Does that fact have your attention? Because media consultants insist we preface anything of substance with a hook like this. It even has the virtue of being true! And now, for those with the stomach for it, let’s descend into the weeds.
According to payroll and benefit data reported by the City of Costa Mesa to the California State Controller, during 2015 the average full-time firefighter made $240,886. During the same period, the average full-time police officer in Costa Mesa made $201,330. In both cases, that includes the cost, on average, for their regular pay, overtime, “other pay,” the city’s payment to CalPERS for the city’s share, the city’s payment to CalPERS of a portion of the employee’s share, and the city’s payments for the employee’s health and dental insurance benefits.
And if you think that’s a lot, just wait. Because the payments CalPERS is demanding from Costa Mesa – and presumably every other agency that participates in their pension system – are about to go way up.
We have obtained two innocuous documents recently delivered to the City of Costa Mesa from CalPERS. They are entitled “SAFETY FIRE PLAN OF THE CITY OF COSTA MESA (CalPERS ID: 5937664258), Annual Valuation Report as of June 30, 2015,” (click to download) and a similar document “SAFETY POLICE PLAN OF THE CITY OF COSTA MESA (CalPERS ID 5937664258), Annual Valuation Report as of June 30, 2015,” (click to download). Buried in the bureaucratic jargon are notices of significant increases to how much Costa Mesa is going to have to pay CalPERS each year. In particular, behold the following two tables that appear on page five of each letter:
Projected Employer Contributions to CalPERS – Costa Mesa Police
Projected Employer Contributions to CalPERS – Costa Mesa Firefighters
In the rarefied air of pension arcana, pension systems can get away with a lot. If you’re a glutton for punishment, read these notices from CalPERS in their entirety and see if, anywhere, they bother to explain the big picture. They don’t. The big picture is this: For years CalPERS has underestimated how much they are going to pay in pensions and they have overestimated how much their investments will earn, and as a result they are continuously increasing how much cities have to pay them. This notice is just the latest in a predictable cascade of bad news from pension systems to cities and other agencies.
Coming down to earth just a bit, consider the two terms on the above charts, “Normal Cost %” and “UAL $.” It would be proper to wonder why they represent one with a percentage and one with actual dollars, but rather than indulge in futile speculation, here are some definitions. “Normal Cost” is how much the city pays (never mind that the city also pays a portion of the employee shares – we’ll get to that) into the pension system if it is fully funded. The reason pension systems are NOT fully funded is because, again, year after year, CalPERS underestimated how much they would pay out in pensions to retirees and overestimated how much they would earn. Read this disclaimer that appears on page five of the letters: “The table below shows projected employer contributions…assuming CalPERS earns 7.5 percent every fiscal year thereafter, and assuming that all other actuarial assumptions will be realized….”
And when the “Normal Cost” payments aren’t enough, and the system is underfunded, voila, along comes the “UAL $,” that bigger catch-up payment that is necessary to restore financial health to the fund. “UAL” refers to “unfunded actuarial liability,” the present value of all eventual payments to retirees, and “UAL $” refers to the payments necessary to reduce it to a healthy level. Notice that for firefighters this catch-up payment is set to increase from $4.2M in 2017 to $6.8M in 2022, and for police it is set to increase from $5.8M in 2017 to $10.1M in 2022. This is in a small city that in 2015 employed an estimated 125 full-time police officers and 75 full-time firefighters.
As always, it must be emphasized that the point of all this is not to disparage police or firefighters. No reasonable person fails to appreciate the work they do, or the fact that they stand between us and violence, mayhem, catastrophe and chaos. And it is particularly difficult for those of us who are part of the overwhelming majority of citizens who appreciate and respect members of public safety to have to disclose and publicize the facts of their unaffordable pensions.
The following charts, using data downloaded from the CA State Controller, put these costs into perspective:
Average and Median Employee Compensation by Department
Costa Mesa – Full time employees – 2015
In the above chart, before sorting by department and calculating averages and medians, we eliminated employees who worked as temps or only worked for part of the year. This provides a more accurate estimate of how much full-time workers really make in Costa Mesa. Bear in mind that most part-time employees still receive pension benefits, as will be shown on a subsequent chart. As it is, during 2015 the average full-time police officer in Costa Mesa was paid total wages of $121,636, about 15% of that in overtime. But they then collected another $79,694 in city paid benefits, including $59,337 paid by the city towards their pension, AND another $11,562 that the city paid towards their pension that the State Controller vaguely describes as “Defined Benefit Paid by Employer.” Total 2015 police pay: $201,330.
Also on the above chart, one can see that during 2015 the average full-time firefighter in Costa Mesa was paid total wages of $150,227, about 32% of that in overtime. They then collected another $90,659 in city paid benefits, including $72,202 paid by the city toward their pension, and as already noted, another $10,440 that the city paid toward the employee’s share of their pension. Total 2015 firefighter pay: $240,886.
To distill this further, the following chart shows, per full-time employee, just how much pensions cost Costa Mesa in 2015 as a percent of regular pay.
Average Employer Pension Payment as % of Regular Pay
Costa Mesa – Full-time employees – 2015
As the above chart demonstrates, employer payments for full-time employee pensions during 2015 already consumed a staggering amount of budget. For police, every dollar of regular pay was matched by 80.5 cents of payments by the city to CalPERS. For firefighters, every dollar of regular pay was matched by a staggering 94.4 cents of payments by the city to CalPERS.
The next chart shows the impact this has on the City of Costa Mesa budget. Depicting total payroll amounts by department, it compares the same variables, total employer pension payments as a percent of total regular pay. As can be seen, the percentages are nearly the same, despite this being for the entire workforce including temporary and part-time employees, some who may not have pension benefits (most do), and many who do not receive top tier pension formulas which the overwhelming majority of full-time public safety employees still receive. As can be seen, for every dollar of regular police pay, CalPERS gets 75 cents from the city, and for every dollar of firefighter pay, CalPERS gets 92 cents from the city.
Total Employer Pension Payment as % of Regular Pay
Costa Mesa – All active employees; full, part-time and temp – 2015
At this point, the impact of CalPERS stated rate increases can be fully appreciated. And because this article, already at nearly 1,000 words, has violated every rule of 21st century social media engagement protocols – keep it short, shallow, simple, and sensational – perhaps the next paragraph should be entirely written in bold so it is less likely to be lost in the haze of verbosity. Perhaps a meme is in here somewhere. Perhaps an inflammatory graphic that shall animate the populace. Meanwhile, here goes:
Once CalPERS’s announced increases to the “unfunded payment” are fully implemented, instead of paying $10.9M per year for police pensions, Costa Mesa will pay $15.2M per year, i.e., for every dollar in regular police pay, they will pay $1.04 toward police pensions. Similarly, instead of paying CalPERS $6.4M per year for firefighter pensions, Costa Mesa will pay $9.1M per year, i.e., for every dollar in regular firefighter pay, they will pay $1.30 towards firefighter pensions.
So just how much do Costa Mesa’s retired police and firefighters collect in pensions? Repeatedly characterized by government union officials as “modest,” shall we report and you decide? The following table, using data originally sourced from CalPERS and downloaded from Transparent California, are the pensions earned by Costa Mesa retirees in 2015. Excluded from this list in order to present a more representative profile are all pre-2000 retirees, since retirement pensions were greatly enhanced after the turn of the century, and it is those more recent pensions, not the earlier ones, that are causing the financial havoc. Also excluded because the benefit amounts are not representative and the retirement years are not disclosed, are all “beneficiary” pensions, which survivors receive.
Average Pensions by Years of Service
Costa Mesa retirees – 2015
While these averages are impressive – work 30 years and you get a six-figure pension – they grossly understate what Costa Mesa public safety retirees actually get. There are at least four reasons for this: (1) The data provided doesn’t screen for part-time workers. Many retirees may have put in decades of service with the city, but only worked, for example, 20-hour weeks. They would still accrue a pension, but it would not be nearly as much as it would be if they’d worked full time. (2) Nearly all full-time employees are also granted “other post-employment benefits,” primarily health insurance. It is reasonable to assume that for public safety retirees, the value of these other post employment benefits is at least $10,000 per year. (3) Because CalPERS did not disclose what department retirees worked in during their active careers, this data set is for all of Costa Mesa’s retirees. That means it includes miscellaneous employees who receive pensions that are, while very generous, are not nearly as good as the pensions that public safety retirees receive. (4) While recent reforms have begun to curb this practice, it has been common at least through 2014 for retirees to purchase “air time,” wherein for a ridiculously low sum they are permitted to claim more years of service than they actually worked. It is common for retirees, for example, to purchase five years of air time, so when their pension benefit is initially calculated, instead of multiplying, for example, 20 years of service times a 3.0% multiplier times their final salary, they are permitted to claim 25 years of service.
All of this, of course, is dense gobbledygook to the average millennial Facebook denizen, or, for that matter, to the average politician. To be fair, it’s hard even for the financial professionals hired by the public employee unions to acknowledge that maybe 7.5% (or even 6.5%) annual investment returns will not continue for funds as big as CalPERS, or that history is no indicator of future performance. And even if they know this, they’re under tremendous pressure to keep silent. So the normal contribution remains too low, and the catch-up payments mushroom.
Finally, to be eminently fair, we must acknowledge that since modest bungalows on lots so small you have to choose between a swing set or a trampoline for the kids are now going for about a million bucks each in most of Orange County, making a quarter million per year ain’t what it used to be. But there’s the rub. Because until the people who work for the government are subject to the same economic challenges as the citizens they serve, it is very unlikely we’ll see any pressure to lower the cost of living. Everything – land, energy, transportation, water, materials, etc. – costs far more than it should, thanks to deliberate political policies and financial mismanagement that creates artificial scarcity. But hey – artificial scarcity inflates asset bubbles, which helps keep those pension funds marginally solvent.
Cost-of-living reform, if such a thing can be characterized, must accompany pension reform. What virulent meme might encapsulate all of this complexity?
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Ed Ring is the president of the California Policy Center.
California’s largest state/local government employee pension system, CalPERS, has posted a page on their website called “Myths vs. Facts.” Included among their many rather debatable “facts” is the following assertion, “Pension costs represent about 3.4 percent of total state spending.”
This depends, of course, on what year you’re considering, and what you consider to be direct cost overhead for the state as opposed to pass-throughs from the state to cities and counties. But CalPERS overlooks the fact that most of California’s government workers who collect pensions do not work for the state, they work for cities and counties and school districts. As can be seen on the “view CalPERS employers” page on Transparent California, there are 3,329 distinct employer retirement pension plans administered by CalPERS, and the vast majority of these are not state agencies paid from the state budget, but local agencies.
In a study earlier this year, “California City Pension Burdens,” the California Policy Center calculated 2015 employer pension contributions as a percent of total revenue for California’s cities to be 6.85%, more than double the amount CalPERS implies is the average pension burden. But this hardly tells the whole story, because CalPERS is systematically increasing the amounts that their clients will have to contribute as a percent of payroll, and hence, as a percent of total revenue.
UnionWatch has obtained budget documents from Costa Mesa showing how the pension contributions as a percent of payroll will grow between their 2014/15 fiscal year and 2020/21. Over the next six years, as the chart below shows, Costa Mesa’s total payroll is projected to grow from $50.1 million to $54.6 million. Their pension contribution, on the other hand, will grow from $23.2 million to $33.0 million. That is, their pension contribution as a percent of total payroll will increase from 46.3% of payroll today, to 60.4% of payroll in 2020.
Costa Mesa’s pension burden as a percent of payroll is a bit higher than average, but not much. And in terms of the percentage increases to pension contributions announced by CalPERS, they are typical. California’s cities, based on CalPERS announced pension increases, can expect to add another 15% of payroll to whatever amount they are already sending to CalPERS each year.
For every dollar they pay their employees in salary, should California’s cities be sending, year after year, $.50 cents or more to CalPERS? That’s the best case. It assumes that CalPERS will continue to be able to realize annual returns on investment of 7.5%, on average over the next several decades. It also assumes they’ve got the demographic projections correct this time, and won’t have to contend with the otherwise happy eventuality of people living longer than their current projection of approximately 80 years. These are big assumptions.
And how much of this fifty cents (or more) on the dollar do the employees themselves pay as a percent of withholding? In many cases, up until recently, they paid nothing. Or if they did pay via withholding, at the same time as they became subject to that requirement, they received a raise to their overall salary of an equivalent amount. But under California’s 2012 Public Employee Pension Reform Act, employees will gradually be required to pay more for their pensions – with a ceiling of 8% for regular employees, and 12% for public safety employees.
If they paid the maximum via withholding, for a miscellaneous employee in Costa Mesa, that 8% equates to a 4-to-1 employer match today, rising to a 5-to-1 matching in 2020. Similar employer matching ratios will apply for public safety employees. How many companies, anywhere, provide 1-to-1 matching, much less 2-to-1, or more? 5-to-1 matching? It is unheard of. For good reason – it is absolutely impossible for a private company to afford this in a competitive economy.
Returning to the Myths vs. Facts page posted by CalPERS, they also assert that “The average CalPERS pension is about $31,500 per year.” This is profoundly misleading. It is based on the assumption that every CalPERS retiree worked a full career in government. Returning to the CalPERS Employers page on Transparent California, one can see a more accurate estimate of the “average pension,” because it is limited to the average for retirees who put in at least 30 years of work. Take a look. For Costa Mesa, the average 2014 pension for a full career retiree was $91,805.
If our cities could afford this, nobody would care, but they cannot. If Social Security, which withholds benefits until a participant, typically, has worked 45 years, could afford to be equally generous, nobody would care. But the average Social Security benefit is around $15,000 per year and even at that pittance, without major restructuring it will go broke.
One can debate forever regarding how much of a premium public employees should receive over private sector workers because they’re, on average, more educated, or take more risks in their jobs. But as it is, taxes are going up to pay pensions and benefits to government workers that are by any objective standard many times greater than what private citizens can ever hope to achieve. No premium, however much deserved on principle, should be this big.
The insatiable demand by CalPERS and other government pension systems for more money to keep these pensions intact does more than create financial stress to our cities and counties. It exempts public employees from the economic challenges that face everyone else. It takes away the sense of shared fate between private citizens and public servants. It undermines the social contract. It exposes a self-dealing, hidden agenda behind all new regulations. It erodes the credibility of laws, ordinances, codes, because perhaps they are merely there to generate revenue.
CalPERS and California’s other government pension systems have the financial wherewithal to lobby and run PR campaigns that dwarf that of reformers. But myths and facts are not defined in press releases. They are defined by reality. The reality is that California’s pension funds have increased their required contributions as a percent of municipal budgets by an order of magnitude in just the last 15-20 years, and there is no end in sight. If and when they can no longer seize public assets to force payment, bully compliant judges to overturn reforms, or find enough money from new taxes to save their financially shattered systems, they are going to have a lot of explaining to do – not only to the beleaguered taxpayers, but to their own members.
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Jim Righeimer was elected to the Costa Mesa City Council in 2010, where he currently serves as Mayor. In Costa Mesa, Jim has led the charge to shrink government and provide more transparency and efficiency to the Citizens of the City. Labor union leaders now say Costa Mesa is “Wisconsin in California.” Costa Mesa has been called a battleground for reform, and numerous national news publications have printed front page stories about the debate. As part of Righeimer’s program to increase transparency, Costa Mesa enacted one of the first “COIN” ordinances back in 2012. In this exclusive interview for UnionWatch, Righeimer explains COIN, and comments on prospects for similar transparency ordinances in other cities and counties.
(1) What does COIN stand for, and what other terms are used to describe this?
Civic Openness in Negotiation. It is also referred to as “open public employee negotiations.”
(2) Was Costa Mesa, where you currently serve as mayor, the first city you are aware of in California (or in Orange County) to adopt a COIN ordinance?
Costa Mesa was the first that we know of. It was created by Steve Mensinger, who is the mayor pro-tem for Costa Mesa.
(3) What inspired you guys to propose a COIN ordinance, who else was involved, and where did you go for guidance?
Steve is a businessman who does a lot of contract work, which in the business world is a very deliberate process. When he would talk with previous councilmembers about their votes, they would often have forgotten what they’d voted for. There was almost no process for how deals were reviewed and voted on. He decided something needed to change. He got guidance from attorneys at Leesberg Cassidy, the attorneys who currently handle a lot of negotiations for Costa Mesa and many other cities. Steve was the inspiration, but they had a lot of good ideas. For example, the union membership gets three weeks to review and vote on an agreement, but as soon as they approve it, the city has to vote within a week. That’s even in their bylaws.
(4) When was Costa Mesa’s COIN ordinance adopted?
It was adopted in September of 2012, and 2013 was the first year we’ve been using it in negotiations.
(5) What are the key provisions of Costa Mesa’s COIN ordinance?
The first one is the requirement for an outside auditor calculate what the existing contract costs, right down to each line item. That needs to be in front of the public 30 days before negotiations begin. Then after that, you have to hire a nonbiased, independent person to conduct the negotiations. Nobody who may be impacted by the negotiations, such as management employees of the city, can be the prime negotiator. Also, every time there is an offer or counter offer that’s been countered or rejected, the details are made public. Finally, once an agreement is made it has to be scored at least seven days before any council agenda, and it requires two readings in council meetings before the public before it can be approved – just like an ordinance.
(6) What tangible examples can you point to so far as a result of Costa Mesa’s COIN ordinance?
The first contract that has been reviewed under the new COIN process hasn’t been finalized. But before it is in front of the public, both parties are more reasonable in their offers and counteroffers because they know the public sees it. In the past, one side might ask for 50 items just to overwhelm the city. They don’t do that any more.
(7) The City of Fullerton has recently adopted a COIN ordinance. What would you say are the strengths and weaknesses of their version of a COIN ordinance compared to Costa Mesa’s?
Our city had already had a lot of confrontations and a lot of previous back room dealing, so when mayor pro-tem Mensinger first drafted this for us, he covered every contingency he could think of. Whether or not all those contingencies were needed is debatable. the most important thing to have in coin is a third party negotiator, a total accounting of all the costs of the contract, and to have it presented at at least two council meetings so the public has a chance to look at it before its voted on
(8) Orange County is considering adopting a COIN ordinance. What would you say are the strengths and weaknesses of their proposed version of a COIN ordinance compared to Costa Mesa’s?
They’ve removed the sunset provision, which was important to remove, and now it’s going back for another 2nd reading. There’s no reason to put a sunset on this type of law. If it needs to be modified or repealed later that can be done. As it is, there may not be any significant contract renewal negotiations coming up between now and 2017. So with a sunset provision, COIN can expire right before it’s needed! It is also really important to calculate and report the total contract costs, which Orange County’s COIN ordinance provides for. For example, the county recently voted to approve the deputy sheriff’s contract – they say they’re going to save 22.6 million over the two year term of the contract by increasing employee pension contributions. If they had already had COIN during these just completed negotiations, however, you would have seen that the county is giving them an offsetting raise and other benefits to pay for it.
(9) Over time, just how much benefit do you believe can come from tough COIN ordinances?
Well, a big benefit that could have occurred is that we would not have the pension problem we have today if we had had COIN back when the pension enhancements were being negotiated. COIN also slows down the ability of unions to come back in the future and repeal agreements they don’t like.
(10) Do you consider a COIN ordinance to be of bipartisan benefit, and if so, who opposes COIN ordinances?
For the honest brokers on both sides, transparency is not bad. The people who are against it are the people who like the system the way it was – they would just make political endorsements or attacks in order to get a vote where a politician would not have any other input. The guys who like the backroom deals don’t like COIN
(11) Do you predict that COIN ordinances will proliferate throughout Orange County and California’s cities and counties?
Huntington Beach looks like they are going to be the next city to put COIN on their agenda. Dave Sullivan, one of their councilmembers, has just brought that up to his staff to work on. I expect this process to become normal procedure, everywhere, within the next ten years. It’s going to be the new standard.
Eight years ago, then Orange County Register reporter Norberto Santana opened his piece, “The Art of the O.C. Deal (Orange County Register, August 6, 2006),” with the following observation: “When people see the board of supervisors vote on a labor deal, what they don’t know is that most often, an agreement has already been reached in private. And it’s perfectly legal.”
The root cause of fiscal distress for many municipalities is the negotiated bargaining unit agreements. The promise of future benefits could not be feasibly be paid. And most would have told you so if they were asked about the sustainability of the deal points. But when the public is not aware of the contract details until after they are agreed to, it is too late. Shouldn’t the experience of this obvious flaw in the process give those who come after a strong reason to open the negotiation process? Yes, it should.
Can you imagine a private sector business allowing a third-party to negotiate contracts on its behalf with no say in the process? Of course not. Yet, when dealing with labor negotiations, the general public, whose tax money is being spent, allows their elected officials to negotiate without any real say in the process.
As a county supervisor, one of the most serious responsibilities that I have been entrusted with is negotiating with employee organizations representing more than 17,000 county employees. To put this in context, salary and employee benefits represents 35.2 percent of the County’s $5.4 billion budget.
These negotiations, which happen behind closed doors, are shrouded in secrecy, with the general public only being able to give input after a deal is already agreed upon. For this reason, I have introduced the Civic Openness in Negotiations (COIN) ordinance for consideration by the Orange County Board of Supervisors at its June 17, 2014, meeting. The idea is not new. It was first adopted by the city of Costa Mesa.
The ordinance has five main components:
- Independent Negotiator – As is current policy, the County will hire an independent negotiator that is not impacted by any outcome in the negotiation process. Past practice had county staff, who were subject to the same provisions as the bargaining unit they were negotiating with, negotiate on behalf of the Board of Supervisors. Independent negotiators remove this conflict.
- Cost of Contracts – Current practice has the county budget office analyze the costs of any contract proposal. Under COIN, the independently elected Auditor-Controller will take on this responsibility. This ensures an equal playing ground for both labor organizations and the county as both will be given the ability to comment about the analysis.
- Offers and Counteroffers – This ordinance would require that all offers and counteroffers be disclosed to the public within 24 hours.
- Board Disclosure – Each member of the Board of Supervisors will be required to disclose any and all verbal, written, or electronic communications they have had with an official representative of a recognized employee organization.
- Contract Approval – This ordinance will require that, before the final proposed contract is placed on the Board agenda, the Memorandum of Understanding will be posted to the County website.
This ordinance is intended to not only make the negotiation process more transparent, but to allow the public to hold elected officials accountable for the actions they take in regard to taxpayer funds.
We universally agree on transparency and scrutiny. By implementing COIN, the negotiation process will improve for all the impacted parties.
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About the Author: John M. W. Moorlach is a Republican member of the Orange County Board of Supervisors and represents the Second District on the board. He serves on the Orange County Transportation Authority, OC LAFCO, CalOptima, and Southern California Regional Airport Authority boards. Moorlach has the distinction of having predicted the largest municipal bond portfolio loss and bankruptcy in U.S. history while campaigning for the office of Orange County Treasurer-Tax Collector against incumbent Democrat Robert Citron in 1994. Citron resigned later that year. In 1995 Moorlach was appointed to fill the vacancy, was elected by the voters in 1996 to complete the unexpired term, and re-elected in 1998 and 2002, serving nearly twelve years. In 2006, he opted not to run for re-election as Treasurer-Tax Collector and instead ran for Orange County Supervisor, winning 70% of the vote. He is recognized as a leading expert on municipal bankruptcies.