Pension spiking results in crumbling CA roads

November 2, 2014 By James Poulos 3 Comments

From roads to bridges and well beyond, California’s neglected infrastructure won’t receive relief this election cycle.

For years, the state has lavished money on other projects — especially public pensions. Despite a flurry of bad press surrounding the crushing burdens those pensions place on cities and municipalities, the trend is set to continue.

When voters go to the polls next week, they’ll face a dizzying array of proposed tax increases. All told, Californians must contend with 140 different ballot proposals, largely because of pension-imposed budgetary pressure.

Competing priorities

Pensions have climbed steadily upward while infrastructure has crumbled away, according to findings published in the Sacramento Bee. “Six-figure pensions for mid-level public servants have brought the state to the point where one out of every nine state and local tax dollars goes to pay for pensions,” wrote Mark Blucher. In 1994, he noted, the figure reached just one in 16 tax dollars. “Tax increases now do not increase government services, but simply service government pensions.”

The Golden State’s infrastructure needs have become critical. To repair its local roads, California must make up a budgetary shortfall of $1 billion annually — amounting to $78.3 billion in total, according to the new California Statewide Local Streets and Roads Needs Assessment Report.

And although some 40 percent of state bridges need repair, as the American Society of Civil Engineers estimated, about one-fourth of California’s pensions are still unfunded, Blucher observed. To reverse the tide of funds ebbing away from infrastructure, he suggested, cities faced with bankruptcy and debt restructuring would need the authority to renegotiate contracts with public employee unions.

Setbacks in Stockton

The quest for that kind of authority, which reformers have urged for years, has been stopped short in the days before November’s election. Recently, creditors affected by the city of Stockton’s bankruptcy challenged the so-called “California rule” that has long protected public union contracts from renegotiation in times of fiscal trouble.

Franklin Resources refused to take a haircut that yielded pennies on the dollar while Stockton’s public pensions remained completely protected. Initially, the bankruptcy judge hearing the case, Christopher Klein, seemed to side in principle with Franklin. He ruled that the California Public Employees Retirement System was not constitutionally immune from the kind of cuts imposed by cities entering into bankruptcy.

But Klein reserved himself on the right to rule in favor of a deal in which CalPERS was spared anyway. In fact, that is precisely what Klein did in his final holding. Deciding that “workers would be the real victims” if CalPERS were not shielded from liability, yesterday Klein authorized Stockton to simply reduce public workers’ pay, affecting pensions only indirectly.

Although Franklin has vowed to consider its next steps, policymakers have already concluded that the lid has not been blown off of the legal prejudice in favor of public pensions.

No end in sight

With the Stockton case tipping in CalPERS’ direction, pension reform in California has been thrown into doubt.

New reports recently revealed that ever-increasing sums of money have flowed from Sacramento into the fund’s coffers. Last year alone, according to the Los Angeles Times, CalPERS received more than $8 billion in government cash, quadrupling its haul over the course of the past 10 years.

CalPERS, the Times reported, voted in August to adopt 99 new types of pension bonuses.  Meanwhile, its gap between current resources and pension promises has hit an estimated $100 million.

Gov. Jerry Brown, whose administration tried and failed this summer to prevent pension spiking by the fund, has ordered another round of investigations into whether the perks are “legal and appropriate,” according to the Times.

Meanwhile, as anyone who recently has driven on California’s once world-class roads has found out, the asphalt keeps crumbling.

This article was originally published at CalWatchdog.com

 

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See Tax Increases, Think Pensions

October 29, 2014 By Joel Fox 3 Comments

Despite the ridicule heaped on bonuses offered public workers for simply doing their jobs – just one prime example: a librarian earning a bonus for helping members of the public find books – the California Retirement System (CalPERS) board last week made sure the bonuses added to salaries will be part of pension calculations.

While the exact cost to taxpayers is uncertain, the price tag for pensions because of this move is certain to go up. State and local governments have contributed four times to CalPERS what they contributed just a decade ago.

Local budgets are being eaten away by the pension and health care obligations. In the City of Los Angeles, for example, pensions costs took 3% of the city budget in 2002-3, it was eating 18% of the budget in 2012-13.

Or as an official with the Wall Street rating service Fitch was quoted in a recent Los Angeles Times article concerning the 99 new bonuses that increase pensions, “Cities and taxpayers will undeniably face higher costs. Pensions are taking a bigger share of the pie, leaving less money for core services.”

So, what’s the magic formula officials and activists look to cover these increased costs? Taxes.

They’ll never say that, of course. They’ll argue that new tax money is needed for direct services for residents. But, the bonuses, which appear less than deserved, and their inclusion in the pension calculations, shows there is little regard for taxpayers.

As the Los Angeles Times article noted, “With $300 billion in investments, CalPERS estimates it still needs an additional $100 billion from taxpayers to deliver on its promised pensions to 1.7 million public workers and retirees. That amount would be enough to operate the 23-campus California State University system for 16 years.”

Expect a push for more taxes.

As reported here last week by David Kline of the California Taxpayers Association, 53 jurisdictions are seeking sales tax increases and 40 are asking voters to approve parcel taxes. When you see tax increases on the ballot think pension costs. Money in government budgets is fungible to some extent. If you cover specific agency costs with a tax increase, that frees up general fund money for other items, including pensions.

There are groups of liberal activists who are spending time right now trying to figure out how they can convince voters to agree to a number of tax increases all at once on the 2016 ballot – an extension of Proposition 30, a property tax increase for commercial property, an oil severance tax, a cigarette tax and who knows what else.

If and when you see those tax increases on the ballot, think pensions.

Until there are reforms put in place in the pension system so that taxpayers are not forced to cover someone else’s unreasonable pension costs – like costs tied to bonuses that are part of the job description — while struggling to save for their own retirement, the argument for more tax revenue is impossible to justify.

A sidebar to the Times article listed some of the 99 bonuses that will boost pensions. You can find them here.

This article was originally published on Fox and Hounds Daily.

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The Misleading Arguments of Those Who Fight Against Pension Reform

October 23, 2014 By Ed Ring 1 Comment

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. 

This article originally appeared on the CPC website UnionWatch.org.

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Have Stockton officials learned their fiscal lesson?

October 11, 2014 By CPR Editors 3 Comments

The Bureau of Labor Statistics, which tracks monthly unemployment in 372 metropolitan areas, reported that Stockton, California had the nation’s eighth-highest jobless rate at the end of August. More than 10 percent of those looking for work in the struggling Central Valley city couldn’t find it. This is nothing new. Stockton has been coping with unemployment rates 50 percent to 75 percent above the national average for more than a decade. Based on that long history of joblessness, you’d think that qualified local residents would be ready to snap up government jobs with starting salaries of $60,000, plus health benefits, a pension, and yearly pay increases. Apparently not: according to the city’s elected officials, if Stockton is forced to reduce its generous and costly retirement plan as part of its exit from bankruptcy, the city will see a “mass exodus” of workers and won’t be able to fill crucial positions in its police and fire departments.

Bankruptcy judge Christopher Klein ruled last week that the unusual legal protections enjoyed by California pensions, which make it virtually impossible to cut the costs of a pension plan in the Golden State, did not apply in bankruptcy court. Stockton city officials and lawyers were livid. They had planned a reorganization sharply cutting what some creditors receive while leaving the city’s gigantic annual pension bill untouched. One city creditor, Franklin Templeton Investments, which would receive as little as one penny on the dollar for its unsecured claims, has objected, arguing that it’s not fair that Stockton could ignore its huge retirement debt. Judge Klein essentially agreed, saying that there’s no reason the city couldn’t hack away at it, or even dump its expensive plan with the California Public Employees’ Retirement System and seek a cheaper alternative. “There are lots of permutations and combinations out there,” said Klein, explaining the various ways Stockton might save money by replacing its expensive pensions with something more affordable.

Stockton officials’ claims that they would face a personnel crisis if they cut pensions strain credulity. Salaries and benefits in California’s public sector are so generous that, even after bankruptcy, a government job should appeal to many Stockton residents. Based on a deal negotiated between the city and its police union after Stockton entered bankruptcy, the starting salary for a police officer is $4,970.39 per month, or $59,644 annually. That rises to $72,888 after five years. Firefighters start at $49,000 annually, a salary that rises to $60,000 in five years. The city’s median annual household income is less than $36,000. Stockton will also spendabout $14,000 a year toward a family health-insurance plan for a new officer or firefighter. New officers enter a pension plan under which they can retire at 57, with 2.7 percent of final salary for every year served. So an officer with 30 years of service and a final salary of $75,000 would qualify for a pension of nearly $61,000.

Public service is apparently so tough in Stockton, however, that the city claims it must compete aggressively for a limited pool of new workers. Stockton’s former city manager justified not asking for significant changes to pensions because “we cannot just pluck people from the unemployment lines—the requirements to be a police officer are demanding and 99 percent of applicants do not qualify or, if hired, wash out.” Some elite military units have lower washout rates.

Government-worker unions exploit this kind of thinking to demand higher wages and benefits, especially when neighboring municipalities boost their compensation. That creates an ever-upward spiral of wages as school districts, towns, and cities adopt the new wage levels, regardless of whether they can afford them. Stockton officials admit that their current woes are a product of this mindset. In 2012, the former city manager pointed out that for years, Stockton officials added benefits in line with those offered by other cities. “Nobody gave a thought to how it was eventually going to be paid for,” he said.

Stockton risks coming out of bankruptcy with a heavy compensation burden. Officials argue that city workers have sacrificed enough, largely because the city eliminated its program of providing free health-care coverage for all retirees. But that extremely expensive perk is rare in the private sector and disappearing in government. Meanwhile, however, pension contributions for public-safety workers now amount to 41 percent of payroll. That would put the total cost of salary, health benefits, and pensions at about $120,000 annually for a fifth-year officer. The good news, if you can call it that, is that the city projects that after several more pension increases in coming years, Stockton’s soaring retirement costs will “level off.” The bad news is that pension contributions already amount to $42 million annually in a city with a general-fund budget of just $185 million.

Stockton is heading down a path previously traveled by Vallejo, the Bay-area city that emerged from a three-year bankruptcy in late 2011 without cutting its pension debt. Vallejo tried to compensate for its still-high retirement costs with cuts elsewhere but is now struggling financially thanks to its soaring pension costs, including annual pension contributions for police officers that average about $50,000 per cop.

The long saga of Stockton’s decline dramatizes the inefficiency and illogic of union-dominated, monopolistic, government-labor markets. California laws and court rulings provided Stockton workers with extraordinary protections for some benefits, including one of the nation’s most generous pension plans. When Stockton couldn’t cut its labor costs fast enough, it engaged in destructive rounds of layoffs because, ironically, the one thing you can do when all else fails is fire people. City residents and laid-off city workers were the losers.

Now Stockton has a chance to reach more solid financial footing thanks to Judge Klein’s ruling and a painful two-year sojourn through bankruptcy. But it’s not clear that city officials have learned their fiscal lessons.

This article was originally published by City Journal.

Steven Malanga is the senior editor of City Journal and a senior fellow at the Manhattan Institute. His latest book is Shakedown: The Continuing Conspiracy Against the American Taxpayer.

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City of Stanton Proposes Higher Taxes Instead of Cutting Pay and Benefits

October 9, 2014 By Ed Ring 1 Comment

On November 4th, voters in Stanton, California, will be asked to vote on a 1 percent sales tax increase, which if approved will raise their sales tax to 9 percent – the highest in Orange County. Nestled in the heart of Orange County, tiny Stanton, a city of barely three square miles in size with a population in 2012 of 38,915 residents, is an unlikely candidate for the spotlight, when California’s local ballots are about to be inundated with over 140 local tax increases affecting many cities and counties that are ten times bigger. But Stanton is ground zero in a battle over how to manage municipal budget deficits, because if their voters approve this tax increase, cities throughout Orange County will follow suit.

We’re not talking small potatoes here. Stanton currently only retains 1 percent (one-eighth) of the 8 percent sales tax they currently collect. According to Stanton’s Consolidated Annual Financial Report for the fiscal year ended 6-30-2013 (page 9), their total sales tax revenue for that year was $3,683,199. If they increase their sales tax rate from 8 percent to 9.0 percent, they should double the amount of sales tax collections retained by the city. A spokesperson for the city of Stanton confirmed they project the new sales tax will add $3.1 million to their projected annual sales tax revenues. How does that compare to their spending?

According to Stanton’s “Measure GG,” the city “now faces a $1.8 million structural budget deficit.” This means the sales tax increase is expected to eliminate their budget deficit with $1.3 million left over. But if you evaluate Stanton’s expenditures, there is an alternative to new taxes. How does the city spend most of their money?

To answer this, again, look no further than the “Whereas” section of Measure GG. The third “Whereas” states “public safety is a top priority in Stanton and represents over 70 percent of the City’s General Fund budget, and without a local funding source the City will be forced to significantly cut public safety services.”

It’s quite clear that Stanton has already cut everything else. Based on information reported to the California State Controller’s Office, in 2012, the City of Stanton had 26 full-time non-safety personnel. Their average base pay was $74,146 per year, with negligible overtime, and “lump sum” payments averaging $4,700 per year, mostly to management. The lowest full-time regular rate of base pay was $42,359 for an administrative clerk. When you pile on the employer payments for retirement health care (average per year $8,691) and for their 2 percent at 55 pensions (average per year $15,693), the total pay and benefits for Stanton’s 26 non-safety employees in 2012 averaged $104,990. Nice work if you can get it. But it represents less than 18 percent of Stanton’s estimated direct personnel costs.

Finding information as to just how much Stanton pays for police and fire protection is not easy, but a reasonably accurate estimate is possible. According to Stanton’s city website under “Fire Services, we learn “there are a total of 21 firefighters who serve the City of Stanton.” Under “Police Services,” we learn “the Sheriff’s Department provides 44 staff members to the City of Stanton.” If we make just one assumption – that the rates of pay earned by the sheriffs and firefighters assigned to Stanton are representative of the rates of pay earned by all Orange County sheriffs and firefighters, we can estimate how much Stanton incurs in direct personnel costs for public safety. Pay for Orange County sheriffs can be found using 2012 data reported by Orange County to the CA State Controller. Pay for Orange County firefighters can be found from 2013 data recently obtained by the California Policy Center directly from the Orange County Fire Authority. Here goes:

OC Public Safety

Based on the data and assumptions as noted, on average, Stanton’s 21 firefighters earn a direct pay and benefits package of $217,956 per year; Stanton’s 44 sheriffs earn an average direct pay and benefits package of $186,682 per year. The source data used for these calculations and others cited in this post can be downloaded here “Stanton_2014_Statistics.xlsx” and readers are invited to point out any errors in calculations or reasoning therein.

There are a lot of takeaways here. For example, if Stanton were to join with other Orange County cities who contract for their police and fire protection and negotiate a 14 percent decrease to the average total pay and benefits their police and firefighters earn, they would eliminate their structural deficit of $1.8 million – and their firefighters would still earn average pay plus benefits, after the reduction, of $187,285 per year, and their sheriffs would still earn average pay plus benefits, after the reduction, of $160,412 per year. The average household income in Stanton during 2012 was $48,146.

A final observation – CalPERS has announced a 50 percent increase in required annual pension contributions, to be phased in between now and 2017. If Orange County’s independent pension system follows suit, and there is no evidence their financial imperatives differ significantly from CalPERS, then Stanton’s annual required pension contributions will increase by $2.2 million per year – nearly all of that for public safety. So even if Measure GG passes, the projected surplus of $1.3 million will probably be more than offset by increased pension contributions. Expect more taxes, or start cutting pay and benefits.

It is always important to emphasize that public safety employees deserve to be paid a premium to compensate for the risks they take to protect the public. But Stanton’s citizens and elected officials, and their counterparts in cities throughout Orange County, will have to decide where to draw the line on that premium. Perhaps the facts should speak for themselves.

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

 

 

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2013 CalPERS Payouts Online at Transparent California

October 4, 2014 By Mark Bucher 2 Comments

CalPERS financial struggles are draining state taxpayers. The ever-increasing contribution rates it demands from state and local governments have already bankrupted several cities. Even for more financially stable agencies, increased CalPERS contributions have crowded out other spending priorities or tax relief.

While discussions about unfunded liabilities and projected rates of return are necessary and important, the average member of the public is too busy to dive into the details.

That’s why the recent release of CalPERS’ 2013 base payouts, including retiree names, on TransparentCalifornia.com is so important.

For the first time, average Californians can quickly and easily see how much CalPERS paid out to retirees in 2013. The names and payouts are available here.

Even a casual glance at the data shows the root cause of CalPERS’ financial struggles: It’s paying tens of thousands of its government retirees pensions that dwarf what private-sector households make while working full-time.

The U.S. Census reports that the median household income in California is $61,400. This includes households where two adults are working full-time. The data on Transparent California though shows that the average 2013 pension for those who worked 30 years or more and received a full year’s pension was $64,448 for the year.

For those who retired in 2000 or later, the average pension was $68,403.

And whose taxes are going to increase to ensure that the retiree making over $64,400 a year receives a generous cost of living adjustment next year and every year thereafter? The working couple, despite making less in salary than the public servant receives in retirement. No wonder so many people have a hard time saving for their own retirement — they’re already subsidizing the retirement of California’s government employees.

Unfortunately, Social Security isn’t going to provide these private-sector families with equity. While the average 30-year government employee will collect an average payout of over $64,400, that’s more than twice the maximum Social Security benefit of $31,704 that a private sector retiree could receive after working for 35 years and retiring at the age of 66. In contrast, some government workers retire as early as 50.

These high pension payouts are actually understating the compensation received by CalPERS retirees. These payout amounts do not include health benefits received by retirees that are worth up to $18,000 a year.

Just a glance at the list of highest paid retirees shows why taxpayers should be so outraged.

Mark Bucher is the president of the California Policy Center.

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Federal Judged Rules CalPERS Pensions Can Be Cut

October 3, 2014 By Ed Mendel 4 Comments

A federal judge ruled yesterday that CalPERS pensions can be cut in bankruptcy like other debt. He rejected the argument that the giant system is an “arm of the state” with pensions protected by federal law and two state laws on contracts and liens.

U.S. Bankruptcy Judge Christopher Klein, who has called the issue of whether CalPERS pensions can be cut in bankruptcy a “festering sore,” delayed until Oct. 30 a ruling on whether Stockton can exit bankruptcy without cutting pensions.

Stockton does not want to cut pensions, arguing they are needed to be a competitive employer, particularly for police. The city reached agreements with three bond insurers owed $265 million, all labor unions, retirees and other major creditors.

But Stockton could not negotiate an agreement with a lone holdout, two Franklin bond funds owed $36 million, triggering a trial in May on the Stockton “plan of adjustment” to cut debt and emerge from the bankruptcy filed two years ago.

Franklin argues that an exit plan that provides full payment of the city’s “massive” pension liability, while paying Franklin a penny on the dollar, cannot be confirmed under the federal bankruptcy code requiring fair treatment of creditors.

Klein issued his CalPERS decision after receiving extensive written briefings from both sides he requested at the May trial. His lengthy oral ruling, covering the disputed legal points in detail, may be followed by a written decision.

“We have a plan that proposes not to adjust pensions,” Klein said. “I have concluded that pensions could be adjusted, at least the CalPERS contract could be adjusted, and by inference the pensions could be adjusted.”

 

A federal judge ruled in the Detroit bankruptcy last fall that pensions can be cut. CalPERS joined in the appeal, arguing that Detroit has a city-run plan and that CalPERS is an arm of the state whose operations are protected under federal bankruptcy law.

“We disagree with the judge’s opinion on the issue of pension impairment,” CalPERS said in a news release. “This ruling is not legally binding on any of the parties in the Stockton case or as precedent in any other bankruptcy proceeding and is unnecessary to the decision on confirmation of the City of Stockton’s plan of adjustment.

“CalPERS will reserve any further comment until such time as the court renders its final written decision. What’s important to keep in mind is what the City of Stockton stated in court today: that they can’t function as a city if their pensions are impaired.”

Matthew Jacobs, CalPERS general counsel, said in a separate news release: “The real precedent of today’s proceedings is that even if municipalities are allowed to impair pensions in the rare situation of bankruptcy, cities like Stockton can make the smart decision to protect the pension promises for their public employees.

“The city has made a choice to protect pensions for its public employees and find a reasonable path forward to a more fiscally sustainable future. This is the right decision. While we disagree with today’s ruling on pensions, we are hopeful that Judge Klein will approve Stockton’s plan. Providing great services to a city requires great employees and Stockton said today in court that it can’t function as a city if pensions are impaired.”

CalPERS has taken several steps, some going back decades, to avoid a ruling like the one Judge Klein made yesterday.

Vallejo officials said they considered cutting pensions in bankruptcy, but chose not to try after CalPERS threatened a lengthy and costly legal battle. Vallejo cut deals with all creditors, avoiding a rare trial as on Stockton’s plan to “cram down” debt.

The Vallejo bankruptcy prompted public employee unions to back legislation requiring cities to get permission from a state panel to file bankruptcy. Some union officials said the threat of “pulling a Vallejo” could affect labor contract bargaining.

The bill, AB 506 in 2011, was altered to require an attempt in neutral mediation to reach an agreement with creditors before filing bankruptcy. Stockton failed to get an agreement during a 90-day mediation before filing for bankruptcy on June 26, 2012.

A month later San Bernardino made an emergency filing for bankruptcy without first trying mediation. Then San Bernardino, saying it was in danger of not making payroll, took an unprecedented step: skipping payments to CalPERS for a year.

The failure to make payments gave the California Public Employees Retirement System grounds to terminate its contract with the city, probably triggering a deep cut in pensions for San Bernardino current workers and retirees.

Last June San Bernardino announced an undisclosed agreement with CalPERS, reached in closed-door mediation, to pay the $13.5 million in skipped payments, plus several million more in penalties and interest.

San Bernardino is still struggling to reach agreements with labor unions, receiving court approval to modify a firefighter contract. City officials have said they do not expect to have a debt-cutting plan of adjustment until early next year or later.

In the Stockton bankruptcy, Judge Klein said during the trial in May that one of his options was ruling on whether CalPERS pensions could be cut without necessarily finding that Stockton pensions should be cut.

Part of his analysis yesterday that CalPERS pensions are not state “governmental or political powers” protected under federal bankruptcy law is that while state workers are in CalPERS by statute, cities choose to join CalPERS.

Klein said California cities have the option of forming their own pension systems, joining a county pension system, hiring a private pension provider or withdrawing from CalPERS, if they can afford to do so.

He concluded that benefits not prescribed by state law are not “governmental or political” powers protected by the federal bankruptcy law, but instead are unprotected “business powers.”

Klein said a CalPERS-sponsored state law preventing cities from rejecting their CalPERS contracts in bankruptcy is “flat-out invalid” under the constitutional “supremacy clause” giving federal law priority over state law.

The judge said another CalPERS-sponsored state law that gives CalPERS a lien on all city assets, except wages, when they declare insolvency is an invalid attempt by the state Legislature to “edit” the federal bankruptcy law.

Stockton argues that its employees and retirees have a fair share of the bankruptcy burden with pay cuts, workforce reductions and the elimination of retiree health care, a $545 million long-term debt replaced with a $5 million lump sum.

Klein’s ruling on Stockton may hinge on the city’s decision to place Franklin in the same class of debtors as retirees, who voted to accept the big cut in health care with the promise that their pensions would not be cut.

The low payment to Franklin is similar to the retiree health care cut. Franklin argues that it was “punished” for rejecting a city offer in closed-door mediation and unfairly placed in the debtor class to be “swamped” by the retiree approval of their health care cut.

The city argues that Franklin is properly in the class because most of its debt is unsecured. After the judge ruled that Franklin’s collateral (two golf courses and a park) were valued at $4 million, Stockton amended its plan to pay that amount.

But Franklin wants payment for the remaining $32 million of unsecured debt.

This article was originally published on Calpensions.com

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. 

 

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Palo Alto’s Proposed New Pension Tax – Oops, Hotel Tax

October 2, 2014 By Ed Ring Leave a Comment

Fungible – definition – “able to replace or be replaced by another identical item; mutually interchangeable.”

On November 4th, Palo Alto voters will be asked to approve Measure B, with only a simple majority required for passage. According to a summary compiled by the California Taxpayers Association, “2014 Local Elections,”Measure B “increases the city hotel/motel tax by 2 percent and extends the tax to apply to online bookings, to fund general city services.”

According to an article in the Silicon Valley Business Journal entitled “Palo Alto 2 percent hotel tax hike headed for November ballot,” “About $4.6 million would be generated annually through a combination of the potential tax increase and funds generated by several new hotels slated to open in the city.”

Analysis of raw data downloaded from the California State Controller’s website, and available for review on the spreadsheet produced by the California Policy Center “Palo_Alto_2012_Stats.xlxs,” the total employer pension contribution made by the city of Palo Alto to CalPERS in 2012 was $20.7 million. That includes $1.9 million of pension contributions that are supposed to be made by employees via paycheck withholding, but which the city helpfully pays for them. On the spreadsheet ref. tab “Palo Alto Payroll SCO 2012” column O, rows 2-12, “Employees Retirement Cost Covered” [by employer].

As documented here, and here, Palo Alto, like all CalPERS participants, will be required to increase their pension contribution by 50 percent between now and 2017, i.e., by around $9 million per year.

The hotel tax, if passed, will cover less than half of Palo Alto’s imminent contribution increases to CalPERS. Expect more tax increases, and fewer city services, or…

Palo Alto, like Watsonville, and nearly every other local entity that is asking voters to increase taxes this November, needs new taxes to help comply with the incessant, irresistible, escalating, insatiable demands of CalPERS. They can say the money is for anything they want. But money is fungible.

As Carl DeMaio, former San Diego council member and current congressional candidate, once famously put it, framing policy options as either involving higher taxes or fewer services is a “false choice.” The third rail of California politics, still deadly to any politician, state or local, who moves beyond rhetoric to action, is lower compensation and pensions. But it is an option. One more market downturn, and it will magically morph from an option to an imperative.

Here’s a summary of Palo Alto’s city worker average compensation:
–  Police – Base pay plus overtime $116,401, benefits incl. pension, $48,075, total $164,476.
–  Fire – Base pay plus overtime $132,011, benefits incl. pension, $49,326, total $181,337.
–  Other – Base pay plus overtime $90,306, benefits incl. pension, $36,140, total $126,446.

From the city website, here are highlights from Palo Alto’s “salaries and benefits:”
–  Fully paid employee and dependent dental and vision plan.
–  Fully paid life and disability insurance equal to annual salary and long term disability plan (not included in State Controller data).
–  Two to five weeks vacation, 12 holidays, and 12 paid sick days.
–  90 percent paid employee and dependent medical plan.

From data obtained by the California Policy Center’s Transparent California project, here are the average pension benefits for city of Palo Alto retirees since 2000 (i.e., since benefit formulas were enhanced):
–  For 30+ years of service, $91,348 per year.
–  For 25-30 years of service, $75,437 per year.
–  For 20-25 years of service, $53,946 per year.

To put this in perspective, while veteran employees of the city of Palo Alto are paying for 10 percent of their annual health care premiums, middle aged married couples working as private sector independent contractors with base incomes comparable to the average non-safety Palo Alto city worker are paying household premiums – either to individual health insurers or on the exchanges – including deductibles, of approximately $30,000 per year. Thirty thousand dollars. While their taxes then pay for 90 percent of these same premiums as they apply to their public servants.

To further put this in perspective, while someone working for the city of Palo Alto may retire after 30 years work with a pension that averages $91,348 per year, an independent contractor with comparable annual earnings will contribute 12.4 percent of their gross earnings to Social Security – more than virtually anyone in local government contributes to their pensions via withholding – in return for a projected Social Security benefit of around $25,000 per year beginning after 40+ years work. Yet their taxes are being increased to maintain these pensions for their public servants.

In Palo Alto, and in general throughout the Silicon Valley, the wealthy elites condone the public sector union greed that has lead to this abominable inequity. They are so rich they consider it churlish to question levels of compensation that to them, seem such a pittance. In turn, because their excessive compensation effectively exempts them from its consequences, public employees and their unions support the misanthropic policies of this elite – artificial scarcity in the name of environmentalism; causing higher prices for housing, land, energy and water.

The solution to the challenges of social equity is not higher taxes to benefit government workers. The solution is to lower the cost of living for everyone through resource development and capitalist competition. To do this, government workers and their unions will have to make common cause with ordinary private sector workers, instead of with the wealthy elites and their political cronies who reside in an insular and privileged world, filled with utopian visions and plans for everyone.

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

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How Much Do Los Angeles Police Officers Make?

August 8, 2014 By Ed Ring 3 Comments

There’s a deep seated frustration and anger among the rank and file due to their low pay.
Det. Tyler Izen – President, Los Angeles Police Protective League, July 28, 2014, KTLA Channel 5

Low pay, of course, is relative. It’s very difficult to objectively determine what a police officer should be paid. There aren’t jobs in the private sector that are easily compared to police work. As a result, police officers typically compare how much they are making in their city to how much other cities are paying their police officers. The problem is no city wants to pay the lowest rates, which creates endless rounds of wage and benefit increases. But a city as big as Los Angeles doesn’t have the option of matching what a much wealthier, much smaller city may pay. Too many billions are involved.

Despite the difficulty in determining what may be a fair rate of pay and benefits for police officers, this very sensitive debate has to be waged. Because without debate, there can be no limit – how do you put a price on safety and security? How do you put a price on enduring the stress and the dangers that come with police work? You can’t. In that context, a fair wage will always be far more than any public institution can possibly afford.440px-LAPD_officers

Calculating Average Total Compensation for LAPD Officers

So how much do Los Angeles police officers make? This information is not easily found. Every year California’s cities are required to report to the state controller the individual pay and benefits for all of their employees. The most recent 2012 raw data for cities can be downloaded here. The information can be sorted by city, then by department. Within police departments, by sorting records by the reported pension benefit formulas, sworn officers can be differentiated from administrative police personnel. There is even sufficient data to eliminate records for officers who have not worked the full 12 months in the year being analyzed. Using all of these techniques, we were able to determine that the average LAPD pay and benefits during 2012 for full time sworn officers was $110,285. But the state controller’s numbers are grossly understated because they don’t include how much the city of Los Angeles paid for retiree health benefits or retiree pensions. This adds a significant amount to their actual total pay. Funding these benefits are part of any employee’s total compensation package.

How can that information be obtained for Los Angeles police?

If you review the Actuarial Valuation and Review Of Retirement and Other Postemployment Benefits as of June 30, 2013, performed by Segal Consulting Group for the city of Los Angeles Fire and Police Protection Plan, there is some pretty good information available. Exhibit B in the beginning of the document shows the retirement fund contribution rates as a percent of eligible payroll. The pension contribution last year was 37.82 percent of base pay, and the retirement health care contribution was 11.69 percent of base pay. An expert at the LAFPP office confirmed that these percentages exclusively represent the employer contribution and do not include amounts withheld from employee paychecks which are also contributed to their retirement funds. Therefore, the total of those percentages, 49.51 percent, can be applied to to the average LAPD base salary of $94,660 and apportioned per employee to accurately represent, on average, how much they are making in retirement benefits. As it is, that equates to $59,491 per year – meaning that the average total compensation for LAPD officers is actually $157,151.

LAPD Retirement Payments Affected by Investment Returns

It doesn’t end there, however. If the LAPD retirement systems fail to achieve forecast investment results, the amounts currently being paid by the employer – already nearly 50 percent of base pay – will have to increase. According to the Segal Report (Exhibit III, page 59), as of June 30, 2013 there were assets of $14.6 billion set aside for retirement pension liabilities estimated – using a discount rate of 7.75 percent – to have a present value of $17.6 billion, leaving a $2.6 billion unfunded liability. How confident can the LAFPP be that they will be able to grow a $14.6 billion fund at a rate of 7.75 percent per year? Using formulas provided for this purpose by Moody’s Investor Services, if you lower that annual projected earnings rate just a little, to a still very healthy 7.0 percent, the unfunded liability grows to $4.65 billion; at projected annual earnings of 6.2 percent, which represents the historical earnings rate of U.S. equities (including dividend reinvestment), the unfunded liability grows to $6.62 billion. And at the less risky 5.0 percent annual earnings rate of top grade corporate bonds, that liability grows to $10.1 billion.

In plain English – the unfunded liability for the LAPD pension fund could quadruple if the fund earns 5 percent per year instead of 7.75 percent. Just dropping the rate of earnings to 6.2 percent nearly triples the unfunded liability.

And it gets worse. The pension plan – officially analyzed at what some of us would consider to be a ridiculously optimistic annual 7.75 percent rate of return assumption, has a “funded ratio” of 83.2 percent. That should still alarm us, actually, because only 100 percent qualifies as fully funded, but 83.2 percent is a better ratio than most public employee pension funds out there. The other fund managed by LAFPP, however, for retirement health care, is only 38.5 percent funded (Segal Report, Valuation Results, Health Plan, page 4), although it is a much smaller fund – it’s officially recognized unfunded liability is “only” $1.6 billion.

There may be a lot of deep financial concepts and arguments in play here, but unfortunately, it’s not mere gibberish. There are real world consequences and tough decisions signified by these numbers. The city of Los Angeles is going to have to put more into these retirement funds then they already are, or they are going to have to cut benefits.

What Criteria: Comparable Pay, Affordable Pay, or Appropriate Pay?

If you look around Southern California it isn’t hard to find cities who pay their police officers more than LAPD. The California Policy Center compiled 2011 and 2012 data for a few cities in Orange County and here are some of the numbers they found for average annual total compensation for their police: Irvine, $168,336; Anaheim, $170.866; Costa Mesa, $181,709. One may reliably surmise that immediate neighbors such as the city of Beverly Hills also pay their police more than Los Angeles – and herein lies an irony that will justifiably grate on any officer of a large city like Los Angeles: The wealthy cities have less crime, but can afford to pay more to their police. But are the LAPD receiving low pay, or are the police in these other cities overpaid?

Moreover, there is a converse to this point – small cities cannot possibly absorb and employee thousands of police leaving because they want to earn more money.

Which returns us to the difficult question – is an average pay package of $157,151 really “low pay”? Beyond what rate of pay may be comparable or affordable, what is appropriate? Bear in mind the average LAPD overtime earned per officer, as reported in the 2012 data, was $1,691, which means that most LAPD officers are working the 4-10 or 3-12 shifts and not much more. According to an official summary of LAPD benefits, they also get 13 holidays, and three weeks vacation as rookies, which increases to 4.6 weeks after 10 years. And for all those contributions to their retirement benefits, after 30 years work the average LAPD officer can expect to retire with a pension and health insurance package worth between $90K and $100K per year (ref. Evaluating Public Safety Pensions in California, CPC, April 2014).

One of the most significant reasons the city of Los Angeles faces financial challenges is because personnel costs – for all departments – increased year after year, thanks to the power of collective bargaining. But was this appropriate? During the lean years after the internet bubble popped, and again after the real estate bubble popped, people in the private sector felt lucky to have jobs. Meanwhile, in the public sector, year after year, annual cost-of-living adjustments kept being awarded. And even in cases where, finally, cost of living increases were suspended due to financial constraints, “step increases” and “longevity pay” and other annual pay hikes continued per labor agreements. Worse still, the pension funds and retirement health care funds, which appeared to be flush during the bubble years, have now revealed themselves to be in serious trouble. When comparing their pay to what other cities pay, LAPD officers, and all public employees, ought to also compare their rates of pay to what private citizens have experienced. Making $157,151 per year is a LOT of money in virtually any profession in America, including police work if you venture outside of California, New York and a few other places where, arguably, public employee unions have taken over their local governments.

When confronting the continuous risk and inevitable tragedies that befall police officers, no amount of money will ever be enough. But the Los Angeles Police Protective League, and other public and private unions, should consider the deeper cause of middle class struggle, which is the artificially high cost of living in California. Despite well crafted arguments to the contrary, there is plenty of land and almost limitless conventional energy in California. And if the alfalfa farmers in the Mojave Desert were permitted to sell their water allotments to the LADWP, there wouldn’t be a residential water shortage even in this tough year. Taxes in California are among the highest in the nation, and taxes are driven primarily by public sector personnel costs, along with the costs for an unreformed welfare system that gives California the dubious distinction of having 12 percent of the nation’s population but 30 percent of its welfare recipients. Failed immigration policies further strain the system. Public employees could afford to make less, a lot less, and live better, if these needless hindrances to California’s prosperity were corrected.

Along with protecting one of the greatest cities in the world, and hopefully participating constructively in a tough debate over whether or not their compensation is appropriate and affordable – L.A.’s finest should consider the deeper roots of the economic hardships we share together, and how to engage on those fronts for the good of everyone.

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

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Steven Greenhut: Brown pension plan going nowhere

November 11, 2011 By CPR Editors 1 Comment

From Redding.com:

Despite some encouraging details in Gov. Jerry Brown’s recently announced pension-reform proposal, there’s virtually no chance the state will seriously reform — or even seriously attempt to reform — a system creaking under the weight of up to an estimated $500 billion in unfunded liabilities.

The proposal isn’t bad. It doesn’t go far enough to fix the problem even if implemented in its entirety, but it goes further than most pension reform advocates had expected from a Democratic governor who, to date, has governed as an extension of the public-employee unions that elected him to office.

But the plan probably is dead on arrival in the union-dominated Legislature. One might even argue that Brown is being cynical here — offering reasonably tough reform proposals that he knows will go nowhere. Then he can claim that he has tried to fix the problem but could not surmount the insurmountable.

(Read Full Article)

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