the California Board of Education to grant waivers from numerous sections of the California Education Code, including bond indebtedness limitations. This power is obscure but significant, and until now a compilation of the history of bond indebtedness waivers has not been available to the public.

Out of the 51 waiver requests from 2000 through 2014, only one received notable public attention. In 2013, the fourth waiver request since 2002 from the West Contra Costa Unified School District became controversial when some local taxpayer activists and a columnist for the Contra Costa Times criticized the district for repeatedly seeking waivers to borrow yet more money for construction through bond sales.

To develop a bond indebtedness waiver chart and provide the public with comprehensive information about the waivers, the California Policy Center obtained a document from the California Department of Education listing the bond indebtedness waivers granted by the California Board of Education since 2000. Staff indicated that this listing was an “internal working file and has not been reviewed or validated for accuracy.”

California Policy Center - School District Requests to California Board of Education for Waivers from Tax and Debt Limits, 2000-2014 - Listed by DistrictCalifornia Policy Center researchers checked the data, corrected various inaccuracies, and expanded on the data using meeting agendas, staff reports, and meeting minutes. Now the public finally has a useful resource for considering public policy related to bond indebtedness waivers.

The link below goes to a PDF chart detailing the complete history of school district requests to the California Board of Education for waivers from tax and debt limits in order to borrow money for school construction by selling bonds to investors. Preliminary activity in the first three months of 2015 is also included.

History of Bond Indebtedness Waivers for California K-12 School Districts

The PDF chart includes linked citations of source documents on the California Department of Education website.

At the end of this article is the same chart in JPG format.

Initial Policy Recommendations Concerning Release of Information to the Public on Bond Indebtedness Waivers

As a result of this exercise, the California Policy Center recommends that the state legislature improve government transparency by amending the section of the California Education Code that requires the California Department of Education to produce and submit an annual report about waivers.

[California Education Code Section] 33053. The State Department of Education shall annually submit a report to the Governor, Legislature, State Board of Education, and make the report available to the superintendent and board president of each school district and county office of education. This report shall include a description of the number and types of waiver requested of the board, the actions of the board on those requests, and sources of further information on existing or possible waivers.

As of April 1, 2015, the California Department of Education has only posted reports from 2010, 2011, 2012, and 2013 on its web site. And these reports have limited value because the Department of Education provides the bare minimum of information required by law. Reports provide a spreadsheet with a tally of the number of waivers requested and approved for various provisions in the California Education Code. They do not name specific school districts that requested the waivers. Reports provide annual statistics in isolation, with very limited effort to compare tallies to past years to show trends. Links to the charts are here:

California Department of Education Waiver Reports for the Years 2010 Through 2013

Waivers from the California Education Code are an obscure area of public policy, and even if people know about waivers, they must perform time-consuming research to determine what is going on in their school district or statewide. If the California legislature chooses not to amend this inadequate law, the California Department of Education could (and should) choose to make an administrative decision to provide more details about the waivers in the annual reports.

What the California Policy Center Discovered

From 2000 through 2014, California K-12 school districts have requested 51 waivers from sections of the California Education Code that do the following:

  1. Prohibit the total amount of bonds issued (the total amount of principal) from exceeding 1.25 percent or 2.50 percent of the most recent assessed aggregate value of taxable property in the district. (Elementary and high school districts have a 1.25% limit; unified school districts have a 2.5% limit.)
  2. Prohibit the total amount of bonds issued as authorized by one bond measure from requiring a property tax that exceeded $30 or $60 per year per one hundred thousand dollars ($100,000) of taxable property.  (Elementary and high school districts have a $30 limit; unified school districts have a $60 limit.)

Out of these 51 waiver requests, school districts ended up withdrawing three of them. The State Board of Education approved all 48 other waiver requests, without one dissenting board vote.

The 100% approval rate for waiver requests is not surprising. In 2013, the State Board of Education took action on 518 waiver requests for all sections of the California Education Code and approved 97% of them. Under state law, the California Board of Education is generally obligated to grant such waivers as long as the request is submitted correctly and the waiver doesn’t violate seven criteria specifically listed in state law:

  1. The educational needs of the pupils are not adequately addressed.
  2. The waiver affects a program that requires the existence of a schoolsite council and the schoolsite council did not approve the request.
  3. The appropriate councils or advisory committees, including bilingual advisory committees, did not have an adequate opportunity to review the request and the request did not include a written summary of any objections to the request by the councils or advisory committees.
  4. Pupil or school personnel protections are jeopardized.
  5. Guarantees of parental involvement are jeopardized.
  6. The request would substantially increase state costs.
  7. The exclusive representative of employees, if any…was not a participant in the development of the waiver.

None of those seven criteria relate to local fiscal policies, meaning there is no obvious justification in state law for the Board of Education to deny a waiver from state laws related to bond indebtedness. Nonetheless, the Board of Education has chosen to impose conditions on bond indebtedness waivers and sometimes incorporated changes from the original requests at the recommendation of California Department of Education personnel. But the Board of Education has also rejected recommendations from the Department of Education, most notably in 2013 when the board repeatedly rejected a staff recommendation that school districts applying for waivers should not be permitted to sell Capital Appreciation Bonds.

More Comprehensive Reform Is Needed for the Process for Bond Indebtedness Waivers

Some people would describe these waivers as appropriate; others would condemn them as evasions. Whichever perspective is accurate, California law is inadequate in its current requirements regarding bond indebtedness waivers for school districts. The process for considering waivers is flawed and the results of that consideration are not transparent.

The California Policy Center is preparing a large, comprehensive report for publication about the astonishing bond indebtedness that has resulted from educational construction in California. This report will include numerous public policy recommendations, including several related to bond indebtedness waivers.

One obvious recommendation is shifting responsibility for approving bond indebtedness waivers from the California Board of Education to the State Allocation Board, which makes decisions for state funding of school district construction and directs the Office of Public School Construction. Of course, there also needs to be serious deliberation about whether school districts should even have the right to request and get waivers from state limits on debt and taxes.

Since the enactment of Proposition 39 in 2000, California voters have approved borrowing $142.4 billion for school construction, including $35.8 billion through three statewide ballot measures. And as of March 1, 2015, the State of California and almost 600 local educational districts have borrowed enough money since the enactment of Proposition 39 to accumulate approximately $188 billion in debt service – that is principal and interest owed to bond investors over the full term of the bonds – including $56.7 billion through three statewide ballot measures.

Before California voters approve another proposed statewide bond measure or more local bond measures for school construction, they need to be better informed about the current state of bond indebtedness. Rhetoric about “helping the kids” needs to be balanced with fiscal reality.


California Policy Center - School District Complete Waiver History from Tax and Debt Limits, 2000-March 2015

California Policy Center – School District Complete Waiver History from Tax and Debt Limits, 2000-March 2015

Examining Public Pay in California: The Los Angeles Department of Water and Power

Summary:  The Los Angeles Department of Water and Power (DWP) is the nation’s largest municipal utility, but it may also be one of the clearest examples of excessive public pay driven by powerful public sector unions. This paper analyzes the pay received by DWP employees to their non-DWP counterparts and finds that the average DWP employee receives total compensation that is 155% greater than their non-DWP counterpart.

The largest premiums are found in generic jobs such as custodians, garage attendants, security officers, and the like. The average DWP security officer, for instance, makes 288% more than a non-DWP security officer working in the Los Angeles Metropolitan area. Overall, the weighted average wage premium for DWP employees performing generic jobs was 90% over their counterparts in the Los Angeles area. For all jobs, and including the value of benefits such as pensions and employer paid health insurance costs, the premium for DWP employees as estimated to be 155% higher – that is, 2.5 times as much – than for employees performing work with similar job descriptions in the Los Angeles area.

Applying these premiums to the number of employees at the DWP, the total cost to rate-payers of the DWP paying above market wages is estimated to be $392.8M a year.

*   *   *

INTRODUCTION

The issue of comparing public pay to private pay has challenged academics and sparked fierce debate for years. A serious gap in the academic literature was filled by Andrew Biggs and Jason Richwine’s groundbreaking paper, Overpaid or Underpaid? A State-by-State Ranking of Public-Employee Compensation. Biggs and Richwine found that California State employees receive a total compensation premium of 33% versus their private sector counterpart. Given the scope of their paper, their analysis was limited to state employees only.

However, roughly 90% of all public employees in California work for local agencies. Further, state employees are paid less in wages and receive less generous benefits than local public employees do, suggesting that the bulk of public employees in California receive compensation greater than the 33% premium found at the state level. This paper is the first in a series that will analyze the level of pay for individual public agencies in an attempt to fill this gap.

The Los Angeles Department of Water and Power (DWP) is the nation’s largest municipal utility, serving over four million residents. It is also a powerful example of the above market wages received by California’s public employees. The DWP made national headlines in 2012 and 2013 when Bloomberg reported that their garage attendants were making nearly four times the national average. The Los Angeles Times found that the average total pay for DWP employees was over $100,000 in 2012, approximately 50% higher than other city employees. With recently published 2013 data available on TransparentCalifornia.com, this analysis will update and expand upon the Times’ previous findings.

First, DWP pay is compared to the market in general, as represented by the Bureau of Labor and Statistics (BLS) average wage for the same or similar job, not merely to other government agencies. Secondly, the weighted average of the pay premium found is used to project the total cost associated with the systemic practice of paying above market wages for the department as a whole.

Finally, the value of retirement and health benefits provided to the DWP employee are contrasted to the comparable retirement and health benefits received by a non-DWP employee.

*   *   *

METHODS

The methodology used is known as the “positions approach” in the economics literature. This approach searches for matching job descriptions and then compares the pay between each. Adjusting for the traits of the underlying people holding the position, also known as the human-capital model, is not utilized. Given the extremely narrow focus of this paper to a single agency in a specific region, as opposed to a state or nation-wide analysis, the “positions approach” is sufficient.

Additionally, the singular focus allows for findings that are based on the actual wages paid, not an estimate based off of a regression analysis.

The DWP employs just over 10,000 people. However, this paper only analyzes employees who worked for a full-year by eliminating any employee with a base salary less than the reported annual salary minimum, leaving 8,318 full-time, year-round employees in 2013.

Twenty-three DWP job titles were selected for analysis, accounting for a total of 3,476 employees. This sample size represents 42% of 2013 full-time, year-round employees and 39% of total payroll expenditures. Job titles were selected by the degree of total employment they represented as well as the ability to reasonably identify a corresponding job title in the BLS report. While identical or similar job title names served as a starting point, the determination in matching a DWP job title to a corresponding BLS title was made entirely on whether or not the job description and responsibilities reasonably corresponded to each.

Modifications were made in the following two cases. First, while the DWP job of customer service representative correlated to the BLS job of the same name, the required skills and job responsibilities for the DWP position appeared much higher than average. Consequently, the corresponding BLS wage was increased to the BLS 75th percentile wage.

A similar adjustment was made for the job of “senior clerk typist.” The DWP job description for both “clerk typist” and “senior clerk typist” correlated to the BLS job of “office clerks, general.” The BLS average wage was used as the comparison for the DWP job of “clerk typist” and the 90th percentile wage was used for the comparison against the DWP’s “senior clerk typist” position.

An appendix listing the exact comparisons made is included at the end of the paper. The analysis was able to incorporate the seven most populated job titles held within the DWP, along with 16 additional job titles of various sizes.

*   *   *

COMPENSATION COMPARISONS

Regular Pay

The DWP wage is compared to the average wage for the same or comparable job as reported in the May 2013 wage estimates by the Bureau of Labor and Statistics for the Los Angeles Metropolitan area.

The BLS wage does not include overtime pay, but does include a variety of additional pays such as longevity, hazard, and incentive pay. As such, only the DWP wages without overtime pay (Regular Pay) should be considered as analogous to the BLS wage. Regular Pay is defined as base pay plus the multitude forms of routine “other pay” that DWP employees receive. In 2013, the average non-OT earnings (Regular Pay) of a DWP employee were $99,900.

 Table 1  –  Average DWP Regular Pay vs Average BLS Wage by Job Title

20150318-CPC_Fellner_LADWP-1

Overtime Pay

Overtime pay was excluded from this analysis to create parity between the DWP wage and BLS estimates. However, the DWP provides overtime pay at a higher rate than even firefighters or police, which casts serious doubts about the management structure and the necessity of the overtime pay issued. Including overtime pay increases the average 2013 total earnings of a DWP employee by 15% – to $114,941.

Additionally, an incomprehensible 92% of DWP employees receive overtime pay of some kind. The Los AngelesTimes discovered at least one particular example which confirms that at least some of the overtime pay is the result of union-friendly contracts, not necessity, when they revealed that DWP employees receive overtime pay for work that an outside contractor performs. This bears repeating: DWP employees can receive overtime pay for work that others do. Such a provision is unheard of in typical labor contracts, according to the expert cited in their article.

Despite the fact that the overtime pay at the DWP is at least partially excessive and not reflective of a genuine staffing need, it is impossible to quantify the proportion that is driven by abuse, as compared to that which is driven by legitimate need. Consequently, overtime pay is omitted from this comparison. Still, it must be noted that the average DWP employee receives a non-trivial benefit, averaging 15% in 2013, from the department’s atypically generous overtime policy.

A 90% pay premium for regular jobs

Many of the jobs with the smallest degree of DWP premiums are likely due to the fact that the DWP essentially is the market for that position in the Los Angeles Metropolitan area. Electric distribution and electrical mechanics and their comparable BLS job titles (listed in the Appendix) are jobs unique to a utility company. Obviously the DWP is, by far, the largest utility in the Los Angeles Metropolitan area. Consequently, the BLS comparable wages are going to be overwhelmingly represented by DWP employees, making a comparison less meaningful.

To have a more accurate picture of the above market wages paid by the DWP it is necessary analyze generic jobs that have a robust, non-DWP market such as custodians, security officers, and the like. When filtering for jobs not unique to a utility company, the Regular Pay received by a DWP employee is 90% greater than the market average.

Table 2  –  Average DWP Regular Pay vs BLS Wage for Generic Jobs Only

20150318-CPC_Fellner_LADWP-2

Benefits

It is well documented that public sector defined benefit plans provide more generous benefits than a defined contribution plan; typically the public employee shares in the cost of funding this plan to some extent. In CalPERS, for instance, many public employees pay half of the required contribution rate, which can range from 10-30% of salary, depending on the individual employing agency.

DWP employees, however, participate in their own pension plan and contribute only a maximum of 6% of salary towards their defined benefit plan, with earlier employees paying even less than that. While the DWP plan offers benefits slightly lower than CalPERS in absolute terms, the ability to receive these benefits at a reduced cost to the employee greatly increases the net value of the DWP pension plan.

However, most employees, particularly private employees, participate in a defined contribution plan, which is vastly less generous than the defined benefits plans California’s public employees participate in. A comparison to the type of benefits typically received from a contribution of 6% of salary is illustrative in that regard.

Given private employees must contribute 6.2% of their salary in Social Security taxes, any 401(k) style matching retirement benefits available to the non-DWP employee are only available if they incur an additional cost. Consequently, the following will compare the retirement benefits available based on the assumption that each employee is contributing the same level of salary (6%) towards their retirement.

Take, for instance, the average DWP custodian receiving an average base pay of $52,734 vs. the BLS average wage of $26,810. Many custodial positions outside of the DWP are hourly and do not offer benefits of any kind. However, the DWP custodian receives employer-paid medical benefits and is enrolled in a “2.3% @ 55” defined benefit plan. Assuming the DWP custodian retires at the age of 60 with 30 years of service, they will begin receiving an annual pension of $36,386. By contrast, the private sector custodian will not be able to receive anything from Social Security until the age of 62, at which point they will receive a yearly benefit of $8,880 based on a wage of $26,810.

Using an average life expectancy of 85, a discount rate of 3.75%, and an annual Cost of Living Adjustment (COLA) of 2%, the net present value of the DWP custodian’s pension benefit is $706,841. The net present value of the non-DWP custodian’s Social Security benefit is $161,250. This represents a retirement benefit for the DWP employee nearly 340% greater than that of what their non-DWP counterpart can expect to receive, despite having contributed the same percentage of salary towards their retirement plan.

The wages used to compute the DWP’s pension are base salary only and do not include the various forms of “other pay” that are included in Regular Pay for the salary comparisons done above.

The table below displays the results of the same analysis for five of the most populated job titles in the DWP.

Table 3 – Net Present Value of Avg Full-Career DWP
Retirement Benefit vs Comparable Social Security Benefit

 20150318-CPC_Fellner_LADWP-3

While it may seem initially counterintuitive that the largest pension premium is not found in the position with the largest wage premium, it makes sense when you remember there is a cap on the maximum Social Security benefit. As such, the key driver is the absolute value of the wages used for the DWP employee.

The comparison in Table 3 assumes an employee had worked 30 years and retired at the average wage reported, which is unlikely. Granted, this weakness applies to both sides equally in that both the DWP and non-DWP employee would likely retire at a higher wage than the average. Still, it is sufficient to illustrate the enormous disparity in pension benefits offered to DWP employees in relation to the cost of an annual contribution of no more than 6% of salary.

Total Compensation Premium

An alternative and more robust measure of comparison would be to calculate the value of employer-paid benefits as a percentage of annual wages.

To do so, we rely on the model pioneered by one of the nation’s leading experts on public sector pay and pensions, Andrew Biggs. An explanation as to how we calculated the value of the DWP’s defined pension benefits can be found starting on page 26, with an explanation on how we treated the value of the Social Security benefit beginning on page 40. The most pertinent section is reprinted below:

“To calculate pension compensation paid from state government pensions, we must convert normal costs as published by those plans to a measure using risk-appropriate discount rates. To do so, we gathered data on over 20 plans from California, Florida, Colorado, Washington, and Rhode Island in which pensions’ own actuaries have calculated pension costs under different discount rates. The median result indicates that a 1 percentage point reduction in the discount rate raises the normal cost of a plan by around 36 percent. As a check, we performed our own calculations using workers stylized to be typical of state government employees, which produced similar results.

The factor to convert a normal cost would equal 1.36(re – rra), where re equals the expected return on plan assets and rra the risk-adjusted discount rate. For instance, the factor to convert a normal cost calculated at 8 percent to a 4 percent discount rate would be 1.364, = 3.42. From this risk-adjusted total normal cost we subtract the value of employee contributions to arrive at net pension compensation. For instance, a plan with a total normal cost of 10 percent of wages at an 8 percent discount rate would have a normal cost of 34.2 percent of pay using a 4 percent discount rate. If the employee contributes 5 percent of pay to the plan, his net pension compensation would be equal to 29.2 percent of wages.”

In a nutshell, public pension systems understate the true cost, and value, of their benefits by using an inappropriately high discount rate in their actuarial calculations. Experts from the Congressional Budget Office, Federal Reserve Board, federal Bureau of Economic Analysis, Moody’s Investment Services, and across academia agree that an appropriate discount rate is one that matches the risk characteristics of the benefit (sidebar 1.)

The most commonly used discount rate for benefits that have little to no risk is the yield on a 20 year Treasury. Currently, the 20 year Treasury rate is at historic lows in the low 2 percent range. Therefore, we will again follow Biggs’ lead and use 4 percent as our discount rate, roughly the average yield over the past decade of a 20-year Treasury.

The DWP pension plan has a normal cost of 23.85% of wages (page 12.) The plan also uses a discount rate of 7.5% for its actuarial calculations (page 40.)  However, given the DWP’s pension benefits are guaranteed, and thus have no risk, it is necessary to adjust this cost to a 4 percent discount rate for the reasons outlined above. This represents a discount rate reduction of 3.5%. Per Biggs, every 1 percent point reduction increases the normal cost of a plan by around 36%. Therefore, the factor to convert to a risk-adjusted total normal cost would be 1.363.5,= 2.93. Multiplying 2.93 by the normal cost of 23.85% = 69.96%. After subtracting the contribution rate for DWP employees of 6%, the net pension compensation is worth 63.96% of wages.

For health benefits, the DWP’s 2013 payroll report stated the average cost per employee was $16,230. Therefore the total compensation for the DWP employee is: (Regular Pay * 1.6396 + $16,320.)

For the BLS counterpart, data from the BLS Employer Costs for Employee Compensation (ECEC) Survey was used to estimate the cost of employer-paid health insurance at 11% of wages. The total cost of Social Security and employer contributions towards a matching 401(k) was estimated at 9% of wages, also using data from the ECEC Survey. The formula for BLS Total Compensation is: (BLS Wage * 1.2.)

The chart below is a graphical representation of the total compensation premium for 10 of the most heavily populated positions in the DWP. Table 4 documents the total compensation premium found for all job titles analyzed in this paper. The average DWP employee receives compensation that is 155% greater than their non-DWP counterpart.

  20150318-CPC_Fellner_LADWP-4

 

Table 4  –  Total Compensation for DWP Employee vs. BLS Counterpart

20150318-CPC_Fellner_LADWP-5

*   *   *

LIMITATIONS

This paper is limited in that no attempt to compare the value of retiree health benefits, fringe benefits, or job security is made. However, it is extremely likely that doing so would only inflate the compensation premium already found.

These benefits, particularly things like job security, a generous (unlimited until mid-2013) sick day policy, and so forth are all extremely likely to weigh in favor of the DWP employee.

Another limitation was that many jobs in the DWP do not have a meaningful non-DWP counterpart in the Los Angeles area. Most notably, the jobs of “Water Utility Worker” and “Electric Station Operator” were omitted, despite being the eighth and ninth most populated jobs in the DWP, given the lack of a suitable BLS counterpart.

*   *   *

THE COST TO RATE-PAYERS

In order to project the total cost estimated with the DWP’s routine policy of paying above market wages, it is necessary to look at the actual dollar cost found as a percentage of total payroll.

For instance, the actual total cost of the pay premium received by the 3,476 DWP employees analyzed in this paper was: $116,668,950. This number was created by multiplying the difference between the BLS wage and the DWP Regular Pay by the total number of employees for each job title, as displayed in Table 1.  After which, one can simply sum the actual cost found for each of the 23 job titles for a total cost.

The total non-OT payroll for these employees is $323.8 million. As such, the total pay premium found represents 36.02% of payroll. If we assume these findings hold true for the rest of the DWP, the total cost can be estimated by multiplying the total (including PT employees) non-OT payroll of $927.6 million by 36.02% for a total cost of $334.1 million.

Further, the savings associated with reducing pay to the market average would expand beyond the immediate reduction in payroll expenditures; as doing so would simultaneously reduce the cost of pension benefits.

The DWP estimates their total normal cost for 2014 to be 17.56% of payroll (page 12.) As a result, every dollar reduction of payroll would save the DWP an extra 17.56 cents in pension contributions.

Assuming the DWP was to pay market wages, the total savings would rise to $392.8M when including the savings from the reduced pension contributions.

New Salary Contract

The public pressure from the Los Angeles Times’ exhaustive work in exposing the DWP’s unlimited sick day policy, overtime pay abuse, and high levels of pay led to a new contract being signed in late 2013.

Revealingly, the “concession” by the DWP only further demonstrates the power of their union. The deal slightly reduced benefits for new hires only; salaries were not reduced at all. Current employees received no benefits or pay reduction of any kind and merely saw their yearly base salary raise delayed until 2016.

As mentioned above, the DWP employee receives over 600 forms of other pay beyond their base salary, not to mention overtime pay that accounted for an average 15% increase in total earnings in 2013. The deal did not touch any of these forms of pay.

*   *   *

CONCLUSION

The above analysis makes clear the DWP’s primary motivation in setting employee compensation is political in nature – specifically, to accommodate the union and its members at the expense of ratepayers.

Particularly alarming is that the DWP is funded via what amounts to a regressive tax by being able to set the cost of water and power for their over 4 million customers. Consequently, Los Angeles area residents are being forced to subsidize lavish compensation packages that dwarf their own incomes.

The theoretical case against public sector unions is strong, with many of the Left’s greatest heroes having previously warned of the danger and impossibility of collectively bargaining with the public at large. The DWP offers a specific, real-world example of just how egregiously public sector unions can enrich themselves at the expense of the public.

*   *   *

About the Author:  Robert Fellner is Research Director for TransparentCalifornia.com, a joint project of the California Policy Center and the Nevada Policy Research Institute.

*   *   *

APPENDIX

Please click here to go to the BLS’ Los Angeles Metropolitan Area May 2013 overview page, which contains the wage estimates listed below. Clicking the link for the individual job titles provides a description of the job’s duties and responsibilities, but wage data on a national level only.

DWP Job TitleBLS WageBLS Job Title
Senior Clerk Typist$45,960Office Clerks, General (90th percentile)
Customer Service Representative$44,800Customer Service Representatives (75th percentile)
Electric Distribution Mechanic$97,210Electrical Power-Line Installers and Repairers
Electrical Engineering Associate$61,530Electrical and Electronics Engineering Technicians
Electrical Mechanic$88,680Electrical and Electronics Repairers, Powerhouse, Substation, and Relay
Civil Engineering Associate$62,080Civil Engineering Technicians
Security Officer$26,640Security Officers
Meter Reader$46,930Meter Readers, Utilities
Custodian$26,810Janitors and Cleaners, Except Maids and Housekeeping Cleaners
Heavy Duty Truck Operator$42,210Heavy and Tractor-Trailer Truck Drivers
Clerk Typist$31,350Office Clerks, General
Electrical Engineer$110,620Electrical Engineers
Secretary Legal$54,010Legal Secretaries
Plumber$65,350Plumbers, Pipefitters, and Steamfitters
Air Conditioning Mechanic$54,690Heating, Air Conditioning, and Refrigeration Mechanics and Installers
Truck Operator$42,210Heavy and Tractor-Trailer Truck Drivers
Civil Engineer$95,250Civil Engineers
Custodian Supervisor$42,210First-Line Supervisors of Housekeeping and Janitorial Workers
Garage Attendant$29,175Approximated this value*
Mechanical Engineer$98,330Mechanical Engineers
Management Analyst$90,040Management Analysts
Maintenance and Construction Helper$44,930Helpers, Construction Trades, All Others
Mechanical Engineering Associate$62,520Mechanical Engineering Technicians

*The BLS reported a mean wage of $21,320 for a parking lot attendant. However, the Garage Attendant for the DWP entails additional non-skilled auto mechanic responsibilities and the wage was increased to reflect that by averaging the wage for a parking attendant and automotive service mechanic.

Alameda County Water District Rate Increase Driven by Labor Costs, Not Drought

With California facing a significant drought, many water districts are raising rates on customers who have been asked to significantly reduce water use.   Water districts cite the lack of rainfall, the rising cost of imported water, and reduced demand as reasons why customers must pay more.  However, many districts fail to explain the role labor costs play in the rising cost of water.

On February 12, 2015, the Alameda County Water District (“ACWD”), a special district serving the southern Alameda County cities of Fremont, Union City, and Newark and governed by a publicly elected Board of Directors, proposed to increase the service charge portion of most water bills by 30%.  A public hearing has been set for April 14. This will be at least the 16th consecutive year of rate increase and the third rate increase in the last 15 months. [1]

In 2010, the bimonthly service charge for a single family residence with a 3/4” meter (the most common) was $11.62. [2] The ACWD Board is proposing to increase the service charge to $41.54, a 257.5% increase in just five years.

The service charge is the fixed portion of the water bill all customers pay regardless of water use.  Raising the service charge does not create any incentive for customers to save water, which is what most water districts are encouraging their customers to do during this drought.  According to ACWD, customers who use 30 ccf (hundred cubic feet) of water will see their bill increase 6.2%.  However, customers who use only 5 ccf of water will see their bill increase 19.6%. [3]

Increasing this fee disproportionately harms low income households and households who use less water, including many seniors living on fixed income.  Given that households most impacted by this rate increase are the ones who can least afford it, ACWD has a high burden to justify its increased expenses that necessitates this rate increase.

ACWD’s expenses are budgeted to increase $6.0 million in fiscal year 2015. [4] On several occasions, ACWD said that its water supply costs are the main reasons for the increased expenses. In December 2014, ACWD’s Budget and Financial Analysis Manager said, “The primary reason for the [increase in operating budget] is the increase in water supply costs during this drought period.” [5] In a presentation to the public, ACWD said that 70% of their increased expense are due to water supply costs. [6] In a notice mailed to all property owners detailing the proposed rate increase, ACWD again said that 70% of the $6.0 million of increased expenses are due to water supply costs. [7] However, ACWD has been misleading the public for months by failing to mention that labor costs are included in the 70% water supply figure.

To separately examine labor costs, one must compare ACWD’s fiscal year 2014 actual labor costs and its fiscal year 2015 budgeted labor costs. In 2014, ACWD’s actual labor costs were $38.4 million. For 2015, ACWD budgeted $42.9 million, a $4.5 million increase (or 11.6% increase), for labor costs. [8] In other words, 75% of ACWD’s $6.0 million budgeted increase in expenses are due to labor costs. It is clear that the main reason for this 30% increase on the service charge will be used to pay for the significant increase in labor costs and not to help alleviate water supply costs as ACWD would like customers to believe.

To understand whether a budgeted $4.5 million increase in labor costs is justified, here are some facts about ACWD’s employee compensation:

–          More than half of employees received at least $150,000 in total compensation in 2013. [9]

–          Employees have received annual raises since at least 2003. [10]

–          Employees received a cumulative 21.7% raise during the Great Recession years of 2008 through 2012 (tied for the highest raise given in Alameda County government agencies). [11]

–          Employees will receive a 2.5% raise in 2015, a 3% raise in 2016, and a 3% raise in 2017. [10]

–          Up until July 2014, employees received free medical, dental, and vision insurance for their entire family.  Employees currently pay only one quarter of one percent of their salary for full insurance. [12]

–          Management employees are reimbursed 2.5% of the employee’s share of the CalPERS retirement contribution. [13]

–          Management employees are reimbursed $500 a year for personal Internet and cell phone bills. [14]

–          Employees can earn an unlimited number of sick hours, which can then be converted to pension credit at retirement. [15]

–          ACWD has $66.4 million of unfunded pension liability. [16]

–          ACWD has $37.1 million of unfunded retiree health care liability. [17]

In addition to employee compensation, ACWD gave $6,500 to a slush fund for employees to use how they please, including to attend baseball games, and paid $1,140 for employees to enter a sports tournament, which included 9 holes of golf. [18] Although inconsequential to its finances, both payments were made after ACWD implemented a drought surcharge.  Also, ACWD’s former General Manager, who receives an annual pension of about $250,000 a year, will receive $60,000 to write a book about ACWD’s 100 year history. [19]

When a government agency faces a difficult financial situation, some citizens are willing to share in the sacrifice to ease the financial burden.  In early 2014, ACWD declared a water shortage emergency [20] and asked customers to reduce water usage by 20% [21], which customers have done. [22] In mid 2014, ACWD implemented a drought surcharge.  Ratepayers, who have reduced water use and faced higher water rates, have done their part to share in the sacrifice during this drought.

ACWD employees, on the other hand, have done nothing to share in the sacrifice during this drought (and during the Great Recession).  Employees are generously compensated, receive generous benefits, have received annual raises for over a decade, and will continue receiving raises through 2017.

Yet, ACWD is still seeking to raise the service charge by 30% on the backs of the most financially vulnerable, including seniors living on fixed income, families collecting food stamps, families living paycheck to paycheck, the unemployed, and households who strive to conserve water, to pay for a 11.6% increase in labor costs.

If ACWD believes water rates must rise to support higher labor costs, ACWD needs to make the case on its merits rather than using the drought and water supply issues as a distraction.  It is dishonest to ratepayers and especially those who can least afford another significant rate increase.

About the Author:  Eric Tsai is a Fremont resident.

FOOTNOTES

(1)  See “Tsai-1_Rate-Increases.pdf” for history of rate increases.  From 2009 and 2014 CAFRs.

(2)  See “Tsai-2_2010-Service-Charge.pdf” for service charge fee in 2010.

(3)  See “Tsai-3_Rate-Proposal-Presentation.pdf” for rate increases by water use (page 19).

(4)  See “Tsai-4_Budgeted-Expenses.jpg” for budgeted expenses for fiscal year 2015.  From Public Records Act request.

(5)  Dec. 2014 article about consideration of rate increase: http://www.insidebayarea.com/news/ci_27156807/fremont-water-district-considering-another-rate-hike

(6)  Feb. 2015 presentation about rate increase (page 7): http://acwd.org/DocumentCenter/View/923

(7)  Notice mailed to all property owners about rate increase (page 2): http://acwd.org/DocumentCenter/View/927

(8)  See “Tsai-8_Budget.pdf” for 2015 budgeted labor costs.

(9)  See “Tsai-9_2013-Payroll-Records.xlsx” for calendar year 2013 employee compensation data.  The first and last names were removed from the file.  128 employees earned over $150,000 in total compensation while ACWD had 215 employees as of the end of 2013.

(10)  See “Tsai-10_Employee-Pay-Increases.pdf” for history of employee raises.  From three previous MOUs.

(11)  See “Tsai-11_Survey-Pay-Increases.pdf” for survey of 30 government agencies. From 2014 Alameda County Grand Jury final report.

(12)  See “Tsai-12_Employee-Health-Insurance.pdf” for employee medical coverage information.  First page is from prior MOU stating employee will receive full coverage and second page is from most recent MOU stating employee contribution for coverage.

(13)  See “Tsai-13_Management-Benefits.pdf” for employer pick up of employee retirement contribution (page 2, Retirement).

(14)  See “Tsai-13_ Management-Benefits.pdf” for employee allowance for personal Internet and cell phone bills (page 1, Management Allowance).

(15)  See “Tsai-13_ Management-Benefits.pdf” for management employee sick leave policy (page 3, Sick Leave) and “Tsai-15_Union-Benefits.pdf” for union employee sick leave policy (page 2, Sick Leave).

(16)  See “Tsai-16_Unfunded-Pension-Liability.pdf” for unfunded pension liability as of June 30, 2013 (page 12).

(17)  See “Tsai-17_Unfunded-OPEB-Liablity.pdf” for unfunded OPEB liability as of June 30, 2013 (page 10).

(18)  See “Tsai-18_Employee-Association.pdf” for payment to a slush fund and “Tsai-18_Sports-Reimbursement.pdf” for payment for employees to enter a sports tournament.

(19)  Jan. 2014 article about history book: http://www.insidebayarea.com/news/ci_24912579/fremont-based-water-district-paying-280-000-history

(20)  See “Tsai-20_Water-Shortage-Emergency.pdf” for water shortage emergency ordinance.

(21)  See “Tsai-21_Reduce-Water-Use.pdf” for request asking customers to reduce water use.

(22)  Confirmation from ACWD’s Twitter page stating ACWD water use is down 20%.

Single-Parent Families and Educational Achievement: The Tragedy of Welfare

Project TALENT, a government-funded study that tracked the development of 364,000 high school students from 1960-1971, reported significant differences in the academic performance and adult achievement between children who were raised by an unmarried mother in a fatherless home and children who were raised by two biological parents.

The results were independent of race and socioeconomic status. They were similar for Black and White students. [1,8] A second study assessed 3rd-grade boys and noted consistently superior performance of boys in father-present homes compared to father-absent peers. [2] Several studies quantified the difference as one-tenth of a year for every year spent in a single-parent home. [3]

A third study reported increased behavioral and disciplinary problems as well as school dropouts among single-parent students. The effects on social and intellectual development were more pronounced on boys. [1,4,5,8] The results have been replicated in studies across the globe. Sexual promiscuity, depression, drug abuse and pregnancy rather than delinquency, violent crime and incarceration occurred with alarming frequency in girls.

Despite compelling evidence of the damaging effects of fatherless families on intellectual development, clinically demonstrable by an absence of curiosity and a diminished response to stimulation in five-and six-month old infants and lower IQ in school-age children, the federal government ignored the data and the dire warnings in the Moynihan Report.

“The Negro Family: A Case for National Action,” Daniel Patrick Moynihan’s 1965 landmark report, warned that the deep roots of poverty lay in the absence of nuclear families, not of jobs, and the government’s proposed national welfare program would greatly exacerbate the problem. [7]  Instead of heeding the warning, President Johnson institutionalized family breakdown as the Great Society.

An avalanche of welfare programs emerged with the destructive consequences Moynihan predicted. Today, more than 1,600,000 infants are born out of wedlock annually in the US (1,714,643 in 2007), a number which represents 41% of the total number of births. By contrast, the rate in 1960 was a mere 5%. [5] The results have had profound effects on the national culture and on academic proficiency, particularly on minority populations.

The results of student performance on international tests will illustrate the magnitude of the effects. The Programme for International Student Assessment (known as PISA) tests the competence of fifteen-year old students in mathematics, science and reading, with an emphasis on mathematics. It is given every three years to members of the Organization for Economic Co-Operation and Development. 510,000 students from 65 OECD countries were assessed in 2012, representing 28 million 15-year olds.

PISA also gathers data about the students’ family, socioeconomic, cultural and ethnic background. The data reveal the United States has the highest percentage of students raised in single mother homes among all the nations that participate. In 2012, it was 28% for the US, 8% for Japan and 3% for Greece and South Korea.  The latter three nations ranked higher than the US in all subjects. [5,6]

The United States ranked 20th in math on PISA 2000. That year, 18% of the students were from single-parent homes. On the more recent 2012 assessment, the US ranked 36th. The percentage without fathers was 28%, an increase of more than 50%. [6]

Across the industrialized world, nations with high rates of illegitimacy had lower PISA rankings than the nations with low rates of illegitimacy like Shanghai, Singapore, Hong Kong, Taipei and India. Raw data were repeatedly adjusted for factors such as race, socioeconomic status, language spoken at home, immigrant status and the parents’ level of education. From the writer’s perspective, this served to minimize the striking differences observed and to discount the effects of fatherlessness on performance.

The differences, however, are independent of such background factors as demonstrated by the remarkable achievements of the offspring of non-English-speaking Eastern European Jewish immigrants in the early 20th century, graduates of Dunbar High School, the nation’s first all-Black public high school, until the mid-20th century and non-English-speaking immigrants from Viet Nam, China, Taiwan, Japan and India whose children continue to outperform their peers.

Although their families were poor, over 90% of these children grew up in traditional two-parent homes. The determinative factor for the differences in performance observed in PISA was a father.

Welfare institutionalizes fatherlessness. The monthly stream of checks and services insinuate the State into the place of the traditional breadwinner. But federal programs cannot fill the critical role of an actual father as PISA and prison populations demonstrated.

Welfare has led to the intergenerational transmission of fatherlessness. The phenomenon is most striking among African-Americans. 53% of Black children are raised in single-parent homes. [8]  In the absence of the father, our civilized society has begun to disappear. Just look at Detroit, Chicago and any jail or prison, cities and institutions with significant single-parent, minority populations. [4]

The nation is at risk. Preventive steps should be taken now to reverse this trend. The public should be educated about the effects of out of wedlock births. Politicians, educators and clergymen should be educated as well.

The almost 200 separate welfare programs need to be cut in half, at a bare minimum. The anti-marriage bias that penalizes couples when they marry (by taxing their combined income) should be removed and a marriage credit issued instead.

Reforms such as loans instead of cash grants should be implemented. Mandatory minimum work requirements and maximum length of benefits should be re-instituted. California currently awards welfare benefits to single mothers until their child reaches 18.  Most importantly, efforts should be made to preserve marriage rather than encourage divorce, perhaps by strengthening overly lax divorce laws.

Precocious sexuality, promiscuity and out of wedlock pregnancy should be discouraged by as many avenues as possible. The cost of illegitimacy should be the topic of sermons in every house of worship. The recovery of shame (an internal governor of human behavior) would be transformative.

Male teachers, coaches and tutors for girls would be both helpful and therapeutic in these efforts. They would make appropriate father surrogates and provide a corrective emotional experience for young women desperately in need of such role models.

Illegitimacy stands at historic highs; marriage and academic achievement of America’s youth, at historic lows. This trend must be reversed.

There are certainly examples of children raised in single-parent who have achieved great success such as Dr. Benjamin Carson or Oprah Winfrey. These are typically bright, gifted or talented children with unusually strong, proud mothers or grandmothers. The majority who lack these endowments or caretakers achieve little to no success.

A national tragedy merits a national conversation. Welfare and public education are fraternal twins born of the same bad political seed. Both are in need of reform. Let us continue the discussion in homes and churches and in the national media.

*   *   *

About the Author: R. Claire Friend, MD, is the Assistant Professor, Department of Psychiatry and Human Behavior, UC Irvine Medical Center, and the editor of the UC Irvine Quarterly Journal of Psychiatry. She is a retired psychiatrist and frequent commentator on the psychological dimensions of education and social welfare policies.

*   *   *

FOOTNOTES

(1)  https://www.nlsinfo.org/sites/nlsinfo.org/files/attachments/121214/Mott-AbsentFathersandChildDevelopment-1993.pdf

(2)  Bain, H. Academic Achievement and Locus of Control in Father-Absent Elementary School Childr, School Psychology International,1983: 4, 69-68

(3)  Krein, S. and Beller, A., Educational Attainment of Children from Single-Parent Families, Demography, 1988, 25: 221-234

(4)  http://thf_media.s3.amazonaws.com/1996/pdf/bg1084.pdf

(5)  http://educationnext.org/international-look-single-parent-family/

(6)  http://educationnext.org/files/ednext_XV_2_woessmann_unabridged.pdf

(7)  http://en.wikipedia.org/wiki/The_Negro_Family:_The_Case_For_National_Action

(8)  http://scholarworks.wmich.edu/cgi/viewcontent.cgi?article=1044&context=hilltopreview

(9)  Personal communications with psychoanalyst William S. Horowitz, MD.

(10)  The primary reason for concern is the California’s liberal welfare eligibility criteria and total benefits that incentivize illegitimacy. Not unsurprisingly, the state ranks 49th in academic performance, bested only by Arkansas. Of the 503,738 babies born in California in 2013, 494, 705 were born out of wedlock. To put those numbers in better perspective in terms of the state’s future academic performance, the total number of students enrolled in kindergarten in California in 2010 was 410,000.

For West Contra Costa Healthcare District, the Numbers Just Don't Add Up

This week, Bay Area media have been covering the financial crisis at Doctor’s Medical Center, a public hospital operated by the West Contra County Healthcare District. As I discussed in a recent California Policy Center study, many California health care districts have financial issues, but the problems at WCCHD are especially acute.  The district filed for bankruptcy in 2006 and appears to be on the brink of doing so again. There have been two ongoing themes in the Doctor’s Medical Center drama: the facility consistently loses money and local political leaders are always searching for some way to keep the doors open. Often missing from the coverage is a debate over whether keeping Doctor’s Medical Center open is a cost effective way of providing hospital care to area residents. A review of public data raises some questions about whether the facility succeeds in this mission.

In 2013, WCCHD paid 45 of its employees total wages in excess of $150,000 each. Most of these highly compensated employees were registered nurses. In fact, two nurses received more than $250,000 including overtime but excluding the value of benefits.  This compares to an average salary of $112,140 for Bay Area RNs.  A complete list of WCCHD salaries is available on the State Controller’s Public Pay web site.  Transparent California also provides the salary data together with employee names.

Since personnel costs accounted for 64% of operating expenses in 2013, high compensation at Doctor’s Medical Center is a major barrier to reaching a budgetary balance. The facility is also handicapped by its relatively small size, which reduces its ability to spread fixed costs across a large number of patients. Contrary to statements from district officials, patient mix is not the primary cause of its financial woes.  In 2011, the hospital sustained a substantial loss, even though 46% of patients had private insurance (this proportion fell to 36% in 2013).

With respect to quality, Medicare’s Hospital Compare web site provides some useful insights.  According to patient surveys, only 52% of Doctor’s Medical Center patients would definitely recommend the hospital.  This compares unfavorably to a statewide average of 71%. Among nearby facilities, 64% of patients would definitely recommend Contra Costa Regional Medical Center in Martinez, 66% would definitely recommend Kaiser in Oakland and 67% would definitely recommend Alta-Bates in Berkeley. The Medicare comparison tool also reports that Doctor’s has an unplanned hospital readmission rate that exceeds national averages, but does not provide an exact level.

Since its last bankruptcy filing in 2006, WCCHD has sought (and in many cases received) extraordinary assistance from the state, the county, the cities of Richmond and San Pablo, and district residents. While no political leader wants to see a community health facility close on his or her watch, at some point, it becomes time to bow to fiscal realities. That time appears to be now.

California City Pension Burdens

SUMMARY:  This study estimates the burden of pension costs on 459 California municipalities. The primary measure we consider is the ratio of required pension contributions to estimated total revenue for each city.  We also look at contribution rates per employee and at pension funding levels.  We find a wide variation in the impact of pension costs on city finances. While several cities spend more than one-eighth of their revenues on pension contributions, many spend far lower proportions and ten municipalities have no defined benefit pension plans at all.

The most heavily burdened cities are San Rafael, Costa Mesa and San Jose, which have pension cost / revenue ratios estimated at 17.58%, 14.36% and 13.88% respectively. As we discuss in the study, all three of these cities are taking measures to reduce future pension costs, so their rankings are not necessarily a reflection on currently sitting elected officials. Using an alternative measurement of total pension debt (unfunded liability plus pension bonds outstanding) / revenue, the most heavily burdened cities are Oakland, Costa Mesa, and Richmond, which have pension debt / revenue ratios of 203.3%, 182.0%, and 180.9%, respectively.

Prospectively, using data from recently released CalPERS actuarial reports, we project pension costs for most cities through to fiscal year 2020, identifying two cities – Monrovia and Fremont – that may face troubles in the years ahead. Monrovia and Fremont have 2015 pension cost / revenue ratios greater than 10% AND they will both experience dramatic cost growth.  Between 2015 and 2020 and assuming a 7.5% CalPERS return, Monrovia is projected to see a 64.15% cumulative increase in pension costs, while for Fremont, the number is 46.51%. 

The weighted average funding ratio across all 459 cities was just over 75% as of June 30, 2013. Given strong stock market performance since that time, it is likely that the funding situation improved significantly over the last 18 months. Overall, CalPERS reported that its assets increased by 15% between June 30, 2013 and June 30, 2014. Its actuarial liabilities probably rose during this period as well, but likely at a slower rate.

Download Print Version of Study

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INTRODUCTION

California cities that participate in defined benefit pension plans are expected to make a total of $5.1 billion in contributions during fiscal 2015, accounting for nearly 7% of their total revenue. As of June 30, 2013, the average funded ratio for these plans was 75%. Underneath these averages, we observe a great diversity of pension cost burdens and funding rates.

Study data by city and by plan may be found here. This Google Spreadsheet model contains multiple tabs including a city summary and plan details.

California City Pension Burdens – City Summaries
(click on image to view GoogleDoc spreadsheet, select tab “city_summary”)

20150205-CPC_Joffe_City-Summary

California City Pension Burdens – Plan Details by City
(click on image to view GoogleDoc spreadsheet, select tab “plan detail”)

20150205-CPC_Joffe_Plan-Detail

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The city level data can also be viewed on a map:

California City Pension Burdens – Plan Summary by City
(click on image to view Google Map, then click circles to view individual summaries)

20150205-CPC_Joffe_CA-Map

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METHODS

We collected most of the cost and funding data for this study from CalPERS plan-specific actuarial valuations. The vast majority of city pension plans are administered by CalPERS, but several large California cities operate their own plans. In these cases, we gathered data from actuarial valuations and audited financial statements published by the plans themselves, and from the State Controller’s Office retirement plan data set. Large cities that maintain their own plans include Los Angeles, San Diego, San Jose, San Francisco, Fresno, Oakland and Sacramento (some of these cities have both internally administered plans and CalPERS plans). A few cities participate in county pension systems. In these cases, we consulted actuarial reports and financial statements provided by these county plans.

In all cases, we derived revenue estimates from State Controller Office data posted at http://bythenumbers.sco.ca.gov. We used the total of general and functional revenues reported in the controller’s data set.  This provides a larger denominator and thus lower pension/revenue ratios than one might derive from considering only general fund revenue. Dividing pension costs by general fund revenue is inappropriate because public employees may be paid from special governmental funds or enterprise funds controlled by the municipal government. When evaluating total pension costs, it is best to consider total governmental revenue.

Total 2015 revenues were estimated by adding 6.25% to 2014 city revenue data recently published by the State Controller.  According to the SCO data set, the median city’s revenue increased by 6.25% between 2013 and 2014.  We applied this rate of increase to the 2014 data as a proxy for fiscal 2015 actuals, which won’t be available until late this year.  Ideally, the 2015 revenues would be taken from individual municipal budgets, but many cities do not forecast total revenues. Budgets often include only general fund projections.

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FINDINGS

In general, pension costs do not represent a near-term threat to municipal solvency, but in many cities, the burden of financing pension benefits is crowding out other spending priorities or adding to pressure for tax increases. A number of cities are spending more than 12% of total revenue on pension contributions.

A city’s pension burden relative to revenues is a product of a number of factors including:  (1) the generosity of plan benefits, (2) the size of the municipal workforce relative to the city’s size and wealth, (3) growth rates and (4) tax rates. Thus, a city may be able to support very generous pension benefits if it has a small workforce, has rapidly growing revenue and/or imposes additional sales taxes.

The study includes data for 459 of the state’s 482 towns and cities. Of the 23 cities not in our list, ten offer retirement plans that do not provide defined benefits. As discussed later, these cities provide employees with defined contribution and/or deferred compensation plans. Most of the remaining 13 are small towns that do not issue audited financial statements or provide retirement plan information on their web sites.

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MOST HEAVILY BURDENED CITIES

Cities with the highest pension expenses relative to revenue are listed below:

Rank City or Town County 2015 Pension Contributions 2015 Estimated Revenue Pension Cost / Revenue Ratio
1 San Rafael Marin County 18,422,967 104,823,893 17.58%
2 Costa Mesa Orange County 18,997,065 132,253,907 14.36%
3 San Jose Santa Clara County 253,967,345 1,829,814,350 13.88%
4 San Gabriel Los Angeles County 5,124,429 38,198,183 13.42%
5 Sonora Tuolumne County 892,361 7,108,772 12.55%
6 West Covina Los Angeles County 10,304,114 84,893,591 12.14%
7 El Cerrito Contra Costa County 4,837,781 40,189,354 12.04%
8 Hemet Riverside County 7,083,161 60,907,403 11.63%
9 Montclair San Bernardino County 4,267,343 36,721,464 11.62%
10 Eureka Humboldt County 5,507,187 48,722,417 11.30%
11 Corona Riverside County 20,593,975 183,906,784 11.20%
12 El Cajon San Diego County 11,781,843 105,802,628 11.14%
13 Hermosa Beach Los Angeles County 4,330,474 39,374,676 11.00%
14 Foster City San Mateo County 5,185,144 48,319,867 10.73%
15 Richmond Contra Costa County 24,795,689 234,178,451 10.59%
16 Orange Orange County 17,353,503 164,072,449 10.58%
17 Los Gatos Santa Clara County 4,566,479 43,225,331 10.56%
18 Chico Butte County 10,017,258 94,967,151 10.55%
19 Monrovia Los Angeles County 6,231,567 59,132,054 10.54%
20 Fremont Alameda County 26,777,512 255,758,600 10.47%

Cities with the highest burdens typically have responsibility for both safety and non-safety employee pensions. Cities with relatively low burdens generally do not have a safety plan, perhaps because they rely on the County or another authority for police and fire services.

The city with the highest pension contribution/revenue ratio is San Rafael, which spends more than one-sixth of its revenue on retirement fund contributions.  This burden is partially a legacy of generous retirement benefits. Police officers and firefighters were entitled to pensions equal to 3% of salary per year employed with a retirement age of 55. Miscellaneous employees – those who are not uniformed public safety officers – received 2.7% per year at age 55. While San Rafael’s pension formula for safety employees is not unusual (in fact, some cities provide 3% of salary per year at age 50), the formula for miscellaneous employees is more generous than most California cities. As of June 30, 2013 the city had 220 active and 202 retired employees in the miscellaneous category.

Recent reforms have resulted in less generous benefits for new employees. The city has documented its efforts at pension reform at http://www.cityofsanrafael.org/pensions/.

In 2011, San Rafael lowered the benefit for new miscellaneous employees from 2.7% to 2%. It did not lower the benefit rate for new public safety employees, but reduced their cost of living allowance (COLA) in retirement from 3% to 2%. It also changed the Final Average Pay (FAP) used for to calculate the pension benefit from the last year’s salary to the average of the final three years’ salary. This reform reduces pension spiking, a practice under which employees work substantial overtime in their final year or are awarded extraordinary salary increases to maximize their pension benefits.

In 2013, the city further reduced new employee benefits after the implementation of California’s Public Employees’ Pension Reform Act (PERPA).  New miscellaneous employees must wait until age 62 to receive benefits, which continue to be based on 2% per year times final average pay. For new safety employees, the rate is now 2.7% instead of 3% while the retirement age has risen from 55 to 57.

It is worth emphasizing that these changes apply only to new employees – hired from 2011 onwards. Most employees will be eligible for the more generous, pre-2011 retirement benefits for many years to come, implying that San Rafael’s high pension burden will be a fact of life for some time.

Also contributing to San Rafael’s relatively high annual pension costs is the aggressive approach its plan administrator, the Marin County Employee Retirement Agency (MCERA) is taking toward paying down unfunded liabilities. Most plans, including those administered by CalPERS and other county systems, amortize their unfunded balances over a period of 30 years; MCERA has implemented a 17-year amortization period. More rapidly amortizing UAAL promotes fiscal sustainability, so, at least to this extent, San Rafael’s high pension contributions could be seen as positive.

The second most burdened city is Costa Mesa. Like San Rafael, the city has a legacy of generous benefits. By 2011, police and fire employees were in plans that paid 3% at age 50, while miscellaneous employees received 2.5% at 55. In some cases, existing employees had benefitted from plan enhancements after being hired. For example, in 2010, the fire union negotiated a reduction in retirement age from 55 to 50. This change applied to current employees even though the enhanced benefit had not been funded by previous contributions made by the firefighters or the city.

The City’s Mayor Pro Tem, Jim Righeimer, noted that another factor contributing to Costa Mesa’s high pension burden is its inability to outsource services to the private sector. California cities fall into two legal categories under state law:  chartered and general law. As a general law city, Costa Mesa, operates under many more rules specified under the state’s government code (section 34000).  In Costa Mesa City Employees Assn. v. City of Costa Mesa, 209 Cal. App. 4th 298 (Cal. App. 4th Dist. 2012), the Court of Appeals found that Costa Mesa could not outsource services to private companies, unless these services required specialized training or expertise. The ruling only applies to general law cities; charter cities have the flexibility to reduce future pension costs by outsourcing basic functions like street sweeping and animal control.

Although the city has been unable to outsource miscellaneous positions, it has taken some steps to limit pension costs. The council made some reductions for new employees starting after March 2012, and made further cuts after PERPA took effect in 2013. The benefit formula for new safety employees is 2.7% at 57; new miscellaneous employees receive 2% at 62.

Costa Mesa has also established a Pension Oversight Committee whose work is documented at http://www.costamesaca.gov/index.aspx?page=1603.

The city with the third highest pension burden is San Jose, with fiscal 2015 contributions of over $250 million accounting for almost 14% of total revenue. Public employee retirement costs have been an issue in San Jose for a number of years now, and the city’s experience illustrates the difficulty municipalities encounter when they try to limit these expenditures.

According to a city presentation, total retirement costs for San Jose have quadrupled since fiscal 2003. In that year, San Jose contributed $72 million to pension contributions and retiree health benefits. In the current fiscal year, that cost has risen to over $300 million (including $50 million in health costs).

In 2012, Mayor Chuck Reed placed Measure B on the ballot. Among other changes, the proposal gave currently employed city workers the option of accepting lower pension benefits or substantially increasing their own contributions to retain existing benefits. Most proposed reforms only apply to new employees, because there is a presumption that existing employees have a contractual right to the pension benefit formula available at the time of hire (unless the formula is enhanced as we saw in Costa Mesa’s case). Because the San Jose reform threatened to reduce the benefits of existing employees, it drew substantial union opposition.

Despite this opposition, Measure B passed with a 69% majority. Unions and other opponents then attempted to overturn the measure in court. In December 2013, Superior Court Judge Patricia Lucas ruled that the increased employee contributions were unlawful. But the judge agreed that the city could obtain the same cost savings by reducing employee pay. As of this writing, the city has not attempted to implement such a pay cut.

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FUNDING LEVELS

There was less variation in funding levels across cities and differences appeared to be idiosyncratic. The vast majority of plans are administered by CalPERS, which requires all member cities to pay the full Actuarially Required Cost (ARC) it computes each year. CalPERS uses the same calculation procedures for each member. Thus there should not be issues with deliberately skipped or reduced payments, as we see in other states. Cities with large non-CalPERS plans also appear to pay their full ARCs each year.

The weighted average funding ratio across all 459 cities was just over 75% as of June 30, 2013. Given strong stock market performance since that time, it is likely that the funding situation improved significantly over the last 18 months. Overall, CalPERS reported that its assets increased by 15% between June 30, 2013 and June 30, 2014. Its actuarial liabilities probably rose during this period as well, but likely at a slower rate.

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CITIES WITHOUT DEFINED BENEFIT PLANS

A review of audited financial statements identified ten California cities that rely exclusively upon defined contribution and deferred compensation plans to provide for their employees retirement needs. Because the city makes its contribution upfront or makes no contribution at all, it cannot have an unfunded actuarially accrued liability. Further, it could be argued that many of these cities do not have a pension burden at all, because matching contributions can be suspended during a fiscal emergency.

The list of cities relying exclusively upon defined contribution and/or deferred compensation plans is as follows:

City County
Danville Contra Costa County
Holtville Imperial County
Huron Fresno County
Lafayette Contra Costa County
McFarland Kern County
Mendota Fresno County
Orinda Contra Costa County
Rio Dell Humboldt County
San Juan Bautista San Benito County
Trinidad Humboldt County

While most of these cities are small, Danville and Lafayette have populations of 43,000 and 25,000 respectively, suggesting that medium sized cities can attract employees without offering defined benefit retirement programs.

Steven Falk, City Manager for Lafayette told us via e-mail:

“… Lafayette’s non-PERS status has little or no apparent impact on the City’s ability to hire and retain lower-skilled and administrative employees, such as caretakers, landscape workers, recreation workers, administrative assistants, etc. The lack of a PERS program, however, does appear to have some impact on the City’s ability to attract and retain higher level professionals with skill sets that are particular to the municipal operation, such as urban planners, civil engineers, transportation planners, community development employees, etc. We have had occasions where candidates have retracted their job applications upon learning that Lafayette does not participate in PERS.”

The city contacts out public safety services to Contra Costa County, so it has not had to test whether it could recruit police officers and firefighters without the benefit of PERS membership.

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EMPLOYER CONTRIBUTION RATES

Thus far our analysis has focused on total employer contribution amounts. Historically, CalPERS and other multi-employer plans have quoted contribution rates. The contribution rate is the percentage of current employee payroll that must be contributed to the pension plan. For example, if a public employee has a salary of $100,000 and the employer’s contribution rate is 40%, the city must pay CalPERS $40,000 to keep the covered employee in the defined benefit plan. This rate excludes employee contributions, which are typically withheld from each employee’s salary but have been paid –partially or fully – by municipal employers.

The plans with the highest contribution rates tend to be smaller plans with declining balances. In these cases, contributions are primarily funding pension payments to members that have already retired and there is a small, declining numbers of active employees across which these payments may be allocated. For example, Taft’s First Tier Police plan has a 227.5% contribution rate. As of June 30, 2013, the plan had only one active member and 28 retirees.

Among larger plans, Rialto’s Safety Plan has one of the highest contribution rates:  48.8% in fiscal 2015, with a projected increase to 50.3% in fiscal 2016. The city’s contribution rate appears to be especially high because of a 2008 decision to increase the plan’s benefit formula to 3% at 50. Because the increase applied to existing employees (whose contributions had been based on less generous benefits), the plan has required catch-up contributions to avoid greater underfunding. After the new formula took effect in 2011, the employer contribution rate jumped from 19.3% to 38.3% and has continued to rise.

Another large plan with a relatively high contribution rate is Berkeley’s police plan with a 2015 rate of 46.6% rising to 48.6% in 2016. Police have been eligible for the 3% at 50 benefit formula for several years. A new contract negotiated in 2012 scaled back the formula for new hires to 3% at 55.  This change should slow the increase in contribution rates as more new hires join the force. One aspect of the Berkeley plan that pushes up contribution rates is the provision of a “sick leave credit”. This plan feature allows retirees to add unused sick pay to their length of service at retirement. Each sick day adds 0.004 years to the employee’s service period for purposes of calculating his or her pension benefit rate.  For example, if a police officer retires with 100 sick days and a $100,000 final average pay, she would be entitled to an extra 100 x 0.004 x 3% x $100,000 = $1200 per year.

As one might expect, the most heavily burdened cities also have plans with high contribution rates. San Rafael’s overall contribution rate is 57.7%, Costa Mesa’s fire plan has a 47.5% rate and San Jose’s public safety plan has a 70.8% rate.

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MOST HEAVILY INDEBTED CITIES (INCLUDING PENSION OBLIGATION BONDS)

No discussion of California’s city pension burdens would be complete without taking into account Pension Obligation Bonds. This is the practice of borrowing money to make an annual employer contribution to the pension system, on the assumption that the interest rate paid on the bond will be less than the earnings that will accrue to investing the bond proceeds in the pension fund. We have identified 58 cities that had outstanding pension obligation as of June 30, 2013. These cities are listed below along with the face value of POBs they issued. These amounts include principal that has already been repaid.  Also, some cities, including Oakland and Richmond, have issued zero coupon capital appreciation pension obligation bonds that do not pay any interest. The issuance amounts shown below often reflect the maturity value of these zero coupon bonds rather than the proceeds each city received.

City County Amount Issued
Auburn Placer County 4,965,000
Azusa Los Angeles County 7,215,000
Baldwin Park Los Angeles County 12,810,000
Bell Los Angeles County 9,225,000
Benicia Solano County 13,972,596
Berkeley Alameda County 12,415,000
Brisbane San Mateo County 4,745,000
Burlingame San Mateo County 32,975,000
Capitola Santa Cruz County 5,170,000
Carmel-By-The-Sea Monterey County 6,280,000
Claremont Los Angeles County 6,000,000
Colton San Bernardino County 31,149,399
Daly City San Mateo County 36,235,000
Fairfield Solano County 36,865,000
Fresno Fresno County 205,335,000
Hawthorne Los Angeles County 30,700,000
Huntington Park Los Angeles County 23,000,000
Inglewood Los Angeles County 64,986,301
La Verne Los Angeles County 8,380,000
Long Beach Los Angeles County 164,500,000
Marina Monterey County 4,315,000
Merced Merced County 7,355,000
Mill Valley Marin County 6,775,000
Millbrae San Mateo County 11,521,660
Monrovia Los Angeles County 12,750,000
Monterey Park Los Angeles County 17,405,000
Novato Marin County 18,296,066
Oakland Alameda County 757,930,000
Oceanside San Diego County 42,780,000
Oroville Butte County 7,260,000
Pacific Grove Monterey County 19,365,355
Pacifica San Mateo County 20,510,000
Palm Springs Riverside County 19,832,588
Paradise Butte County 10,918,154
Pasadena Los Angeles County 159,380,000
Pinole Contra Costa County 16,800,000
Pittsburg Contra Costa County 39,566,055
Pomona Los Angeles County 42,280,684
Port Hueneme Ventura County 10,679,956
Porterville Tulare County 3,765,000
Redlands San Bernardino County 25,862,392
Richmond Contra Costa County 239,500,729
Riverside Riverside County 150,480,000
Sacramento Sacramento County 183,365,000
San Bruno San Mateo County 13,175,000
San Leandro Alameda County 18,305,000
San Marino Los Angeles County 7,095,000
San Rafael Marin County 4,490,000
San Ramon Contra Costa County 17,650,000
Santa Cruz Santa Cruz County 24,150,000
Santa Rosa Sonoma County 32,715,000
Scotts Valley Santa Cruz County 4,460,000
Seaside Monterey County 6,880,000
Sonoma Sonoma County 2,925,000
South Gate Los Angeles County 24,400,000
Stockton San Joaquin County 125,310,000
Union City Alameda County 22,997,973
Yuba City Sutter County 7,685,000

Finally by combining unfunded actuarially accrued liabilities and outstanding pension obligation bond debt, we find the cities that have the highest overall pension debt burden – based on 2013 total revenue. In the table that follows, we have used 2013 revenues from the State Controller’s Office, except in the case of Oakland which had an anomalous value in the SCO data set. The 2013 POB column reflects our calculation of unpaid principal plus unamortized premia on zero coupon bonds as of June 30, 2013.

California Cities, Ranked by Pension Debt as Percent of Total Revenue – Top 20

Rank City 2013 Total Revenue 2013 UAAL 2013 POB Outstanding Total Pension Debt Debt / Revenue
1 OAKLAND 902,343,411 1,336,731,344 497,326,504 1,834,057,848 203.3%
2 COSTA MESA 120,941,625 220,088,382 220,088,382 182.0%
3 RICHMOND 229,667,716 213,851,021 201,590,579 415,441,600 180.9%
4 WEST COVINA 75,202,992 129,009,677 129,009,677 171.5%
5 SAN RAFAEL 98,069,848 161,297,000 4,490,000 165,787,000 169.0%
6 NEWARK 42,011,267 70,674,444 70,674,444 168.2%
7 PARADISE 16,283,406 13,598,638 11,809,914 25,408,552 156.0%
8 PACIFIC GROVE 24,393,663 24,510,771 12,451,649 36,962,420 151.5%
9 FOSTER CITY 36,608,718 52,461,839 52,461,839 143.3%
10 INGLEWOOD 159,019,773 166,164,169 58,076,302 224,240,471 141.0%
11 MAYWOOD 9,228,259 12,978,485 12,978,485 140.6%
12 EL CAJON 99,209,121 137,565,731 137,565,731 138.7%
13 STOCKTON 362,091,530 370,970,850 125,310,000 496,280,850 137.1%
14 BERKELEY 296,093,704 401,733,284 1,865,000 403,598,284 136.3%
15 PLEASANT HILL 25,049,832 33,041,047 33,041,047 131.9%
16 WHITTIER 66,526,402 86,998,800 86,998,800 130.8%
17 FREMONT 211,801,362 275,568,580 275,568,580 130.1%
18 DOWNEY 100,912,444 130,989,072 130,989,072 129.8%
19 ORANGE 147,030,133 190,178,031 190,178,031 129.3%
20 CONCORD 111,190,625 142,421,844 142,421,844 128.1%

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As can be seen on the above table, some cities, such as Richmond, actually have more debt carried in the form of pension obligation bonds than they have in the form of an unfunded pension liability. Omitting consideration of pension bond debt clearly favors a city like Richmond, but in reality their pension contributions are significantly understated unless the pension bond debt is taken into account. Using this ratio also validates the precarious situation Costa Mesa finds themselves in, since even though they have no pension bond debt, their unfunded liability is 66% greater than their entire annual revenue. It is also interesting to see that some of California’s larger cities, including Oakland and Stockton, have relied heavily on the use of pension obligation bonds to finance their annual pension fund contributions.

WHAT THE FUTURE HOLDS

In February, 2014 CalPERS adjusted its actuarial assumptions with the effect of further increasing employer contribution rates.  The rate increase will be phased in over five fiscal years.  When the change is fully implemented, in fiscal 2020-21, CalPERS projects a further increase in safety officer contribution rates of between 5.3% and 9.3%.

In addition to listing contribution rates for the upcoming fiscal year, CalPERS actuarial valuation reports have also provided projected rates for future fiscal years to assist agencies with multi-year financial planning. In theory, this data could be used to compare projected future burdens among cities.

Unfortunately, there are complexities inherent in creating such a comparison and these challenges have been exacerbated by a change in this year’s CalPERS actuarial reporting.  In some cases, the reports provide an employer contribution rate, but, in most others, they list both a normal cost rate and a lump sum Unfunded Actuarial Liability (UAL) payment. This makes comparisons across plans more difficult. Further, non-CalPERS plans often do not provide projected rates at all. Consequently, a systematic comparison of contribution rates across plans and cities is impossible, but we can consider some specific cases.

One city that can expect to face sharply increased pension burdens is Monrovia, a medium-sized community northeast of Los Angeles. Between fiscal 2016 and 2020, the city’s UAL payment is projected to rise from $1.6 million to $2.9 million. During the same period, contribution rates for the city’s miscellaneous plan are projected to rise from 30.9% to 38.8%.

Assuming that CalPERS estimated 2016 covered payroll increases three percent annually, Monrovia’s actuarially required contribution is projected to rise from $6.2 million in fiscal 2015 to $10.2 million in fiscal 2020.  Since the city’s 2015 pension burden already exceeds 10%, the city will be hard pressed to find this additional $4 million.

CalPERS projections assume a 7.5% annual increase in the value of system assets. This assumption – which is closely related to the discount rate applied to unfunded liabilities – is controversial.  However, the system easily exceeded this rate in four of the last five years – benefitting from the bull market in stocks that followed the Great Recession.

Since future portfolio returns are unpredictable, CalPERS provides a sensitivity analysis that shows contribution rates (or UAL payments) under different return scenarios.  The worst scenario reflects a -3.8% annual return between July 1, 2014 and June 30, 2017. Under this scenario and using a 3% covered payroll growth assumption, Monrovia’s fiscal 2020 contribution would rise to almost $12.5 million.

Of course, the city’s pension burden would not grow as much if the market continues to do well.  CalPERS most rosy scenario calls from an 18.9% annualized returns during the same period. If this were to happen, Monrovia’s fiscal 2020 ARC would be $6.4 million – little changed from the fiscal 2015 level.

A larger city facing a sharp increase in an already heavy pension burden is Fremont in Alameda County. The city’s safety plan has a contribution rate of 40.7%.  In fiscal 2016 this will rise to 44.7%, and by fiscal 2020, the rate will reach 55.3% assuming median CalPERS returns. If CalPERS underperforms, the 2020 rate will stabilize at 43.0%; in the event of underperformance the rate will escalate to 65.8%.

The city’s miscellaneous plan has an employer contribution rate of 24.1%.  This is expected to rise to 25.8% in fiscal 2016 and 31.3% in fiscal 2020.  Once again, the range of potential 2020 outcomes is wide: from 23.3% under bull market conditions and 38.1% if the bears prevail.

In absolute dollars and assuming 3% covered payroll growth, Fremont’s pension cost is expected to rise from $26.8 million in fiscal 2015 to $39.2 million in fiscal 2020. Under the bull market scenario, the 2020 cost would be $30.0 million; while it would reach $47.1 million in the bear market case.

*   *   *

CONCLUSION

The impacts of public employee pension costs vary widely across California cities. By offering new employees defined contribution plans or more modest defined benefit formulas, heavily burdened municipalities can gradually reduce the share of their budgets devoted to this legacy cost. Substantial towns including Lafayette and Orinda show that it is possible to fill openings – at least among non-safety employees – without offering defined pension benefits.

There are cautionary lessons as well. As San Jose has learned, it is very difficult to pare back generous pension benefit packages once they have been granted.  And, as Costa Mesa has discovered, sweetening benefits for existing employees is a recipe for trouble.

Given prevailing court rulings to date, there is little municipalities can do to lighten their pension loads in the near term. By projecting pension contributions for the next several fiscal years, CalPERS has provided a way for cities to anticipate and hopefully reserve for the obligations they face shortly beyond the current budget year. We hope that systems outside CalPERS will provide similar multi-year projections in their own actuarial valuation reports.

The CalPERS projections are buried deep inside plan-specific valuation reports available only in PDF form. By extracting the relevant data from these valuation reports and then aggregating them by city, we hope we have provided policymakers and citizens with an accessible tool that they can use to assess and address growing pension costs in their respective communities.

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Marc Joffe founded Public Sector Credit Solutions in 2011 to educate policymakers, investors and citizens about government credit risk. PSCS research has been published by the California State Treasurer’s Office, the Mercatus Center and the Macdonald-Laurier Institute among others. Prior to starting PSCS, Marc was a Senior Director at Moody’s Analytics. He has an MBA from New York University and an MPA from San Francisco State University.

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Where Did All The Vehicles Come From?

Have you ever wondered where all the vehicles come from?

Stand by the side of a busy road and count the first 100 to 200 vehicles that pass by. One could bet that no two vehicles would be exactly alike. There would be vehicles from more than a dozen various manufacturers, a few domestic and most from international manufacturers. Some are manufactured in the U.S. while others are shipped from Europe or Asia. There would be commercial vehicles such as taxis, vans, dump trucks, panel trucks, and big rigs. There would be an even greater variety of personal vehicles such as sedans, sports cars, SUVs, pickup trucks, and station wagons. These would come in a variety of sizes from full size sedans and SUVs, to compacts, and subcompacts. There would also be a number of motorcycles and a scooter or two. No two vehicles would be alike. If you happened to identify two vehicles from the same manufacturer, of the same model and year such as 2012 Toyota Camry sedans, they would be different colors with different options.

What you may not notice is the tremendous improvements in the newer vehicles. This includes a general improvement in quality, comfort, safety, reliability, and durability including newer safety features, more advanced electronics such as Bluetooth audio for cell phone communications and entertainment, to voice activated navigation systems. Today’s vehicles can go over 7,000 miles between oil changes and drive trains last for more than 200,000 miles without requiring major service.

Where did this variety of vehicles come from? Why all the improvements? Was it due to the superior policies and programs of the Department of Transportation in Washington, DC? Or was it something like Adam Smith’s invisible hand?

There definitely is a role for enlightened regulations. For example, no single manufacturer could afford the cost of installing expensive safety features such as air bags if there wasn’t a requirement that all vehicles of a certain class include air bags. This created a mass market for air bags and led to lower costs and better performance. Eventually, manufacturers could go beyond the minimum required and meet market demand for even safer vehicles.

Another important regulation involves standardized testing and labeling such as for vehicle mileage. It’s easy to compare various vehicles based on price, features, and performance. The Internet is also a big help with various sites allowing easy comparisons.

However, the vast majority of the vehicle improvements we enjoy are due to competition between companies and countries. Customers have choices and customers control their money and make purchasing decisions without government interference. Individuals can make good or bad purchasing decisions spending their own money. Suppliers that fall behind on price, features, or performance quickly lose business and are forced to change or go out of business. International competition and competition within states in the U.S. prevent monopoly abuses such as the United Auto Workers dictating pay, benefits, and work rules in U.S. auto plants. Workers as well as companies have to compete.

We could conduct a similar thought experiment in a supermarket or by watching TV shows. The growing variety and quality of the goods and services we enjoy is due to competition for our business. We control the money and we make our own spending decisions.

Ditto for the Internet, smart phones, tablet computers, social networks, etc. Was all this part of a central plan or the result of a lot of bright, well educated people coming up with new ideas that others are willing to finance in spite of the financial risk associated with a high failure rate?

What about money? Where do good ideas go to be funded? The money flows to the opportunities. The U.S. has the largest and freest capital markets in the world. Individuals control their investments, where they put their hard earned savings. Yes, there are government subsidies and government regulations. Again, those that enforce full disclosure and penalize abuses and criminal activity are essential to the successful operation of our capital markets. There’s deposit insurance that allows small savers to put their money in a bank without worrying about the safety of their money. However, it’s individuals who decide where to put their money from safe money market accounts to high-risk venture capital deals. Yes, people make foolish decisions with their money. They can make bad decisions and lose everything. Some people go to a casino rather than save or invest their money.

This organization of our financial system insures that new ideas and whole new industries such as the Internet get all the money needed to grow and innovate.

The system works. It’s not perfect but it has led to the high standard of living most of us enjoy.

What’s required for this to happen?

Our free markets work because of the following:

1. The purchaser controls the money and makes the decision as to what to buy and what price to pay. Isn’t this the fundamental basis of a capitalist economy?

2. Choice and competition. We need multiple suppliers offering products or services competing for your business.

3. Defined metrics so that you can make valid comparisons. Price is usually the single most important variable when a consumer makes an intelligent decision. You know the price before you buy. Second only to price is accurate and fairly complete disclosure defining the product or service and the options available to the purchaser. If two products have the same price, they are not necessarily equal.

4. Decentralized decision-making and control: bottoms up (the consumer decides) as opposed to top down decision making by bureaucrats in Washington D.C. or Sacramento CA.

5. Flexibility for innovation and experimentation. Prior approval is not required before making changes except for some specific mandates such as safety requirements.

6. Enforceable contracts and agreements and a judicial system to resolve commercial and criminal disputes. Bad actors can’t stay in business.

7. Free and open financial markets so that buyers can arrange financing if needed, businesses can get loans to grow, and entrepreneurs have access to risk capital to fund new ventures.

8. A minimum of subsidies and regulations that tend to push consumers in a direction favored by the government or preferred suppliers.

What if we ran the automobile industry as we do K-12 education?

We know that monopolies or quasi monopolies (reduction in competition) always result in higher costs, less choice, lower quality, slower pace of innovation and adoption of new technology, and poor response to customers’ needs and preferences.

We have two industries that largely ignore the free market system: education and health care. These industries are highly regulated by the federal and state governments and are largely government funded. K-12 education is no only funded by the government, it is also largely delivered via government run monopolies.

What are the consequences of this heavy government involvement? Let’s run another thought experiment. What if we ran the automobile industry as we currently run K-12 education?

1. We’d probably define personal transportation as a public good and state that every family or adult should have an automobile regardless of their ability to pay.

2. There would be a tax or series of taxes and fees to collect the money needed to provide an automobile to everyone who qualifies.

3. There would be very strict standards on the size, features, and performance of these vehicles. There would be a need for extensive rules and regulations. For example, would someone who lived in a city such as New York or Chicago with access to public transportation receive a government-supplied vehicle? If so, would a city dweller get a battery powered small car, or would they get a full size family sedan? Who would be eligible for a full size pickup truck? Farmers need them. Would a farmer raising apples in Wisconsin get the same pickup truck as a Texas rancher? You can see the need for extensive regulations for the public good.

4. You would have limited choice of the automobile you get. In K-12 education, children go to a neighborhood school without regard to quality, courses offered, etc. The government would assign a vehicle to you and these vehicles would meet rigid, difficult to change standards to insure equity.

5. Most important, the government would not give you the money to buy a car. The money would go directly to the suppliers who would be told what vehicles to make and how many, and how to distribute them to those eligible to receive automobiles. You would get a new vehicle every five years or so as defined by detailed regulations to insure equity. General Motors would have very little incentive to make you happy or to accommodate your specific preferences as long as they met the government’s regulations.

Would you get lucky and perhaps get a Mercedes or a Lexus? I doubt it. I don’t think that the government would be willing to or allowed by Congress to spend public money to buy vehicles from foreign manufacturers.

Would you be happy with the car assigned to you? Would you get a Yugo or a Ford Fusion? How long would it take to get new technology such as Bluetooth audio or a navigation system? If you’re old enough, you may remember the old AT&T monopoly for phone service. It was said that you could have any color phone you wanted as long as it was black. If we retained the AT&T monopoly, would we have smart phones, the Internet, Wi Fi?

If a government run monopoly under which the government collects taxes, directly funds the product or service, and assigns customers to suppliers without any choice or competition wouldn’t work for the things we buy, why should we expect it to work for education or health care?

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About the Author:

William Fletcher is a business executive with interests in public finance and national security. He retired as Senior Vice President at Rockwell International where most of his career was spent on international operations and business development for Rockwell Automation. Before joining Rockwell, he worked for Bechtel Corporation, McKinsey and Company, Inc., and Combustion Engineering’s Nuclear Power Division, and was an officer and engineer in the U.S. Navy’s nuclear program. His international experience includes expatriate assignments in Hong Kong, Europe, the Middle East, Africa and Canada. In addition to his interest in California’s finances, he is involved in organizations dealing with national security and international relations. Fletcher is a graduate of Tufts University with a BS degree in Engineering and a BA degree in Government. He also graduated from the U.S. Navy’s Bettis Reactor Engineering School.

Scholars and Scholarship: A Case for Charter Schools

Public and private charter schools have emerged as a striking exception to the dismal system of U.S. public education that has performed so poorly on international assessments of student performance such as PISA and TIMMS. Despite the virulent opposition to them by the powerful California Teachers Association, National Education Association and their political allies in Sacramento and on local school boards who support them, these schools have amassed an impressive record of excellence.

Eight of the top ten public schools in California as ranked by US News and World Report are charter schools. Oxford Academy in Cypress ranked 1st. Pacific Collegiate in Santa Cruz ranked 3rd; KIPP San Jose Collegiate, 4th; Preuss School in La Jolla, 5th, American Indian Public High School in Oakland, 6th; Hawthorne Math and Science Academy, 9th and Mathematics, Science and Technology Academy in Lennox, 10th.

KIPP Empower Academy in South Central is the top performing school in the Los Angeles Unified School District. Located in a predominantly poor, disadvantaged minority community where less than 5% of the student population finish college, 75% of KIPP Empower graduates get their degree. Equally impressive records have been achieved by other schools in the KIPP network: KIPP San Jose ranked 41st nationally and KIPP King Collegiate in San Bernardino, 67th.

With the evident benefits for those students most in need, the strong appeal to parents desperate for better educational opportunities for their children (with an admission waiting list of one million names nationally) and the predominantly non-union academic faculty, charter schools represent a powerful threat to the economic and political hegemony of the unions.

These are the primary reasons only a relative handful of charter petitions in California have been granted: 123 in San Diego, 100 in Los Angeles, and 15 in San Francisco. Their toughest opponents may be in Orange County, one of California’s most affluent areas.

Traditionally hostile authorizing agencies have approved only 18 charters in Orange County. The most recent member, Endeavor Albert Einstein Academy of Letters, Arts and Sciences in Huntington Beach, opened its doors to students in grades K-5 last September. Serving 244 students, the school already promises to become one of the top performers in the state.

Founded by a group of concerned parents and educators, the first charter school opened its doors in Milwaukee a mere two decades ago. Since that time, charter schools have expanded into a network of more than six-thousand schools serving 2.7 million students across 42 states and the District of Columbia. The percentage of students enrolled in the schools varies from city to city, from 5-10% in small communities to over 50% in the largest urban centers: 44% in DC, 55% in Detroit and 90% in New Orleans.

Typically, students in charter schools perform 2-3 grades and 30 points higher on achievement tests than their counterparts in traditional public schools. For-profit schools such as the 162-school network operated by KIPP have amassed impressive national rankings as mentioned above. These results have been achieved by disadvantaged students from poor minority communities, traditionally the lowest performing students, which makes the KIPP results even more stunning.

Detractors often challenge these results by accusing charter schools of skimming the cream of the crop or selecting a disproportionate number of gifted students compared to traditional public schools. In reality, only 5.4% of charter school students are gifted compared to 6.7% in traditional public schools. The majority are from low-income families. 63% qualify for the free or reduced-fee federal lunch program compared to 48% in traditional public schools.

Most impressively, charter schools have accomplished all of this on a much-reduced budget in make-shift buildings: abandoned warehouses and schools, unoccupied stores and leased office space. These schools operate on a fraction of the funds per student traditional public schools receive, on average $3,500-$4,500 per student. They are forced to raise private funds to make up the deficit. A small minority receive $7,500 per student. Traditional public schools receive up to $21,000 per student in public funds annually.

Because such excellent results are achieved at greatly reduced taxpayer costs, it flies in the face of common sense and reason to oppose something that would be of benefit to so many in such great need, not to mention the nation itself. Sadly, union politics serve their own interests, not those of the young clients and their parents.

A good education is a right guaranteed to all Americans. School choice is a civil rights issue. Judging by their record, charter schools represent one of the best opportunities for success for those among us who are in greatest need. Parents, educators, school administrators and support groups should petition school boards and state politicians to increase the numbers of charters that are granted.

The primacy of union power needs to end. Their control over the destinies of millions of children needs to be challenged. Nothing less than the future of our country is at stake. It needs to be our fight to the finish.

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About the Author: R. Claire Friend, MD, is the Assistant Professor, Department of Psychiatry and Human Behavior, UC Irvine Medical Center, and the editor of the UC Irvine Quarterly Journal of Psychiatry. She is a retired psychiatrist and frequent commentator on the psychological dimensions of education and social welfare policies.

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California Healthcare Districts in Crisis

INTRODUCTION

While financial conditions in California cities have improved markedly since 2012, many of the state’s 78 healthcare districts are struggling. Last April, Palm Drive Healthcare District in Sebastopol filed for protection under Chapter 9 of the federal bankruptcy law.  In December, the West Contra Costa Healthcare District, which operates San Pablo-based Doctors Medical Center received a $3 million bailout from Contra Costa County after district voters rejected an additional parcel tax. Palm Drive and West Contra Costa are the two most visible cases of healthcare district financial problems, but our review suggests that they are not alone.

Healthcare districts are local governments dedicated to providing health services to their residents. They are special districts that operate independently from city and county governments. Although voters elect district board members, public awareness of these entities is often limited. Perhaps as a result, many of these districts have strayed from their original functions or even outlived their reason for being,

In the 1940s, California experienced a shortage of acute hospital beds, especially in rural and suburban areas, partially due to an influx of wounded soldiers returning from World War II. The state legislature responded in 1945 by passing the Local Hospital District Law. This act authorized the creation of local taxing districts to build and operate hospitals in medically underserved areas. Most of today’s healthcare districts were formed as hospital districts in the late 1940s and 1950s.

District hospitals created under the law were typically small, independent facilities. Many of the hospitals have had difficulty keeping up with industry changes in recent decades. Fee for service medicine has been largely replaced by third party payment and managed care, while the length of hospital stays has declined sharply. Large healthcare organizations, like Kaiser Permanente and Sutter Health, have proved better able to adopt to the new environment.

In some cases, hospital districts responded by closing their hospitals or transferring them to larger providers. Rather than dissolve, some districts diversified into other medical services prompting the legislature to rechristen the “hospital districts” as “healthcare districts” in 1994.  In other cases, districts continue to operate inefficient hospitals to the detriment of local taxpayers. We anticipate more bankruptcies in this area. Although harmful to creditors, bankruptcies and dissolutions of some healthcare districts may be the best outcome for local taxpayers and other stakeholders.

BANKRUPTCY FILINGS BY CALIFORNIA HEALTHCARE DISTRICTS

The Palm Drive district bankruptcy filing is the twelfth chapter 9 bankruptcy petition by a California healthcare district in the last twenty years. The following table lists these filings:

Healthcare District Bankruptcies – 1996 to 2014

Year

Health Care District Court

Case Number

1996 Heffernan Memorial Hospital District Central 95-10251
1996 Corcoran Hospital District Eastern 96-15051
1997 Kingsburg Hospital District Eastern 97-15254
1999 Southern Humboldt Community Health Care District Northern 99-10200
2000 Chowchilla Memorial Hospital District Eastern 00-13597
2000 Sierra Valley District Hospital Eastern 00-30288
2001 Alta Healthcare District Eastern 01-17857
2003 Coalinga Regional Medical Eastern 03-14147
2006 West Contra Costa Healthcare District Northern 06-41774
2008 Valley Health System Central 07-18293
2009 Sierra Kings Health Care District Eastern 09-19728
2014 Palm Drive Hospital District Eastern 14-10510

 

Most of the bankrupt districts have not been dissolved. West Contra County Healthcare District continue to operate Doctor’s Hospital amidst ongoing financial crises culminating in the County bailout mentioned above.  On the other hand, Alta Healthcare District sold its facilities and no longer offers services, but remains in existence. Of the 12 districts listed above, only Valley Health System appears to have been liquidated.

FINANCIALLY CHALLENGED CALIFORNIA HEALTHCARE DISTRICTS

Below we look at a few of the more challenged districts. Along with this report, we have published a map of the state’s hospital districts with selected financial information and links to audited financial statements we have located. The visualization is available at http://www.govwiki.info/pdfs/Analysis/HealthCareDistricts.html.

California Health Care Districts – Positive vs. Negative Equity

 

To view district information, click on one of the green, red or black polygons. The coloration is based on the district’s reported equity, or the difference between its assets and liabilities (this concept is sometimes referred to as “Net Position”. Districts that reported negative equity (liabilities exceeding assets) are colored red; those that reported positive equity are colored green.  District that did not report an equity positon are colored black. Map boundaries were obtained from Association of California Healthcare District’s web site.

Sources:

Margaret Taylor, California’s Health Care Districts, California HealthCare Foundation, 2006. http://www.chcf.org/~/media/MEDIA%20LIBRARY%20Files/PDF/C/PDF%20CaliforniasHealthCareDistricts.pdf

Jennifer Baires. County supervisors approve $12 million for floundering West Contra Costa hospital. http://www.mercurynews.com/my-town/ci_27056277/county-supervisors-approve-12-million-floundering-west-contra

Robert Rogers, San Pablo: Voters reject tax to fund Doctors Medical Center, May 7, 2014. http://www.contracostatimes.com/contra-costa-times/ci_25711650/san-pablo-voters-reject-tax-fund-doctors-medical

Dan Verel, Palm Drive files for bankruptcy, plans to suspend services, North Bay Business Journal, April 7, 2014.  http://www.northbaybusinessjournal.com/90443/palm-drive-files-for-bankruptcy/

California State Controller’s Office. Special Districts Raw Data for Fiscal Years 2003-2013. https://bythenumbers.sco.ca.gov/Raw-Data/Special-Districts-Raw-Data-for-Fiscal-Years-2003-2/vi4x-fbus

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Eden Township Healthcare District (ETHD), Alameda County

Residents of Southern Alameda County voted to form a hospital district in 1948.  In 1954, Eden Township Hospital began operations. Today, the district no longer operates a hospital and is deeply in debt.

According to its 2014 audited financial statements, the district took out a $54 million line of credit from US Bank in 2007. Between 2010 and 2013, the bank agreed to six loan modifications – repeatedly extending payment deadlines and changing other terms of the loan agreements. Had the financing been secured through the municipal bond market rather than a more flexible bank lender, ETHD would have been required to report multiple events of default. Currently, ETHD owes US Bank $45 million payable on February 1, 2016.

ETHD also owes $19 million to Sutter Health. This debt arose from a legal judgment that Sutter won against the district in connection with the transfer of San Leandro Hospital. In 2004, ETHD purchased San Leandro Hospital and leased it to Sutter. In 2008, it gave Sutter an option to purchase the hospital and the right to recoup any losses from operations at the time of purchase. These losses proved to be substantial and by the time Sutter acquired the hospital in 2012, the accumulated losses greatly exceeded the purchase price. ETHD tried unsuccessfully to litigate away these costs, but ultimately failed in court. On June 2013, Sutter was awarded $17.2 million including damages. By late December 2014, the debt remained unpaid and had grown to $19 million with the accrual of interest.  The district has recently sought a hardship ruling which would allow it to pay Sutter over time.

ETHD currently owns and leases three medical arts buildings. It also administers a community health grants program funded by the 1998 sale of its original facility – Eden Township Hospital. Leasing and grant-making now represent the sum total of the district’s activities.

ETHD does not currently levy taxes on its 360,000 residents, but – as a governmental entity – it has the ability to place parcel taxes on the ballot and can also petition Alameda County Supervisors for a bailout. Also, as a governmental entity, it incurs election costs whenever board members’ terms expire. Given the nature of its activities (which could be easily provided by private not-for-profits) and the liabilities it has accumulated, district residents might best be served by a bankruptcy filing and liquidation.

According to district CEO Dev Mahadevan – who contacted CPC after seeing the original version of this study – the district is constrained from declaring bankruptcy because its assets exceed its liabilities. Because the assets are primarily in the form of land and buildings, ETHD lacks the cash to service its debts. Liquidating the district’s debt by selling most of its assets would require voter approval. In an email message, Mahadevan told me: “Our overhead, including election costs every two years runs around 8% of our total expenses. We don’t have expensive benefits costs and pension plans which the County department of health, with a similar mission has. Lastly, a private non-profit does not act in the public realm. We are witness to this every day and every week, right here. Sutter Health is a private, non-profit charitable organization; however, their interests are not focused on Castro Valley, Hayward or San Leandro but on the “East Bay”: a larger area and a much larger and more diverse population. Their meetings and deliberations are definitely NOT public. These are arguments that convinced our Local Agency Formation Commission (LAFCO) of our reason to exist and continue!”

With respect to the last point, I have found no evidence of a LAFCO eliminating any healthcare district. It appears that the LAFCO process has a bias toward creating and maintaining governmental units, rather than dissolving them.

Sources:

Rebecca Parr, Castro Valley: Health care district to file hardship claim to pay debt, Contra Costa Times, December 31, 2014. http://www.contracostatimes.com/breaking-news/ci_27236342/castro-valley-health-care-district-file-hardship-claim

Eden Township Healthcare District. 2014 Audited Financial Statements. http://ethd.org/wp-content/uploads/2014/11/FY-2014-Audited-Financials.pdf

Eden Township Healthcare District. 2015 Budget. http://ethd.org/wp-content/uploads/2014/06/Budget-Approved-FY15.pdf

Eden Township Healthcare District. History. http://ethd.org/about-ethd/history/

Why Should Eden Township Healthcare District Exist. Newark Editor. Castro Valley Patch. March 20, 2013. http://patch.com/california/castrovalley/why-should-eden-township-healthcare-district-exist

Local Agency Formation Commission of Alameda County. Eden Township Healthcare District Municipal Service Review Final. December 9, 2013. http://www.acgov.org/lafco/documents/finalmsr2013/eden-final.pdf

Eden Township Healthcare District – The Community Health Advisory Committee: A Brief History. http://ethd.org/wp-content/uploads/2014/10/CHAC-101414-Attach-B.pdf

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Palo Verde Health Care District, Riverside County

The Palo Verde Health Care district operates a small, rural hospital in Blythe – near the Arizona border. The hospital opened in 1937 and then came under district control in 1948. In the early 2000s, Palo Verde Hospital was operated by LifePoint Hospitals. At the beginning of 2006, Lifepoint terminated its operating agreement; since then, the elected district board has managed the hospital directly.

The results have not been good. The district reported a loss of $4.4 million in the fiscal year ending June 30, 2013 after losing $2.4 million the previous year. If losses continue, the district’s $4.1 million of remaining equity will soon be exhausted.

Small, rural hospitals under all ownership types have been under pressure for many years. Although their problems are often attributed to inadequate Medicare and Medicaid reimbursement rates, they often face low utilization as the population shifts away from rural areas and the length of patient stays shortens.

According to its most recent quarterly filing with the California Office of Statewide Health Planning and Development, the hospital is licensed to operate 51 beds but is staffed to handle a capacity of only 34 beds. The hospital reported a staffed bed occupancy rate of only 28%, implying that only 10 patients were staying in the facility on an average day. With such a small number of patients, the hospital is challenged to cover its fixed costs, such as executive pay. According to Transparent California, former CEO Peter Klune received $432,000 in total compensation during 2012.

A January 2013 editorial in the Palo Verde Valley Times surveyed a long history of litigation affecting the local hospital and concluded that the facility should be privatized. A few months after the editorial appeared, the district became embroiled in further legal action. Three dismissed hospital officials – including the former CEO – alleged that patients requiring air transport were being directed to an airline owned by a district board member. This choice of carrier was often detrimental to patients, who could reach a larger medical center more quickly via helicopters departing from a helipad at the hospital.

Sources:

Hospital Quarterly Disclosure Report, Palo Verde Hospital, California Office of Statewide Health Planning and Development, Quarter ending September 30, 2014. https://siera.oshpd.ca.gov/OpenFacsimile.aspx?oshpdid=106331288&rpedate=9%2F30%2F2014%2012%3A00%3A00%20AM&rpttype=A&outputtype=P&SystemId=4&rptid=47095

Times Editorial: Palo Verde Hospital needs to be privatized, Palo Verde Valley Times. January 3, 2013. http://paloverdevalleytimes.com/main.asp?SectionID=36&subsectionID=807&articleID=18118

Former hospital CEO, finance director and CNO file federal suits against Healthcare District, President Sartin and board members Hudson and Burton, Palo Verde Valley Times, July 31, 2013. http://paloverdevalleytimes.com/main.asp?SectionID=1&SubSectionID=1&ArticleID=19010

Palo Verde Healthcare District, Financial Statements, June 30, 2012. http://paloverdehospital.org/ArchiveCenter/ViewFile/Item/841

Palo Verde Health Care District, History, http://paloverdehospital.org/index.aspx?nid=62

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Kern Valley Healthcare District, Kern County

The district operates both an acute care hospital and skilled nursing facility near Lake Isabella, northeast of Bakersfield. As of September 30, 2014, the district had $10.6 million in assets and $17.6 million in liabilities, yielding a negative net position slightly in excess of $7 million.  Recent performance appears to be near breakeven with $155,000 in net income reported to the state controller for fiscal 2013.

I was unable to locate audited financial statements for the district. This is surprising since KVHD has municipal debt securities outstanding, and municipal issuers are generally required to publish audited financial statements on the EMMA system.

Unlike Palo Verde Hospital, the Kern Valley facilities have fairly robust utilization. In the three months ending September 30, 2014, the district reported 65% occupancy of its 99 licensed beds. KVHD’s financial challenge appears to relate more to its patient mix. About 85% of the district’s patient days were compensated by Medi-Cal, which typically provides lower reimbursement rates than either Medicare private insurance.

The large Medi-Cal share is likely due to the inclusion of a skilled nursing facility in Kern Valley’s service mix. Low income elderly patients become eligible for Medi-Cal long term care coverage once they exhaust most of their assets.

While the skilled nursing facility provides steady income, it has also opened the district to liability. In 2006 and 2007, three patients died at the home due to drug overdoses and nursing neglect. Investigators also determined that 23 other residents received unnecessarily large doses of antipsychotic drugs apparently administered for the purpose of keeping them quiet.  The allegations resulted in a federal fine and a prison term for one of the facility’s nurses, as well as community service for a doctor and the district’s former CEO.  Although I could not find evidence of any civil suits being filed against the district, such filings are clearly a risk – potentially tipping the financially vulnerable district into bankruptcy.

Sources:

Kern Valley Finance District, Unaudited Financial Statements for the three months ended September 30, 2014. http://www.kvhd.org/wp-content/uploads/2014/10/Finance-10-14.pdf

Hospital Quarterly Disclosure Report, Kern Valley Health District, California Office of Statewide Health Planning and Development, Quarter ending September 30, 2014. https://siera.oshpd.ca.gov/OpenFacsimile.aspx?oshpdid=106150737&rpedate=9%2F30%2F2014%2012%3A00%3A00%20AM&rpttype=A&outputtype=P&SystemId=4&rptid=46820

Chisum Lee and A.C. Thompson. Gone Without a Case: Suspicious Elder Deaths Rarely Investigated. Pro Publica. December 21, 2011. http://www.propublica.org/article/gone-without-a-case-suspicious-elder-deaths-rarely-investigated

Pamela McLean. Three Years in Prison for Nurse in Elder Abuse Case. Redwood Age. January 14, 2003. http://redwoodage.com/content/view/267223/49.

Steve Clawkins. 3 Arrested in Nursing Home Deaths in Lake Isabella. February 20, 2009. http://articles.latimes.com/2009/feb/20/local/me-nursing-home-deaths20

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John C. Fremont Hospital District, Mariposa County

John C. Fremont Hospital District operates a hospital and freestanding medical clinics in a sparsely populated area of the state. The district’s boundaries are the same as those for Mariposa County, which has less than 18,000 residents scattered across 1463 square miles.

The hospital has 34 beds and a 70% occupancy rate according to its September 30, 2014 disclosure report. Occupancy has declined from 87% in 2009.

According to its audited financial statements, the district was carrying $8.0 million in long term debt and had a net position of -$2.7 million. Fremont lost $1.0 million in fiscal 2013. Unaudited results suggest that Fremont is no longer losing money, but it lacks the cash to pay off obligations as they become due. Further, the hospital requires a seismic upgrade to meet earthquake safety standards set by the state legislature.

Consequently, the district will need to continue to rely upon debt financing to operate. This can be a costly proposition as evidenced by Fremont’s 2010 bond issue.  The unrated securities carried coupons of between 7% and 8.55%. If the district was part of a larger entity, it would most likely be able to secure bond financing at substantially lower rates.

Sources:

John C. Fremont Healthcare District, Financial Statements with Independent Auditors’ Report, June 30, 2013. http://www.jcf-hospital.com/docs/12_13_Audited_Financials.pdf

John C. Fremont Healthcare District, Official Statement: $2,000,000 Certificates of Participation.  Augist 1, 2010. http://emma.msrb.org/EP524372-EA313657-EA709355.pdf

Hospital Quarterly Disclosure Report, John C. Fremont Healthcare District, California Office of Statewide Health Planning and Development, Quarter ending September 30, 2014.  https://siera.oshpd.ca.gov/OpenFacsimile.aspx?oshpdid=106220733&rpedate=9%2F30%2F2014%2012%3A00%3A00%20AM&rpttype=A&outputtype=P&SystemId=4&rptid=47179

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Lindsay Local Hospital District, Tulare County

Although not in financial distress, Lindsay Local Hospital District illustrates issues that can occur in smaller districts that have ceased to operate hospitals. LLHD does not have a functioning web site; minutes of director meetings, budgets and audited financial statements do not appear to be publicly available, complicating the efforts of media and citizens to ensure that tax moneys flowing to the district are spent effectively.

According to State Controller’s Office special district data, LLHD collected $440,000 in property tax revenue during fiscal 2013. The district collected $157,400 in other revenue mostly by renting office space to medical providers. LLHD incurred $507,000 in expenses and reported net income of $101,200.

A 2011 staff report for the Tulare County Local Agency Formation Commission (LAFCO) reported that district funds were being spent on the following:

  • Equipment for the Lindsay High School football team
  • A portion of the salary for a nurse staffed by Lindsay’s Healthy Start Program
  • Matching funds for a Agricultural Worker Health and Housing Program grant awarded by the Rural Communities Assistance Corporation
  • City Wellness Center Solar Panels

The LAFCO report also estimated that the district’s five board members were paying themselves $1200 per year each – the maximum allowable under state law. It is not clear whether the district also incurs election costs, and, if so, how much those are.

A 2012 article in the Porterville Record suggested that if LLHD was dissolved, property taxes would still be collected and remitted to the state.  The article also quoted the district’s attorney as saying that without LLHD healthcare would be almost unavailable in Lindsay – quite an overstatement given the services the district actually subsidizes.

In 2014, ABC Action News 30 quoted Board Chairman Gary McQueen as follows: “People aren’t paying any more than they were if we didn’t exist, it would just go to the county. So this way we keep X amount of dollars that goes to our district and we spend it on needs of health care.” This comment appears to be correct. District funding is included in the 1% ad valorem tax rate applied to homeowners within LLHD’s boundaries. Their tax rate would be unlikely to change if the district was dissolved, but if tax revenues went directly to the city or county, a largely redundant administrative structure could be eliminated.

Sources:

Tulare County LAFCO, Health Care Districts, 2011 http://lafco.co.tulare.ca.us/documents/ItemVI2HDandMADMSRFinals.pdf

Emily Shapiro, Lindsay Hospital District continues to provide health care, The Porterville Reporter, September 28, 2012. http://www.recorderonline.com/lindsay-hospital-district-continues-to-provide-health-care/article_7cefd4bf-cb6e-5e26-9c70-15ec4575b3a9.html?mode=story

Mariana Jacob, Race to Choose Lindsay Hospital District Director Raises Concerns. ABC Action News 30. October 10, 2014. http://abc30.com/politics/race-to-choose-new-lindsay-hospital-district-directors-raises-concerns/346015/

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CONCLUSION

While the formation of hospital districts may have been a wise public policy in the aftermath of World War II, many of these entities are now struggling.  Several districts that continue to operate hospitals are experiencing poor financial performance compared to privately owned facilities. Districts that close or sell their hospitals try to find new missions, but may not be doing so in a cost-effective manner.

Although run by elected officials, the accountability of health care districts is often much less than that of general purpose governments or school districts. Board elections are low profile affairs attracting limited voter attention. Board proceedings, budgets and audited financial statements are less readily available to the public.

Once bureaucracies have been created they are hard to eliminate. But extraneous bureaucracies hinder public sector performance. The state and county governments should consider policies that encourage healthcare districts with underperforming hospitals to close these facilities, transfer them to private not-for-profit agencies or place them under direct County supervision. Policy changes should also encourage the elimination of districts that no longer maintain hospitals. Office leasing, grant making and operating wellness centers are functions that can be performed by the private sector or general purpose governments.

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Marc Joffe founded Public Sector Credit Solutions in 2011 to educate policymakers, investors and citizens about government credit risk. PSCS research has been published by the California State Treasurer’s Office, the Mercatus Center and the Macdonald-Laurier Institute among others. Prior to starting PSCS, Marc was a Senior Director at Moody’s Analytics. He has an MBA from New York University and an MPA from San Francisco State University.

Do Newer Technologies Threaten High Speed Rail?

So many lies were told to convince voters to approve the High Speed Rail project six years ago, that most Californians have soured on it. They are appalled that the estimated cost to build, the time to build, the time between destinations and the price of a ticket have all nearly doubled since voters approved a $10 billion bond to kick start the project.

Add to this that the private investment that backers promised would limit taxpayers’ liability is nowhere to be seen and it is little wonder that even the former Chairman of the High Speed Rail Authority, respected independent Quentin Kopp, has excoriated the project as it has morphed into something wholly unrecognizable from what the voters approved.

It is somewhat ironic that Governor Brown, who fancies himself as a futurist (as Governor in the 1970s he thought California should have its own satellite) wants to commit Californians to spending billions of dollars on what is increasingly apparent to be an aging technology. Today’s futurists and tech savvy interests are suggesting that investing in High Speed Rail might be tantamount to buying stock in a chain of blacksmith shops in 1910 just as the automobile began replacing the horse as the dominant form of personal transportation.

The first successful powered railroad trip is said to have taken place in the United Kingdom in 1804. More than two centuries later, the train remains the best way to move large quantities of heavy goods. But for moving people, is the huge amount of capital investment in equipment and track that impedes the crossing of vehicles and pedestrians, destroys neighborhoods and farmland, and degrades wildlife habitat, really essential?

Elon Musk, who heads successful high-tech companies Tesla Motors and SpaceX, believes there is a better way to move people. Musk favors the Hyperloop, or something similar, that would whisk travelers between San Francisco and Los Angeles in as little as 35 minutes. Compare this with a drive time of six hours, a bullet train time of about four hours, and an hour by air.

The Hyperloop is a hovering capsule inside a low-pressurized tube, supported by pylons, which can reach speeds of up to 760 mph. According to Hyperloop CEO Dirk Ahlborn, within about 10 years and with about $16 billion, Hyperloop could become a reality. He believes it would it would be easy to put together, the challenge is to come up with a good business model.

As with High Speed Rail, there are many unanswered questions and hurdles with Hyperloop. However, it does appear to be cheaper, faster and able to be completed more quickly than the bullet train and would be less environmentally intrusive.

Moreover, for taxpayers, it doesn’t appear that public dollars are being spent on the design of this project. Unlike High Speed Rail, the Bay Bridge and the Twin Tunnels projects, keeping this project in the private sector – at least in the concept and design stage – is resulting in some fairly notable progress in a short period of time.

In addition to the Hyperloop concept, rapid advances have been made with driverless cars. Fuel efficient personal vehicles directed by computers show great promise and the technology is no longer theoretical. Google has already built a prototype. And best of all, they can operate on an existing infrastructure project which we call roads.

High Speed Rail’s cost dwarfs all other public infrastructure projects by many factors.  Before we commit more money to this project – whose funding is very much in doubt – shouldn’t we be sure there isn’t a better and cheaper alternative?

Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.

Analysis of the Reasons for San Diego Police Department Employee Departures

Summary:  The San Diego Police Officers Association and, to some degree, the San Diego media has long held that low pay was a significant factor in the department’s attrition rate that required pay increases to solve. A recent City-commission study that found the SDPD’s compensation (base pay range + cost of benefits) was near the bottom of the cities surveyed has prompted widespread support for further pay increases for the SDPD.

A review of all available data demonstrates that the attrition rate for the SDPD is overwhelmingly driven by retirement, not officers leaving for other agencies. In fact, the rate of officers leaving for other agencies in the past five years has dramatically declined from the prior five year period and has never represented as much as 1% of the total force in any given year. In the two most recent years, 2013 and 2014, retirement accounted for 60% of the total attrition rate and officers leaving for other agencies accounted for only 10%.

Moreover, the staffing shortfall itself would have been entirely avoided had the City not cancelled or greatly reduced the number of budgeted new recruits to hire over the past ten years.

Further, we find a pair of serious issues with the City-funded salary survey. First, the survey incorporates cities from entirely different markets, such as the Bay Area, LA-area, etc. many of which, such as San Francisco, have dramatically higher costs of living and higher rates of public pay in general. After restricting the comparison to only those cities within San Diego County, the pay disparity found is greatly reduced.

Additionally, the City passed a series of non-pensionable pay raises beginning in FY2014 which are not captured in the study’s analysis of base pay ranges. Consequently, the pay disparity reported is overstated.

Finally, we look at the theory arguing for an increase in public pay to match those of nearby agencies with higher level of pay and find it severely misguided. When job openings for 25 positions are met with over 3,000 applicants, implementing agency-wide pay raises in an attempt to retain the less than 1% who depart for other agencies in any given year is not merely ineffective, it is fiscally irresponsible.

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“The San Diego Police Department is woefully understaffed and has clearly shown, over an extended period of time, it cannot correct its staffing crisis without increasing the compensation of sworn police officers and recruits.”
– Jeffrey T. Jordan, VP, San Diego Police Officers Association

On the contrary, the San Diego Police Department’s (SDPD) current staffing shortfall is the result of repeated City decisions that have prevented thousands of prospective recruits who wish to serve from doing so.

Presently, the department is short approximately 250 officers from its 2018 targeted goal of 2,128 budgeted sworn staffing positions.

This shortfall, rather than being caused by uncompetitive salaries that are insufficient to attract or retain officers, is the result of events that demonstrate just the opposite — the City stopped or greatly reduced hiring in the face of thousands of prospective recruits willing to join. Specifically, the City cancelled or reduced scheduled academy classes that would have otherwise brought in over 400 new officers since 2004, more than enough to completely alleviate the current shortfall.

The City’s Independent Budget Analyst Office (IBA) reported that during 2004 and 2005 the City canceled five budgeted academy classes which “could have resulted in an infusion of 150-175+ new recruits.”

In retrospect, this cancellation could not have occurred at a worse time. The City would experience a higher-than-expected attrition rate in the coming years — driven predominantly by officers leaving for retirement.

In 2007, the IBA warned that 251 officers would take advantage of the Deferred Retirement Option Plan (DROP) in the next five years and that retirement would be the largest component of officer attrition going forward. They further advised that It could take 3-5 years to return to more typical sworn staffing levels. This will depend largely on the City’s ability and efforts to recruit new qualified candidates.” (Emphasis added.)

Unfortunately, the City’s ability to recruit new candidates would be seriously compromised when budget decisions in FY2009 and FY2010 resulted in the City cutting its quarterly academy class sizes from 50 to 25. In FY2011 the City cancelled all but one academy class, a decision that “resulted in a lost opportunity to add approximately 57 additional recruits.”

And what did happen after the hiring freeze of 2011 ended? The SDPD received over 3,000 applicants for just 25 positions in its first academy class of 2012, according to 10News.  This is symptomatic of a larger trend – a tremendous, unmet demand to work in law enforcement in the San Diego area. For example, the following year the nearby San Diego County Sheriff’s Department received over 4,000 applicants for their 275 deputy positions.

Further, when the City authorized increasing the academy class size to 43 in FY2015, the first class easily reached capacity, with 41 new recruits and an additional five officers who are leaving other agencies to come work for the SDPD. (Classes are authorized to accept slightly more than the budgeted amount of 43 to accommodate for potential drop-outs.) With four classes scheduled for the year, up to 172 new recruits could be added by close of FY2015.

THE DATA

An analysis of the data does not support the assertion that officers leaving the San Diego Police Department to work at other agencies is the primary cause of the staffing shortfall.

Despite an abundance of prospective recruits eager to work for the SDPD at current compensation levels, the union has seized upon the current shortfall as an opportunity to lobby for higher wages. The union has long stated (as far back as 1985) that paying salaries less than competing agencies will result in a high rate of attrition as SDPD officers leave for greener pastures elsewhere.

Yet recent data reveals this is simply not true. Over the last five years, the SDPD lost an average of 103 police officers a year, with only 13 a year going to other agencies. Even assuming that all officers leaving for other agencies left for higher pay, this represents only a small minority of SDPD departures, and less than 1 percent of the entire force lost to other agencies per year.

Recent increases in the overall attrition rate is overwhelmingly driven by an increase in retirement — in both 2013 and 2014 retirement accounted for 60 percent of the attrition rate, with officers leaving for other agencies accounting for only 10 percent of departures.

The San Diego County Sheriff’s Department is frequently cited by the union as a potential poacher for underpaid SDPD officers. Yet the Sheriff’s attrition data says otherwise. Since 2010, only a total of 17 SDPD officers transferred to the Sheriff’s Department, with 11 arriving in 2014. However, the Sheriff’s Department itself lost 16 officers to other agencies in both 2013 and 2014. This would suggest that the SDPD’s recent attrition rates are not the result of an SDPD-specific crisis, but are in line with similar agencies of their size and region.

Nonetheless, the City implemented an officer retention program beginning in 2014 that authorized a seven percent raise in non-pensionable pay over the next five years for all sworn officers.

Additionally, the City expanded its officer retention program in 2015 with a $3.2 million expenditure for increased overtime pay. Despite this, a recent study comparing SDPD compensation with other California agencies has prompted everyone from the union to the Mayor to call for further pay increases.

Notably, the summary findings from the study compares base pay ranges only, which omits the 7 percent salary increase in non-pensionable pay and additional overtime authorized for the SDPD beginning in FY2014. It thus overstates the pay disparity reported.

Further, the study’s surveyed employers include cities from entirely different markets, such as San Francisco, Oakland, and San Jose. In addition to being located in opposite ends of the State, the Bay Area cities have dramatically higher costs of living than San Diego. Consequently, the average salaries of all government employees in these cities, not just police officers, are significantly higher than those found in San Diego or the San Diego area generally.

A more meaningful comparison would be restricted to competing agencies in the San Diego area only; doing so greatly reduces the pay disparity found.

San Diego Police Department
Base Pay Midpoint as Percent of Market Average by Job Title

20150114-CPC_Fellner_SDPD-1a

The study reported that the SDPD’s base pay midpoint ranged from 78% to 90% of the “market” average, as represented by the blue bar in the chart above, with the “market” defined as the 19 statewide employers surveyed. However, if the comparison is restricted to the six cities located within San Diego County plus the San Diego County’s Sheriff Department, the SDPD’s base pay ranges from 84% to 98% of the average.

THE THEORY

Flawed logic underlies the theory that pay parity is essential to retaining trained police officers.

Even if the current staffing shortfall is not caused by low pay and even if officers going to other agencies are a much smaller component of attrition than retirement, should not SDPD salaries be increased to parity with nearby, competing agencies?

Two factors are important when considering this question. The first is that such a salary policy would guarantee ever-increasing levels of public pay and taxation. It would entail every agency presently paying “below market” rates increasing its pay to the higher rates paid by other agencies, which in turn will now use that level as its salary baseline, which the follower-agencies would then seek to match, and so on and so forth.

Additionally, the argument assumes that competing agencies are capable of absorbing any and all lower-paid police officers. There are, however, only a finite number of positions at competing agencies. So the idea that any imbalance in pay would result in a mass exodus from one agency to the other is simply not plausible.

Decisions whether salary levels are adequate should be based on whether or not sufficient talent is being attracted, and subsequently retained, at current salary levels. We have seen the SDPD has no trouble attracting an excess of applicants and recruits, when the city chooses that course. Additionally, the number of officers leaving for other agencies has been extremely modest over the past five years, never representing even 1 percent of the force in any given year.

The first half of FY2015 data does project that 24 of this year’s projected 136 departures will leave for other agencies. This mild uptick is likely attributable to the recent increase in hiring authorized by the Sheriff’s Department and other agencies that are seeing their budgets return to pre-recession levels. As noted above, this pull is not something perpetual that can go on indefinitely.

Even in an abnormally higher year, the number of officers leaving for other agencies is a small fraction of the total attrition rate, and represents a mere 1.3 percent of the total force. Is it really appropriate to implement agency-wide pay raises for such a small minority, particularly when thousands of willing applicants want to join the ranks at current pay levels?

CONCLUSION

With half of the force eligible for retirement by 2017, it is likely the attrition rate will continue to grow in the coming years.

To address its staffing shortfall without creating an unnecessary additional burden on taxpayers, the City has several options. It can:

  1. Maintain or modestly expand academy class size while continuing to focus on improving recruitment methods.
  2. Prioritize the importance of recruitment to avoid eliminating or reducing academy classes in future years.
  3. Reform pensions to encourage the most experienced and valued officers to stay past the average SDCERS Safety retirement age of 51. A change to pension formulas that would allow for maximum benefits to be received at 55, instead of 50, would help. Benefits could still be available as young as 50, but on a sliding penalty scale similar to what Social Security employs.
  4. Consider implementing service contracts for new recruits that incentivize them to stay with the SDPD for a set period of time.

In sum, the current shortfall is predominantly caused by two features: an artificial restriction on the supply of available labor and an abnormally high rate of retirement incentivized by lucrative pensions that average $94,425 a year.

Ironically, not only will an increase in pensionable compensation fail to address the true cause of the problem, it will further exacerbate the city’s primary cause of attrition – retirement – by increasing the average pension and corresponding incentive to retire early.

The claim that the SDPD’s staffing shortfall was created because of low pay contradicts all available evidence. Policies based on this claim will not only fail to address the source of the problem, but also create an unnecessary financial burden for the City and its taxpayers.

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About the Author:  Robert Fellner is Research Director for TransparentCalifornia.com, a joint project of the California Policy Center and the Nevada Policy Research Institute.

Has Sacramento really balanced the state’s budget?

Thanks to Proposition 30 with its retroactive tax increase and an improving economy, the state claims that it has balanced its General Fund budget.  This may be technically correct but ignores some very unpleasant realities.

Claiming to have balanced the budget ignores the growing unfunded liabilities associated with public employee pensions and other unfunded retirement benefits, mainly health care.  This also ignores the fact that the state has fallen behind in maintenance and expansion of its infrastructure.

Ignoring these liabilities is possible because state and local governments in California use cash accounting.  Except for very small companies, private sector businesses are required to use accrual accounting under which increases in liabilities are required to be recorded in profit and loss statements and major assets have to be depreciated with depreciation showing up on the profit and loss statement.

Under cash accounting, only the year’s actual cash outlays are recorded in the budget.  If the state or local government doesn’t make a pension payment, it is not recorded as part of the year’s expenses.  For retiree health care, these expenses typically aren’t even funded. Even though these obligations accumulate indefinitely and are the obligation of future taxpayers, they are not required to be recognized on public agency balance sheets as long term liabilities. Similarly, the cost of  deteriorating roads and other infrastructure aren’t recorded anywhere in state and local governments’ financial statements.  There aren’t any depreciation schedules and the accumulating costs of deferred maintenance and essential expansion of the state’s infrastructure are not recorded.

How bad is this problem?  Until recently, it’s been very difficult to find and summarize these financial problems.  However, as highlighted in a recent Los Angeles Times article by Marc Lifsher, California Pension Funds are Running Dry, there is a new data source thanks to the efforts of the California state controller John Chiang (who was just elected state treasurer).  The Controller’s office has assembled data from 130 state and local pension funds and other data at ByTheNumbers.sco.ca.gov.

The following are two charts from the state controller’s website under the heading “Interesting Charts.” They are annotated to illustrate the problems that should concern us.

Total California Public Pension Fund Assets
Change Between 2003 and 2013

20150114_Fletcher_Pensions-1

As can be seen on the above chart, statewide defined benefit pension fund assets suffered a loss of 30 percent in the 2008 recession. Five years later, they have not even recovered to their pre-recession values. During this time pension liabilities have continued to grow.  How big is this problem?

Total California Public Pension Unfunded Liabilities (Officially Recognized Amount)
Change Between 2008 and 2013

20150114_Fletcher_Pensions-2

This second chart, above, shows that during the five year period between 2008 and 2013 the official unfunded liabilities of these defined benefit pension funds has grown 200 percent from $65 billion to $198 billion.  This is almost twice the size of the state’s current year General Fund budget of $107 billion.

Even this total understates the problem.  For example:

(1)  The state’s pension funds assume an investment return of 7.5 percent per year or higher and also assume there will be no recessions such as in 2008.  Single-employer private sector pension funds assume a more conservative rate of return closer to 5.0 percent per year.  California’s unfunded pension liability would increase by another $200 billion or more if a more conservative investment rate of return is used such as 5 percent (ref. “Calculating California’s Total State and Local Government Debt“).

(2)  Retiree health care expenses are largely unfunded but are an obligation for the state’s taxpayers just like pension benefits.  The best estimate we’ve see for unfunded retiree health care is $150 billion, approaching the value of unfunded pension obligations.

(3)  What about infrastructure maintenance and expansion to meet the state’s growth requirements?  The current year’s value of these costs would be reflected as depreciation expenses under accrual accounting that is required for private sector financial statements. In 2012 the American Society of Civil Engineers estimated the current unfunded infrastructure requirement necessary to upgrade California’s roads, bridges, ports, rail, dams, aqueducts and other civil assets at a staggering $650 billion (ref. “2012 Report Card for California’s Infrastructure“).

In addition to these state obligations we can’t ignore unfunded entitlements for federal Medicaid and welfare payments.  These are beyond the scope of this article but add to the problem we’re concerned about, rapidly growing unfunded obligations that will bury future taxpayers and crowd out other essential public spending.

We should also note that state and local government pension systems are not covered by Employee Retirement Income Security Act (ERISA) that single-employer private sector pension plans must conform to.  ERISA has strict requirements for minimum funding of pension plans, defines what is a reasonable rate of investment return in valuing pension fund assets, and dictates actions that must be taken if pension fund assets drop below a certain level.  None of these rules apply to California’s public employee pension funds.  ERISA also requires that pensions be funded during an employee’s working years. The cost of benefits earned today cannot be passed on to future pension fund contributors or taxpayers as can happen with public employee pension plans.

There is also an equity issue.  Should future taxpayers be required to pay for retiree pensions and health care that were earned years earlier?  The earlier taxpayers got the benefit of the public employees services without paying the full cost of these services.  These future costs will crowd out spending on schools, infrastructure, and other items.

Are we anti-public employee for questioning the level of post retirement benefits or their underfunding?  That’s not our intention.  Politicians and unions are not doing these employees any favors by underfunding their retirements.  Future taxpayers will not be able to cover the costs of these underfunded benefits and also maintain the schools, infrastructure, and other government services they need.  There will be a day of reckoning when it’s clear that there isn’t enough money set aside for these obligations and we can’t raise taxes enough to cover the difference.  We’ll be forced to recognize that all our debts and unfunded obligations can’t be met.  There won’t be any winners when this day arrives.  Nationwide, the amounts of unfunded retirement benefits, debts, and entitlements are too large for a federal bailout.

There is also an element of “heads I win tails you lose” to this issue.  The true cost of public employee retirement benefits, pensions and health care, are understated by using optimistic financial assumptions and by passing on a significant portion of these costs to future taxpayers.  However, as it stands today, the bill for any shortfall is totally the taxpayers responsibility.

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About the Author:

William Fletcher is a business executive with interests in public finance and national security. He retired as Senior Vice President at Rockwell International where most of his career was spent on international operations and business development for Rockwell Automation. Before joining Rockwell, he worked for Bechtel Corporation, McKinsey and Company, Inc., and Combustion Engineering’s Nuclear Power Division, and was an officer and engineer in the U.S. Navy’s nuclear program. His international experience includes expatriate assignments in Hong Kong, Europe, the Middle East, Africa and Canada. In addition to his interest in California’s finances, he is involved in organizations dealing with national security and international relations. Fletcher is a graduate of Tufts University with a BS degree in Engineering and a BA degree in Government. He also graduated from the U.S. Navy’s Bettis Reactor Engineering School.

When Borrowing $142.4 Billion for School Construction Isn't Enough

On January 12, 2015, the Sacramento Bee reported that “school-construction and home-building groups have launched an effort to qualify a $9 billion school bond for the November 2016 ballot…The last state school bond was in 2006, and the pot of new construction and modernization money is virtually empty.”

See California School Builders, Others to Gather Signatures for November 2016 Bond Measure

If the proposed bond measure qualifies for the ballot, its title will be the “Kindergarten Through Community College Public Education Facilities Bond Act of 2016.” Read the proposed text and the “Findings and Declarations” to justify the bond measure:

Kindergarten Through Community College Public Education Facilities Bond Act of 2016 – Request for Title and Summary for Proposed Initiative

According to the Findings and Declarations, the bond measure will “provide a comprehensive and fiscally responsible approach for addressing the school facility needs for all Californians.”

What it doesn’t mention is that California voters since 2002 have authorized the state, K-12 school districts, and community college districts to borrow a total of $142.4 billion for K-12 school and community college construction.

It also doesn’t mention that bond measures authorize governments to borrow money via bond sales and then pay it back over time, with interest. That $9 billion will likely end up costing about $20 billion over 30-40 years. The $142.4 billion authorized since 2002 for educational construction will likely end up costing $300 billion or more.

Finally, it doesn’t mention that the State of California already has $75.7 billion in outstanding bond debt and an additional $25.7 billion in authorized-but-unissued bonds. Note also that the State of California has not yet sold $9 billion of the $9.95 billion it is authorized to borrow via bond sales for California High-Speed Rail.

Obtain a PDF version of the list of 870 state and local bond measures approved by California voters since 2002 for K-12 school district and community college district construction:

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Kevin Dayton is the President & CEO of Labor Issues Solutions, LLC, and a policy analyst for the California Policy Center. Dayton is the author of frequent postings about generally unreported California state and local policy issues at on the California Policy Center’s Prosperity Forum and Union Watch, as well as well as on his own website LaborIssuesSolutions.com. Follow him on Twitter at @DaytonPubPolicy.

Seven Years Ago, Wall Street Was the Villian, Now It Gets To Call the Shots

The recent passage by Congress of new legislation favorable to loosening controls on risky Wall Street trading is just the most recent example of the consolidation of plutocratic power in Washington. The new rules, written largely by Citibank lobbyists and embraced by the Obama administration, allow large banks to continue using depositors’ money for high-risk investments, the very pattern that helped create the 2008 financial crisis.

This move was supported largely by the establishment in each party. Opposition came from two very different groups: the Tea Party Republicans, who largely represent the views of Main Street businesses, and a residue of old-line progressive social democrats, led by Massachusetts Senator Elizabeth Warren.

Support for big finance is no surprise from Republicans, who are used to worshipping at the altar of Wall Street. But the suborning of “progressivism” to Wall Street has been a permanent feature of this administration. From the onset of his presidential run, Barack Obama had strong ties to Wall Street grandees. New York Times Wall Street maven Andrew Ross Sorkin noted in 2008 how Obama had “nailed down the hedge fund vote”.

The ultra-rich so backed the president that, at his first inaugural, noted one sympathetic chronicler, the biggest problem for donors was finding parking space for their private jets. Since then, despite occasional flights of populist rhetoric, the president has kept close ties with top financial firms, including the well-connected Jamie Dimon, chairman of JP Morgan, often called Obama’s “favourite banker”. He appears to have been instrumental in getting Democrats to support the recent loosening of financial controls on big banks.

These Wall Street connections have continued to play dividends for the president, in terms of contributions. The financiers benefited from Obama’s choice of financial managers, such as former treasury secretary Tim Geithner, widely known as a reliable ally of the financial sector. (He liked to explain his support by equating its importance to that of the technology and manufacturing industries.) To no sensible person’s surprise, Geithner, when he left the Treasury last winter, found his reward by joining a large private equity firm. (By way of completing the circle, Geithner’s successor, Jacob Lew, used to work for Citibank.)

The Justice Department has also been cosy with the plutocracy. Attorney general Eric Holder allowed Wall Street a kind of “get out of jail free card” by failing to launch tough prosecutions of the grandees. In contrast to the situation under previous administrations, both Republican and Democratic, the financial plutocrats have not been forced to pay for their numerous depredations. Instead, most prosecutions have been aimed at low-level traders, Ponzi schemers or inside traders.

So if you still think 2008 and the financial crisis changed everything, still think of it as a progressive triumph, think again. Instead of the brave new world of reformed finance, what’s been created in the US is something close to a perfect world, policy-wise, for the plutocrats. The biggest rewards have come from an economic policy, backed by the Federal Reserve and the administration, that has maintained ultra-low interest rates. This has forced investors into the market, at the expense of middle-class savers, particularly the elderly. The steady supply of bond purchases has essentially given free money to those least in need and most likely to do damage to everyone else.

The results make a mockery of the Democrats’ attempts to stoke populist sentiments. In this recovery, the top 1% gained 11% in their incomes while the other 99% experienced, at best, stagnant incomes. As one writer at the Huffington Post put it: “The rising tide has lifted fewer boats during the Obama years – and the ones it’s lifted have been mostly yachts.” If this had occurred during a Republican administration, many progressives would have been horrified. But Democrats, led by New York senator Charles Schumer, Wall Street’s consigliere on the Hill, have been as complicit as Republicans in coddling Wall Street. Democrats, for example, despite their rhetoric about inequality and fairness, have refused to challenge the outrageous discount on taxes for capital gains as opposed to income. A successful professional making $300,000 a year is often taxed at rates twice as high as the rate paid by hedge fund investors, venture capitalists, tech entrepreneurs and Wall Street stock jobbers.

At the same time, the Obama years have been something of a disaster for Main Street, where most Americans work. A 2014 Brookings report revealed that small business “dynamism”, measured by the growth of new firms compared with the closing of older ones, has declined significantly over the past decade, with more firms closing than starting for the first time in a quarter of a century.

Small banks, long a critical source of funding for small businesses, have also been pummelled by the very regulatory regime that also allows mega-banks to enjoy both “too big to fail” protections as well as their sacred right to indulge their most cherished risk-oriented strategies. In 1995, the assets of the six largest bank holding companies accounted for 15% of gross domestic product; by 2011, aided by the massive bailout of “ big banks”, this percentage had soared to 64%.

These trends do much to explain what happened in the recent midterm elections, which saw a massive shift of middle- and working-class voters, especially whites, to the Republicans. Increasingly, Americans suspect that the economic system is rigged against them. By a margin of two to one, according to a 2013 Bloomberg poll, adults feel the American Dream is increasingly out of reach. This pessimism is particularly intense among white working-class voters and large sections of the middle class .

The other major cause for the Democratic demise in November was the low turnout among minority voters. They certainly have ample reason to be indifferent. Both African American and Latino incomes have declined during the current administration, in large part because neither group tends to benefit much from the appreciation of stocks and high-end real estate.

In caving in to Wall Street and its economic priorities, members of both parties have demonstrated where their primary loyalties lie. Amid the obscene levels of compensation going to the financial grandees, it seems the ideal time for politicians, right or left, to challenge Wall Street’s control of Washington. High finance has so devastatingly rocked the world of the middle and working classes. Voters, it might be thought, now need leaders who will take these grandees down a notch or two.

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About the Author:  Joel Kotkin is executive editor of NewGeography.com and Roger Hobbs Distinguished Fellow in Urban Studies at Chapman University, and a member of the editorial board of the Orange County Register. His newest book, The New Class Conflict is now available at Amazon and Telos Press. He is author of The City: A Global History and The Next Hundred Million: America in 2050. His most recent study, The Rise of Postfamilialism, has been widely discussed and distributed internationally. He lives in Los Angeles, CA. This piece first appeared at The Guardian and is republished here with permission.

Average CalPERS Pension Up To 5 Times Greater Than Comparable Social Security Payouts

CalPERS officials are fond of saying that their average pension benefit is only about $31,500 – suggesting that CalPERS members’ benefits are at Social Security-type levels.

On this basis, they argue it’s a “myth” that public pension benefits are excessive.

But is that really true? What happens when something like Social Security’s benefit assumptions – a full career of employment and minimum income levels – are used in the comparison?

When accounting for these factors, CalPERS is unable to hide behind the misleading cover of a raw average – CalPERS benefits are up to 5 times greater than the comparable Social Security payout.

We filtered the 2013 CalPERS pension data for retirees with at least 30 or more years of service credit to create parity in the comparisons between the Social Security benefit estimates, which assume 35 years of employment and a retirement age of 64 and 4 months. Social Security estimates were generated with the Social Security Administration’s Quick Calculator Benefit Estimates tool in October, 2014. CalPERS 2013 data is provided by TransparentCalifornia.com. By contrast, the average age of retirement for CalPERS members is only 60.

Next, we analyzed CalPERS retirees by their pensionable compensation. The top pensionable compensation bracket is greater or equal to $117,000 – the maximum taxable earnings limit for Social Security. The remaining brackets move down in 25% increments from there.

20150102_Fellner_PvsSS-1

While the CalPERS values above represent the actual average pension received for the 2013 year, the Social Security benefit is an estimated figure. The SSA’s Benefit Estimator Tool requires a final salary, similar to pensionable compensation, in order to generate its estimates. We used the average pensionable compensation of the respective CalPERS retirees being compared to as the final salary for estimating the comparable Social Security benefit.

For example, the actual average pensionable compensation of all full career CalPERS retirees with a pensionable compensation of greater or equal to $117,000 was $146,250. Therefore, we used $146,250 as the final salary for generating the comparable Social Security benefit – $26,292.

These values, along with the average years of service of the respective CalPERS retirees, are displayed in the table below.

20150102_Fellner_PvsSS-2b

As shown above, CalPERS retirees with a reported pensionable compensation of at least $117,000 or more received an average 2013 pension benefit of $126,833. Additionally, the average years of service credit for these retirees was 33.85 and their average pensionable compensation was $146,250. By comparison, an employee who worked at least 35 years under Social Security and had a final salary of $146,250 can expect to receive a pension benefit of $26,292 in 2014.

Said differently, the CalPERS retiree with a pensionable compensation of at least $117,000 received a pension benefit nearly 5 times greater than a comparable private sector employee can expect to receive from Social Security. Those in the $87,750-$117,000 bracket received a benefit nearly 4 times greater than the comparable Social Security amount, while those with a final salary of less than $87,750 were receiving benefits over 3 times the comparable Social Security benefit.

It should be noted that the comparison of Social Security to CalPERS is not an apple to apple comparison. Most private employees participate in a defined contribution plan that will supplement their Social Security benefits. On the other hand, public employees who do not participate in Social Security are also not responsible for paying Social Security taxes. Further, CalPERS provides extremely generous health benefits for all of its members, regardless of income level, which are not captured in the values quoted above. Currently, these health benefits can cost up to $18,000 a year.

Nonetheless this comparison is a useful starting point to provide context for the value of CalPERS benefits, as opposed to obscuring them by quoting raw averages only.

Another striking inequity is the age of retirement a private sector worker needs to reach to receive full benefits, compared with a CalPERS retiree.

There is enormous value in the ability to retire at an earlier age rather than at a later one. For CalPERS retirees, they may retire as early as 55 and receive full benefits that are significantly greater than private sector retirees who, on average, have to work more years and retire later at life. For CalPERS safety officers (police/fire) they may retire as early as 50 and receive their maximum benefits.

This structure further compounds the disparity between CalPERS benefits and comparable Social Security benefits. Not only are CalPERS retirees receiving benefits that dwarf what Social Security can offer; they are able to retire up to a full decade earlier than private sector workers as well.

Given the cap on Social Security benefits, the trend demonstrated above is not surprising. As the maximum Social Security benefit one could receive in 2014 is capped at $31,704, compared to the lack of any cap whatsoever for CalPERS benefits, those public employees who receive larger salaries are going to receive exponentially greater pension benefits than what Social Security offers.

The aim of Social Security is to be a progressive tax that takes from those earning more and, consequently, least in need of assistance, and gives to those who earn less and are more in need of assistance in retirement. CalPERS, however, is essentially a wealth maximizing system. It provides lavish pension benefits for its members, with the highest earners receiving the largest share.

Perversely, these benefits are primarily funded by taxpayers who receive dramatically reduced retirement benefits from Social Security and, subsequently, are faced with a burden the CalPERS full-career retiree is immune from – the need to defer present spending in an attempt to supplement their meager Social Security benefits once in retirement.

As troubling as the inequity of CalPERS is, the more pressing issue is that it’s simply not sustainable in the long run. There are good reasons why defined benefit pension systems are heading towards extinction in the private sector.

The public sector, however, has held onto the defined benefit plan system. Given the substantial benefits CalPERS provides to their members, public employees and their unions have strong incentives to lobby on its behalf.

While a private firm would jettison any system that produces the long term liability associated with California’s defined benefit plans, politicians have little to no incentive to act on behalf of the taxpayers. The benefits received are immediate and relatively concentrated, while the costs are widely dispersed. Further, while some of the cost is beginning to be felt today, the lion’s share can be delayed for future generations, a demographic that has been traditionally ignored by today’s politician.

It is imperative that Californians recognize the true value, and cost, of a CalPERS pension, and recognize the urgent need for reform measures such as those that have been discussed exhaustively elsewhere.

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About the Author:  Robert Fellner is Research Director for TransparentCalifornia.com, a joint project of the California Policy Center and the Nevada Policy Research Institute.