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Pension Reform Requires Mutual Empathy, not Enmity

Attending a high school reunion after more than a few decades ought to be a memorable experience for anyone. Hopefully the occasion is filled with warmth and remembrance, rekindled friendships, stories and laughs. But as our lives develop and we build our adult networks based on shared values and common professions, a high school reunion offers something else; a unique opportunity to meet people we knew very well and still care about, whose lives all went in completely different directions.

My high school classmates chose a diverse assortment of careers. Some became engineers, some went into sales, some are entrepreneurs; some work in high-tech, some in aerospace, others in construction. And some are teachers, some are police officers, and some are firefighters. Without any exceptions I could observe, all of them made conscientious choices, all of them worked hard, all of them were responsible with their savings and investments. And now they’ve reached the age where whatever retirement plans they made are unlikely to change much.

How to ensure government pensions are not blown up by the next sustained market downturn is a complex challenge, complicated further by ideological divisiveness and political opportunism. On one side are powerful financial special interests in the form of the pension systems, and their government union allies. On the other side are poorly organized taxpayer activists whose grassroots strength, combined with fiscal reality, attract support from increasing numbers of local and state politicians. But caught in the middle are the people who served in government jobs, the overwhelming majority of whom did those jobs well, and have earned the right to retire with dignity. It’s personal.

Figuring out how to make government retirement benefits financially sustainable should be part of a bigger conversation, which is how all Americans are going to have the ability to retire with dignity. It is part of a conversation even bigger than that – how to nurture sustainable economic growth while coping with an aging population, environmentalist considerations, globalization, debt/GDP ratios at historic highs, and mushrooming new technologies that present unprecedented potential to eliminate human jobs. All of these mega-trends are this generation’s challenge, all of them are urgent, all of them are personal.

It’s easy to solve all of these challenges if you are willing to ignore reality and hew to an ideological pole-star. Libertarian answers to social and economic policy issues inevitably advocate privatization. Socialist theorists inevitably advocate state ownership. But both of these ideologies, in their most orthodox forms, are utopian. Libertarians envision a stateless, humane society based on personal liberty and private ownership. Socialists envision a stateless, humane society based on common ownership. If these extremes are so absurd, why is the center so uninviting?

It’s a long way from Silicon Valley to utopia, but in that fabled land, anchored by what was only referred to as San Jose back when we were high school students there, thoughtful futurists abound. Some think we shall all become independent contractors, linked by technology to virtual employment opportunities all over the world. They believe secure full time jobs will wither away entirely, and everyone will thrive as free agents in a wired world. Others think automation will eliminate so many jobs, and create so much abundance, that guaranteeing a minimum income to everyone will be feasible and necessary, whether they work or not. The conversation taking place among the Silicon Valley elite regarding the political economy of our future is helping to define that future as much as their innovative new products. It’s a conversation worth listening to without ideological blinders.

My classmates who chose careers in public service, just like my classmates who pursued careers in the private sector, are starting to retire. Just like everyone else – our friends, our families, our neighbors – they want answers, not ideology. They want constructive solutions, not controversial schemes. Is there enough room in the political center to permit a conversation that sticks to facts and practical solutions, or will the professional chorus of perennial opponents crush them, abetted by all those millions who are comforted by inflexible ideologies?

One ideologically impure, centrist way to save defined benefits would be to borrow concepts from Social Security. Reformed defined benefits would be (1) awarded according to progressive formulas, where the more someone makes, the less the pension benefit is as a percent of their final salary, (2) there is a benefit ceiling which no individual pension can exceed, (3) pension contributions in the form of employee withholding can be increased without commensurate increases to overall salary, (4) annual pension accrual multipliers, going forward for active workers, can be reduced depending on the system’s financial health, and (5) when necessary, pension benefits to existing retirees can be reduced, in order to maintain the overall financial health of the system. Often that can be as little as skipping a COLA.

When political professionals, volunteer activists, policymakers, commentators, analysts, or anyone else influencing the pension debate speak on the topic, they should imagine the following situation: With every word, they are looking into the eyes of two close friends or family members, two people nearing retirement, one of them about to collect a government pension, the other a taxpayer who will rely on Social Security supplemented by a lifetime of personal savings. People who didn’t create the financial challenges we collectively face. People we love.

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

What Happens When Public Unions Control Everything for Decades?

Editor’s Note:  California and Illinois have a lot in common. Both have diverse, resilient economies, both are large states with most of the population concentrated in urban areas, and both have been controlled for decades by public sector unions. The crucial difference, of course, is that at least in Illinois, there is a reform minded governor who is standing up to the unions. But will it matter? In this article by Mike Shedlock, including commentary by Michael Bargo, it is clear that the depth of government union power in Illinois will be hard to overcome, even by a charismatic governor who is committed to reform. One of the most noteworthy quotes in this article comes from Bargo, who contends that literally 100% of the property tax proceeds paid by residents of Chicago are required to make pension payments. One analyst estimated the total per capita state and local debt for a Chicago resident at $88,000. But this debt wasn’t incurred to “help the working class and poor.” It is primarily to pay for pensions. California’s teetering pension systems are one market downturn away from facing a situation just as dire as Illinois. The hypocrisy of the government union controlled politicians in Illinois, and California, is only matched by their unwarranted power.

Here is my post from two weeks ago, Emanuel Fiddles While Chicago Burns; Public Schools Over the Edge; 9% Cloud Tax on Data Streaming; Emanuel Eyes Property Tax Hikes. discussing the sorry state of affairs in Chicago.

Michael Bargo, writer for the American Thinker, provides additional commentary on this topic.

Here is a  lengthy snip from Bargo’s recent, well-written article Public Pensions Prove Zero Sum Economics.

One of the major appeals in Democrat presidential campaigns  is to explain to voters that they need Democrats in office to take money away from the rich. And since the rich own big corporations, they will pay workers as little as possible. This idea is what Barack Obama had in mind in 2008 when he said he will redistribute money to the working class and poor.

But so far this analysis has only been applied to the private sector; the “rich” who own stocks or run corporations. If public sector workers, particularly pensioners who are not working, are taking significant amounts of money from taxpayers, then this may also be seen  as contributing to the shrinkage of middle class incomes.

Of course, Illinois is not the only state dominated by high Democrat taxes and public sector spending but it serves as a good case study of what Democrats do when they have total control of budgets for decades.

The results are startling. Today, Chicago’s public sector unions are underfunded, according to the City itself, by $26.8 billion. This is just the City of Chicago. When the state debt is added, the total amount of debt owed by each Chicago household to the city and state rise, according to the Illinois Policy Institute, to $61,000. SEC Commissioner Gallagher stated the number is $88,000.

Pension payments to Chicago public union employees have become so high that today all the property taxes paid by the households of Chicago go exclusively to pensions. The operating expenses are paid by additional taxes on things from packs of cigarettes, to gasoline, sales tax, and cable TV bills. Given these facts about how Chicago’s property taxes are used, it’s not surprising that its new Republican governor wants to freeze property taxes to rescue the middle class’s paychecks from Democrats.

Illinois Democrats have indentured the taxpayers of the state to turn over historic amounts of their incomes to government, shrinking Illinois’ middle class.

All public debt creates taxation and the effects have an impact, sooner or later. The more time allowed for debts to go unpaid, the greater the amount of taxes eventually wasted on interest payments.

Chicago is now the slowest growing of all major cities. In 2014 Chicago only gained 82 people in population. Residents are fleeing Illinois, taking their purchasing power with them. Illinois is also the slowest state to recover from the recession.

Chicago households will have to pay, through taxes, muni bond and unfunded pension debt for decades to come. Far into their lifetimes, and the lifetimes of their children. Zero sum theory is true, but the lion’s share of the proof shows that government spending, not private sector investing, takes money from average Americans.

Zero sum theory has been used by Democrats as nothing but a rhetorical tool used to exploit voters’ emotions of envy and greed. But in the end, the greed is exercised by Democrats while taxpayers in Illinois find themselves deep into a hole of government-created debt.

The private Illinois Policy Institute has uncovered most of the facts used here, and often had to file FOIA requests. In some cases, they had to take state agencies to Federal court to find out how much they were earning, and how much debt they had accumulated. This is all planned, it is a strategy used by Democrats to con taxpayers into putting them into office; saying they want small class size and to help the elderly; while all along they were secretly passing huge public pension contracts and dumping the cost onto average middle class and poor taxpayers.

These facts show two things. One is that these payments are so high that all Chicago households are under a crushing debt burden that takes many thousands per year away from their household budgets. And secondly, these figures provide an opportunity to measure whether this transfer of wealth from households to public pensioners negatively impacts economic grow. Illinois has the most public debt, the lowest credit rating, and the slowest growth.

Who Really Runs Illinois?

Little or no legislation passes through the Illinois legislature without the approval of Michael Madigan.

Wikipedia notes Madigan has been a House member since 1971, and Speaker in all but two years since 1983.

Chicago Magazine named Madigan the fourth-most-powerful Chicagoan in 2012 and second in 2013 and 2014, calling him “the Velvet Hammer—a.k.a. the Real Governor of Illinois.

Rich Miller, editor of the Capitol Fax Illinois political newsletter, wrote “the pile of political corpses outside Madigan’s Statehouse door of those who tried to beat him one way or another is a mile high and a mile wide.

Taxes Not the Answer

The results of Madigan’s tenure as the long-serving “real governor” of Illinois are as follows:

  • Pension holes in the hundreds of billions of dollars
  • Budget deficits
  • Corruption
  • Business exodus
  • Private taxpayer exodus
  • High taxes
  • Shrinking middle class

Tax hikes are clearly not the answer. Illinois has a spending problem, not a revenue problem.

Unfortunately for Illinoisans, other than kowtowing to public union demands, raising taxes is about the only thing Madigan knows how to do.

The results of Madigan’s tenure speak for themselves.
Isn’t it time to try a new tack?

Here’s Where to Start 

  1. Bankruptcy legislation to allow municipal bankruptcies
  2. Pass Right-to-Work legislation
  3. Scrap prevailing wage laws
  4. Property tax freeze
  5. Freeze defined benefit pension plans
  6. Pension reform
  7. Fair redistricting
  8. Reform worker’s compensation laws

That’s a big list of things that needs to be done, and Madigan is on the other side of every one of them.

As I said at the top,  Emanuel Fiddles While Chicago Burns.

And at the state level, Madigan Fiddles While Illinois Burns.

About the Author:  Mike Shedlock is the editor of the top-rated global economics blog Mish’s Global Economic Trend Analysis, offering insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education, and a senior fellow with the Illinois Policy Institute.

Why Pension Reform is Inevitable, and How Reforms Can Benefit the Economy

“The six-year bull market is admittedly long in the tooth.”
CalSTRS Chief Investment Officer Chris Ailman, Sacramento Bee, July 17, 2015

If what Mr. Ailman really means is equity investments may not be turning in double digit returns any more, that makes the recent performance of CalSTRS and CalPERS all the more troubling. Because according to their most recent financial statements, CalSTRS only earned 4.8% last year, and CalPERS only earned 2.4%. That leaves CalSTRS 68.5% funded, and CalPERS 77% funded.

Are we at the top of a bull market? Take a look at this chart:

S&P 500, Last Twenty Years Through June 21, 2015

20150721-UW-pensions1

The S&P index, which reflects U.S. equity trends reasonably well, enjoyed a five year bull market that crested in mid-2000, then another one that ran five years from September 2002 to October 2007, then this current bull market, which began 6.5 years ago. The bull market ending in September 2000 saw a 170% rise in the S&P, the one that peaked in October 2007 rose 90%, and this current one has yielded a 188% rise. So far.

Is today’s bull market “long in the tooth”? It sure looks that way.

There’s more to this, however, than the new reality of globalized, largely automated equity trading that condemns stock indexes to unprecedented volatility – or the graphically obvious fact that we’re at another peak.

There’s something stock traders call “fundamentals,” in this case creating economic headwinds that all the high-frequency trading and hedges in the world can’t avoid. About the same time that CalSTRS and CalPERS announced they missed their earnings targets, Reuters published this: “Calpers chief looks to cut volatility as fund enters negative cash-flow era.”

In plain English, this “negative cash-flow era” means that CalPERS has crossed a big line financially. They are now going to be selling more investments each year than they buy. They are going to be net sellers in the markets. While the superficial explanation for this is “baby boomer retirements,” that is incorrect. Government staffing is not directly driven by population demographics. In government, new hires replace retirees and headcounts trend upward. The real reason CalPERS is entering a negative cash flow era is because the retroactive pension benefit enhancements that started in 1999 and rolled through agency after agency for the next six years or so are now translating into large numbers of people retiring with these enhanced pensions, replacing earlier retirees who had modest pensions. Meanwhile, new hires are, increasingly, accepting more realistic reduced retirement promises, and paying proportionately less into the funds.

If CalPERS were the only pension fund becoming a net seller in the market, it wouldn’t really matter. But all the major pension funds, everywhere, are becoming net sellers. That’s nearly $4.0 trillion in assets under management in the U.S. that suddenly are shedding assets faster than they’re acquiring them. When supply rises, prices drop. This is a headwind.

There are other headwinds. If government staffing doesn’t directly reflect population demographics, the general population obviously does. Between 1980 and 2030 the percentage of Americans over 65 will rise from 11% to 22% of the total population. And ALL of these seniors will be net sellers of assets.

If that weren’t enough, there is the small matter of the United States – along with most of the rest of the world – arguably in the terminal phase of a long-term credit cycle. Total market debt as a percentage of GDP in the United States is over 300%, higher than it was in 1929. When interest rates fall to zero, playing the debt card to stimulate economic growth doesn’t work anymore. And when interest rates rise, asset values fall and debt service becomes untenable. We’ve painted ourselves into an economic corner.

In the face of this reality, unconcerned and all-powerful, the government union band plays on. Today the Los Angeles based City Watch published an early version of what will become an irresistible torrent of propaganda opposing the proposed Reed/DeMaio pension reform initiative. The title says it all “Measure of Deception: Initiative Would Gut Retirement Benefits for Millions of Californians.”

Take a look at the average full career CalPERS pension per former employer. Bear in mind the average public sector retirement age is 61, and that the average Social Security benefit is around $15,000 per year. Is there no middle ground between “gutting” and restoring financial sustainability?

Restoring pension systems to financial sustainability in the face of economic headwinds will require two major changes in policy. First, pension benefit plans would need to change in the following ways: (1) Increase employee contributions, (2) Lower benefit formulas, (3) Increase the age of eligibility, (4) Calculate the benefit based on lifetime average earnings instead of the final few years, and (5) Structure progressive formulas so the more participants make, the lower their actual return on investment is in the form of a pension benefit. Finally, enroll all active public employees in Social Security, which would not only improve the financial health of the Social Security System, but would begin to align public and private workers to share the same sets of incentives. Taking these steps will repair the damage caused by SB 400 in 1999, which set the precedent for retroactive pension benefit increases.

Second, completely change the investment strategy of public pension systems to return to lower risk investments. Along with choosing, say, high-grade corporate bonds over global hedge funds, these lower risk investments could include investment in revenue producing civil infrastructure. A thoughtful article recently published in Governing, “How Public Pensions Are Getting Smart About Infrastructure,” explores this possibility. Not only would massive investment by pension funds in revenue producing infrastructure create millions of jobs, repair neglected public assets, and constitute a low risk investment, over their life-cycle many of these projects actually produce excellent returns. Moving to lower risk investments will repair the damage caused by Prop. 21, narrowly passed in 1984, that “deleted constitutional restrictions and limitations on the purchase of corporate stock by public retirement systems.”

Given the financial headwinds they face, it is going to take courage and creativity to save defined benefits for public sector workers. But depending on what direction these reforms take, they have the potential to greatly benefit the overall economy.

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

CALIFORNIA POLICY CENTER PENSION STUDIES

California City Pension Burdens, February 2015

Estimating America’s Total Unfunded State and Local Government Pension Liability, September 2014

Evaluating Total Unfunded Public Employee Retirement Liabilities in 20 California Counties, May 2014

Evaluating Public Safety Pensions in California, April 25, 2014

How Much Do CalSTRS Retirees Really Make?, March 2014

Comparing CalSTRS Pensions to Social Security Retirement Benefits, February 27, 2014

How Much Do CalPERS Retirees Really Make?, February 2014

Sonoma County’s Pension Crisis – Analysis and Recommendations, January 2014

Are Annual Contributions Into CalSTRS Adequate?, November 2013

Are Annual Contributions Into Orange County’s Employee Pension Plan Adequate?, August 2013

A Method to Estimate the Pension Contribution and Pension Liability for Your City or County, July 2013

Moody’s Final Adopted Adjustments of Government Pension Data, June 2013

How Lower Earnings Will Impact California’s Total Unfunded Pension Liability, February 2013

The Impact of Moody’s Proposed Changes in Analyzing Government Pension Data, January 2013

A Pension Analysis Tool for Everyone, April 2012

A Challenge to Moorlach and Glazer – Build A Radical Center

On March 22, 2015, John Moorlach was officially sworn in as state senator for California’s 37th District. On May 28, 2015, Steve Glazer took the oath of office as state senator for the 7th District. Moorlach is a Republican serving mostly conservative constituents in Orange County. Steve Glazer is a Democrat serving mostly liberal constituents in Contra Costa County.

Different parties. Different constituents. You wouldn’t think these two men had much in common. But you’d be wrong.

John Moorlach and Steve Glazer have both distinguished themselves as politicians and candidates by doing something that transcends their political party identity or conventional ideologies. They challenged the agenda of government unions. As a consequence, both of them faced opponents who were members of their own party who accepted money and endorsements from government unions.

It wasn’t easy to challenge government unions. Using taxpayers money that is automatically deducted from government employee paychecks, government unions in California collect and spend over $1.0 billion per year. These unions spent heavily to attack Moorlach and Glazer, accusing – among other things – Moorlach of being soft on child molesters, and accusing – among other things – Glazer of being a puppet of “big tobacco.”

This time, however, the lavishly funded torrent of union slime didn’t stick. Voters are waking up to the fact that the agenda of government unions is inherently in conflict with the public interest. Can Moorlach and Glazer transform this rising awareness into momentum for reform in California’s state legislature?

Despite sharing in common the courage to confront California’s most powerful and most unchecked special interest, Moorlach and Glazer belong to opposing parties whose mutual enmity is only matched by their fear of these unions. With rare exceptions, California’s Democratic politicians are owned by government unions. Fewer of California’s Republican politicians are under their absolute control, but fewer still wish to stick their necks out and be especially targeted by them.

The good news is that bipartisan, centrist reform is something whose time has come. Democrats and Republicans alike have realized that California’s system of public education cannot improve until they stand up to the teachers unions. Similarly, with the financial demands of California’s government pension systems just one more market downturn away from completely crippling local governments, bipartisan support for dramatic pension reform is inevitable.

There are other issues where voters and politicians alike realize current policy solutions are inadequate at best, but consensus solutions require intense dialog and good faith negotiations. An obvious example of this is water policy, where the current political consensus is to decrease demand through misanthropic, punitive rationing, when multiple solutions make better financial and humanitarian sense. Supply oriented solutions include upgrading sewage treatment plants to reuse wastewater, building desalination plants, building more dams, increasing cloud seeding efforts, and allowing some farmers to sell their allocations to urban areas.

Imagine a centrist coalition of politicians, led by reformers such as Moorlach and Glazer, implementing policies that are decisive departures from the tepid incrementalism and creeping authoritarianism that has defined California’s politics ever since the government unions took control. How radical would that be?

Ultimately, forming a radical center in California requires more than the gathering urgency for reforms in the areas of education, government compensation and pensions, and, hopefully, infrastructure investment. Beyond recognizing the inevitable crises that will result from inaction, and beyond finding the courage to stand up to government unions, Moorlach and Glazer, and those who join them, will have to manifest and pass on to their colleagues an empathy for the beliefs and ideologies of their opponents.

Ideological polarities – environmentalism vs. pro-development, social liberal vs. social conservative, libertarian vs. progressive – generate animosity that emotionalizes and trivializes debate on unrelated topics where action might otherwise be possible. The only solution is empathy. The extremes of libertarian philosophy are as absurd as those of the progressives. The extremes of social liberalism can be as oppressive as an authoritarian theocracy. Economic development without reasonable environmentalist checks is as undesirable as the stagnant plutocracy that is the unwitting consequence of extreme environmentalism. And while government unions should be outlawed, well regulated private sector unions play a vital role in an era of automation, globalization, and financial corruption.

Despite being inundated with a torrent of slime by their opponents, John Moorlach and Steve Glazer took the high road in their campaigns. They are worthy candidates to nurture the guttering remnants of empathy that flicker yet in Sacramento, and turn them into a roaring, radical centrist fire.

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

Pension Reformers are not "The Enemy" of Public Safety

“You will find that powerful financial and investment institutions are the ones promoting the attacks on your pensions. Firms like Berkshire-Hathaway and the Koch brothers are backing political candidates and causes all over the country in the hopes of making this issue relevant and in the mainstream media. Why? Because if they can crack your pension and turn it into a 401(k), they will make billions. Your pension is the golden egg that they are dying to get their hands upon. By the way, it was those same financial geniuses that brought about the Great Recession in the first place. After nearly collapsing the entire financial system of western civilization, they successfully managed to deflect the blame off of themselves and onto government employee pay/benefits.”
– Jim Foster, Vice President, Long Beach Police Officers Association, posted on PubSec Alliance website

These comments form the conclusion to a piece published by Foster entitled “What does “unfunded liability” mean?,” published on PubSecAlliance.com, an online “community of law enforcement associations and unions.” If you review the “supporters” page, you can see that the website’s “founding members,” “affiliated organizations,” and “other groups whose membership is pending” are all law enforcement unions.

In Foster’s discussion of what constitutes an unfunded pension liability, he compares the liability to a mortgage, correctly pointing out that like a mortgage, an unfunded pension liability can be paid down over many years. But Foster fails to take into account the fact that a mortgage can be negotiated at a fixed rate of interest, whereas a pension liability will grow whenever the rates earned by the pension system’s investments fall short of expectations. When the average taxpayer signs a 30 year fixed mortgage, they don’t expect to suddenly find out their payments have doubled, or tripled, or gone up by an order of magnitude. But that’s exactly what’s happened with pensions.

Apart from ignoring this crucial difference between mortgages and unfunded pension liabilities, Foster’s piece makes no mention of the other reason unfunded pension liabilities have grown to alarming levels, the retroactive enhancements to the pension benefit formula – enhancements gifted to public employees and imposed on taxpayers starting in 1999. These enhancements were made at precisely the same time as the market was delivering unsustainable gains engineered by, as Foster puts it, the “same financial geniuses that brought about the Great Recession in the first place,” and “nearly collapsing the entire financial system of western civilization.”

This is a huge failure of logic. Foster is suggesting that the Wall Street crowd is to blame for the unfunded liabilities of pensions, but ignoring the fact that these unfunded liabilities are caused by (1) accepting the impossible promises made by Wall Street investment firms during the stock market bubbles and using that to justify financially unsustainable (and retroactive) benefit formula enhancements, and (2) basing the entire funding analysis for pension systems on rates of return that can only be achieved by relying on stock market bubbles – i.e., doomed to crash.

You can’t blame “Wall Street” for the financial challenges facing pension funds, yet demand benefits based on financial assumptions that only those you taint as Wall Street charlatans are willing to promote.

Foster ignores the fact that the stock market bubbles (2000, 2008, and 2014) were inflated then reflated by lowering interest rates and accumulating debt to stimulate the economy. But interest rates cannot go any lower. When the market corrects, and pension funds start demanding even larger annual payments to fund pensions and OPEB that now average over $100,000 per year for California’s full-career public safety retirees, Foster and his ilk are going to have a lot of explaining to do.

There is a deeper, more ominous context to Foster’s remarks, however, which is the power that government unions, especially public safety unions, wield over politicians and over public perception. The navigation bar of the website that published his essay, PubSecAlliance, is but a mild reminder of the power police organizations now have over the political process. Items such as “Intel Report,” “Pay Wars,” “Tactics,” “Tales of Triumph,” and “The Enemy” are examples of resources on this website.

When reviewing PubSecAlliance’s reports on “enemies,” notwithstanding the frightening reality of police organizations keeping lists of political enemies, were any of the people and organizations listed selected despite the fact that they were staunch supporters of law enforcement? Because pension reformers and government union reformers are not “enemies” of law enforcement, or government employees, or government programs in general. There is no connection.

Here are a few points for Jim Foster to consider, along with his leadership colleagues at the Long Beach Police Officers Association, and police union members everywhere.

TEN POINTS FOR MEMBERS OF PUBLIC SAFETY UNIONS TO CONSIDER

(1)  Not all pension reformers want to abolish the defined benefit. Restoring the more sustainable pension benefit formulas in use prior to 1999, and adopting conservative rate-of-return assumptions would make the defined benefit financially sustainable and fair to taxpayers.

(2)  Over the long term, the real, inflation-adjusted return on investments cannot be realistically expected to exceed the rate of national and global economic growth. You are being sold a 7.0% (or more) annual rate of return because it is an excuse to keep your normal contribution artificially low, and mislead politicians into thinking pension systems are financially sound.

(3)  As noted, you can’t blame “Wall Street” for the financial challenges facing pension funds, yet demand benefits based on financial assumptions that only those you taint as Wall Street charlatans are willing to promote.

(4)  If public safety employers didn’t have to pay 50% or more of payroll into the pension funds – normal and unfunded contributions combined – there would be money to hire more public safety employees, improving their own safety and better protecting the public.

(5)  Public safety personnel are eyewitnesses every day to the destructive effects of failed social welfare programs that destroy families, ineffective public schools with unaccountable unionized teachers, and a flawed immigration policy that prioritizes the admission of millions of unskilled immigrants over those with valuable skills. They ought to stick their necks out on these political issues, instead of invariably fighting exclusively to increase their pay and benefits.

(6)  The solution to the financial challenges facing all workers, public and private, is to lower the cost of living through competitive development of land, energy, water and transportation assets. Just two examples: rolling back CEQA hindrances to build a desalination plant in Huntington Beach, or construct indirect potable water reuse assets in San Jose. Where are the police and firefighters on these critical issues? Creating inexpensive abundance through competition and development helps all workers, instead of just the anointed unionized government elite.

(7)  If pension funds were calibrated to accept 5.0% annual returns, instead of 7.0% or more, they could be invested in revenue producing infrastructure such as dams, desalination plants, sewage distillation and reuse, bridges, and port expansion, to name a few – all of which have the potential yield 5.0% per year to investors, but usually not 7.0%.

(8)  Government unions are partners with Wall Street and other crony capitalist interests. The idea that they are opposed to each other is one of the biggest frauds in American history. Government unions control local politicians, who award contracts, regulate and inspect businesses, float bond issues, and preserve financially unsustainable pension benefits. This is a gold mine to financial special interests, and to large corporate interests who know that the small businesses lack the resources to comply with excessive regulations or afford lobbyists.

(9)  Government unions elect their bosses, they wield the coercive power of the state, they favor expanded government and expanded compensation for government employees which is an intrinsic conflict of interest, and they protect incompetent (or worse) government employees. They should be abolished. Voluntary associations without collective bargaining rights would still have plenty of political influence.

(10)  Expectations of security have risen, the value of life has risen, the complexity of law enforcement challenges has risen, and the premium law enforcement officers should receive as a result has also risen. But unaffordable pensions, along with the consequent excessive payments of overtime, have priced public safety compensation well beyond what qualified people are willing to accept. Saying this does not make us your “The Enemy.”

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

RELATED ARTICLES AND POSTS

Pension Reform is BAD for Wall Street, and GOOD for California, April 14, 2015

Desalination Plants vs. Bullet Trains and Pensions, April 7, 2015

The Glass Jaw of Pension Funds is Asset Bubbles, February 24, 2015

Police Unions in America, December 9, 2014

How Police Unions and Arbitrators Keep Abusive Cops on the StreetAtlantic Monthly, December 2014

More Taxes and Tuition Buy Time for the Pension Bubble, November 25, 2014

The Amazing, Obscure, Complicated and Gigantic Pension Loophole, November 18, 2014

Estimating America’s Total Unfunded State and Local Government Pension Liability, September 9, 2014

Two Tales of a City – How Detroit Transcended Ideology to Reform Pensions, July 22, 2014

Government Employee Unions – The Root Cause of California’s Challenges, June 3, 2014

California’s Green Bantustans, May 21, 2014

Conservative Politicians and Public Safety Unions, May 13, 2014

The Unholy Trinity of Public Sector Unions, Environmentalists, and Wall Street, May 6, 2014

Public Pension Solvency Requires Asset Bubbles, April 29, 2014

Add ALL Public Workers to Social Security, March 25, 2014

How Much Does Professionalism Cost?, March 11, 2014  (The Kelly Thomas Story)

Pension Funds and the “Asset” Economy, February 18, 2014

Middle Class Private Sector Workers Are NOT “Ripping Off the Next Generation”, December 17, 2013

Unions and Bankers Work Together to Protect Unsustainable Defined Benefits, November 26, 2013

A Member of the Unionized Government Elite Attacks the CPC, November 19, 2013

How Public Sector Unions Skew America’s Public Safety and National Security Agenda, June 18, 2013

Pension Reform is BAD for Wall Street, and GOOD for California

“His idea [Mayor Chuck Reed’s] of pension reform is, you sign up for one pension system, we’re going to change it now in mid career, and now you’re going to get something different.”
Lou Paulson, President, California Professional Firefighters (ref. CPF Video,  April 1, 2015)

The biggest problem with Mr. Paulson’s comment is the double standard he applies. Changing pension systems “mid-career” are just fine when they improve the benefit to Mr. Paulson’s unionized government workforce, but when it comes time to roll back these financially unsustainable changes, he cries foul.

The most obvious, indeed egregious example of a “mid-career” change to pension systems that improved pension benefits began during the internet bubble year 1999, when SB 400 was passed by the California State Legislature. SB 400 changed the pension benefit formula for California’s Highway Patrol officers from “2% at 50” to “3% at 50,” a 50% increase to their benefit. But that’s not all…

SB 400 made this increase retroactive to the date of hire for all participants. That is, if you had worked for 30 years for the California Highway Patrol and were going to retire in another year or two, instead of calculating your pension benefit based on 2% times the number of years you worked, 30 years, you would calculate your pension benefit based on 3% times the number of years you worked. Suddenly your pension benefit went from 60% of final salary to 90% of final salary – a 50% increase. Retroactively.

Mr. Paulson, does SB 400 qualify as “you sign up for one pension system, we’re going to change it now in mid career, and now you’re going to get something different?”

Once SB 400 enhanced pension benefits for California’s Highway Patrol officers along with workers in some other state agencies, laws and MOUs governing the rest of California’s state/local workforce followed suit. By 2005, most public safety employee in California were on a “3% at 50” pension. And in virtually all cases, these benefits were enhanced, by 50%, retroactively.

Last week, on April 10, the Reason Foundation hosted what has become an annual conference for citizens and policymakers involved in pension reform. As reported in the Sacramento Bee and elsewhere, the conference was disrupted by protesters, many of them off-duty firefighters, who carried signs saying things like “Reed and DeMaio Plan – Good for Wall Street, Bad for Rest of Us.”

20150414-UW_Promises

 

The problem with the notion that pension reform is “good for Wall Street,” of course, is that pension reform is bad for Wall Street. The biggest shareholders in the world are public employee pension funds. This began back in 1984, when the California state legislature placed a citizen’s initiative onto the ballot, Prop. 21, that “deleted constitutional restrictions and limitations on the purchase of corporate stock by public retirement systems.” Scarcely understood and narrowly passed, Prop. 21 turned California’s government pension funds into the biggest gamblers on Wall Street.

Before Prop. 21, just for example, pension funds might have purchased bonds to finance revenue generating projects such as dams, power stations and desalination plants, which yield decent annual returns to investors and greatly benefit ordinary Californians. Now, thanks to Prop. 21, California’s 81 independent state/local government employee pension systems, controlling over $722 billion in assets, invest 90% of it out-of-state, chasing 7.5% returns by gambling on volatile stocks, private equity funds, and even hedge funds. Private financial firms rake in billions every year in commissions and fees, while directly managing tens, if not hundreds of billions on behalf of California’s state/local government employee pension funds.

And when those investment banks and private equity firms and hedge funds make bad bets on behalf of public employee pension systems, the taxpayers bail them out.

In Sacramento Bee columnist Jon Ortiz’s report on the protest outside the April 10th pension reform conference, in what is perhaps the understatement of the century, Manhattan Institute researcher Stephen Eide said “The organizational advantages of the other side are significant.”

You can say that again, Stephen. Firefighters, along with other public employee groups, organized by unions who goad them into thinking they’re the victims of “Wall Street,” and “haters,” pack every city council meeting, every county supervisor meeting, every legislative hearing, and every event they can find where the interests of their unions may be threatened. They stare down council members, county supervisors, and legislators, making sure they know that if their interests aren’t favored, they will destroy them politically. And the taxpayers are paying for every cent of this. No businessperson even slightly dependent on an at least neutral local government is going to cross the government unions, because the government unions run the government.

Take a look at this “call to action” created by the Sacramento Area Firefighters to recruit protesters to show up on April 10th:

20150414-UW_Action

As can be seen, the firefighter union contact for this “action” is Bobby Weist, a firefighter for the City of Davis. According to Transparent California, Mr. Weiss made $162,259 last year. As for the rest of the firefighters in Davis, take a look: City of Davis Firefighter Salaries and Benefits. Of the 13 people listed (searching City of Davis employees with “Fire” in the job title), Bobby Weist was the lowest paid. Twelve other firefighters in this small department made more than him. Their salaries and benefits ranged from Weist’s $162,259 to $235,375. Six of them made over $200,000. For those readers who still think employer paid benefits don’t count as compensation, please join around 50 million other Americans and start working as an independent contractor. Every dime you save for retirement has to come out of whatever it is you get paid. Of course it counts.

A firefighter in an affluent California city like Davis works one 24 hour shift every three days. In practical terms however, taking into account paid vacation and holiday benefits, veteran firefighters actually work two 24 hour shifts every week (ref. Davis firefighter MOU), with anything beyond that paid overtime. If a veteran firefighter works 3.3 24 hour shifts per week, they double their regular pay. And the reason cities pay so much overtime? Because they can’t afford to pay the pension benefits for additional firefighters. A doctor working at Kaiser makes $251,000 per year, which is “46% above the national average.” Get that? California’s veteran firefighters, whose total compensation averages over $200,000 per year, make as much as the average medical doctor in the U.S.

Firefighter unions have managed to con many of their members into thinking that any effort to reform pension benefits is unreasonable. They are wrong. If firefighters, and by extension all public servants, really cared about the people they serve, they would (1) repeal Prop. 21, and start pouring pension assets into financing new California infrastructure projects that would benefit all Californians and still yield a solid 5% annual return, and (2) repeal SB 400 and all of its copycat measures, and accept pension benefit formulas as they were up until 1999 – still generous, but at least within the bounds of financial sustainability.

*   *   *

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

California's Cities Aren't Alone – Unions Trample Finances in Scranton, Pennsylvania

The city of Scranton hiked property taxes 57% and garbage collection fees 69% to shore up a police and fire pension funds that will run out of money anyway, in 5 years and 2.5 years respectively.

Amusingly (to outsiders) but certainly not to Scranton taxpayers, Scranton Pensions Increased as Much as 80 Percent as a result of inane mayoral promises.

 The 2011 court ruling that awarded huge raises and millions of dollars in back pay to Scranton firefighters and police officers was a windfall for retirees too, with some seeing a more than 80 percent hike in their pensions between 2008 and 2012, a Times-Tribune investigation found.

The increase, most of which was paid in 2011, made the retirees among the highest paid in Pennsylvania, the newspaper’s review of the Public Employee Retirement Commission records revealed.

The increased pensions come at a time when Scranton, in distressed status since 1992, is struggling to survive. Faced with a $20 million deficit, council enacted a 2014 budget with massive tax increases — hikes of nearly 57 percent in property taxes and 69 percent in garbage fees. The recently passed 2015 budget hiked property taxes 19 percent.

The plans’ actuary, Randee Sekol, recently cited the raises as one of the key factors that have pushed the funds closer to insolvency. With a deficit of $78.8 million as of 2012, the fire fund is projected to run out of money within about 2½ years, while the police fund, with a deficit of $62 million, has less than five years left.

The city had no choice but to approve the pension hikes, issued under former Mayor Chris Doherty’s administration, because they are contractually obligated under the union contracts, said city solicitor Jason Shrive.

No Choice?!

Of course the city had a choice. Actually, the city had two reasonable actions and curiously, Shrive even mentioned one of them.

 Last week, the city asked the fire and police pension boards to forgo that increase. Both boards rejected the request.

Mr. Shrive made the request based on a section of the Class 2A city code that states no increases can be granted to retirees if an actuary determines the fire and police funds are not actuarially sound. Scranton is the only Class 2A city in the state.

Mr. Shrive acknowledged that the union contracts obligate the city to pay the retirees’ raises, but he said he believes state law, which mandates the city follow the Class 2A code, takes precedent.

Tell, Don’t Ask

Given Class 2A law, you don’t ask police and fire for cuts, you tell them. Then if they fight, you make the final step:

Declare Bankruptcy on the Spot 

The police and fire departments would have to plead their case in federal bankruptcy court, most likely getting haircuts of 50% or more.

Ultimately, bankruptcy is where all these cases are headed. Taxpayers certainly don’t deserve preposterous tax hikes while inept politicians look for ways out, because there are no ways out.

In the meantime, collective bargaining of public unions needs to go the way of the dinosaur. Public unions and the hack politicians who support unions have wrecked more city and state budgets than the next 10 things combined.

About the Author:  Mike Shedlock is the editor of the top-rated global economics blog Mish’s Global Economic Trend Analysis, offering insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education.

California's New, Big, Nonpartisan Political Tent

“In politics, a big tent or catch-all party is a political party seeking to attract people with diverse viewpoints and thus appeal to more of the electorate. The big tent approach is opposed to single-issue litmus tests and ideological rigidity, conversely advocating multiple ideologies and views within a party.”
–  Wikipedia, “Big Tent

Something is happening in California. An unstoppable movement for reform is building, attracting support from conscientious Californians regardless of their age, income, race, gender or political ideology. The metaphor of a “big tent” aptly describes the approach that reform leaders are finally embracing.

The fabric of this big tent is supported by two poles, one representing restoring quality education, the other representing restoring financial health to California’s public institutions. But the big tent metaphor breaks down somewhat if it describes a political party. Because most of California’s reform leaders no longer care who gets it done, or what political party takes credit. They just want to Californian children to get quality educations, and they just want to restore economic opportunity to ordinary citizens.

For years, the powers that oppose education reform and fiscal reform have painted reformers as either Republican fanatics, bent on dismantling government, or Democratic traitors, beholden to “Wall Street Hedge Funds.” But this argument is wearing thin. On the topic of education reform, here are three reasons why Californians, all of them, are waking up:

(1) The Vergara Decision:  This case pits nine Oakland public school students against the State of California, arguing that (a) granting tenure after less than two years, (b) retaining teachers during layoffs based on seniority instead of merit, and (c) the near impossibility of dismissing incompetent teachers, is harming California’s overall system of public education, and is disproportionately harming public education in low income communities. Earlier this year, in a Los Angeles Superior court decision, the judge wrote: “The evidence of the effect of grossly ineffective teachers on students is compelling. Indeed, it shocks the conscience.” In return, the California Teacher’s association had this to say in an official press release:

“All along it’s been clear to us that this lawsuit is baseless, meritless, and masterminded by self-interested individuals with corporate education reform agendas that are veiled by a proclamation of student interest” (ref. CTA press release).

Watch the plaintiff’s closing arguments in the Vergara case. Note how the plaintiff’s legal team was actually able to use the testimony of the defendant’s expert witnesses to support their own case.

(2) Parent Trigger Laws:  In 2010, the California State Legislature signed into law the “Parent Empowerment Act.” This law enables parents in failing schools to (a) transfer their child to a higher performing school, (b) permits parents to change policies at an underperforming school if 50% of parents sign a petition, and (c) requires the California Dept. of Education to regularly publish a list of the 1,000 worst performing schools in the state. Former State Senator Gloria Romero, the liberal Democrat who is largely responsible for getting passage of the Parent Empowerment Act, writes this week in UnionWatch about how the Los Angeles Unified School District tried and failed to exempt themselves from the law. But government employee unions in California are incredibly powerful, collecting and spending over two billion dollars in taxpayer funded dues per two-year election cycle. They literally can be in all places at all times. Read the slime job someone sympathetic to the union machine entered on Romero’s Wikipedia profile:

“Romero leads the California chapter of Democrats for Education Reform, an interest group funded by Wall Street hedge fund managers who support charter schools.”

(3) Charter Schools:  Here is an example of why claims that “Wall Street hedge fund managers” are somehow hoping to profit from private schools or charter schools (which are not private) are absurdly unfounded. The Alliance College-Ready Public Schools in Los Angeles is a network of 26 high schools, located throughout Los Angeles, which, like nearly all charter schools, consistently delivers superior educational outcomes at a fraction of the cost of union controlled public schools. But the Alliance network is a nonprofit. The capital investments necessary to launch these schools are funded by donations. There is no return on investment. And the benefactors of these schools have no political agenda – they are Democrats, Republicans, and independents. They are a perfect example of California’s new, powerful, big tent.

Financial reform issues are the other pole that supports the big tent. Despite accusations of “hedge fund managers” and “Wall Street” getting behind allegedly phony reform proposals for public education along with fiscal issues such as runaway pension costs, it is actually corrupt financial interests that join with government bureaucrats to perpetuate the abuse and prevent reform. The reason government services are being cut and infrastructure spending is neglected is because unionized government workers receive excessive pay and benefits, crowding out funding for everything else. Wall Street firms underwrite the bonds to cover the deficits and finance deferred maintenance. Wall Street firms (including hedge funds) invest the pension fund assets. People are connecting the dots.

The behavior of powerful government unions, opposing education and fiscal reforms that virtually everyone else supports, is finally exposing them – along with their partners, corrupt financial interests and crony corporations – as the root cause of the most severe challenges facing Californians. This issue is nonpartisan and transcends ideology. The big tent is filling up.

*   *   *

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

RELATED POSTS

California’s Emerging Good Government Coalition, November 4, 2014

The Challenge Libertarians Face to Win American Hearts, October 14, 2014

Reinventing America’s Unions for the 21st Century, September 2, 2014

The Looming Bipartisan Backlash Against Unionized Government, August 26, 2014

Two Tales of a City – How Detroit Transcended Ideology to Reform Pensions, July 22, 2014

Government Employee Unions – The Root Cause of California’s Challenges, June 3, 2014

A “Left-Right Alliance” Against Public Sector Unions?, May 20, 2014

Conservative Politicians and Public Safety Unions, May 13, 2014

The Unholy Trinity of Public Sector Unions, Environmentalists, and Wall Street, May 6, 2014

Public Pension Solvency Requires Asset Bubbles, April 29, 2014

Construction Unions Should Fight for Infrastructure that Helps the Economy, April 1, 2014

Pension Funds and the “Asset” Economy, February 18, 2014

Forming a Bipartisan Consensus for Public Sector Union Reform, January 28, 2014

The Amazing, Obscure, Complicated and Gigantic Pension Loophole

“The bottom line is that claiming the unfunded liability cost as part of an officer’s compensation is grossly and deliberately misleading.”
– LAPPL Board of Directors on 08/07/2014, in their post “Misuse of statistics behind erroneous LA police officer salary claims.”

This assertion, one that is widely held among representatives of public employees, lies at the heart of the debate over how much public employees really make, and greatly skews the related debate over how much pension funds can legitimately expect to earn on their invested assets.

Pension fund contributions have two components, the “normal contribution” and the “unfunded contribution.” The normal contribution represents the present value of future retirement pension income that is earned in any current year. For example, if an actively working participant in a pension plan earns “3% at 55,” then each year, another 3% is added to the total percentage that is multiplied by their final year of earnings in order to determine their pension benefit. That slice, 3% of their final salary, paid each year of their retirement as a portion of their total pension benefit, has a net present value today – and that is funded in advance through the “normal contribution” to the pension system each year. But if the net present value of a pension fund’s total future pension payments to current and future retirees exceeds the value of their actual invested assets, that “unfunded liability” must be reduced through additional regular annual payments.

Without going further into the obscure and complicated weeds of pension finance, this means that if you claim your pension plan can earn 7.5% per year, then your “normal contribution” is going to be a lot less than if you claim your pension plan can only earn 5.0% per year. By insisting that only the cost for the normal contribution is something that must be shared by employees through paycheck withholding, there is no incentive for pension participants, or the unions who represent them, to accept a realistic, conservative rate of return for these pension funds.

This is an amazing and gigantic loophole, with far reaching implications for the future solvency of pension plans, the growing burden on taxpayers, the publicly represented alleged financial health of public employee pension systems, the impetus for reform, and the overall economic health of America.

Governor Brown’s Public Employee Reform Act (PEPRA) calls for public employees to eventually pay 50% of the costs to fund their pensions, this phases in over the next several years. But this 50% share only applies to the “normal costs.”

In a 2013 California Policy Center analysis of the Orange County Employee Retirement System, it was shown that if they reduced their projected annual rate of return from the officially recognized 7.50% to 4.81%, the normal contribution would increase from $410 million per year to $606 million per year. In a 2014 CPC analysis of CalSTRS, it was shown that if they reduced their projected annual rate of return from the officially recognized 7.50% to 4.81%, the normal contribution would increase from $4.7 billion per year to $7.2 billion per year.

The rate of 4.81% used in these analyses was not selected by accident. It refers to the Citibank Liability Index, which currently stands at 4.19%. This is the rate that represents the “risk free” rate of return for a pension fund. It is the rate that Moody’s Investor Services, joined by the Government Accounting Standards Board, intends to require government agencies to use when calculating their pension liability. As can be seen, going from aggressive return projections of 7.5% down to slightly below 5.0% results in a 50% increase to the normal contribution.

No wonder there is no pressure from participants to lower the projected rate of return of their pension funds. If under PEPRA, a public employee will eventually have to contribute, say, 20% of their pay via withholding in order to cover half of the “normal contribution,” were the pension system to use conservative investment assumptions, they would have to contribute 30% of their pay to the pension fund.

Moreover, these are best case examples, because the formulas provided by Moody’s, used in these studies, make conservative assumptions that understate the financial impact.

In another California Policy Center study, “A Pension Analysis Tool for Everyone,” the normal contribution as a percent of pay is calculated on a per individual basis. One of the baseline cases (Table 2) is for a “3.0% at 55” public safety employee, assuming a 30 year career, retirement at age 55, collecting a pension for 25 years of retirement. At a projected rate of return of 7.75% per year, this employee’s pension fund would require 19.6% of their pay for the normal contribution. Under PEPRA, half of that would be about 10% via withholding from their paychecks. But at a rate of return of 6.0%, that contribution goes up to 31%. Download the spreadsheet and see for yourself – at a rate of return of 5.0%, the contribution goes up to 41%. That is, instead of having to pay 10% via withholding to make the normal contribution at a 7.75% assumed annual return, this employee would have to pay 20% via withholding at a 5.0% assumed annual return. The amount of the normal contribution doubles.

This why not holding public employees accountable for paying a portion of the unfunded contribution creates a perverse incentive for public employees, their unions, the pension systems, and the investment firms that make aggressive investments on behalf of the pension systems. Aggressive rate of return projections guarantee the actual share the employee has to pay is minimized, even as the unfunded liability swells every time returns fall short of projections. But if only the taxpayer is required to pick up the tab, so what?

Adopt misleadingly high return assumptions to minimize the employee’s normal contribution, and let taxpayers cover the inevitable shortfalls. Brilliant.

Public employee pension funds are unique in their ability to get away with this. Private sector pensions were reformed back in 1973 under ERISA rules such that the rate of return is limited to “market rates currently applicable for settling the benefit obligation or rates of return on high quality fixed income securities,” i.e., 5.0% would be considered an aggressive annual rate of return projection. If all public employee pension funds had to do were follow the rules that apply to private sector pension funds, there would not be any public sector pension crisis. And when public employees are liable through withholding for 50% of all contributions, funded and unfunded, that basic reform would become possible.

This is indeed an obscure, complicated, amazing and gigantic loophole. And it is time for more politicians and pundits to get into the weeds and fight this fight. Especially those who want to preserve the defined benefit. Until incentives for public employees and taxpayers are aligned, pension funds will cling to the delusion of high returns forever, until it all comes crashing down.

*   *   *

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

The Misleading Arguments of Those Who Fight Against Pension Reform

Weakening pensions is a choice, not an imperative. The crisis is political, not actuarial.
– Susan Greenbaum, guest editorial, Al Jazeera America, October 20, 2014

With this thesis highlighted, Greenbaum, a retired professor of anthropology at the University of South Florida, has just published a guest editorial that provides in one place a useful example of the distortions, demonizing and inversions of logic used by those who fight against pension reform. To understand why public employees, and their union leadership, remain sincere in their delusions regarding pensions, Greenbaum’s missive may serve as Exhibit A. Because she has joined a chorus that is funded not only by the billions that are spent by public employee unions on political and educational propaganda each year, but also funded by elements of those same Wall Street financial interests they routinely deride.

Let’s examine some of these misleading arguments and tactics, in no particular order:

(1) Identify key reformers, demonize them, then accuse anyone who advocates reform of being their puppets. Greenbaum identifies a lot of “demons,” i.e., opponents, who have been the victims of character assassination for years: John Arnold, a “hedge fund billionaire,” Charles and David Koch, the “conservative billionaire brothers,” and, of course “Wall Street [whose] shenanigans, not sound financial knowledge, posed the real threat to the solvency of these funds.” The fallacy here, notwithstanding the vicious and unfounded attacks that have tainted these individuals, is that whether or not pensions are financially sustainable or equitable to taxpayers has nothing to do with who some of the reformers are. And what about liberal democrats who advocate pension reform, such as San Jose mayor Chuck Reed, Chicago mayor Rahm Emanuel, former Rhode Island treasurer and gubernatorial candidate Gina Raimondo, and countless others? Are they all merely puppets? Absurd.

(2)  Assume if someone advocates pension reform, they must also want to dismantle Social Security. While there are plenty of pension reformers who have a libertarian aversion to “entitlements” such as Social Security, it is wrong to suggest all reformers feel that way. Social Security is financially sustainable because it has built in mechanisms to maintain solvency – benefits can be adjusted downwards, contributions can be adjusted upwards, the ceiling can be raised, the age of eligibility can be increased, and additional means testing can be imposed. If pensions were adjustable in this manner, so public sector workers might live according to the same rules that private sector workers do, there would not be a financial crisis facing pensions. There is no inherent connection between wanting to reform public sector pensions and wanting to eliminate Social Security. It is a red herring.

(3)  “Public sector pension plans would be financially healthy if they had not been invested in risky derivatives, especially mortgages.” This is a clever inversion of logic. Because if pension funds had not been riding the economic bubble, making risky investments, heedless of historical norms, then public employee unions would never have been mislead by these fund managers to demand and get unsustainable enhancements – usually granted retroactively – to their pension benefit formulas. The precarious solvency of pension funds today is entirely dependent on asset bubbles. Most of these funds still have significant positions in private equity investments, which are opaque and highly volatile, and despite recent moves by some major pension funds to vacate hedge fund investments, they still comprise significant portions of pension fund portfolios. What Greenbaum either doesn’t understand or willfully ignores is a crucial fact: if pension funds did not make risky investments, they would have to bring their rate-of-return projections down to earth, and their supposed solvency would vaporize overnight.

(4)  “Weakening pensions is a choice, not an imperative. The crisis is political, not actuarial.” This really depends on how you define “weakening.” If you weaken the benefits, you strengthen the solvency. The fundamental contradiction in Greenbaum’s logic is simple: If you don’t want pension funds to be entities whose actions are just like those firms located on the proverbial, parasitic “Wall Street,” then they have to make conservative, low risk investments. But if you make low risk investments, you blow up the funds unless you also “weaken” the benefit formulas.

To drive this point home with irrefutable calculations, refer to a recent California Policy Center study “Estimating America’s Total Unfunded State and Local Government Pension Liability,” where the impact of making lower risk investments that yield lower rates of return is calculated. If, for example, state and local public employee pension funds in the United States were to lower their rate-of-return to a decidedly non-“Wall Street,” low-risk rate of return of 4.33% (the July 2014 Citibank Pension Liability Index Rate), and invest their $3.6 trillion in assets accordingly, their aggregate unfunded liability would triple from today’s estimated $1.26 trillion to $3.79 trillion. The required annual contribution (normal plus unfunded) would rise from today’s $186 billion to $586 billion. The alternative? Lower benefits.

Those who fight against pension reform willfully ignore additional key points. They continue to claim public sector pension benefits average only around $25,000 per year, ignoring the fact that pension benefits for people who spent 30 years or more earning a pension, i.e., full career retirees, currently earn pensions that average well over $60,000 per year. Public safety unions still spread the falsehood that their retirees die prematurely, when, for example, CalPERS own actuarial data proves that even firefighters retire today with a life-expectancy virtually identical to the general population.

Propagandists who oppose urgently needed reform should recognize that pension reform is bipartisan, it is a financial imperative, and it is a moral imperative. They need to recognize that the sooner defined benefits are adjusted downwards, the less severe these adjustments are going to be. They need to understand that for many reformers, converting everyone to individual 401K plans is a last resort being forced on them by political, legal and financial realities, not an ulterior motive. They need to stop demonizing their opponents, and they need to stop stereotyping every critic of pensions as people who want to destroy retirement security, including Social Security, for ordinary Americans. And if they wish to defend Social Security, then they should also be willing to apply to pension formulas the tools built into Social Security – including its progressive formulas whereby highly compensated workers receive proportionally less in retirement than low income workers. Ideally, they should support requiring all public workers to participate in Social Security, so that all Americans earn – at least to the extent it is taxpayer funded – retirement entitlements according to the same set of formulas and incentives.

 *   *   *

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

Governor Brown – The Bailout King

“What a salesman,” he said, mockingly. “I guess that’s what you learned … selling that stock that went south.”
– California Governor Brown, to challenger Kashkari, during televised debate Sept. 4th, 2014 (ref. SF Gate)

If anyone wants to know what the theme of Governor Brown’s attacks on GOP candidate Neel Kashkari is going to be over the coming weeks preceding the November 4th, election, his remarks in their debate last week would probably provide accurate clues. At least a half-dozen times, Governor Brown smeared Kashkari with accusations of being beholden to his banker friends on Wall Street. You know, those guys who shorted the investments of millions of small investors and turned America into a debtors prison? The sharks at Goldman Sachs? The banker bullies who took taxpayer funded bailouts and then collected billions in personal bonus checks? It will play well.

But Governor Brown is the king of taxpayer bailouts. Because pension funds, the biggest players on Wall Street, are getting bailed out by taxpayers. And over the corrupt courts who deny activists their chance to get pension reforms onto the ballot, or deny voters who have passed pension reforms the chance to enforce them, Gov. Brown presides. Over California’s obscure but powerful Public Employee Relations Board, an entity that consistently overrules common sense details of proposed pension reform and compensation reform, Gov. Brown presides. And before the billions in taxpayer sourced public sector union dues that deluge every policy debate, every press briefing, every lobbyist’s bank account, or politician’s war chest, Brown bows down, beholden, and says – “your wish is my command.”

California’s state and local governments owe an estimated $1.0 trillion dollars (ref. CPC Study), about half of it in the form of unfunded retirement healthcare and pension liabilities for government workers, the other half for bonds and short-term borrowing to finance projects whose costs were inflated by unions, or deficits whose root cause is government union greed. Every dime of that debt benefit a public sector union agenda; every dime of it was facilitated by bankers. Unions and the bankers worked together to con voters into approving the myriad measures that lead to this fiasco, or, even more likely, pressured beholden politicians behind closed doors into enacting them without voter approval.

And Governor Brown presides over this entire, gigantic, exploitative joint venture between government unions and financial firms. Who will bail out California’s state and local governments from a trillion dollars of debt?

Taxpayers.

Who does Brown think will pay for the bailout, when government worker pension funds report too many of their investments were comprised of “that stock that went south?”

Taxpayers.

Who does Brown think benefits from obscenely inflated asset prices that make life unaffordable except to the super rich? Pension funds benefit, of course! Without asset bubbles, the pension funds would collapse overnight, just like subprime mortgage derivatives did back in 2008. The same corruption. And the same victims.

Taxpayers.

What a salesman. What a hypocrite. Governor Brown, the taxpayer bailout king.

20140909a_Brown-350pxJerry Brown – the bailout king of California.

Across California this November, voters will decide on local tax measures promoted as necessary to “keep teachers in classrooms,” and to “protect public safety,” when invariably the amounts being raised are roughly equivalent to the amounts by which pension funds are planning to raise contributions. CalPERS intends to increase their required annual contributions by 50% over the next five years. CalSTRS needs an additional $5.0 billion per year, or more. Jerry Brown is no dummy. He can connect the dots, but he’d better make sure the voters don’t.

The pension bankers and their union allies hide behind rhetoric that is transparent in its falsity, with a press that is either too innumerate, too busy, too biased, or too scared to challenge any of it. CalPERS claims their investments help California’s economy, when 90% of their investments are made out of state, and 16% of their retirees live out of state. Union officials claim their pensions are “modest,” citing “averages” of $25,000 or less, but not revealing how those averages include millions of people who only worked a few years for state or local government and barely vested a pension. The truth: For recent retirees who benefit from the “enhancements” of the past few years, the average non-safety pension plus benefits in California is over $60,000 per year; for safety retirees it is about $100,000 per year.

And Brown leads this chorus of deceit with abandon, claiming last week that thanks to his pension reform (AB 340), “government employees will pay 50% of the normal contribution,” conveniently neglecting to explain the “normal contribution” is deliberately underestimated via using hyper-optimistic rates of return when making the calculation, and ignoring the fact that the unfunded liability (caused by years of insufficient “normal” contributions) requires a much larger “unfunded contribution,” for which public employees, their unions, and the politicians like Brown who are controlled by the pension bankers and the unions, expect taxpayers to bear 100% of the cost.

Bond issuers earn billions on fees to enable California’s state and local governments to accumulate unsustainable debt. Pension funds pay billions each year to financial firms to speculate on global markets in a desperate attempt to prolong the nominal solvency of unsustainable government pensions. And when these bills come due, and when the investment returns fail to meet expectations, taxpayers fund the bailout.

Neel Kashkari may or may not have some explaining to do. But Governor Brown, the bailout king, has no business calling anybody, anywhere, a tool of bankers.

*   *   *

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

The Looming Bipartisan Backlash Against Unionized Government

Whenever discussing politically viable policy proposals to improve the quality of life in California, the imperative is to come up with ideas that strongly appeal to moderate centrists, since that is how most Californians would describe themselves. And there are two compelling issues that offer that appeal: making California’s system of K-12 education the best in the world, and restoring financial sustainability to California’s state and local governments.

While these two objectives have broad conceptual appeal, there is a clear choice between two very different sets of policies that claim to accomplish them. The first choice, promoted by public sector unions, is to spend more money. And to do that, their solution is to raise taxes, especially on corporations and wealthy individuals. The problem with that option, of course, is that California already has the highest taxes and most inhospitable business climate in the U.S.

The alternative to throwing more money at California’s troubled system of K-12 education and financially precarious cities and counties is to enact fundamental reforms. And these reforms, despite the fact that each of them arouses relentless, heavily funded opposition from government worker unions, are utterly bipartisan in character. They are practical, they are fair, and they are not ideologically driven.

Education Reforms:

  • Faithfully implement the Vergara Ruling – abolish the union work rules that (1) grant teacher tenure well before new teachers can be properly trained and evaluated, (2) protect incompetent teachers from dismissal, and (3) favor seniority over merit when implementing workforce reductions.
  • Streamline permitting for charter schools. These independent enterprises allow far greater flexibility to teachers and principals, creating laboratories where new best practices can rapidly evolve. Poorly performing charter schools can be shut down, successful ones can be emulated.
  • Enable school choice, so parents can move their students out of bad schools. Start by aggressively promoting and supporting California’s 2010 Open Enrollment Act, that empowers any parent whose child attends one of the state’s 1,000 lowest performing schools to move them to the school of their choice.

Financial Sustainability Reforms:

  • Roll back defined benefit pension formulas to restore viable funding and protect taxpayers. Adopting “triggers” that prospectively lower pension benefit accruals for existing workers and suspend COLAs for retirees, will preserve the defined benefit. One more market downturn will make this choice unavoidable – the sooner this reform is accepted, the more moderate its impact.
  • Reform public employee compensation. The average total compensation for California’s state and local government workers (taking into account all employer paid benefits including retirement benefits and annual paid vacations/holidays) is now more than twice the median compensation for private sector workers. Typically, approximately 70% (or more) of local government budgets are for personnel costs. Public sector compensation needs to be frozen – or even reduced – until the private sector can catch up.
  • Modernize and streamline public agencies. Introduce flexibility to job descriptions and eliminate unnecessary positions. Upgrade and automate information systems.
  • Improve financial management and accountability. The public sector needs to adhere to the same accounting standards that govern the private sector. If anything, public sector reporting should be more standardized, and faster, than what is required in private industry – currently the opposite applies.
  • Eliminate exploitative financing mechanisms: Outlaw capital appreciation bonds, revenue anticipation bonds, and pension obligation bonds, for starters. Nearly all of the “creative” financing instruments being foisted onto relatively unsophisticated city councils are short-term solutions that create long-term financial nightmares.

There are many other fundamental reforms that could rescue California’s K-12 educational system and rescue California’s state and local finances. But the ones listed here would be a very good start. And while there is plenty of room for debate over the particulars of each of these proposed reforms, there is only one powerful interest group that vigorously opposes all of them – public sector unions.

The reality of California’s unacceptable educational results and insolvent cities and counties will compel concerned citizens of all political persuasions to examine these issues over the next several years. And in that process, the inherent conflict between public sector unions and the public interest will become increasingly obvious. To survive, public sector unions will have to accept reforms that challenge their agenda. They will have to accept meaningful pension and compensation reform. They will have to accept smaller, more efficient workforces. They will have to embrace individual accountability and reward individual merit in public education and throughout public agencies. They will have to abandon their symbiotic relationship with financial predators that pump cash into bloated, unionized public agencies on terms that are usurious to taxpayers.

To the extent public sector unions are not willing to attenuate their power and adapt their agenda to the public interest, their recalcitrance will invite a bipartisan fury from a betrayed people. Even in California.

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

San Jose Court's Flawed Decision Strikes Down Heart of Measure B Pension Reform

In November of 2013, the San Jose voters approved a Charter Amendment that made measured changes and reductions in the cost of the City pension plan. The changes did in fact require greater contributions by the employees and reduced the value of the existing plan to current employees.

The employee unions and others sued the city, contending that current city employees had statutory contract rights which under California case law could not be modified. The court agreed and found the key modifications were illegal and unenforceable.

With due respect, the court was wrong in two major ways: First, the 1965 San Jose Charter specifically provided that all pension plans authorized by the Charter or the City were subject to modification and could even be repealed, and Second, The court misapplied the modification of pension provision set forth in the seminal vested rights pension cases—Kern v. City of Long Beach and Allen v. City of Long Beach.

New Hires after the Effective Date Of The 1965 San Jose City Charter Were Subject to the Charter powers to Modify and/or Repeal Pensions

The court correctly found that under Ca. Rules for determining a vested contract for a pension, San Jose had met all of the criteria. The only question was whether the power set forth in the 1965 Charter granting the city council the power to amend and/or repeal all pensions prevented the city from modifying pensions as attempted by Measure B. The court bent beyond permissible backwardness to rule that the reservation of the right to amend or repeal did not prevent the city employees from acquiring “vested contract rights” to a pension that could not be modified or repealed.

In making its ruling, the court over-looked that under the rules of Kern/Allen, all San Jose employees, except for those who were employed prior to the 1965 Charter containing the amend/or repeal provisions became effective, were “new employees” whose pension rights may always be eliminated or altered even without a reservation of the power to amend and repeal. In the instant case all of the parties “conceded” that Measure B applied to new hires, which makes my point. In Kern/Allen Long Beach had terminated all pensions. “New hires” received no pension at all until years later when the city joined CalPERS. Cases that find a vested right to a pension often state that upon accepting employment, the employee acquires an irrevocable right to the pension that existed at that time. Since 1965, all new City of San Jose hires accepted employment with constructive knowledge that the pension available at the time of hire was amendable and even subject to repeal.

Here is how the judge in the San Jose pension case arrived at its ruling. In the 1960’s California went from a part time to full time legislature. Also, there was substantial re-districting that pushed many legislators out of office. There was a need to increase salaries and pensions for full time legislators and to provide pensions for legislators who were pushed out. So the legislature enacted a series of pension laws to fix the problems from the disruptions. In one instance it enacted a bill that allowed certain legislators to draw pensions immediately after leaving the legislature without waiting for the minimum age limit. In the case of one senator Walsh, that act allowed him to begin receiving his pension 14 years prior to the previous minimum retirement age. The early pension was not funded and the legislature had a change of heart.

Relying on Article IV, section 4, paragraph 3, of the state constitution the legislature rescinded the early retirement act, and thereby, Walsh’s early pension. That section said, in relevant part: “The Legislature may, prior to their retirement, limit the retirement benefits payable to members of the legislature who serve during or after the term commencing in 1967.” Walsh sued claiming a vested right to the early pension. The court, relying on the quoted language found that the rescission was valid.

But the San Jose judge referred to footnote 6 of the Walsh opinion which said that its decision may have been different in the Eu case if benefits for retired legislators had not been funded or subject to a continuing appropriation. Which takes us to Legislators v. Eu.

In Eu, the infamous state-wide initiative, proposition 140 was at issue. Among other things, it terminated pensions for legislators and placed them under social security. That obviously violated the sitting legislator’s vested pension rights per Kern. In footnote 6, the court said: “We have no doubt that incumbent members of the Legislature had contractually vested pension rights under the LRL (Legislature Retirement Law) which would be protected under the contract clause. The question whether a former member of the Legislature acquired a contractual right to a wholly unmodifiable pension benefit when he served during a time when the LRL was neither actuarially funded nor supported by a continuing appropriation, was not a question which was implicated in the Legislature v. Eu decision.” The San Jose trial judge cited this footnote as the KEY to its finding that the power to amend and/or repeal all pensions as set forth in the 1965 City Charter , did not prevent new hires after the 1965 Charter from acquiring vested rights to pensions that could not be impaired in spite of the Charter power to amend/repeal pensions.

The judge, ignoring that the San Jose employees were “new hires” under the 1965 Charter read into that footnote that if a pension plan was actuarially funded, or subject to a continuing appropriation, it was untouchable and could not be impaired. Yes, the logic escapes me too. If anything, I read footnote 6, in Walsh as implying that if the LRL for retired Legislators was both unfunded and without a continuing appropriation, then the pension switch to social security as set forth in Prop. 140 may have been upheld. And since when do trial judges make serious legal decisions based on dicta contained in a confusing footnote of an appellate decision? What about the clear language of the Charter?

Also, the court made a monumental leap in describing the limited modification right set forth in Walsh as a “reservation of rights.” It was clearly a very limited modification right appropriate for rapidly changing circumstances. At best it was a provision to correct oversights, not a condition precedent to pension benefits as set forth in the City’s 1965 Charter. To treat the two as equal led to the court’s flawed decision. All scholars agree that reservation of the right to amend pensions for employees hired after the effective date of the reservation are subject to its terms. If a city can terminate pensions for new hires, then obviously it may take the less impairment path to make modifications to the reduce the cost of the plan.

The San Jose Charter provisions gave the city the specific power to modify or even repeal pensions, consistent with Kern/Allen. The attorneys who drafted the 1965 Charter had obviously read Kern/Allen. They knew that Long Beach had been allowed to terminate pensions for “new hires.”That was clearly the reason for the modify/repeal Articles in the 1965 Charter.

Section 1503 of the San Jose Charter (never amended to date), in effect prior to any plaintiff’s “date of hire” said: “However, subject to other provisions of this Article, the Council shall at all times have the power and the right to repeal and amend any such retirement system or systems,…” The first rule of statutory construction is the “plain meaning rule.” If the meaning of the statute or charter is clear that ends it. Nothing could be plainer as it related to “new hires.” The Charter provision was and is a clear power to modify or repeal pensions. To demean it as only equal to the over-sight power of the legislature involved in the Walsh case did not justify the trial courts conclusion that the amend/repeal provisions of the City Charter were meaningless. Remember, there is a presumption of legality that applies to the Charter.

Mis-application of Kern and Allen

In Kern and Allen, the court dealt with the impact of a termination of all city pensions on the rights of current employees as of the date of termination. In Kern, it found that as to current employees, their pension rights could not be affected by the termination of pension rights. Thereafter, the city attempted to reduce the value of those pension rights and in Allen, the Court held that it could not do so. The termination of pension rights as to “New Hires” was not and could not be challenged.

Both Kern and Allen were cases that did NOT involve the issue of whether the cost of the pension plan was so out of hand that it threatened the integrity(the ability to pay reasonable pensions) of the City pension system. The Court made it clear that the rules concerning modification were entirely different in such cases and cited several material modifications (reductions in benefits) that it had allowed in previous cases so that Agencies could preserve the integrity of its pension system. In the reduction cases off-setting replacement of reduced benefits was NOT required. In one of the reduction cases, the court had allowed a reduction of 2/3 to 1/2 of final salary without off-setting benefits.

The mis-application of Kern/Allen arose because of non-attorneys not understanding that the off-setting benefits rule applied only to cases where the integrity of the pension system was not in jeopardy. Also, City Attorney’s in concert with employee unions consistently mis-advised the city and the courts.

But the appellate courts share blame, because they often cite the canard that pensions may not be impaired without equal off-setting benefits without clearly stating that per Kern/Allen that rule only applies in cases where the integrity of the pension system is not threatened. Re-read Kern. What I have just said is clear. Kern v. City of Long Beach(1947) 29 Cal. 2d. 128.

In the San Jose case, the financial evidence showed that the pension system lacked “integrity” and was threatening the pension system. Therefore, the reduction in the value of employee pension arising from the adoption of Measure B by the people were valid per Kern.

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Click here to read more posts by John Moore.

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 Moore 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. Moore is an admirer of Judge Klein, for his ability and accuracy on the law. As managing partner at his law firm, Moore understood the goals of bankruptcy filings and its benefits and limitations.

Vallejo’s post-bankruptcy plight gets little notice in California’s state capitol

When Vallejo, California was facing bankruptcy, pension reformers warned officials there that unless the city takes the opportunity to trim back pensions for current employees that it would soon be back in the fiscal tank. One official there said the city didn’t want to take on the politically powerful California Public Employees’ Retirement System (CalPERS), but backers of the city’s work-out plan mainly depicted critics as anti-union gadflies. The city hit the fiscal wall in 2008, but by 2010 (before it had even emerged from bankruptcy), it was clear that the city would soon be facing problems again. As I wrote in the Wall Street Journal, “To permanently bring its spending in line with its tax base, however, at some point Vallejo will have to do something about its pensions.” The city ignored such warnings.

Vallejo — a historical but gritty blue-collar, union-dominated port town on the edge of the San Francisco Bay Area — is in trouble again and might have to face a second bankruptcy, according to recent news reports. City officials downplay the findings, but CNN reported that pension costs have increased by 40 percent over the last two years even though the city has slashed employment and public services. The pension gouging from the past decade was so severe that the city just can’t keep its head above water. California courts have successfully stopped efforts by non-bankrupt cities to roll back pensions for current employees, even on a forward-going basis, and those cities that have chosen bankruptcy have mostly avoided the fight with CalPERS.

With public employees spared pension cuts, there’s not much that Vallejo can do other than cut services. “A lot of cuts have already been made,” according to the article. “Vallejo’s roads are littered with potholes. Three of its nine fire stations remain closed. And its police force is down by almost 40% — though … there are plans to hire more officers this year. Crime has surged, with more than two dozen homicides last year, compared to only seven in 2006. Burglaries are also on the rise. Residents maintain neighborhood watch groups, but the crime is taking a toll.”

It’s a shame. Vallejo is a beautiful old city, but it is crumbling because of the greed of its public-employee unions. Moody’s argued that the Vallejo situation holds lessons for two other troubled California cities, Stockton and San Bernardino. The latter has tried to deal with its pensions, but doesn’t have the power to take on CalPERS. Stockton followed the same route as Vallejo and came up with a bankruptcy plan that doesn’t trim pensions. And the city is raising taxes. As I reported for U-T San Diego, the Stockton numbers don’t look encouraging:

“For instance, Stockton-based watchdog Dean Andal, a former Republican Assemblyman and Board of Equalization member, walked me through some disturbing line items about Stockton’s plan to emerge from bankruptcy. … (T)he City Council recently approved a Plan of Adjustment to get back on sound footing. But based on an internal May forecast from the city’s mediation, Stockton could soon again be upside-down even after approving the plan. ‘By the fourth year, they return to insolvency,’ Andal said. ‘It has statewide consequences because other cities have the same structural issues. It’s not possible to become solvent again unless you break PERS (Public Employment Retirement System liabilities).’”

Stockton officials, like Vallejo officials, are sugar-coating the numbers. The Stockton city manager came up with his own rosy budget report, the details of which he wouldn’t even share with council members and the vice mayor. The Vallejo city manager told CNN that a new city tax is basically fixing their problems. Meanwhile, the courts continue to quash efforts by struggling cities to get control of their pension monster before they face insolvency and the state government is fighting San Diego’s fairly modest efforts to reform pensions. Attorney General Kamala Harris did her part to squelch a statewide pension-reform initiative by giving it an unfair title and summary sure to sour it in the minds of voters.

So the state’s political forces are allied against pension reform. Meanwhile, services get cut and taxes get raised. Those are the only two viable solutions. But even that’s not enough — as bankrupt cities ponder a second go at bankruptcy. We warned Vallejo, but it didn’t listen. So here goes again: Unless cities rein in the millionaire pensions granted to police and firefighters, public services (including police and fire, by the way) will suffer. Don’t count on anyone listening.

Steven Greenhut is the California columnist for U-T San Diego.

Reforming Public Sector Unions and Public Sector Pensions is NOT “Anti-Worker”

An incoming email responding to last week’s UnionWatch editorial “Los Angeles Police Union Attacks CPPC Study” included the following statement:

“While you profess not to dislike public employees, it is clear that you disliking public employee unions.  Interesting—so you might like a public employee or two individually, you just dislike when those individuals organize to work for better working conditions or pay.  Which goes hat in hand with your desire to make public employee pension plans seem so expensive that they are terminated.” 

This invites a response.

Our concerns about public employee unions are primarily based on the fundamental differences between unions in the public sector vs. unions in the private sector. There’s nothing wrong – in principle – when “individuals organize to work for better working conditions or pay.” But if those individuals work for the government, there are plenty of problems. We are seeing the result of this throughout California and the rest of the United States.

Public employees work for an entity that funds its operations not by selling competitively priced products to willing buyers, but by assessing taxes that must be paid under threat of imprisonment. And public employees are managed by elected officials, not business owners, elected officials whose campaigns – especially at the state and local level – are funded by public employee unions.

Unionized government workers demand wage and benefit increases from bosses they elected, paid for by government entities that don’t have to earn a profit but can simply take money from other citizens. It is difficult to imagine how a system set up this way can possibly avoid getting dangerously out of control.

As we explore in-depth in our post “The Preexisting Political Advantage of Government Workers,” even if public employees were prohibited from engaging in collective bargaining, they would still have tremendous influence over the political process. After all, it is difficult to find citizens who have a greater stake in how our state and local government is managed than government employees – they have far higher rates of voter turnout, they are far more likely to run for office, and they are far more organized. If government workers were not unionized, they would still be able to effectively lobby for better working conditions or pay.

As it is, with rare exceptions, public employee unions have taken over our state and local governments. A timely example of their power is AB 822, reported on by CalWatchDog’s Katy Grimes in her recent report “Assembly bill would stall local pension reform efforts.” Along with bills already passed to impede the state initiative process, and bills already passed to impede the municipal bankruptcy process, now we have a bill proposed in the California legislature that will impede the ability of voters to modify pension benefits. This is legislation by and for the unions.

AB 822 is offered in direct response to local pension reform initiatives passed by supermajorities in San Jose and San Diego. Which brings us back to our incoming email.

“Which goes hat in hand with your desire to make public employee pension plans seem so expensive that they are terminated.”

The biggest irony here is that if pensions aren’t reformed, i.e., if benefits aren’t reduced in equitable and sustainable ways, they will be terminated by default. In an ideal scenario, pension benefits would all be simply reduced to the formulas that applied prior to 1999 when the California state legislature passed SB 400 to retroactively increase California Highway Patrol pensions by 50%. In the cascade of copycat legislation and contract revisions that followed over the next several years, California’s state and local governments planted the seeds of financial disaster.

Pension reformers are not trying to make pensions “seem” expensive. As they are currently structured, even if 7.0% average annual rates of return for the next 30 years can be achieved, they are expensive. And for every 1.0% that rate of return drops, annual pension contributions have to increase by 10% of payroll.

The problem with trying to have an honest discussion about pensions is compounded because public sector unions aren’t the only defenders of the status-quo. The pension bankers themselves are making billions in fees every year, and they aren’t about to advocate changes. In general, the financial sector is hugely empowered precisely because of unionized government overspending – they invest the government pension money, and they issue bonds to cover government deficits. Remember this, the next time a spokesperson for the California Teacher’s Association urges you to “blame Wall Street.”

To advocate reform – an equitably reduced, financially sustainable defined benefit for public employees, and a set of reasonable regulations to curb the currently unchecked power of public sector unions – is in no way an attack on public sector employees, or retirement security, or even unions themselves.

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UnionWatch is edited by Ed Ring, who can be reached at editor@unionwatch.org.

California’s Public Employment Relations Board Thwarts Pension Reform

When it comes to state government, most people think of the governor and the members of the Legislature, those who are elected by the voters and do their business under the Capitol dome.

However, there is an entire class of faceless, unelected appointees to the state’s hundreds of boards and commission who determine whether or not state residents receive good services and a decent return for billions of dollars of taxpayer money.

These boards and commissions are generally tasked with oversight of various aspects of state management. However, some of these obscure agencies have proven to be nothing more than fronts for special interests.

One of the most egregious of these is the powerful Public Employment Relations Board (PERB) which is comprised of officials who behave as if they were a separate branch of California government. The members of PERB are currently taking aggressive action that could have a major negative impact on taxpayers in San Diego, San Jose, and potentially other communities.

PERB describes itself as quasi-judicial administrative agency charged with administering the collective bargaining statutes covering employees of California’s public schools, colleges, and universities, employees of the State of California, employees of California local public agencies (cities, counties and special districts), trial court employees and supervisory employees of the Los Angeles County Metropolitan Transportation Authority.

PERB is now using its tremendous clout in an effort to overturn landmark pension reform initiatives overwhelmingly approved by voters in the cities of San Diego (67%) and San Jose (70%). Board lawyers have filed complaints against the two cities claiming that public officials failed to bargain in good faith on pension issues with unions representing city employees, prior to the passage of the initiatives.

Voters in San Diego and San Jose acted proactively to avoid the fate of Vallejo, Stockton and San Bernardino, cities that have gone financially toes up because past city council members, elected with the support of government employee unions, agreed to lavish pension benefits that were unsustainable. With the future of their own cities on the line, citizens used the initiative process to approve reforms that would put pensions on an actuarially sound footing.

While the reforms approved by each community are slightly different, neither takes anything away from what employees have already earned. For public employees, having to contribute a little more to their own pensions, or to work several extra years for pension eligibility, is not a bad trade off if it means both cities will avoid bankruptcy and will be in a position to meet their future obligations to these workers.

However, Jerry Brown, who talks a good game of pension reform, is nonetheless beholden to the government employee unions for his repeat trip to the Governor’s office. Therefore, it should come as no surprise that he has used his discretion to stack the PERB with union hacks.

So now the dirty work to overturn pension reform at the local level is being done by PERB, and the governor will raise his hands, palms outward, and say, “Who me?”

With the huge public support for reasonable reform, isn’t it time for the governor and PERB to get out of the way and allow these pension changes that are fair to both employees and taxpayers to proceed?

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

Bipartisan Solutions For California

When Governor Jerry Brown, back in the 1970′s, suggested that California should have its own aerospace program, he was dubbed “Governor Moonbeam,” and the moniker has stuck to this day. That’s too bad, because at the time Gov. Brown made that statement, California had the most robust aerospace infrastructure in the U.S. The nexus of companies in Los Angeles – Northrop, Hughes, Rockwell, TRW, plus the branches of dozens of others – the launch complex at Vandenberg, the vast resources of land in the Mojave including Edwards AFB – made California a natural location to further America’s space efforts.

Today half of the companies noted above have been driven out of California by over-regulation, and instead of talking about mining the asteroids for platinum, Jerry Brown is talking about bullet trains to nowhere. Before you laugh at the Gov. Moonbeam’s original idea, consider California-based entrepreneur Elon Musk, founder of SpaceX. This private aerospace company, which is already supplying launch vehicles to NASA, is now rolling out their “Falcon Heavy,” the largest launch vehicle since the Saturn V moon rocket.

The asteroids will be explored and mined by robotic spacecraft within a few decades. And much of the ingenuity and entrepreneurship, risk capital, and high technology will be coming from California. Imagine if California’s dawning recapture of the lead in aerospace technology, following her existing lead in biotech and info-tech, were encouraged by California’s laws and regulations instead of occurring in spite of them?

There are two steps towards putting California back on track. Both relate to public policy: One, reform California’s government and make it more business friendly, two, set a government project agenda that emphasizes infrastructure over pay and benefits for government workers. These steps will lower the cost of living for all California residents.

It would be an ironic blessing if California’s bloated, dysfunctional state and local governments were to financially implode sooner than anywhere else in the U.S., because it would mean Californians would be the first to come out recovered on the other side. It will be a painful transition, but manageable if investments into projects that lower the cost of living are made at the same time as austerity measures are imposed on government workers and recipients of government entitlements. Here are solutions for California:

(1) Balance State and Local Government Budgets:

(a) Lower the wages of all state and local government workers by 20% of whatever amount they make in excess of $50,000 per year. Lower the wages of all state and local government workers by 50% of whatever amount they make in excess of $100,000 per year. Include in “wages” ALL forms of compensation.

(b) Impose special tax assessments on state and local government pensions in the amount of 50% of all pension payments in excess of $60,000 per year and 75% of all pension payments in excess of $100,000 per year.

(c) Require 75% of all school employees to be teachers in a classroom. Raise average class size to 30 students per classroom by abandoning the failed policy of “mainstreaming” virtually all students, and by separating students into classes based on their academic performance.

(d) Faithfully implement the welfare and entitlement policies already adopted by most other states during the Clinton administration.

(2) Change the Rules in Sacramento:

(a) Implement fundamental curbs on the rights of public sector unions, including:  Grant all public sector workers the right to opt-out of union membership and payment of any union dues including agency fees. Prohibit government payroll departments from collecting union dues. Allow all public sector employees to negotiate their own wages and benefits and not be bound by collective bargaining terms if they wish. Prohibit public sector unions from negotiating over long term benefits, and require all current wage and benefit agreements to expire at the end of the term for the elected officials who approved the agreements. Prohibit public sector unions from engaging in political activity of any kind.

(b) Discontinue the planned “CO2 auctions,” which are nothing more than a way to redistribute money from middle class ratepayers to bankers, phony green entrepreneurs, and public sector payroll departments. Repeal AB32. Crucially, lift the crippling burden of land use regulations that keep the prices of homes and commercial property ridiculously high in California.

(c) Revisit all business-friendly recommendations made by business associations such as the bipartisan California Chamber of Commerce. This would not include compromise positions in support of public sector unions and crony capitalist environmental regulations. This would include banning mandatory project labor agreements or requiring union only contractors on government funded projects.

(3) Use government surpluses to engage in public works, and streamline permitting for private infrastructure investments, that LOWER the cost of living for everyone:

(a) Rebuild California’s aqueducts and develop additional aquifer and surface storage for runoff harvesting. Build desalination plants on the southern California coast. Upgrade existing dams and pumping stations. Permit farmers to contract with California’s urban water districts to sell their water allocations. Create water abundance and make water cheap.

(b) Build new power stations. Whether this is a joint project with Nevada to establish nuclear power stations in the vicinity of Yucca Mountain, or building new natural gas fired power plants, the immediate establishment of an additional 20%+ of generating capacity in California would allow a lowering of utility rates and make California a net exporter of electricity.

(c) Enable development of offshore oil and gas using slant drilling from land. It is no longer necessary to develop offshore drilling rigs to extract energy reserves. There are cost-effective ways to bring this energy onshore without the risk of an oil spill from an offshore platform.

(d) Enable development of natural gas reserves in California.

(e) Enable development of mines and quarries in California.

(f) Build additional pipeline capacity into California to import and export natural gas to and from elsewhere in North America.

(g) Permit development of a liquid natural gas terminal at least 10 miles off the California coast. Get California onto the global LNG grid to import and export natural gas and further diversify sources of energy and income. Create energy abundance and make energy cheap.

(h) Upgrade existing roads, bridges, and freeways. Begin working on “smart lanes” that will facilitate cars driving on autopilot.

(i) Instead of developing a bullet train – something that might be worth experimenting with once everything else on this list is done and Californians have money to burn – upgrade California’s existing freight and passenger rail infrastructure. When practical, integrate passenger and freight service on common rail corridors in large cities where high population densities make passenger rail economically viable. Complete a passenger rail link from Bakersfield to Los Angeles. Increase the speed of intercity passenger rail to 100+ MPH, which can be done on upgraded but already existing track.

Implementing policies designed to lower the cost of living is a perilous undertaking. Because it involves increasing the supply of all basic commodities and services including taxes, housing, energy, water and transportation, it lowers profits and can contribute to a deflationary economy. But by lowering the cost of living, despite the fewer dollars earned by our public sector workers, or by our private sector workers employed by corporations competing in the global economy, the overall standard of living may actually improve.

The solution for California is to develop infrastructure to lower the cost of living at the same time as deregulation is encouraging economic growth. Because California enjoys so many gifts – natural resources of staggering abundance and diversity, and an economy that is the technological leader in the world – the solutions described here, though painful, will ensure California survives and thrives during what are sure to be challenging years ahead.

During the 21st century there are two competing models of economic growth. The path we’re on involves artificially inflating the prices of all basic commodities. Staying on this path will reduce global competition, empower entrenched global elites, and consolidate the power of public sector unions, monopolistic corporations, and global bankers. Economic growth will be slow, and in terms of genuine productivity, it will be an anti-competitive age of control by the few over the many, and a sad utilization of the great technological advances we have seen in recent decades.

The alternative economic model for California is to adopt policies that dismantle monopolies, nurture competition, and encourage new development of land and resources. If costs for basic commodities are lowered instead of raised, capital is released to finance completely new industries, from space commercialization and development to life-extension and other fundamental advances in medicine. This will cause rapid and sustainable economic growth, unprecedented per-capita prosperity, even faster technological advancement, and a renewed golden age.

More Pension Truths and Why You Should be Very Angry

How much is that sweet retired teacher who lives down the street draining from your bank account? As the public employee pension mess worsens in California, little Rhode Island shows a way out.

In last week’s post, I focused on “air time,” a little known scheme in California and 20 other states that allows teachers and other public employees to pad their pensions at taxpayers’ expense. Also, not very well known is just how many of Joe and Jill Taxpayer’s tax dollars are going into the pockets of retired teachers.

In California, teachers contribute 8 percent of their pay to their retirement system. Where do the rest of the contributions come from? The current rates include 8.25 percent from the teacher’s employer and 2 percent from the state. But wait a minute. Who is the teacher’s employer? It’s the school district. In Los Angeles, for example, most school district money comes from the state, some from the federal government and the rest is local revenue. Hence, the employer’s contribution is all really the taxpayer’s burden, as the state, city and feds generate no money on their own. So it would be much more honest to say that 10.25 percent comes from the taxpayer.

Let’s look at the taxpayer’s responsibility another way. Sandy, a teacher I know, worked for 24 years in CA and retired at age 61. The amount of money she contributed into the system at retirement (including interest accrued along the way) was about $150,000. Sandy started collecting a pension of about $40,000 year (plus a yearly 2 percent COLA increase) for life. Whatever interest this money accrues over the next few years, Sandy’s contribution will have evaporated in about four years. So, at age 65 she will start living off other people’s money – whatever the “employer” (i.e. taxpayers) kicked in, whatever the “government” (i.e. taxpayers) kicked in and whatever is left, the taxpayers will have to fork over.

Should Sandy live to be 80, 15 years of her pension will be coming from the taxpayer – about $600,000 worth. (Note: there are about 755,000 current and retired teachers in the state as well as another 1.6 million in the California Public Employee Retirement System who can and are taking advantage of this system.)

Can anyone justify this? Hardly. The question then becomes what to do without impoverishing retired teachers and other public employees, while at the same time stopping the rip-off of taxpayers.

First, those who are retired need to show good will and agree to take a cut in their pensions. Additionally, those districts offering virtually free health care for life – many teachers are required to contribute only miniscule co-pays — need to curtail their generosity.

An example of what can be done just took place in Central Falls, Rhode Island. About to go under due to its suffocating union contracts, the city convinced firemen and cops to agree to accept a cutback in their pensions. Accomplished in a Democrat controlled state, maybe there is some hope for the rest of the country. Rhode Island State Treasurer Gina Raimondo recently gave a talk at the Manhattan Institute where she explained that they pulled off such a feat with “political nerve and good judgment.

“The plan enacted in November cuts $3 billion of the state’s $7 billion unfunded liability by raising the retirement age, suspending cost-of-living increases until the pension system is 80% funded, and even moving workers into a hybrid plan that has a smaller guaranteed annuity along with a 401(k)-style defined-contribution plan.

“‘We decided we owe each other a bright future,’ said Ms. Raimondo, who said she and fellow Democrats (as well as Independent Governor Lincoln Chafee) came to the conclusion they could no longer afford the lavish promises made to state workers without destroying economic opportunity for everyone.

“‘More government revenue wasn’t an option because Rhode Island already suffers from the nation’s 5th highest state and local tax burden—a full 10.7% of per capita income, according to the Tax Foundation. Everyone in the pension system had to give something, from new employees to retirees.’ But a key to reform, Ms. Raimondo said, was to avoid blaming these beneficiaries for the mistakes of the past. ‘No finger pointing’ was her mantra, along with a corollary: ‘Math, not politics.’

“The first step was an education campaign to explain why a tiny state could not afford an unfunded liability that was more than $7 billion and headed north. This also helped to blunt union opposition. Once there was a consensus that the problem was real, citizens were ready to consider solutions.

“Ms. Raimondo said those solutions had to be discussed openly. Rhode Island’s reform process was so transparent that even when a draft bill to implement the changes leaked to the press before its formal introduction, it was essentially a nonstory because the reforms had already been discussed publicly.”

Those of us in California need look at what has happened in Rhode Island – recognition of a big problem, honest dialogue about it, transparency, shared sacrifice and a move to privatization – and start the ball rolling in that direction. Teachers and other public employee pensioners need to come forth and be a part of the process. They need to recognize that pension fund managers are clueless Pollyannas and that their unions have conned them by insisting that the current system is sustainable. This cannot happen too soon. If we don’t do something in the near future, the state could conceivably go into default and we could see the current exodus of business owners and taxpayers become a full-fledged stampede if California’s fiscal malaise gets any worse. I wonder how many Californians can fit into sensible little Rhode Island?

About the author: Larry Sand, a former classroom teacher, is the president of the non-profit California Teachers Empowerment Network – a non-partisan, non-political group dedicated to providing teachers with reliable and balanced information about professional affiliations and positions on educational issues.