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How Local Governments Can Reform Pensions IF the “California Rule” is Overturned

In December of 2018, the California Supreme Court will hear arguments in what is generally referred to as the Cal Fire pension case. The ruling could potentially overturn what is commonly referred to as the “California Rule.” The current interpretation of the rule is that pension benefits, once increased, cannot be reduced for existing employees even for future years of service without the agency providing a benefit of equal value to the employee.

What reforms would become possible if the Supreme Court rules that changes for future years of service are not protected by the California Rule?

To demonstrate how this ruling could be a game changer and open the door to pension reform for nearly every city and county in California, this article uses the potential savings for various reform options for the County of Sonoma.

It should be noted that any changes to the pension system if there is a favorable ruling by the court would need to be made by the governing body of each agency and if they refuse to act, could also be made by the taxpayers through the voter initiative process.

Current Situation in Sonoma County

The pension system for Sonoma County employees was founded in 1945 and up until 1993 was a sustainable and affordable system that paid career employees 2% per year of service. This would mean, for example, that after a 35 year career a retiree would collect a pension equal to 70% of their final base salary. Sonoma County employees are also eligible to receive Social Security benefits. Over the first 48 years until 1993, the pension system had accrued $355 million in total pension liabilities (money owed to retirees and earned to date by current employees).

But then, due to a series of illegal pension increases back to the date people were hired in 1998, 2003, 2004 and 2006, pensions for employees with only 30 years of employment jumped (including “spiking”) to 96% of their gross pay. After the first increase, the liability had doubled from the 1993 $355 million amount to $793 million in 1999. The liability doubled again in 9 years and hit $1.9 billion in 2009. Last year, in 2017 the pension liability reached $3.34 billion, a staggering 941% growth over 24 years.

The Growth of Sonoma County’s Pension Liability
$=Billions

To pay off the soaring liability, Sonoma County issued pension obligation bonds in 1994, 2003 and 2010 totaling $597 million dollars of principal. Paying off the bonds with interest will cost taxpayers $1.2 billion on top of their normal pension contributions. Currently, the County owes $650 million in principal and interest on the bonds that will cost them an average of $43 million per year until 2030.

In addition, the County’s contribution to the pension system (including debt service on the pension obligation bonds) has grown from $8 million in 1998 to $117 million in 2017. In other words, we have a serious math problem on our hands. While tax revenues have been growing at 3% per year, pension and healthcare costs have grown by 19%. Something has to give. In Sonoma County we have two choices, do nothing and pay higher taxes for fewer services, or, if possible (depending on the outcome of the Supreme Court case), reform our pension system to make it more equitable for taxpayers and more secure for employees and retirees.

So far, money has been taken from our roads and infrastructure maintenance budgets and the County has borrowed $597 million to pay for pensions. Soon, more and more money is going to come from cuts to fire and police protection, and services for those to in need. The retroactive pension increases not properly funded have essentially created a debt generation engine that sticks our children and grandchildren with enormous debt for services received in the past.

The Pension Increases May Have Been Illegal

In 2012 responding to a complaint I filed, the Sonoma County Civil Grand Jury could not find any evidence that the County followed the law when pensions were increased. The California Government Code in Section 7507 requires that the public be notified of the future annual cost of the increase. However, records show that all of the retroactive pension increases were enacted without determining the future annual costs and the public was never notified. This is a serious issue since public notification is the only protection taxpayers have. In addition, documents uncovered by New Sonoma indicate that the agreement was for the General employees to pay 100% of the past and future cost of the increase and Safety employees to pay 50% of the cost. This requirement was never enforced by the Sonoma County Retirement Association as it should have, so the vast majority of the costs for the benefit increases have been illegally borne by the County’s taxpayers.

These same increases were enacted at the state and local level from 1999 to 2008 for almost every public agency throughout the state. Cursory investigations of other cities conducted by the California Policy Center and Civil Grand Jury’s in Marin and Sutter county found similar violations at every agency investigated. A lawsuit is currently under appeal that would void illegal increases back to the date they were enacted which would in Sonoma County’s case save taxpayers $1.2 billion over the years ahead. But even if this case fails, other reform options may be available soon as a result of a favorable supreme court ruling. Here they are:

1. Cap the Employer Contribution

A lot of problems could be fixed at the governance level if employees felt the impact of growing unfunded liabilities. As long as the current situation of the employer/taxpayer covering 100% of the unfunded liability and debt service on the bonds exists, the problem will continue to grow and reforms will be minimal because all actuarial losses fall on the taxpayer.

Capping the employer contribution at 15% of salary (still 5 times what private sector employers contribute to retirement funds for their employees) would cut pension costs in Sonoma County from $117 million to $55.4 million, a savings to the county of $61.6 million per year. And as pension costs increase over the years ahead, the employees will pay all the costs associated with the growth.

2. Split All Pension Costs 50/50 Between the County and Employees

Currently the employer contribution is 19% of payroll. The current pension bond debt service, all paid for by the employer, is 11.3% of payroll. The current employee contribution is 11.6% of payroll. Therefore Sonoma County’s total pension costs in 2017 were 42% of payroll.

Capping employer contributions at 50% of pension costs or 21% of payroll would save the county $50 million per year, a cost that would be borne by employees in additional pension contributions.

3. Provide an Opt Out for Employees to a 401k Plan

Instead of forcing employees to contribute 21% of their take-home pay to their pension, a 401k option could be created.

Existing employees could be provided with the option of moving the present value of their future pension benefit into a 401k account and opting out of the defined benefit pension system. Going forward, the County could provide them with a 10% of base salary 401k contribution which the employee could match for a 20% contribution. Then, if the employee wanted to turn their account balance into a defined benefit for life, they could purchase an annuity upon retirement using their 401k funds.

Studies show young people entering the workforce prefer the portability of a 401k plan because they don’t see themselves in the same career their entire lives. Defined benefit pension funds also punish folks who leave the system early and highly reward those that stay because they are back loaded by design.

A lot of folks might also choose this option because they may be worried about the soundness of their pension plan, which in Sonoma County’s case, they should be.

4. Improve Pension Board Governance

Require a majority of non pension fund members on the Sonoma County Employee Retirement Association (SCERA) board or move the servicing of the fund, if possible to a private entity because of the conflicts of interest that exist when board members are also part of the pension system.

5. Establish Greater Transparency

Establish a COIN Ordinance to require the County Supervisors to hire an outside negotiator during contract negotiations and to provide the public with the cost impact of any changes to the citizens ahead of approval.

6. Mandate Public/Private Pay Equity

Require the County to perform a prevailing wage study and offer new County hires salaries that are similar to what Sonoma County residents earn in the private sector for work requiring comparable education and skills.

7. Return Spending Authority to Voters 

Require voter approval of any pension obligation bonds, and require voter approval of any increases to pension formulas or increases to salaries in excess of inflation.

6. Eliminate Conflicts of Interest

Do not allow elected officials to be members of the pension system due to the obvious conflict of interest.

7. Improve Public Oversight

Create a permanent Citizens Advisory Committee on Pensions that would provide an annual study of the pension system and track the success of pension reform efforts and provide recommendations to the Board of Supervisors. All reports prepared by the committee will be posted on the Committee’s webpage on the County’s website. The committee would have the power to perform accounting and regulatory compliance audits of the Sonoma County Retirement Association, investigate any evidence of illegal acts, and recommend appropriate remedies to the Board of Supervisors. A description of any violations and any committee recommendations will be posted on the Committee’s webpage on the County’s website.

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Ken Churchill has over 40 years of business and financial management experience as founder, CEO and CFO of a solar energy company and environmental consulting firm. In 2012 after discovering the county illegally increased pensions without the required public notification of the cost he founded New Sonoma, and organization of financial experts and citizens to investigate the increase and inform the public. Information on New Sonoma and their findings and court case can be found at www.newsonoma.org.

Resources for California’s Pension Reformers

Stampede: a mass movement of people at a common impulse.
–  Merriam Webster dictionary

The pension reform stampede is about to finally overrun California’s political status-quo for three reasons.

(1) Pension debt is out of control. While official estimates are slightly lower, most reasonable estimates put California’s total unfunded liabilities for state and local pensions at around $500 billion.

(2) Required agency contributions are set to double. California’s two largest pension systems, CalPERS and CalSTRS, have both announced that within the next few years their participating agencies are going to have to at least double the amount they contribute to pensions.

(3) Active cases before the California Supreme Court, set to be decided within a year, will likely enable more meaningful pension reform measures at the state and local level.

Serious pension reform may soon become politically feasible, and it’s about time.

An indicator of how serious politicians are finally taking California’s pension crisis is exemplified by the California League of Cities Pension Project. A consensus is belatedly forming within this powerful organization that absent real reform, California’s public sector pensions are not financially sustainable.

Here are some of the groups and individuals in California who are either providing vital information, or engaging in activist efforts for pension reform:

A good place to start is the pensions section of Transparent California, a five year old website that has compiled the most comprehensive database of individual state and local government compensation and pension information possibly in the U.S., and certainly in California. On Transparent California’s All Pensions page, users can search through millions of individual pensions. On its Pension Plans page, users can search for recipient information by pension system. On its Last Employer page, users can search for recipient information by the last employer.

At least four regional groups scattered across California focus exclusively on pension reform, or devote a considerable amount of their resources to the issue of pension reform. From north to south, they are: Citizens for Sustainable Pension Plans (Marin County), New Sonoma (Sonoma County), the Contra Costa County Taxpayers Association, and the Ventura County Taxpayers Association. There are undoubtedly other regional organizations that have done important pension reform work – any suggestions for additions to this list are welcome.

Three heroic individuals who have dedicated years of volunteer time to educating the public, the media, and policymakers about public sector pensions are John Dickerson, publisher of YourPublicMoney.com, Jack Dean, publisher of PensionTsunami.com, and Ed Mendel’s CalPensions.com. If you want to learn the intricacies of pension finance, what John Dickerson has created is as good a place as any. If you want a daily archive of links to every significant report on pensions in the U.S., Jack Dean’s meticulously curated Pension Tsunami website is not only the best place to look, it’s the only place to find that information. Ed Mendel’s CalPensions offers deep analysis of pension developments in California.

Stanford University’s Institute for Policy Research issues regular assessments of California’s pension challenges including the recent Pension Math: Public Pension Spending and Service Crowd Out in California, 2003-2030, October 2017, and California Pension Tracker 2.0, an interactive database that reveals, among other things, by city or county, the total market pension debt per household. The Los Angeles based Reason Foundation presents ongoing analysis of the impact of pensions on the Pension Reform section of their website.

State-focused and national activist organizations in California include the Sacramento based Retirement Security Initiative, which is active in states across the U.S. fighting for pension reform, and the San Diego based Reform California, working for pension reform at the state level.

For continuing dialog with pension reformers the Facebook communities created by the Citizens for Sustainable Pension Plans and Californians for Pension Reform are both very good. The California Policy Center also has a Facebook page that includes extensive coverage of pensions, along with esposes of the most powerful special interest that opposes pension reform, government unions.

For years the California Policy Center has followed the pension crisis in California, and over the past few months has released several reports that, in aggregate, provide a reasonably complete summary of the challenges Californians face to get public employee pension costs under control.

Those reports, with titles that explain the specific topics, are the following: The Underrecognized, Undervalued, Underpaid, Unfunded Pension Liabilities, March 2018 – How to Restore Financial Sustainability to Public Pensions, February 2018 – How to Assess Impact of a Market Correction on Pension Payments, February 2018 – California Government Pension Contributions Required to Double by 2024 – Best Case, January 2018 – Did CalPERS Use Accounting “Gimmicks” to Enable Financially Unsustainable Pensions?, January 2018 – How Much More Will Cities and Counties Pay CalPERS?, January 2018 – If You Think the Bull Market Rescued Pensions, Think Again, December 2017 – Did CalPERS Fail to Disclose Costs of Historic Bump in Pension Benefits?, October 2017 – Coping With the Pension Albatross, October 2017 – and How Fraudulently Low “Normal Contributions” Wreak Havoc on Civic Finances, September 2017.

On the website for the California Policy Center’s “CLEO” (California Local Elected Officials) project, additional policy briefs are available to assist pension reformers, including: Graphics to Explain the Pension Crisis to Colleagues and Constituents, December 2017 – Explaining the Pension Crisis – Additional Graphics, December 2017 – Pension Questions To Ask Your Agency’s CFO, Actuary & Auditor, December 2017 – Did Your Agency Comply with the Law When Increasing Pension Formulas? – October 2017 –  Pension Reform – The San Jose Model, September 2017 – and Pension Reform – The San Diego Model, August 2017.

Edward Ring co-founded the California Policy Center in 2010 and served as its president through 2016. He is a prolific writer on the topics of political reform and sustainable economic development.

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The Mechanics of Pension Reform – Local Actions

Part 2 of 2…

Introduction

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

20160111-UW-Moore

Picturesque Pacific Grove is being destroyed by government unions.

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

Premise

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

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

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

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

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

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

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

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

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

Chapter Nine is a Game Changer

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

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

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

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

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

The Political Landscape for Chapter 9 Filings

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

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

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

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

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

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

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

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

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

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

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

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

Paying For a Chapter 9

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

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

Qualifying For a Chapter 9

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

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

Alternatives to a Bona fide Chapter 9

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

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

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

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

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

Anticipating the Opposition’s Tactics

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SUMMARY

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

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

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

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

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

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

 *   *   *

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

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

*   *   *

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Public Sector Union Reform Requires Mutual Empathy

Sorry but you would all be crying like a little b**** if the cops and firefighters that earn every penny they get in retirement were not there when your perfect make believe world falls apart so shut the f*** up. Until you do the job you have no idea what you are talking about.
–  Comment on Facebook.com/CalPolicyCenter post, June 3, 2015

This comment, made by a California police supervisor onto the Facebook page of our organization, graphically encapsulates what is entirely understandable resentment on the part of public servants to a new reality – their pay and benefits are being exposed to public debate. It would be easy to dismiss this comment as inappropriate, or to merely characterize it as an example of public sector arrogance. But that would be a huge mistake.

Compared to the lives most of us are privileged to lead, public safety employees endure unrelenting stress. While it is important to be honest about rates of police and firefighter mortality and job related disabilities, the fact that many other jobs carry greater risk of death or injury does not change the fact that public safety employees endure unique stress. It is unique not only because it can occur at any time, but because it is the very nature of their work. They face hostility and mayhem as part of their job description, and because they do that, we are enabled to feel secure in our so-called “make believe” lives.

There is a compensation premium we owe public safety employees that appropriately should exceed the premium we’ve paid in the past to those who risk their lives to protect us. Because we now live in a society where overall safety and security has never been greater. Crime rates remain at historic lows in the United States. Based on empirical data, the quality of services we receive from public safety agencies has never been higher. Better service merits higher pay.

Public safety employees deserve a premium over historical rates of pay for another reason. Crime has morphed into areas unimaginable even a generation ago – cybercrime, global terrorism, financial crimes, gangs, international criminal networks, foreign espionage, asymmetric threats – the list is big and gets bigger every year. At the same time, our expectations regarding human rights and police conduct have never been higher. Police officers today need to possess skills well beyond what sufficed in the past. This also means they should be paid more.

Which brings us to the difficult conversation that we still have to have regarding compensation. The person who made this comment was reacting to our recent post that exposed a retired firefighter – and current official for a firefighter union – who was attacking pension reformers, while collecting a pension that during 2013 (not including benefits) was $183,690. It is neither fair nor affordable to pay anyone a government pension that big. The average full-career pension and benefits for recently retired public safety employees in California is over $100,000 per year, and the average retirement age is under 60. Using conservative assumptions, a starting pension of $100,000 per year, awarded that early, is worth at least $2.5 million. Factoring in cost-of-living adjustments, it’s worth even more. This is an impossible level of retirement benefit to sustain. It prevents us from hiring more public safety employees, and it drains funds from other worthwhile government programs including not only general services, but crucial infrastructure development.

Public safety employees deserve all the respect we can give them for the jobs they do. They deserve our appreciation and our thanks. But that courtesy should not extend to routinely conceding the debate over how much they should be paid, or, for that matter, whether or not they should have so much political influence, or, to get down to the crux of it, whether or not they should be allowed to even form unions and bind local governments with collective bargaining agreements. There is NO connection between our debate over public employee compensation or related public policies, and how much we respect public employees.

Finally, the respect that citizens ought to feel towards public safety employees can be taken too far. We should respect all workers, including those whose jobs are indeed more dangerous than police work or firefighting, and including those whose jobs are tedious, laborious, dirty, and underpaying. All work is valuable. All workers deserve dignity and respect. And while the deaths of police and firefighters are always tragic, all deaths are tragic. About 2.5 million Americans die each year, and about 1.0 million of those deaths are untimely – usually from fatal accidents or terminal disease that strikes before someone is elderly. Our collective empathy must extend well beyond what we rightly owe public safety employees, or we cannot keep their sacrifices in perspective.

*   *   *

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

San Diego Police Losing Officers To Lucrative Retirements, Not Other Departments

Editor’s Note:  The following article addresses an ongoing debate:  Are local police departments in California where pension reforms have been enacted, San Diego and San Jose in particular, losing officers and new hires faster than they can replace them because of these reforms? Readers of this article are encouraged to also read the response posted on the San Diego Police Officers Association’s Facebook page, along with this tweet, and this tweet, posted in response by a VP for the San Diego Police Officers Association. Debates over the facts, assumptions, and moral issues envelop literally every facet of public sector compensation and benefits, but a few things should stand out. For example, San Diego is paying pensions to its retirees with 25 years or more of service that are significantly more than they are paying in base salary to their active officers and detectives. There’s something wrong with that picture, whether or not the pension fund is adequately funded – it is not – and whether or not, overall, San Diego’s active police officers are underpaid.

Over the past several months, San Diego media outlets have issued a flurry of news reports asserting that San Diego police officers are underpaid and that this is “why the department is losing officers.”

There’s just one problem. The facts don’t support this narrative.

Yes, 162 San Diego police officers left the force in Fiscal Year 2014, but only a handful went on to other departments. Additionally, 160 new hires were made, resulting in a net loss of two officers in a force of 1,836.

Of the 162 who left, only 17 — or just 10 percent — left the San Diego PD for another police force. 90 percent of those who left did so for retirement, medical retirement or miscellaneous reasons.  Last year, San Diego lost less than 1 percent of its officers to other agencies.

20150109_Fellner_SDPD-1b

The main driver of attrition is found in what is waiting for police officers in retirement – DROP payments that can top $500,000 and ongoing retirement payouts that are often higher than their current base pay.

According to Transparent California, in 2013, the average San Diego police officer retiree who had at least 25 years of service credit prior to retirement received an annual pension benefit of $94,425. This excludes chiefs and assistant chiefs, which would raise the average further. The average years of service for these retirees was only 28.78, suggesting that many police officers take advantage of the ability to retire as young as 50 and still receive their maximum pension benefits.

A further breakdown of this data by job title provides even more insight into why so many police officers are retiring from the SDPD. In the City’s study claiming its police officers are underpaid, it reported the average base pay for a SDPD “Police Officer I or II” to be $62,598. The average pension for retired Police Officer I or II was $76,586 in 2013, or over 20 percent more than the average salary.

A similar comparison for the positions of detective, lieutenant, and captain shows that pensions are routinely higher than average base pay.

20150109_Fellner_SDPD-2a

Part of the popular narrative is correct: Police officers are leaving the San Diego Police Department for higher pay. It’s just that they’re finding that higher pay in retirement, not in competing departments.

The U-T San Diego reported that half of San Diego police officers will be eligible for retirement by 2017. Should the SDPD find themselves facing a legitimate staffing crisis at that time, it will be because of a system that offers virtually no incentive for an officer to continue working past the age of 50, not the allure of higher paying jobs elsewhere.

Increasing pensionable compensation for current officers — something the city is considering to keep officers from leaving — will only compound the problem.

*   *   *

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.

California Pension Reformers Plan New State Ballot Initiative

A statewide constitutional initiative planned for 2014 would tackle the biggest obstacle to meaningful pension reform: vested benefits. Right now, with certain exceptions, California municipalities may not reduce pension benefits for current employees—unlike in the private sector, where employers can change the terms of employees’ current pension plans, making them less generous. The courts have said that benefit increases, even retroactive ones, constitute binding contracts that must be paid for the life of all current employees. The ballot measure, largely conceptual at this point, would allow cities to change future pension benefits. San Jose voters did that last year, voting to change benefit levels for current employees.

The initiative will probably also include a requirement that all agencies offering defined-benefit plans put them up for a vote. These plans impose debt on the public, so reformers reason that voters should have a say in whether to approve any new plans or change existing ones, as San Jose did. The measure would also likely include limits on pension-spiking and governance reforms for the union-dominated California Public Employees’ Retirement System (CalPERS).

Unions are already challenging San Jose’s June 2012 ballot initiative, as well as a similar measure San Diego voters approved that same month, in court. They understand that these reforms, if allowed to stand, threaten to demolish the status quo. San Jose officials believe that they have a strong chance to prevail because of the way their city charter is written, but not all California municipalities are charter cities. It’s unclear what a favorable court ruling for San Jose would mean for them.

The unions are waging their fight against pension reform in the hope of blunting San Jose’s effects statewide. A Monterey County superior court ruled recently that a pension initiative passed in Pacific Grove is unconstitutional because it rolls back benefits for current employees. Like San Jose, Pacific Grove is a charter city, but each city’s charter is different. The Monterey County judge ruled that Pacific Grove’s charter vests compensation power in the hands of the city council, not voters. The court reaffirmed that “what is vested in the employee is the right to earn a pension on the terms promised to him or her upon employment.” Therefore “no subsequent legislation . . . can take these rights away once given.” The Peace Officers Research Association of California (PORAC)—a union group best known for bankrolling the defenses of police officers accused of wrongdoing—funded the case, knowing that it would have statewide implications. Organizations such as PORAC will be ready when a reform initiative reaches the statewide ballot.

Meantime, CalPERS is worried that municipal bankruptcies elsewhere could undermine the state pension fund’s income stream. In San Bernardino, for example, city officials have stopped making contributions to the fund. Stockton’s bankruptcy is still winding through the courts, but a central question remains whether CalPERS must join other creditors in taking a haircut. To avoid similar debacles during future (practically inevitable) municipal bankruptcies, CalPERS is lobbying for a bill that would make it easier for the state pension fund to put liens on city assets. The city of Vallejo, which has emerged from bankruptcy, is headed into the fiscal morass again because it never embraced the kind of rollbacks that reformers say are necessary.

The now-concluded strike by Bay Area Rapid Transit (BART) workers underscores the ongoing pension struggles local governments face. Union members clearly prefer stopping work to helping pay for their benefits. As the liberal Contra Costa Times editorial board put it: “They’re already the top-paid transit system employees in the region and among the best in the nation. They also have free pensions, health care coverage for their entire family for just $92 a month and the same sweet medical insurance deal when they retire after just five years on the job.” As the editorial points out, BART’s pension and retirement-benefit debt is a whopping $636 million, while the transit system faces a $142 million operating deficit in the coming decade. BART has also piled up billions in deferred maintenance and repair costs. Something’s got to give.

Pensions will remain big news, if the BART strike is any indicator. And reformers have suffered a number of setbacks in recent months. In November, prominent San Diego pension reformer Carl DeMaio lost his bid to become mayor to Bob Filner, a union-friendly Democrat, and Democrats gained supermajorities in both houses of the state legislature, thus assuring the defeat of any pension-reform measure. Even the so-called Democratic moderates who hold increased power in Sacramento are uninterested in further reform. A year ago, mayors of California’s eight largest cities sent a letter to the state senate and assembly leadership arguing, “Cities need clear authority to modify future pension accruals and to give their employees an option to choose a lower-cost benefit.” The legislature never responded.

It remains to be seen whether reformers can generate enough funding to run a viable statewide initiative campaign. Union spokespeople continue to portray them as the tools of Wall Street and right-wing groups. But reformers—many of whom gathered in May in Sacramento to plot strategy—are a remarkably diverse group. And there’s no reason to think that last year’s setbacks will be permanent, despite the unions’ wishful thinking. “Today, we spend $1 out of every $7 on pension and benefit costs for city employees; by 2018, it will be one out of every $4,”observed San Francisco public defender Jeff Adachi, an outspoken liberal Democrat. Conservatives aren’t the only ones concerned about the problem.

Steven Greenhut is vice president of journalism at the Franklin Center for Government and Public Integrity and a contributor to City Journal’s new collection, The Beholden State: California’s Lost Promise and How to Recapture It. Write to him atsteven.greenhut@franklincenterhq.org. This article originally appeared in City Journal on July 17, 2013, entitled “Tackling the Pension Problem,” and is republished here with permission.

California Attorney General Distorts Democracy to Aid Unions

We expect all sides in politics to fight hard, given the stakes involved, but our system rests on the broad acceptance of a set of fairly applied rules. We know, for instance, that no matter how nasty the coming presidential election becomes, the loser ultimately will cede power after the final count is in. This isn’t a kleptocracy, where the only redress for the losing side is to take to the streets in a violent revolt.

Unfortunately, California Attorney General Kamala Harris’ recent misuse of power to provide a dishonest ballot title and summary for proposed pension-reform initiatives, which she opposes, comes right out of the totalitarian playbook, where those wielding power recognize no rules of decency or fairness.

We expect judges, no matter their political stripes, to apply the law as written. We expect election officials to battle election fraud no matter their personal preference for the outcome. Likewise, we expect state attorney generals, who are the head of California’s “Justice” Department, after all, to provide fair title and summaries of all initiatives submitted to that office – even ones the AG personally doesn’t like. Without any civic spiritedness, people eventually will lose faith that they can make change by following the rules.

Harris, however, is a close ally of the public sector unions. And she has designs on higher office. Those unions have an iron grip on Sacramento politics, and they are doing all they can to stop the burgeoning pension reform movement. So when California Pension Reform submitted two initiatives that would rein in the unsustainable costs of the state’s pension system, Harris decided to behave as a political operative and besmirch the office she holds by distorting the official descriptions that most voters rely upon when making their voting decision.

In January, she titled the reform measures: “Reduces pensions for public employees.” That’s flat-out wrong. Her summary was filled with distortions meant to sway voters against them. As result, last week the pension reform group dropped the initiative. They couldn’t raise the $2 million needed to gather the signatures given the overwhelming obstacle Harris put in their way.

This never was going to be a fair fight. Unions would have outspent pension reformers by many multiples, but union supporters don’t want to take any chances given the growing pension backlash.

It’s certainly OK to hire a Democratic hack to wage a slash-and-burn anti-reform campaign, as the unions already have been doing, but it’s another thing to abuse the power of the state’s highest law-enforcement officer and rig the process.

Now that the pension reform measure is dead, union allies in the Legislature are saying that Gov. Jerry Brown’s modest pension reform measures also are dead. As the San Diego Union-Tribune explained, one main fear the unions had was that the initiatives would give the governor leverage to force his reforms through the Democratic-controlled, union-friendly Legislature. You don’t want my reforms? the governor could ask. Then you’ll be stuck with tougher reforms at the ballot.

That leverage is gone.

Right-leaning blogger Chris Reed wrote on Calwhine.com, “There are plenty of signs that many … liberals were quite willing to believe that pensions are far too generous for public employees. But not union thug Kamala Harris. She’s in the tank for the union status quo. This is only the start of how the state government is rigged against the interests of regular Californians.”

Reed, a former Register Opinion editor, wasn’t the only one appalled by this increasingly rigged system.

The Modesto Bee’s liberal editorial page opined that pension reformers are “right about the Harris title and summary. Her office’s official description of the two measures read like talking points taken straight from a public employee union boss’ campaign handbook. Harris claimed the measures would reduce retirement income for current employees, which is not true. She also claimed that future government employees would lose survivor and death benefits, also not true.”

The summary also described supposed “cuts” to “teachers, nurses and peace officers, but excluding judges.” That’s campaign rhetoric, not the dispassionate description of a fair-minded AG.

As the reformers explained in their statement, “The AG selectively lists three positive poll-tested jobs out of thousands of government employee job classifications when both measures apply to all public employees, except constitutionally protected judges.” The San Diego Union-Tribune, referring to a pension system that is consuming upward of 30 percent of municipal budgets, complained about “Kamala Harris’ dirty trick on California.”

Ironically, these proposed initiatives were far from radical. They offered alternative plans for newly hired state employees as a way to rein in an unfunded pension liability, or debt, that is estimated as high as a half-trillion dollars by a Stanford University study. One measure would have put new workers only in a defined-contribution, 401(k)-style plan. The alternative would have created a hybrid plan that mixed the current defined-benefit pension with the 401(k)-type program.

The nonpartisan Legislative Analyst’s Office said in its analysis that the initiatives wouldn’t have achieved savings for many years. By focusing on new hires, the initiatives wouldn’t save too much until these new workers start retiring. That would argue for a tougher reform, but the state’s unions and their newfound heroine, Harris, want to block all reform.

California cities are facing potential bankruptcy, localities are cutting services, and there’s much pressure for tax hikes in an already highly taxed state to pay for public employee pensions that are far more generous than those typically earned in the private sector. The problem is real, and the situation is unfair to taxpayers.

It’s made even more unfair by the tactics of an attorney general who is happy to distort the democratic process to do the bidding of a special interest group that already has nearly unchecked power in the Capitol.

Don’t be surprised if more Californians lose faith in their ability to effect meaningful change.

Steven Greenhut is vice president of journalism for the Franklin Center for Government and Public Integrity; write to him at steven.greenhut@franklincenterhq.org.

Unions Greet Facts With Emotionalism

Yet another report released this week confirms the enormous liabilities that California taxpayers must endure to pay for pensions for public employees. The study, released at a Pension Boot Camp for elected officials held in Citrus Heights by the reform group Californians for Fiscal Responsibility, echoed the points made by the Little Hoover Commission, Stanford University and others: “Public pension funds in California face massive shortfalls,” which are the result of pension benefits that are much richer than those received in the private sector.

The reaction from the state’s muscular public employee unions has been as predictable as they are comical. Union spokesman and Democratic activist Steve Maviglio blamed Wall Street greed and argued that “Pension reform is a Trojan horse for an attack on public employees,” as if the half-trillion-dollar unfunded liabilities and fiscal problems faced by state and local governments are mere fictions trumped up by “right-wing” Republicans to diminish government workers.

The silliest response came from pro-union organizations that sponsored the www.DontScapegoatUs.com Web site, which features the type of heavy-handed ad hominem approach perfected by the state’s public employee unions, which are used to bullying and threatening politicians into obedience. The site puts the heads of prominent pension reformers on the bodies of farm animals, spins some conspiratorial yarns about out-of-state billionaires and Wall Street greed. It even depicts some Progressive Democrats as “right-wing zealots.” Apparently, anyone concerned about the effect of these unsustainable pension promises on government budgets and taxpayer wallets is a right-wing zealot. Don’t expect any serious arguments from this group.

Such fact-devoid emotionalism ignores the key findings of the CFFR study: “The combination of retroactive benefit enhancements, lengthening lifespan, and some weaker than expected investment returns during recent years has led to deterioration in the condition of public funds in California. As of 2010, the five largest public pension systems are only between 61 percent and 74 percent funded for benefits earned for past service, based on the actuarial assumptions used by those systems. These measures would be even lower if they instead reflected the assumptions mandated for use by private sector plans, or those used by the United States with respect to federal employee pensions. The funded status amounts also do not reflect liabilities, if any, for outstanding pension obligation bonds.”

The union pension defenders argue that pensions only comprise a small portion of the state budget, but they neglect to mention the enormous portion of local governments consumed by such benefits and they conveniently ignore the unfunded liabilities – the fact that the state should be paying much more to cover these promises, but is instead running up an unsustainable level of debt.

They depict Progressive Democratic pension reformers at right-wingers without addressing the core Progressive argument for pension reform – without it, pensions will deplete public services and destroy public budgets. Here’s a relevant passage from the Little Hoover Commission, a nonpartisan oversight agency that is part of the California state government:

“Pension costs will crush government. Government budgets are being cut while pension costs continue to rise and squeeze other government priorities. As the Commission heard during its hearings, the tension between rising pension costs and lean government budgets is often presented today in a political context, with stakeholders debating the severity of the problem and how long it will last. In another five years, when pension contributions from government are expected to jump and remain at higher levels for decades in order to keep retirement systems solvent, there will be no debate about the magnitude of the problem. Even with the introduction of two-tiered pension plans, barring a miraculous market advance, few government entities – especially at the local level – will be able to absorb the blow without severe cuts to services.”

Union spokespeople like to blame Wall Street without noting that the public pension systems – especially the scandal-plagued CalPERS – are the epitome of Wall Street. They are some of the biggest investors in the stock market and CalPERS’ scandals in particular point to some of the greediest and most despicable tactics we’ve seen on Wall Street. It’s beyond hilarious to hear defenders of CalPERS lecture the private sector on ethics in investing. But the problem goes far beyond some pay-to-play deals that even a belated CalPERS report suggests was inappropriate.

The real problem is that unions elect public officials who then granted them an unsustainable level of benefits without worrying about future debts. They used standards that would never pass muster in the private sector and engaged in the type of greed that rivals the worst of Wall Street. Little Hoover explained how the unions played the system and how these tactics, not Wall Street ups and downs, are the culprits for a pension system that is crushing governments and taxpayers:

“The 2008-09 stock market collapse and housing bust exposed the structural vulnerabilities of California’s public pension systems and the risky political behaviors that have led to a growing retirement obligation for state and local governments, the scale of which taxpayers are just beginning to understand.

“Treated like another speculative house during the boom, the state allowed public agencies and employees to pull equity in the form of increased retirement benefits from the pension funds whose value was inflated by optimistic market return estimates. The retirement promises that elected officials made to public employees over the last decade are not affordable, yet this is a mortgage that taxpayers cannot walk away from easily.

“When the economy crashed, another lesson from the housing bubble became just as important. A public pension, like a house, is not a get-rich-quick investment. As a house is for shelter, a pension is for longterm financial security. Even the ‘teaser rates’ reflecting aggressive investment assumptions are re-setting, revealing a higher cost to maintain a level of benefits that have become more generous than reasonable.

“Boom and bust cycles are natural, if unpredictable, but political leaders agreed to changes in the pension system at the peak of a boom, and as a major demographic event began unfolding – the start of the retirements of the Baby Boomers.

“Pension benefits promised to retirees are irrevocable, as are the promised benefits that current workers have accrued since their employment began. It also remains difficult to alter the theoretical, yet-to-be earned benefits for current workers. This situation, reinforced by decades of legal precedent, leaves little room for state and local governments to control mounting retirement costs, particularly when the only venue for change is the bargaining table.”

No wonder union advocates avoid the facts and instead focus on blaming mysterious billionaires (who support pension reform in California) and Wall Street greed.

They also use dishonest arguments about the average size of public employee pensions, which often are two-to-three times the number they use when one looks at recent retirees, who are retiring under formulas that have vastly expanded over the past decade. Note the $100,000 Pension Club, with a membership that’s growing by about 71 percent a year. Virtually no one in the private sector retires at age 50 or 55 and virtually no one in that sector receives $100,000 cost-of-living-adjusted salaries, plus fully paid medical care and that’s all before the various and unseemly pension-spiking gimmicks that are view more as an entitlement than a fraud by public employees, especially those in the public-safety sectors that claim heroism in order to enrich themselves.

New pension initiatives are in the works, which would cap pensions and increase employee contributions and in one case create a hybrid system that combines a 401/k-style system with a less-generous defined-benefit plan. One by former Assemblyman Roger Niello of Sacramento would:

• Set the retirement age for all California public employees, including current workers in every classification, at age 62.
• Limit retirement benefits for a public agency employee to no more than 60 percent of the highest annual average base wage of the employee over a period of three consecutive years of employment.
• Split the employer/employee contribution to pensions equally.
• Exclude unused leave time from pension calculations.
• Ends retroactive pension increases.

Speaking at the Boot Camp, Niello called his vote for pension increases as a county supervisor the “worst decision” of his career. He explained how the unions have been picketing the Niello car dealerships, even though he has a minority stake in the company and is not involved in managing it. He accused the unions of punishing fellow working-class citizens.

The California Pension Reform initiative would create the hybrid system. It would cap pensions when the pension systems are underfunded and would require that disability benefits be paid outside the pension system, presumably through an insurance-type system common in the private sector. New hires would receive “retirement savings accounts instead of taxpayer-guaranteed pensions.”

Recent polls show that Californians, even California Democrats, overwhelmingly support pension reform. So expect more emotionalism and claims about scapegoating by a union movement that has few facts on its side.

About the author: Steven Greenhut is the editor-in-chief of Cal Watchdog, an independent, Sacramento-based journalism venture providing original investigative reports and news stories covering California state government. Greenhut was deputy editor and columnist for The Orange County Register for 11 years. He is author of the new book, “Plunder! How Public Employee Unions are Raiding Treasuries, Controlling Our Lives and Bankrupting the Nation.”