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Court Pension Decision Weakens ‘California Rule’

The one thing some pension reformers say is needed to cut the cost of unaffordable public pensions: give current workers a less costly retirement benefit for work done in the future, while protecting pension amounts already earned.

It’s allowed in the remaining private-sector pensions. But California is one of about a dozen states that have what has become known as the “California rule,” which is based on a series of state court decisions, a key one in 1955.

The pension offered at hire becomes a “vested right,” protected by contract law, that cannot be cut, unless offset by a new benefit of comparable value. The pension can be increased, however, even retroactively for past work as happened for state workers under landmark legislation, SB 400 in 1999. 

Last week, an appeals court issued a ruling in a Marin County case that is a “game changer” if upheld by the state Supreme Court, said a news release from former San Jose Mayor Chuck Reed, who wants to put a pension reform initiative on the 2018 ballot.

Mayor Chuck Reed considered it a “game-changer” when a Marin County Court rejected the rigid interpretation of the California Rule of vested rights, ruling that although an employee has a vested right to a pension, their only right is to a ‘reasonable pension,’ one without benefit spiking

 

Justice James Richman of the First District Court of Appeal wrote that “while a public employee does have a ‘vested right’ to a pension, that right is only to a ‘reasonable’ pension — not an immutable entitlement to the most optimal formula of calculating the pension.

“And the Legislature may, prior to the employee’s retirement, alter the formula, thereby reducing the anticipated pension. So long as the Legislature’s modifications do not deprive the employee of a ‘reasonable’ pension, there is no constitutional violation.”

The ruling came in a suit by Marin County employee unions contending their vested rights were violated by a pension reform enacted in 2012 that prevents pension boosts from unused vacation and leave, bonuses, terminal pay and other things.

These “anti-spiking” provisions apply to current workers. The major part of the reform legislation, including lower pension formulas and a cap, only apply to new employees hired after Jan. 1, 2013, who have not yet attained vested rights.

The California Public Employees Retirement System expects the reform pushed through the Legislature by Gov. Brown to save $29 billion to $38 billion over 30 years, not a major impact on a current CalPERS shortfall or “unfunded liability” of $139 billion.

Similarly, legislation two years ago will increase the rate paid to school districts to the California State Teachers Retirement System from 8.25 percent of pay to 19.1 percent, while the rate paid by teachers increases from 8 percent of pay to 10.25 percent.

The limited teacher rate increase followed the California rule. The new benefit offsetting the 2.5 percent rate hike vests a routine annual 2 percent cost-of-living adjustment, which previously could have been suspended, though that rarely if ever happened.

While mayor of San Jose four years ago, Reed got approval from 69 percent of voters for a broad reform to cut retirement costs that were taking 20 percent of the city general fund. A superior court approved a number of the measure’s provisions.

But a plan to cut the cost of pensions current workers earn in the future by giving them an option (contribute up to an additional 16 percent of pay to continue the current pension or switch to a lower pension) was rejected by the court, citing the California rule.

In a settlement of union lawsuits, Reed’s successor locked in some retirement savings but dropped an appeal of the option. Reed, a lawyer, thinks the California rule is ill-founded and likely to be overturned if revisited by the state supreme court.

He has pointed to the work of a legal scholar, Amy Monahan, who argued that by imposing a restrictive rule without finding clear evidence of legislative intent to create a contract, California courts broke with traditional contract analysis and infringed on legislative power.

“California courts have held that even though the state can terminate a worker, lower her salary, or reduce her other benefits, the state cannot decrease the worker’s rate of pension accrual as long as she is employed,” Monahan wrote.

In the ruling last week, Justice Richman describes the setting for the reform legislation: soaring pension debt after the financial crisis in 2008-09 and a Little Hoover Commission report in 2011 urging cuts in pensions current workers earn in the future.

He cites several court rulings in the past that conclude cuts in pensions earned by current workers are allowed to give the pension system the flexibility needed to adjust to changing conditions and preserve “reasonable” pensions in the future.

Some of the court rulings cited allowed changes in retirement ages, reductions of maximum possible pensions, repeals of cost-of-living adjustments, changes in required service years, pensions reduced from two-thirds to one-half of salary, and a reasonable increase in pension contributions.

“Thus,” Richman wrote, “short of actual abolition, a radical reduction of benefits, or a fiscally unjustifiable increase in employee contributions, the guiding principle is still the one identified by Miller in 1977: ‘the governing body may make reasonable modifications and changes before the pension becomes payable and that until that time the employee does not have a right to any fixed or definite benefits but only to a substantial or reasonable pension.’”

Richman’s ruling makes several references to a unanimous state Supreme Court decision in 1977 in Miller v. State of California. He said the foundation of the unions’ constitutional appeal is a “onetime variation” in one word in another ruling.

“To be sustained as reasonable, alterations of employees’ pension rights must bear some material relation to the theory of a pension system and its successful operation, and changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages,” the state Supreme Court said in Allen v. City of Long Beach (1955).

Richman said a 1983 state Supreme Court decision (Allen v. Board of Administration) changed “should” have a comparable new advantage to “must,” citing two other State Supreme Court decisions that said “should” and an appeals court decision that said “must.”

In a decision a month later, he said, the Supreme Court used “should” while referring to a comparable new benefit and has continued to use “should” in all rulings since then.

“It thus appears unlikely that the Supreme Court’s use of ‘must’ in the 1983 Allen decision was intended to herald a fundamental doctrinal shift,” Richman said, citing two rulings that “should” is advisory or a recommendation not compulsory.

The 39-page decision written by Richman and concurred in by Justices J. Anthony Kline and Maria Miller makes other points in its rejection of a rigid view of the California rule and pension vested rights.

“The big question for pension reformers is whether or not the California Supreme Court will agree,” Reed said in a news release from the Retirement Security Initiative. “If it does, the legal door will be open for Californians to begin to take reasonable actions to save pension systems and local governments from fiscal disaster.”

There was no immediate word from the Marin Association of Public Employees and other county employee unions last week about whether the appeals court decision will be appealed to the Supreme Court.

About the Author: Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. He is currently a Publisher for CalPensions.com.

The Partisan War on "Income Inequality"; Law of Bad Ideas

Debate rages over “income inequality”. CEOs makes hundreds or thousands of times more than workers. That is one aspect of income inequality. And it’s easily explained: The Fed’s inflation policies, bank bailouts, Fractional Reserve Lending, and crony capitalism are to blame.

That blame is nonpartisan.

Rather than attack the problem, “progressive” partisans howl over minimum wages.

Democrat-Sponsored Income Inequality

There is one major aspect of “income inequality” that you never hear president Obama or the Democrats mention, precisely because they are to blame.

Democrat [mostly, increasing numbers of Republicans condone this] sponsored “income inequality” is even more insidious because it directly affects middle-class Americans who pay high taxes so public employees can retire in comfort with gold-plated guaranteed-for-life pensions.

Gold-Plated Retirements

In support of my above thesis, please consider this report published February 25, 2014 in the Washington Post, entitled “In San Jose, Generous Pensions for City Workers Come at Expense of Nearly All Else“:

“Here in the wealthy heart of Silicon Valley, the roads are pocked with potholes, the libraries are closed three days a week and a slew of city recreation centers have been handed over to nonprofit groups. Taxes have gone up even as city services are in decline, and Mayor Chuck Reed is worried.

The source of Reed’s troubles: gold-plated pensions that guarantee retired city workers as much as 90 percent of their former salaries. Retirement costs are eating up nearly a quarter of the city’s budget, forcing Reed (D) to skimp on everything else.

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Employee costs are growing nearly five times faster than revenues leading to fewer workers and budget deficits.

“This is one of the dichotomies of California: I am cutting services to my low- and moderate-income people . . . to pay really generous benefits for public employees who make a good living and have an even better retirement,” he said in an interview in his office overlooking downtown.

In San Jose and across the nation, state and local officials are increasingly confronting a vision of startling injustice: Poor and middle-class taxpayers — who often have no retirement savings — are paying higher taxes so public employees can retire in relative comfort.

“I got sick and tired of cutting services to my people — 10 years of services cuts — in order to balance the budget,” Reed said. “We got to the point where we were facing service delivery insolvency.”

In California, cities large and small are struggling to pay the growing public-sector retirement tab. Meanwhile, 55 percent of the state’s private-sector workforce — 6.3 million — have no retirement plan on the job.

Other governments are also struggling. In Chicago, Mayor Rahm Emanuel (D) has been pushing to scale back pensions for city workers, warning that without reform, city services will wither. Rhode Island enacted pension reforms in 2011 that trimmed retirement benefits for new workers and for those already on the payroll.”

Enter the Law of Bad Ideas

Instead of admitting the system is hopelessly broken, Sacramento lawmakers want to create the nation’s first retirement savings plan for private-sector workers in which the state manages the money and guarantees a minimum rate of return.

Both cities and the State of California are struggling to pay pensions, yet the proposed solution by California lawmakers is to have the state guarantee even more pensions.

Worst yet, this guarantee would come when treasury yields are in the gutter and stocks 50% overvalued and poised for losses in any time period shorter than seven years according to John Hussman (and I happen to agree). For details, please see It Is Informed Optimism To Wait For The Rain

Note: John Hussman is one of many great speakers at Wine Country Conference II. If you haven’t yet signed up, please do.

For such ideas to be proposed at the worst time is mind-boggling, yet strictly in accordance with “The Law of Bad Ideas“.

A number of corollaries clearly apply.

Corollary Three: Those in positions of political power not only have the worst ideas, they also have the means to see those ideas are implemented.

Corollary Four: The worse the idea, the more likely it is to be embraced by academia and political opportunists.

Corollary Five: No politically acceptable idea is so bad it cannot be made worse.

The reason CEOs make out like bandits is explained in Monetarism, Abenomics, QE, and Minimum Wage Proposals: One Bad Idea Leads to Another, and Another  

Brief History

  • Monetarists act on the theory falling prices are a bad idea
  • The Fed prints money and holds rates too low
  • Housing bubble builds
  • Medical and education prices soar
  • Student loans soar to “help” the students
  • Because housing is not affordable numerous affordable housing programs appear causing still more unwarranted housing demand. Few see the bubble because housing is not in the CPI
  • Housing crashes
  • The affordable housing advocates are abhorred by falling prices
  • Fed bails out banks and steps in to support housing prices
  • Income inequality soars
  • Students remain stuck with debt

Because of one idiotic notion, that “falling prices are a bad thing”, the Fed has generally managed to keep the CPI rising, with some prices rising much faster than others.

That leads to corollary number six, mentioned in the above link:

Law of Bad Ideas Corollary Six: Bad ideas lead to more bad ideas to fix problems caused by previous bad ideas.

And so here we are. To bail out the absurd idea that public pension promises are supportable, complete with 7.5 to 8.0 percent annual returns, when 10-year treasuries yield 2.67%, California proposes insuring private pensions as well.

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.

 

Pension Reform Comes to Ventura County

“401Ks carry no guarantee, and that’s the distinction between a defined contribution system and a defined benefit system.”  – Rick Shimmel, executive director of the Ventura County Deputy Sheriffs’ Association, February 20, 2014, Fox News Soundbite

Truer words were never spoken, Mr. Shimmel. But when the “guarantee” can’t be lowered to levels that are merely unfair and burdensome, as opposed to monstrously unfair and financially catastrophic, then replacing “guarantees” with uncertainty and risk becomes the only option.

The latest attempt at pension reform in California is the Ventura County Pension Reform Initiative, affecting an affluent and idyllic coastal region that includes cities to the north of Malibu and south of Santa Barbara. It’s hard to imagine a nicer place to serve as the latest battleground in the pension wars.

What Shimmel objects to is the provision of the pension reform that creates a 401K “defined contribution” plan for all new hires to the county. The virtue of such as system is that the only commitment the employer makes is to deposit an agreed percent of each participant’s salary into a tax-deferred retirement account. Once the employee retires, they will draw on the retirement account until it’s gone. And if they run out of money, the employer – i.e., the taxpayer – doesn’t have to replenish their account.

How could it not have come to this? Despite well-orchestrated statewide protests against reformers who threaten the “modest pensions” of “working families,” Ventura County is no exception in terms of just how out of proportion their retirement benefits are compared to private sector norms. Take a look at this “VCERA Retirement Benefit Calculator” to do some informal Ventura County pension analysis:  A public safety employee making final compensation of $100,000 with 30 years service can retire at age 55 with a pension of $78,594 per year. Many of us look at these numbers too much. Exactly what part of $78,594 for the rest of your life, starting at age 55 – “guaranteed” and including COLA adjustments – doesn’t sound rather excessive? If you wanted to save enough to pay yourself that much for 30 years using a 401K account, according to the conventional wisdom of responsible investment advisors, you would have to save between $1.97 and $2.59 million. How many 55 year old workers can save that kind of money? But wait, there’s more. While on the VCERA retirement benefit calculator webpage, take a look at their “Retirement Compensation Definition:”

“In addition to base salary, compensation earnable may include, but is not limited to:
Flexible Benefit Credit (total)

Educational Incentives
Employer-paid employee retirement contributions
Employer-paid FICA
Assignment and shift bonuses

Automobile allowance
Annual Leave or Vacation Redemption, limited to the hours you actually redeemed during the normal course of active service, and within the 12 or 36 month period to be used for the measurement of final compensation, not to exceed the number of hours actually accrued during that measurement period, reduced by the number of hours you were required to use in order to qualify to redeem annual leave or vacation.
30 year incentives
Uniform Allowances
Overtime that is scheduled as part of your normal work week”

“Employer-paid employee retirement contributions” and “employer paid FICA” count as “Retirement compensation” for the purposes of calculating a pension. Is this a joke? Automobile allowance? Uniform allowances? Vacation time? “Scheduled overtime”? Using this assortment of criteria, it must be common for full-time senior employees to break $100,000 in eligible final compensation, and many will break $200,000. Skeptical? Go to the TransparentCalifornia website and look up “Ventura County Pensions.” Too bad they didn’t provide the researchers with “years of service,” to debunk the absurdly low averages that are continuously used to mislead voters – averages that include people who only worked a few years.

Ventura’s pension reform has a good chance of being passed by voters, should it make it onto the ballot. But it represents not so much an ideal solution as the only solution that might be expected to survive court challenges. This is a shame. Here is a summary of some pension reform options:

(1) Move to a 401K plan for new hires and make marginal reforms to existing defined benefit plans. Benefits: It will probably survive a court challenge. Drawbacks: It won’t beneficially impact pension fund cash flows for decades, and it creates two very distinct tiers of public servants. An example of this is the Ventura County Pension Reform Intiative (text).

(2) Require all new employees to earn pensions according to lower benefit formulas that are financially sustainable, make marginal reforms to existing defined benefit plans.  Benefits: It will survive a court challenge. Drawbacks: It still won’t beneficially impact pension fund cash flows for decades, if ever. An example of this is CalSTRS “2% at 60” plan for participants hired after 1-1-2013.

(3) Require all active employees, new and existing, to earn pensions from now on according to lower benefit formulas that are financially sustainable.  Benefits: This program will create immediate significant reductions to required annual contributions.  Drawbacks: It still creates two tiers of employees, favoring veteran employees and retirees, because it does not retroactively reduce any formulas or benefits. Also, even though this reform only impacts future pension benefit accruals, by affecting existing employees it is an allegedly unconstitutional violation of “vested contractual rights.” An example of this reform is the state pension reform initiative “Pension Reform Act of 2014” (text) championed by San Jose Mayor Chuck Reed – and probably tabled till 2016, thanks to the power of public sector unions and their political partners, the public employee pension funds.

(4) Suspend cost-of-living adjustments for all pensions for all retirees collecting in excess of, say, $75,000 per year, and concurrently, lower pension formulas on a pro-rata basis, retroactively affecting vested pension benefits and prospectively affecting ongoing pension accruals, for all new and all existing employees, by the additional amount necessary to restore 100% solvency to the fund. Benefits: Solves the problem overnight, and spreads the sacrifice equitably among ALL public servants, rather than punishing the new employees to protect the veterans. Drawbacks: There are legal arguments supporting the position that such measures violate “vested contractual rights.” For examples of this option, look to Detroit and Rhode Island. But the sooner this option is exercised, the less onerous the sacrifices.

An aside: It’s funny how the questionable legality of retroactive pension benefit enhancements never bothered the defenders of defined benefits.

What defenders of defined benefit pensions such as Rick Shimmel should consider is this:  What options three and four accomplish – however unpleasant they may be to veterans accustomed to the current system – is preservation of the defined benefit. What option four offers is conversion to an “adjustable defined benefit” that “adjusts,” whenever necessary, in a manner that preserves solvency, protects taxpayers, and spreads the sacrifice among all participants – new hires, active veterans, and retirees – in an equitable manner, minimizing the sacrifice any single class of participants might have to experience. Social Security, by the way, is an adjustable defined benefit.

What reformers who focus on conversion to 401k plans are doing, unfortunately, is facing reality. The reality is that unions and pension funds refuse to accept meaningful compromises – leaving nothing but the nuclear option of 401K conversions to detonate amidst the palm trees and sandy beaches of Ventura County. Many of the union spokespersons can be forgiven for some of their intransigence, because they are being mislead by spokespersons and strategists representing pension funds into thinking the financial challenges these funds face are manageable without major upheaval. They are not.

*   *   *

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

CalSTRS Contributions Inadequate; Unions Call Reformers “Right-Wing Ideologues”

During the most recent year for which there is publicly available data, the fiscal-year-ended 6-30-2012, the California State Teachers Retirement System contributed a $1.1 billion payment towards paying off an unfunded liability of $71.0 billion. This fact, and much more, came out in a California Public Policy Center study released last week “Are Annual Contributions Into CalSTRS Adequate?

Now let’s suppose you have borrowed $71,000, and you are paying a 7.5% interest rate on this borrowed money. Do you think you would ever have this debt paid off, if you only paid $1,100 per year? How would that work? Isn’t 7.5% interest on $71,000 equal to $5,300? Wouldn’t a mere $1,100 payment put you further in the hole by $4,200? Wouldn’t you owe $75,200 by the end of the year, more than the $71,000 debt you started with?

Multiply by a billion and you’ve got CalSTRS.

And this same disastrous, wishful thinking is playing out in nearly every “professionally managed” public sector pension fund in California. Every year, the combined unfunded liability for these plans grows by $10 billion or more. Why? Because they are employing graduated payment schedules that incur negative amortization, in order to avoid demanding that California’s already over-taxed citizens and bankruptcy challenged cities and counties give even more to the pension funds.

Where is $10 billion a year – or more – going to come from?

Pension finance is complicated. An unfunded liability is caused whenever the present value of the future pension costs, for all participants in the plan, exceeds the value of the assets currently invested. If you think the plan is going to do very well, you expect those assets to earn higher rates of interest. This lowers the unfunded liability. But the $71 billion shortfall is CalSTRS own number, based on their own optimistic projections. They claim they will earn 7.5% per year, on average, forever. Scarier, they believe they will earn 4.5% after inflation, on average, every year, forever. Don’t believe this? Go to page 56 of CalSTRS “Notes to Financial Statements.” See for yourself.

The point? $71 billion is the low number. Adhere to less optimistic forecasts, as recommended by GASB and Moody’s, and watch that $71 billion double. And you don’t need to be a certified pension actuary to know that paying $1.1 billion a year on a $71 billion liability will NEVER get you out of the hole.

Apparently, however, the public sector union machine that runs California wants to believe this party can go on forever. And backing them up are the pension bankers; the Wall Street speculators, the hedge funds, the private equity funds, the high frequency traders, the currency speculators – the entire corrupt apparatus of casino capitalism – addicted to $350 billion (or more) per year of taxpayers money pouring through U.S. government employee pension funds and into their firms to invest.

Public sector pensions are headed for a catastrophic clash with taxpayers. Because California’s taxpayers don’t have another $10 billion per year to rescue public sector worker pensions – and that’s the minimum, if they hit their numbers year after year.

To save CalSTRS, and the other defined benefit plans, the initiative proposed by San Jose Mayor Chuck Reed (ref. Pension Reform Act of 2014) is a good start. It will allow cities and counties to reduce pension benefits that haven’t yet been earned. But even that modest reform is being fought behind the scenes. Unions are putting contributors and businesses on notice – don’t support this initiative – or else.

Here’s what union spokesperson Steve Maviglio has to say about Mayor Reed in his recent essay “Reed’s Anti-Pension Drive Enrages Labor:”

“Perhaps Reed’s biggest dilemma is that the only money behind the measure is likely to come from right-wing ideologues.  The state’s business community has little interest in changing the pensions of public employees.”

These unions are making a tragic mistake. Because if they don’t recognize the problem and start working with reformers, their plans could collapse entirely.

Saving defined benefits, using CalSTRS as an example, might require the following:

(1) Recognize that pension bankers are peddling the same sort of misleading, overly optimistic financial hogwash that lead to the housing bubble and great recession. Stop carrying their water.

(2) Reduce all pension benefits to the levels in place before the benefit enhancements began back around 1999. Do this retroactively and apply this to all active and retired participants.

(3) Establish a floor on pension benefits for participants so nobody collects less than they would have if they’d been enrolled in the Social Security system instead of CalSTRS.

(4) Establish a ceiling on pension benefits equivalent to twice the maximum Social Security benefit.

(5) For retirees and active employees with significant vested benefits, phase in the preceding benefit reductions by abolishing cost-of-living increases to pensions until the purchasing power of their benefits erodes to the specified levels.

(6) Establish one pension multiplier from now on, instead of awarding teachers escalating multipliers if they stay in the profession longer. Back-loaded multipliers keep bad teachers teaching, and discourage good prospects from entering the teaching profession at mid-career.

(7) Enroll ALL public employees in the Social Security system and adjust pension benefits further downwards accordingly.

It may come as a surprise to pension reactionaries that not all reformers are libertarian brutes, or “right wing ideologues,” who hope to someday reduce every citizen to island status in a Darwinian ocean. Social Security is a successful safety net that can be rendered permanently solvent with relatively minor adjustments. Similarly, defined benefit pensions can be saved if the benefits are reduced and the assets are invested in lower yielding, but far less risky assets.

Maviglio suggests that “the smart money in the state sees it [pension reform] as a sure loser.” Maviglio may be right that nobody in their right mind dares to fight California’s unionized government. But he is wrong regarding the facts about pensions. Absent major reform, CalSTRS, CalPERS, and nearly every other government employee pension plan in California is headed for shoals. When they run aground, they are going to wipe out public sector solvency, and, ironically, foster a wave of privatization in response.

*   *   *

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

Union Environmental Appeal of San Jose Infill High-Rise Fools No One

Today (Tuesday, August 13, 2013) construction trade unions either showed exceptional arrogance or exceptional foolishness when they chose to exploit the California Environmental Quality Act (CEQA) against a high-profile “infill” project in downtown San Jose.

For the past few years, some California state legislators have wanted to discourage CEQA actions meant to advance objectives unrelated to environmental protection. Even Democratic legislative leaders such as California State Senate President pro Tem Darrell Steinberg (D-Sacramento) are seeking minor CEQA amendments to reduce obstacles to infill development, which is regarded by some as a wise planning strategy for the environment.

Under these circumstances, it was astonishing to see the Santa Clara-San Benito Counties Building and Construction Trades Council appeal the San Jose Planning Director’s approval of a downtown 23-story residential “infill” project called One South Market Street. The appeal was filed by the law firm of Adams Broadwell Joseph & Cardozo and based on alleged CEQA violations and planning and zoning code violations.

No one was fooled. San Jose Mayor Chuck Reed declared “It’s not really about the environment … it’s abuse of the environmental process.” And Councilman Johnny Khamis complained that the city council had two abusive back-to-back CEQA objections on its agenda, one with an anti-competitive motive and one with a union motive.

In the end, the city council rejected the union appeal, although two council members voted to support the unions. One of them was San Jose City Councilman Xavier Campos, who is the brother of Assemblywoman Nora Campos, who is married to Neil Struthers, who spoke at the meeting in support of the CEQA appeal as the head of the Santa Clara-San Benito Counties Building and Construction Trades Council.

Groundbreaking for the project had already occurred in a ceremony on June 25, 2013. No one up to that point had indicated any concerns about permitting or environmental review. But on that same day, the law firm for construction unions submitted an objection letter. The unions formally appealed various aspects of the project on July 9 and July 12.

In an August 13, 2013 article about the appeal (Union Challenging Downtown San Jose High-Rise), the Silicon Valley Business Journal indicated that the union objections to the project were not necessarily related to environmental concerns.

So what’s going on? Sources told me the union appears to be trying to send a message after several key subcontracts on the job were delivered to non-union contractors out of Sacramento.

“The Building Trades are not opposed to more high-rises downtown. What we are opposed to is this developer generating more profits at the expense of local workers and the environment,” Neil Struthers, CEO of the Santa Clara & San Benito Counties Building & Construction Trades Council, told me in an email.

He added: “No project should be given the ability to avoid the requirements every other developer must meet as it relates to water quality, affordable housing and traffic mitigation. Someone needs to stand up to those that have the power to gain preferential treatment from local government.”

Reportedly the contractor most objectionable to the unions is a large electrical company that works on major commercial projects throughout Northern California. Its headquarters is in Sacramento, but it has a Bay Area office in Hayward, 25 miles away from downtown San Jose via Interstate 880. Construction companies in Northern California capable of working on a 23-story high rise building tend to have a regional market – these are not hometown plumbers.

Because the City of San Jose has provided tax and fee waivers with financial value to the developer, One South Market Street is regarded under California law as a public works project. All construction companies – both union and non-union – must pay state-mandated construction wage rates (“prevailing wages”) to their trade workers on this project. In California, state prevailing wage rates always duplicate the wage rates in the applicable union collective bargaining agreements for that trade in that geographical region.

In other words, local hiring or wage rates are not legitimate issues. Control of the workforce is the issue.

Presumably, the Santa Clara-San Benito Counties Building and Construction Trades Council will continue to interfere with the project (perhaps with a lawsuit) until the developer (Market Street Tower Venture, LLC, on behalf of Essex OSM REIT, LLC) agrees to sign a Project Labor Agreement or some other contract giving unions a monopoly on construction of the building.

The One South Market Street CEQA appeal shows that unions have a strong economic interest in stopping any proposals that compromise the obstructive power of CEQA. It should not be a surprise that construction trade unions are reportedly the primary obstacle to Senator Steinberg’s very modest CEQA reform bill, Senate Bill 731, but apparently Senator Steinberg was surprised, according to the August 5, 2013 article from California Forward: CEQA Roundup: Have Negotiations Really Stalled?

Steinberg himself seems to have been surprised by the opposition on the part of some labor leaders, in particular, who have pushed back against his most basic goal: Updating the CEQA process for infill projects. While the Senate leader has tried from the start to write a bill that would drive more of this type of development across the state, sources say some labor leaders view the coming infill wave as the source of a steady stream of jobs – and they are wary of losing CEQA as a tool they can use to reach project labor agreements with developers.

Reform of the California Environmental Quality Act is not an environmental issue. It’s a labor issue.

News Media Coverage

San Jose Denies ‘Greenmail’ Environmental Appeals on High-Rise ProjectSan Jose Mercury-News – August 13, 2013

San Jose Council Says ‘No’ to Union’s CEQA Challenge of One South MarketSilicon Valley Business Journal – August 13, 2013

Sources

Staff Report on Appeal of Santa Clara-San Benito Counties Building and Construction Trades Council to One South Market Street Project (includes June 25, July 9, and July 12 letters from law firm of Adams Broadwell Joseph & Cardozo)

Initial Study/Mitigated Negative Declaration for One South Market Street and Mitigation Monitoring or Reporting Program for One South Market Street

Union Challenging Downtown San Jose High-RiseSilicon Valley Business Journal – August 13, 2013

California Senate Bill 731 – CEQA reform for infill development projects

CEQA Roundup: Have Negotiations Really Stalled? – California Forward – August 5, 2013

KT Properties One South Market Street

Background on One South Market Street from Silicon Valley Business Journal

CEQA Works – the coalition of environmental groups and labor unions opposed to CEQA reform

www.PhonyUnionTreeHuggers.com


Kevin Dayton is the President & CEO of Labor Issues Solutions, LLC, and is the author of frequent postings about generally unreported California state and local policy issues at www.laborissuessolutions.com. Follow him on Twitter at @DaytonPubPolicy.

California Pension Reformers Plan New State Ballot Initiative

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

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

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

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

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

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

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

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

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

Would ANY Public Sector Union Reform Appeal to California’s Democrats?

“There’s a difference between being liberal and progressive and being a union Democrat.”
San Jose Mayor Chuck Reed, Bloomberg

The most powerful defenders of that broken [public education] system, without a question, is the teachers’ union.”
Los Angeles Mayor Antonio Villaraigosa, Sacramento Press

If you wish to challenge the conventional wisdom, that Democrats and liberals march in lockstep with public sector unions, these two quotes from the mayors of two of California’s largest cities would be a good place to start. But whether it is making pensions financially sustainable, strongly advocated by Mayor Reed, or improving public education, strongly advocated by Mayor Villaraigosa, these reform efforts aim at the symptoms, not the underlying cause. Because the biggest cause of California’s financial and educational problems are public sector unions.

California’s Democrats indeed face a dilemma; they may accept literally hundreds of millions in political contributions each year from public sector unions, in return for adhering to their political agenda, or they may challenge these unions, and lose their financial support. And whenever a Democrat does challenge the unions, the unions always have alternative candidates who will toe the line. Why bother?

The reason to bother, however, is compelling. If the political power of public sector unions is not attenuated in some meaningful way, California’s cities and counties will slip into bankruptcy one after another, and California’s schools will continue to deliver educational results far below their potential. Because public sector unions have an agenda that is intrinsically at odds with the public interest – their agenda is more pay and benefits for public workers, more public workers and bigger government, more protections for incompetent or corrupt government employees, and more inflexible work rules that impede efforts to modernize government operations. None of this makes for better government, and it is Democrats who should be especially concerned, since Democrats typically believe in a stronger role for government than Republicans or Libertarians.

Here are three points that Democrats should seriously consider:

(1) Unionized public sector employees now enjoy total compensation that averages more than twice what the average private sector worker makes. No aggregate edge in education or work hazards can justify this disparity. Public employee compensation consumes roughly 75% of California’s state and local government budgets, and is the primary reason for budget deficits. If public employee compensation and benefits are not reduced, it will remain impossible to fund any worthy new government programs. For more on total compensation paid to California’s local government workers, ref. the CPPC compensation studies for San Jose, Anaheim, and Costa Mesa, as well as the UnionWatch article “‘Work in Progress’ Government Employee Pay Tracker Still Grossly Inaccurate.” For a good summary of the pension myths promoted by unions and bankers, read the recent Heritage Foundation study “Nine Fallacies Used to Defend Public-Sector Pensions.”

(2) There are fundamental differences between public sector unions and private sector unions. Private sector unions must negotiate with the knowledge that overly generous concessions may put their employer out of business. Public sector unions, unlike private sector unions, engage in massive political spending to effectively elect their own bosses; when a politician is uncooperative, the unions replace them in the next election. Public sector unions control the government bureaucracy as well as the politicians who pass laws, regulations or local ordinances. Therefore, opponents of public sector unions face retaliation (or rewards in the form of contracts and favorable legislation)  from the government itself – reason enough why sustained corporate opposition to public sector unions is a myth.

(3) Despite a well cultivated perception that the public sector unions fight for the worker against the interests of the Wall Street financial sector, in reality they want the same things: Deficits which accompany more spending on union payrolls require new bonds to be issued at great profit to the issuers, and more pension benefits provide additional compensation to union members, requiring more money for the bankers to manage – at great profit. In California, financial interests issue bonds to cover what is now nearly a trillion dollars in outstanding government debt, and they invest nearly half-a-trillion in public employee pension fund assets.

An excellent summary of the way public sector unions undermine our democracy, as well as a list of potential reforms, can be found on the State Budget Solutions website in a December 5, 2012 article by Bob Williams entitled “Why government employee collective bargaining laws must be reformed now.”

If Democrats are serious about protecting workers, ALL workers including the private sector taxpayer, and if Democrats are serious about protecting the integrity of the democratic process, they might review these proposed reforms. Apparently, as the spectacular failure of Prop. 32 proved, Democrats aren’t ready yet to require unions to simply allow their members to opt-in to making political contributions. But would ANY reform be worth fighting for?

What about financial transparency? Would it be too much to ask public sector unions to adhere to reporting standards on par with those required of publicly traded corporations? Is it too much to even require public disclosure of how many members and agency fee payers belong to a public sector union, or how much they pay in individual dues? All that is required today is the relatively opaque Federal 990 form, filed once per year (ref. CPPC study “Understanding the Financial Disclosure Requirements of Public Sector Unions.”

What about eliminating closed door negotiations, or eliminating the requirement to submit to binding arbitration whenever negotiations reach an impasse? What about regulating the process whereby public sector unions elect their leadership, or enforcing new processes to make it easier for union members to hold their leaders more accountable for how they spend their dues revenue?

Is there anything that Democrats and liberals may feel are appropriate reforms to public sector unions in California? Anything at all?

Why Public Sector Union Reform is Nonpartisan

Last week UnionWatch received an email from a fairly prominent SF Bay Area journalist who shall remain anonymous. It said “Solidarity forever! You scabs can go to hell.”

The email conversation that ensued was civil, and the final email received from this journalist had a different tone entirely, concluding with this: “If you’re auditing the county budgets and are non-partisan, I owe you an apology–but the “Union Watch” heading made me think you were part of the new war on unions.”

For nearly three years, UnionWatch, along with its parent organization the California Public Policy Center, have been offering news and analysis focused on the impact of California’s public sector unions. Almost invariably, the perspective has been that public sector unions are too powerful and their demands have brought California’s state and local governments to the brink of bankruptcy. And yes, auditing local and statewide public sector budgets and compensation is the biggest reason for this conclusion.

Whether or not this perspective constitutes a “war on unions,” it is nonetheless one that puts us in the company of noted Democratic leaders, including San Jose Mayor Chuck Reed, who was quoted in Bloomberg last year as saying “There’s a difference between being liberal and progressive and being a union Democrat.”

For his courage in standing up to public sector unions, Mayor Reed has been relentlessly vilified. Yet he joins a growing number of Democrats who are criticizing public sector unions, including San Francisco public defender Jeff Adachi, former state assembly speaker Willie Brown, former state senate speaker Gloria Romero, Los Angeles Mayor Antonio Villaraigosa, and, off the record, Governor Jerry Brown. In a guest column for the Orange County Register late last year, commenting on the defeat of Prop. 32, Gloria Romero described quite well what’s starting to happen in California, and has already happened in states from Michigan to Rhode Island:

“The bright spot, even in this loss, is that, while proponents were vastly outspent by the opponents led by public sector unions, a new coalition of Republicans, Independents and Democrats has clearly begun to form. If this coalition can be solidified, it may be California’s best bet to move political reforms forward in the next decade by working across party lines in a new California political playing field.”

All Californians, whether they are right-wing, left-wing, or wingless, are going to need to confront the fact that union pay scales, union retirement benefits, and union obstruction of reforms that might streamline state and local government, are one of the primary causes of California’s economic challenges. In a recent editorial, referencing a recent CPPC study, we estimated that the true size of California’s “Wall of Debt,” is over $800 billion, more than $80,000 for every household in the state.

One of the decidedly nonpartisan perspectives of UnionWatch is to recognize that the financial sector benefits when governments spend more than they collect and have to borrow. Bond issuers collect billions in fees. Similarly, the financial sector benefits when pension benefits are enhanced, and guaranteed by taxpayers, since fund managers collect billions in fees, and invest the money with no moral hazard. The alliance between the financial sector (typically associated with the ideological right), and the public sector unions (typically associated with the ideological left), is one of the biggest unreported political dynamics of our time. And they’d like to keep it that way.

To recognize that the pecuniary interests of Wall Street Bankers and public sector union bosses are aligned complicates the entire notion of right and left. To trumpet that point of view, repeatedly, as we have endeavored to do, certainly does not endear us to the true believers on either side. So perhaps it’s time for more liberals and good government Democrats to recognize this complexity, and begin to confront the possibility that public sector unions do NOT generally operate in the public interest.

Union spokespersons representing firefighters, along with those representing teachers, nurses and police, frequently say that compensation for their members must be elevated in order for them to be able to “afford to live in the communities they serve.” They are missing a key point: Nobody can afford to live in these communities. And the reason nobody can afford to live in these communities is because public sector unions, along with their allies in the environmentalist lobby and on Wall Street, have pooled their political influence to pass laws and regulations that have given California an unaffordable cost of living. Critics of right-to-work laws correctly point out that wages are lower in right-to-work states. What they ignore is the fact that the costs for everything – housing, water, gasoline, electricity, and taxes – are even lower. People make less in right-to-work states, but they have more disposable income. Perhaps that is an area where the allegedly conservative leaning public safety unions should focus their legal and political energy – a political agenda aimed at lowering the cost of living for everyone, instead of raising their own pay to unaffordable levels.

Dan Borenstein, a journalist with the Bay Area News Group (Borenstein is not the one who emailed us last week), is blessed with not only the financial literacy to fully appreciate the unsustainable excess of union negotiated pay and benefits, but the courage to write about it. His perspective, however, is that of a liberal, and he has consistently explained that public sector union influence is an issue that should concern progressives.

Steve Greenhut, a journalist formerly with the Orange County Register, and author of the book “Plunder, How Public Employee Unions are Raiding Treasuries, Controlling our Lives, and Bankrupting the Nation,” leaves little doubt as to his perspective on public sector unions. But Greenhut is no Republican. He is a libertarian, who has frequently admonished good government Democrats to defer the argument over what government programs we need until after we’ve tackled the public sector unions – who have taken all the spoils of government for themselves.

When libertarians and progressive Democrats are stepping forward in growing numbers to question the power of public sector unions, and when the secret partner of public sector unions is none other than the Wall Street financial sector, something bigger than partisan politics is at work.

San Jose’s Pension Initiative will be a National Bellweather

San Jose union officials are celebrating a decision last week by the Sixth District Court of Appeals, which struck some city-drafted language from a June ballot measure designed to reduce pension benefits for newly hired city workers and require existing workers either to pay more for their current pension plan or switch to a lower-benefit plan. But the three-judge panel’s unanimous verdict will do little to affect the ultimate outcome of the pension measure and much to remind the public of the lengths to which the state’s public-sector unions will go to resist any reform—and keep voters from having a say.

“How much more taxpayer dollars will be wasted defending this flawed ballot measure?” asked Robert Sapien, president of the city’s firefighters’ union, in a plaintive cry ridiculous even by the low standards of political campaigns. Taxpayers had to pay to defend the measure because the unions kept challenging it in court. After four such attempts, virtually the entirety of the measure withstood judicial scrutiny.

The union “victory” amounted to legal nitpicking. The judges concluded that the word “reform” was too biased. “By combining this charged word with ‘pension’ in the title, all in capital letters,” the panel maintained, “the city council has implicitly characterized the existing pension system as defective, wrong or susceptible to abuse, thereby taking a biased position in the very titling of the measure itself.” That’s a bit dramatic. Seeking political advantage, cities do indeed add titles and summaries to ballot initiatives, but San Jose’s effort didn’t seem over the top here. And the titles on these measures are always printed in all capital letters, so it’s not as though the city’s drafters inserted the word REFORM in the midst of lower-case text, the way overheated spam e-mailers send out those WAKE UP, AMERICA! blasts. People from every political persuasion trying to change a policy describe their efforts as “reform,” and the word has a rather benign and neutral meaning. Nevertheless, the ballot initiative’s new introductory title is “Pension Modification.” That, too, will appear in all caps.

The second part of the court’s objection—the inclusion of language stating that the measure is designed to “protect essential services”—is more understandable. The judges argued that such language belongs more appropriately in the ballot arguments in favor of the initiative. The city’s language is straightforward and truthful, however. City officials are trying to protect services now in jeopardy in large part because of a 350 percent increase in pension costs over the past decade. Pensions now constitute more than 20 percent of San Jose’s general-fund budget. With these changes to its language, the initiative for pension reform—er, modification—will now go to the voters in June. In the heated world of San Jose pension-modification politics, every voter will surely know what’s at stake when voting for or against Measure B; only the most unaware city voters will have to rely upon the ballot wording to know their position on it.

For various reasons, San Jose is more of a pension bellwether than other California cities. Not only is San Jose the state’s third most populous city; it’s also run by a Democratic mayor who argues that pension costs run amok are endangering liberal programs. Most important, San Jose is confronting what the good-government Little Hoover Commission calls the “elephant in the room”—the pension benefits of current public workers. As the commission explains: “Adding a ‘second tier’ of lower pension benefits for new hires, for example, will not deliver savings for a generation, while pension costs are swelling now as Baby Boomers retire. . . . Public agencies must have the flexibility and authority to freeze accrued pension benefits for current workers, and make changes to pension formulas going forward to protect state and local public employees and the public good.” San Jose argues that its charter specifically allows it to address pensions for current employees; court decisions have prevented other cities from tackling these costs.

The court battle underscores an unavoidable California reality: union officials have the deepest pockets to challenge pension-reform measures in every jurisdiction every step of the way, and they’re determined to deny the public the chance to vote on pension-related measures. San Jose will be a closely watched case. The unions will challenge the measure in court if it passes, based on the changes-to-current-benefits argument—a longstanding precedent holding that the U.S. and California constitutions forbid the reduction of promised pensions. Pension-receiving judges will have the final word.

On the plus side, reformers—call them “modifiers” if you like—have won the rhetorical battle. As cities careen toward bankruptcy, even Democratic officials now must contemplate pension reform.

Steven Greenhut is vice president of journalism at the Franklin Center for Government and Public Integrity.