When speaking about pension burdens on California’s cities and counties, a perennial question is how much are the costs going to increase? In recent years, California’s biggest pension system, CalPERS, has offered “Public Agency Actuarial Valuation Reports” that purport to answer that question. Notwithstanding the fact that CalPERS predictive credibility is questionable – i.e., they’ve gotten it wrong before – these reports are quite useful. Before delving into them, it is reasonable to assert that what is presented here, using CalPERS data, are best case scenarios.
In partnership with researchers at the Reason Foundation, the California Policy Center has compiled the data for every agency client of CalPERS, including 427 cities and 36 counties. In this summary, that data has been distilled to present two sets of numbers – payments to CalPERS for the 2017-2018 fiscal year, and officially estimated payments to CalPERS in the 2024-25 fiscal year. In calculating these results, the only assumption we made (apart from the assumptions made by CalPERS), was for estimated payroll costs in 2024. We used a 3% annual growth rate for payroll expenses, the rate most commonly used in official actuarial analyses on this topic.
So how much more will cities and counties have to pay CalPERS between now and 2024? How much more will pensions cost, six years from now?
On the table below, we provide information for the 20 cities that are going to be hit the hardest by pension cost increases. To view this same information for all cities and counties that participate in the CalPERS system, download the spreadsheet “CalPERS Actuarial Report Data – Cities and Counties.”
CalPERS Actuarial Report Data
The Twenty California Cities With the Highest Pension Burden ($=M)
If you are a local elected official, or if you are an activist, journalist, or anyone else with a keen interest in pensions, these tables merit close scrutiny. Because they not only show costs estimates today, and seven years from now, but they break these costs into two very distinct areas – the so-called “normal” costs, which are how much employers have to pay into the pension fund for current workers who are vesting one more year of future benefits, and the “catch-up” costs, which are what CalPERS charges employers whose pension plan is underfunded.
Take the first city listed, Millbrae. By 2024, we predict Millbrae will have the highest total pension payments of any city in California that belongs to the CalPERS system.
The table presents are two blocks of data – the set of columns on the left show current costs for pensions, and the set of columns on the right show the predicted cost for pensions. In all cases, the cost in millions is shown, along with the cost in terms of percent of total payroll.
Currently, as can be seen on the table, for every dollar it pays active employees in base wages, Millbrae must contribute 59 cents to CalPERS. This does not include payments to CalPERS that Millbrae collects from its employees via withholding. The same data show that, by 2024, for every dollar Millbrae pays active employees in base wages, they will have to contribute 89 cents to CalPERS. Put another way, while Millbrae may expect its payroll costs to increase by $1.4 million, from $6.3 million today to $7.7 million in six years, their payment to CalPERS will increase by $3.1 million, from $3.7 million today to $6.8 million in 2024.
But here’s the rub. Nearly all of this increase to Millbrae’s pension costs are the “catch-up” payments on the city’s unfunded liability. In just six years Millbrae’s payment on its unfunded liability will increase by 99%, from $2.9 million today to $5.8 million in 2024.
What are the implications?
It is difficult to overstate how outrageous this is. Here’s a list:
1 – Virtually every pension “reform” over the past decade or so has exempted active public employees from helping to pay down the unfunded liability via withholding. Instead, their increased withholding – in some cases supposedly rising to “fifty percent of pension costs” (the PEPRA reforms) – only apply to the normal contribution.
2 – In order to appease the unions who, quite understandably, lobby for the lowest possible employee contributions to pension funds, the “normal cost” is calculated based on financially optimistic projections. The less time an actuary predicts a retiree will live, and the more an actuary predicts investments will earn, the lower the normal contribution.
3 – In order to cajole local elected officials to agree to pension benefit enhancements, the same overly optimistic, misleading projections were provided, duping decision makers into thinking pension contributions would never become a significant burden on cities and counties, and by extension, taxpayers.
4 – Because cities and counties couldn’t afford to pay down the growing unfunded liabilities attached to their pension plans, tricky accounting gimmicks were employed, where minimal catch-up payments were made in the present in exchange for bigger catch-up payments in the future. The closest financial analogy to what they did would be the “negative amortization” mortgages that were popular prior to the housing crash of 2008.
5 – The consequence of this chicanery is that today, as can be seen, catch-up payments on the unfunded liability are typically two to three times greater than the normal contribution. And it’s getting worse. In 2024, Millbrae, for example, will have a catch-up contribution that is nearly six times as much as their normal contribution.
6 – When a normal contribution isn’t enough, and the plan becomes underfunded, the level of underfunding is compounded every year because there isn’t enough money in the fund earning interest. The longer catch-up payments are deferred, the worse the situation gets.
Yet the normal contribution has always been represented as all that should be required for pension plans to remain fully funded. Just how bad it has gotten can be clearly seen on the table.
Take a look at Pacific Grove, fourth on the list of CalPERS cities with the highest pension burden. Pacific Grove is already paying 40 cents to CalPERS for every dollar it pays to its active employees. But in six years, that amount will go up to 75 cents to CalPERS per dollar of salary to active employees. And take a look at where the increase comes from: Their catch-up payment goes from 1.7 million to $4.4 million in just six years.
Why isn’t Pacific Grove paying more, now, so that it can avoid more years of having too little money in its pension plan, earning interest to properly fund future pensions? The reason is simple: Telling Pacific Grove to go out and find another $2.7 million, right now, is politically unpalatable. In six years, most of the local elected officials in Pacific Grove will be gone. But where is Pacific Grove going to find this kind of money? Where are any of California’s cities and counties going to find this kind of money?
One final point: These pension plans are underfunded after a bull market in stocks has doubled since it’s last peak in June 2007, and has nearly quadrupled since it’s last low in March 2009. When stocks and real estate have been running up in value for eight years, pension plans should not be underfunded. But they are. CalPERS should be overfunded at a time like this, not underfunded. That bodes ill for the financial status of CalPERS if and when stocks and real estate undergo a downward correction.
CalPERS, and the public employee unions that dominate CalPERS, have done a disservice to taxpayers, public agencies, and ultimately, to the individual participants who are counting on them to know what they’re doing. They were too optimistic, and the consequences are just beginning to be felt.
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As of a few days ago, high-wage earners have a new reason to leave California: their state income taxes are no longer deductible on their federal income tax returns. Can California’s union-controlled state legislature adapt? Can they lower the top marginal tax rates to keep wealthy people from leaving California? The short answer is, no, they cannot. They cannot conceive of the possibility that California’s current economic success is not because of their confiscatory policies, but in spite of them.
“A public employer shall provide all public employees an orientation and shall permit the exclusive representative, if applicable, to participate.”
– Excerpt from California State Assembly Bill AB 52, December 2016
In plain English, AB 52 requires every local government agency in California to bring union representatives into contact with every new hire, to “allow workers the opportunity to hear from their union about their contractual rights and benefits.” What’s this all about?
As explained by Adam Ashton, writing for the Sacramento Bee, “New California government workers will hear from union representatives almost as soon as they start their jobs under a state budget provision bolstering labor groups as they prepare for court decisions that may cut into their membership and revenue.”
Ashton is referring to the case set to be heard by the U.S. Supreme Court early next year, Janus v. American Federation of State, County, and Municipal Employees. A ruling is expected by mid-year. It is possible, if not likely, that the ruling will change the rules governing public sector union membership. In pro-union states like California, public sector workers are required to pay “agency fees,” which constitute the vast majority of union revenue, even if they laboriously opt-out of paying that portion of union dues that are used explicitly for political campaigning and lobbying.
Needless to say, this law is designed to allow union representatives to get to newly hired public employees as soon as they walk in the door, in order to convince them to join the union and pay those dues. But can anyone argue against union membership?
The short answer is no. To deter such shenanigans, SB 285, thoughtfully introduced by Senator Atkins (D-San Diego), adds the following section to the Government Code: “A public employer shall not deter or discourage public employees from becoming or remaining members of an employee organization.” Governor Brown signed this legislation on October 9th. So much for equal time.
So what can local elected officials do, those among them who actually want to do their part to attenuate the torrent of taxpayer funded dues pouring into the coffers of public employee unions in California? Can they provide the contact information for public employees to outside groups who may be able to provide equal time?
Once again, the answer is no. To deter access even to the agency emails of public employees, a new law bans public agencies from releasing the personal email addresses of government workers, creating a new exemption in the California Public Records Act. Those email addresses could be used by union reformers to provide the facts to public employees. How this all became law provides another example of just how powerful public sector unions are in Sacramento.
In order to quickly get the primary provision of AB 52 enacted, which allows union representatives into new public employee orientations, along with a provision to deny public access to public employee emails, both were added at the last minute to the California Legislature’s 2017-2018 budget trailer bill, AB 119. The union access to new employee orientations is Article 1. The denial of email access is Article 2.
So how are the unions preparing for the Janus ruling? By (1) making sure the union operatives get to new employees as soon as they begin working, (2) by preventing agency employers from saying anything to deter new employees from joining the unions, and (3) by preventing anyone else from getting the official agency emails for new employees in order to inform them of their rights to not join a union. That’s a lot.
So what can you do, if union reformers control a majority on your agency board or city council, and you in a position to try to oppose these unions?
First, examine the legal opinions surrounding the wording of SB 285, “A public employer shall not deter or discourage public employees from becoming or remaining members of an employee organization.” The words “deter” and “discourage” do not in any way preclude providing facts. Consider this preliminary opinion posted on the website of the union-controlled Public Employee Relations Board:
“One major concern I have is that the terms “deter” and “discourage” are not defined. What if an employee comes to an employer with questions about what it means to be a member of the union, and the employer provides truthful responses. For example, assume that the employer confirms that being a member will mean paying dues. What if that has the effect of deterring or discouraging the employee from joining the union?”
It is possible for employers to present facts regarding union membership without violating the new law. Find out what disclosures remain permissible, and make sure new employees get the information.
Another step that can be taken, although probably not by local elected officials, is to challenge the new law that exempts public agency emails from public information act requests. And apart from accessing their work emails, there are other ways that outside groups can communicate with public employees to make sure they are aware of their rights.
California’s public employee unions collect and spend over $1.0 billion per year. If the Janus vs AFSCME ruling takes away the ability of government unions to compel payment of agency fees, and imposes annual opt-in requirements for both agency fees and political dues, these unions will collect less money. How much less will depend on courage and innovative thinking on the part of reformers who want to rescue California from unionized government.
Get a state job and meet your labor rep: How state budget protects California unions, Sacramento Bee, June 21, 2017
AB 52, Public employees: orientation and informational programs: exclusive representatives, California Legislature
Janus v. American Federation of State, County, and Municipal Employees, Supreme Court of the United States Blog
SB 285, Atkins. Public employers: union organizing, California Legislature
2017-2018 budget trailer bill, AB 119, California Legislature
California Public Records Act, Office of the Attorney General
Fact Sheet – AB 52 (Cooper) & SB 285 (Atkins), California Labor Federation
Legislative Bulletin – California School Employees Association
SB 285: Public Employers Cannot Discourage Union Membership, Public Employee Relations Board
Public employee unions wield hefty Atkins stick [SB 285], San Diego Reader
California’s minimum wage is set to gradually increase to $15 by 2022, following in the footsteps of minimum wage pioneer city Seattle.
Unfortunately, the unintended consequences of Seattle’s minimum wage experiment are starting to show, both in deteriorating restaurant quality and in decreasing wages for low-income workers.
According to the latest study, Seattle’s 2016 minimum wage hike approved by the Seattle City Council appears to have pushed restaurants to deal with rising labor costs by cutting corners in hygiene. Researchers at Ball State University in Indiana concluded that overall restaurant health code violations increased by 6.4% and less severe violations increased by 15.3% with each dollar increase of the minimum wage.
Bad hygiene is gross, but it isn’t the only serious consequence of Seattle’s minimum wage increases. Researchers from the University of Washington published in June their finding that Seattle’s increase from $11 to $13 coincided with a decrease in actual wages for low income workers – the exact opposite of the policy’s intended result.
According to the study, the 2016 increase to $13 led to a 9% decrease in hours worked at low-income jobs, while hourly wages rose by 3%. This means that on average people in low-wage jobs earned around $125 less per month than they earned before. Instead of helping people in low wage jobs, significantly raising the minimum wage in Seattle has actually hurt their earning ability!
Beginning around 2009 it became clear to civic leaders and councilmembers that the City of San Diego faced serious financial challenges. A San Diego County Grand Jury in that year released a report that recommended the city file for bankruptcy. The report cited the underfunded City’s pension system as the primary underlying cause of their budget deficits. By June 2009, the City of San Diego’s independent pension system was only 66.5% funded. By 2012, the systems unfunded liabilities were well over $200 million. Apart from bankruptcy, the only solution available to San Diego was pension benefit reform.
In June 2012, voters in the City of San Diego voted 66% to 34% to enact sweeping reforms to that city’s pension benefits. The coalition that promoted this reform included advocates for taxpayers, fiscal conservatives, and local business and trade associations that wanted to improve the financial health of the city. Since then, these reforms have been challenged repeatedly in court, but thus far the entirety of the pension reform package has been upheld. Here is a checklist of things to consider for local pension reformers in other cities and counties in California:
1 – The Reform Cannot Attack “Vested Rights”:
“Vested” benefits in California under current law require public employees to receive whatever benefits they were promised when they were hired. This means that even future benefits for existing employees cannot be changed. San Diego’s reform made certain to only affect future retirement benefits for new hires. San Diego’s reform also enacted a salary cap on existing employees, which did not violate vested rights. These two steps, putting new employees onto 401K plans that will not generate unfunded liabilities, and putting a cap on pension eligible salaries for existing employees, significantly reduced the amounts the City of San Diego has to contribute to their pension fund in order to keep it solvent.
2 – Rely on a Citizen’s Ballot Initiative:
Because most city councils and county boards of supervisors are populated by local elected officials whose campaigns are overwhelmingly funded by public employee unions, it is almost impossible to rely on them to enact pension reform. But a citizen’s initiative bypasses these beholden officials and relies on local activists and concerned citizens to research, write, qualify for the ballot, and campaign for meaningful reform.
3 – Prepare to Spend Between $5 and $10 per Signature to Qualify a Measure for the Ballot:
Or more! Signature gathering almost never can be 100% completed by volunteers, and professional firms are almost universally relied upon to make up the difference. In San Diego, supporters of the reform initiative spent about $1.1 million to gather 94,000 signatures – over $10 per signature.
4 – Expect Relentless Harassment From Public Unions:
One of the reasons it costs so much to obtain signatures is because the anti-initiative forces mount well organized opposition to signature gathering efforts. Tactics used in San Diego or elsewhere in California include (a) sending people to pace in front of the signature gatherer’s table, intimidating anyone who may want to sign the petition, (b) following signature gatherers home and photographing them in an attempt to intimidate them, (c) circulating flyers and sponsoring media campaigns that present misleading information – in San Diego the anti-initiative forces paid for a radio campaign that suggested people who signed petitions might have their identity stolen, (d) deliberately having people sign the petitions using fraudulent names in order to cause the entire body of petitions to be invalidated during the verification process.
5 – Be Prepared to Repeatedly Defend the Reform in Court:
San Diego’s reform was challenged before it went onto the ballot by opponents who argued it violated the “meet and confer” rule, wherein city officials have to talk with union representatives before changing conditions of their contract. This challenge first went to the Public Employee Relations Board, packed with gubernatorial appointees who are all former labor activists. PERB, predictably, upheld the opponents accusations, but in court the judge overruled PERB and permitted the initiative to stay on the ballot. The initiative survived other pre and post ballot legal challenges, but still faces one more round, sometime in either 2017 or early 2018, at the California Supreme Court.
What reformers did in San Diego succeeded because the language of the initiative minimized the potential for legal challenges, and it succeeded because there was a critical mass of committed reform minded activists, business associations, and politicians who were prepared to stay in the fight for years. Here is the language of San Diego’s Proposition B:
PENSION REFORM – SAMPLE LANGUAGE
Amendments to the San Diego City Charter Affecting Retirement Benefits
This measure would amend the San Diego City Charter to make changes to retirement benefits. The measure would:
From its effective date until June 30, 2018:
1. Limit a City worker’s base compensation used to calculate the employee’s pension benefits to Fiscal Year 2011 levels.
2. Require that any new job classification be created only after specific findings are made that the new classification “is necessary to achieve efficiencies and/or salary savings” by consolidating job duties or creating a more efficient service delivery method.
3. Define the terns the City must use when it begins negotiations with the City’s labor unions for their contracts, unless the City Council overrides those terms with a two-thirds vote.
Provide all new hires at the City, except for sworn police officers, with a defined contribution plan modeled after a 401 (k) plan in place of a defined benefit pension plan.
Provide contributions for employees participating in the new defined contribution plan, in order to compensate for the lack of Social Security provided to City workers. The City’s maximum contribution for general City employees would be 9.2 percent of ah employee’s salary; the maximum contribution for uniformed public safety officers would be 11 percent of their salaries.
Authorize the City Council to enroll police officers in either the defined benefit or the defined contribution plan. The maximum payment to a sworn police officer hired after the measure goes into effect, under the defined benefit pension plan, would be based on the officer’s highest three years of pay, and capped at 80 percent of the average of those years.
Eliminate the defined benefit pension plan prospectively for elected officials (Mayor, City Attorney and City Councilmembers).
Eliminate, to the extent allowed by law, pension benefits for City officers or employees convicted of a felony related to their employment, duties or obligations as a City officer or employee. This may be reversed if the conviction is overturned.
Eliminate, unless otherwise allowed by law or agreement, the requirement of a majority vote by employees or retirees in the retirement system for changes that affect their benefits.
Require the City to contribute annually to the defined benefit pension plan an amount substantially equal to that required of the employee for a normal retirement allowance, but not contribute in excess of that amount.
Provide disability benefits for defined contribution plan participants who have a work-related disability.
Require the Retirement System to submit an actuarial study to the Mayor and Council regarding the impact on the pension plan “of any increases in proposed compensation or benefits” in an initial Council proposal.
Require the City to annually publish the amounts paid to City retirees, but redact their names.
Ballotpedia – San Diego Pension Reform Initiative, Proposition B (June 2012)
Ballotpedia – Pension reform: San Jose and San Diego Voters Weigh in
City of San Diego – Text of 2012 Proposition B
San Diego Union-Tribune, April 11, 2017 – Appeals court vindicates San Diego’s 2012 pension cutbacks
San Diego Union-Tribune, May 22, 2017 – [Union] Appeal says ruling that vindicated San Diego pension reform could create statewide problems
KPBS San Diego, July 27, 2017 – San Diego Pension Reform Headed for California Supreme Court