The Mechanics of Pension Reform – State Actions
Part 1 of 2…
Since the passage of SB 400, adopted by the California Legislature in 1999 (93 for, 7 against), pension deficits have steadily grown in California. According to the Stanford Institute for Economic Policy Research, as of the end of 2015, credible estimates of the total unfunded pension obligations owed by California’s state and other government agencies now approach $1.0 trillion.
Reform groups support pension reform and voters generally back pension reform initiatives by a 75% vote; but usually, state and agency lawyers pollute the process to defeat the reforms. In Pacific Grove and San Jose, clearly legal pension reform initiatives were defeated. In Marin and Sonoma county, Grand Juries determined pension increases of about a billion each were illegally adopted, but the sheriffs, district attorneys and boards of supervisors simply purchased “as requested” legal opinions that ignored the reports and said everything looked “OK” to them.
At the state and agency level, there will not be curative pension reform without the election of a pension reform majority of each legislative body. This analysis will outline an agenda, first at the state level and later, separately, at the agency level, specifically describing reforms required prospectively at the state level and setting forth remedial steps available to local agencies. Obviously, legislative body majorities must be elected to adopt the curative action.
The Need for Pension Reform at The State Level:
The current Ca. Government pension system is a classical “Blue Sky System,” a term defined by U.S. Justice McKenna in Hall v. Geiger-Jones Co.:
“The name that is given to the law indicates the evil at which it is aimed…’speculative schemes which have no more basis than so many feet of blue sky’…. ‘the sale in fly by night schemes’”
Unfortunately, the state can and has enacted a pension system for government workers, including the legislature, that is NOT subject to its own Blue Sky Laws and could not comply with its own enactments controlling the private sector:
1. All applicable evidence proves that the financial assumptions for government pensions are and have been impossible to achieve since SB 400 to-date. If marketed by a private investment company, the state would shut it down. The state attorney general should take vigorous action against pension administrators, but is openly supportive of the blue sky nature of the system;
2. The system is managed by administrators who openly support a goal of growing pensions for union workers. They are controlled by Boards that were elected by the Unions. Their definition of reform is greater contribution rates;
The infamous Hotel CalPERS – you can check in, but you can’t check out.
3. Retirement Boards routinely violate section 17 (b) of Article XVI of the State constitution which says: “The members of the retirement board of a public pension or retirement system shall discharge their duties with respect to the system solely in the interest of, and for the exclusive purposes of providing benefits to, participants and their beneficiaries, MINIMIZING EMPLOYER CONTRIBUTIONS thereto (my emphasis)…” If retirement boards had obeyed this dictate, there could be no pension crises. It is the duty of the state to assure retirement board compliance in minimizing employer contributions;
4. Government unions in the state of California have become too powerful. FDR was emphatically opposed to collective bargaining in government affairs: “collective bargaining with public-employee unions takes much of the decision making authority over government functions away from the people’s representatives and transfers it to union officials, with whom the public has no authority.” At present, public-employee unions dominate the state legislature, the executive branch (including pension boards), the attorney-general, every local legislative body, sheriff or other elective position. Why? Because the average citizen has no idea about the decline in and cost of government services since the enactment of Meyers-Milias-Brown, California’s collective bargaining scheme. One thing is for certain, the cost of union controlled government services proves that “new development” is a financial loser, requiring a larger police, fire and administrative services regime, leading to larger uncontrollable deficits.
5. As an example of what FDR feared consider the fact that the Unions run the California employee retirement systems. You and I don’t get to vote for the various retirement boards. Imagine if social security and medi-care were managed by a board composed of seniors: certainly they would expect retirement benefits comparable to those of government union members; $50K, $60K even up to $300K per year.
6. Why are voters so uninformed? With the notable exception of the Contra Costa Times, newspapers have foregone any pretense of journalism. Why aren’t they all like the Times? Because it takes research. In Monterey county, where I live, every news source simply repeats the skewed tales of pro-union city managers, administrators and bent government lawyers. If a citizen provides them with documentary evidence of illegal government activity, the press then gives the last word, truthful or not, to the government agent.
The Mechanics of Pension Reform at the State Level:
It is difficult to be optimistic about pension reform at the state level. Neither the Republicans, nor the Democrats have a pension reform platform that meets the requirement of Article XVI, section 17 (b) that retirement boards minimize pension contributions. The state legislature will not enact laws requiring a balanced pension system. The attorney general will not act to prosecute institutional untruthfulness per Penal code sec. 85. The press, whether intentional or not, is a handmaiden for union dominated government that has decimated government service. Since government unionism, California has declined from first to near bottom in education, infrastructure, and most importantly, quality of life for the middle class. Any responsible parent should encourage their children and grandchildren to move to a fairer government where a middle class citizen can afford a home, decent schools and safety. For those of us able to stay, it is time for a new approach. I don’t claim to be the perfect person to set forth first principles of reform. I am doing so only because no one else has, or seems likely to do so.
Because the unions are so strong at the state level, it is imperative that reform groups demand that candidates specify the pension reforms they would initiate and support.
In the case of a candidate for the legislature, or state office, would he or she support state sponsored initiatives, referendums, or laws that:
1. Replaced retirement boards with politically neutral private institutions to manage government pension plans;
2. Limited government pension plans to outlaw annual deficits. Any apparent deficit would require a reduction in benefits to eliminate the deficits;
3. Limited the annual pension contribution by any government entity to a fixed percentage, say 10% of salary;
4. Limited annual salary increases for pension purposes to 0% of salary until current deficits are eliminated;
5. Neutralized the power of unions by doing away with statewide unions for government workers. Local unions would be allowed and may propose working conditions (pay, medical, vacations, etc.); but without collective bargaining. After listening to the unions proposals and after public comment, the legislative body would enact working condition statutes;
6. Prop 218 would be amended to stop the current abuse of creating a new tax to provide that which was paid by current revenues, but have been depleted by pension and other retirement costs.
7. Legislative bodies would be prohibited from granting staff, employees and legislative bodies, vested contract rights related to pensions, insurance of all kind and any other work-related benefit;
8. Validation actions for the issuance of bonds, including pension bonds, pursuant to the authority of Government code 53511 shall restrict the scope of validation judgments to protect the bond holders from the relief for matters specifically stated in the summons published in the action. A judgment purporting to grant relief in excess of matters specified in the summons shall not be entitled to collateral estoppel, or res judicata or enforcement;
9. In all matters between staff, employees and the city council, agency lawyers shall only advise the legislative body, and shall do so consistent with the applicable law. In such circumstance, agency lawyers shall have a duty only to the agency through its legislative body. Currently, agency lawyers advocate for staff and unions, ignoring its duty of loyalty to the agency;
10. Government code, section 7507 shall add a provision that states that compliance with the statute has always been mandatory and shall continue to be mandatory;
11. Government code 7507 shall add a provision requiring the chief financial officer of any agency to certify that the annual costs for any contemplated pension increase will not violate the debt limitation set forth in Article XVI of the state constitution. Note: In the Orange county pension bond, debt limit case, the court found that the potential to cause deficits did not violate the debt limit, but the issue concerning the annual costs as a violation was not presented;
12. No agency shall link salary increases to that of other agencies and all such legislative provisions now in effect are void;
13. The chief financial officer of any agency shall be hired and replaced by the agency’s legislative body. In addition to its current duties, it shall advise the legislative body of the soundness of any proposal related to employee and staff compensation. Said position shall be autonomous of the agency manager or administrator. Presently, agency financial officers often risk their jobs if they do not recommend game the system” schemes;
14. The current practice of annual cash budgets shall be supplemented with an accrual method budget. The accrual method budget shall expense all items that are necessary for the agency to provide a good level of service, but have been omitted from the cash budget because of a lack of revenues. For example, a county like Sonoma may have $200M in deferred road maintenance; in the accrual method, that sum will be shown as an expense. The agency legislative body shall determine the correct level of service for every agency department, and to the extent there are insufficient revenues to provide that level of service, the insufficient revenues shall be shown as an accrued expense. The purpose of the accrual budget is to show the actual financial condition of the agency, but also to help an agency qualify for a chapter 9 in bankruptcy;
15. The current practice of obtaining a post-employment disability so that up to 50% of pension payments are tax free shall be the subject of an investigation by the state legislature with the goal of eliminating abuses of said practice. Evidence indicates that a high percentage of safety employees who were able to perform normal services up to their date of retirement then magically become disabled for tax benefit purposes;
16. The current practice of borrowing proposition 218 funds and other restricted funds shall be prohibited. Such practice is and shall constitute evidence of a debt violation;
17. Ventura county attempted to terminate its CERL program and make new hires subject to a defined contribution or employee funded plan. PERL and CERL agencies may make limited terminations of its pension plans (LT). In that case it may create a defined contribution plan for new hires and said hires shall not be in the defined benefit plan; but the agency may remain in the defined benefit plan for pre-LT employees. The purpose is to allow the agency to continue to work its way out of its deficit making annual contributions at the current income rate, not the termination rate. The termination rate is so punitive, it prevents agencies from terminating. This provision shall not create pension or other benefit vested rights;
18. Agency staff (attorneys, administrators, managers and finance officers) shall not be granted indemnity for their acts of gross negligence and criminal conduct. Currently such grants are commonplace.
Most reasonable citizens appreciate the place of unions in the private sector. Arms-length bargaining between management and union leaders has passed the test of time, albeit not without turmoil. On the other hand, there has been and cannot be arms-length bargaining in government: both agencies staff and the unions have acted in concert to grant themselves incredible salaries and benefits. Agency attorneys have given up all pretense of any duty to the agency or taxpayers. Mathematically, the system cannot continue. For reform to succeed, it is necessary to demand that candidates for local legislative and state office, take a position on substantial reforms. Without substantial curative reforms, the quality of life in California will continue to decline.
In Part Two, I will discuss the mechanics of reform at the agency level, particularly at the city and county level. Unlike reform at the state level, local agencies have tools to initiate reforms that will preserve the quality of life in the jurisdiction. It will still require the election of true reformers, but your city or county can be saved from the mockery of the parasitic governance that now prevails. Voters are anxious and will vote for the reforms, and for candidates, that will cure the current “blue sky” pension system. But candidates must run on these concrete reforms; otherwise. As they say: “pension reform is 25 years away, and always will be.”
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About the Author: John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34749) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. John graduated from San Jose State College with majors in Political Science and Economics (summa cum laude). He then received a JD from The Stanford School of Law and practiced business and trial law for 40 years before retiring. In 1987, he was the founding partner of a Sacramento law firm that he formed in 1987 to take advantage of the increased bankruptcies brought about by the Tax Act of 1986. Although he did not file and manage bankruptcy cases, he represented clients in numerous litigation matters before the bankruptcy court, including several cases before judge Klein, the current judge of the Stockton bankruptcy case. He is an admirer of Judge Klein, for his ability and accuracy on the law. As managing partner, he understood the goals of bankruptcy filings and its benefits and limitations.
Note to readers: During 2012 author John Moore published the “final” chapter of “The Fall of Pacific Grove” in an four part series published between October 20th and November 9th:
The Fall of Pacific Grove – A Primer on Vested Rights
– The Final Chapter, Part 1, October 20, 2015
The Fall of Pacific Grove – The City’s Tepid Defense of the Vested Rights Lawsuit
– The Final Chapter, Part 2, October 27, 2015
The Fall of Pacific Grove – The Judge’s Ruling
– The Final Chapter, Part 3, November 2, 2015
The Fall of Pacific Grove – The Immediate Future
– The Final Chapter, Part 4, November 9, 2015
During 2014 author John Moore published the first chapter of “The Fall of Pacific Grove” in an eight part series published between January 7th and February 24th. For a more complete understanding of the history, read the entire earlier series:
The Fall of Pacific Grove – How it Began, and How City Officials Fought Reform
– Part 1, January 7, 2014
The Fall of Pacific Grove – How City Thwarted Reform, and CalPERS Squandered Surpluses
– Part 2, January 14, 2014
The Fall of Pacific Grove – CalPERS Begins Calling Deficits “Side Funds,” Raises Annual Contributions
– Part 3, January 21, 2014
The Fall of Pacific Grove – Outsourcing of Safety Services Causes Increased Pension Deficits
– Part 4, January 28, 2014
The Fall of Pacific Grove – Anti-Pension Reform Mayor Claims to Favor Reed Pension Reform
– Part 5, February 3, 2014
The Fall of Pacific Grove – Privately Owned Real Property are the Only Assets to Pay for Pensions
– Part 6, February 11, 2014
The Fall of Pacific Grove – The Cover-Up by the City After the Hidden Actuarial Report Surfaced in 2009
– Part 7, February 18, 2014
The Fall of Pacific Grove – Conclusion: The “California Rule” Cannot Stand