How to Identify a “Good” Bond

Photo courtesy of kenteegardin, flickr

Photo courtesy of kenteegardin, flickr

On November 8th, Californians approved Prop. 51, authorizing $9.0 billion in new borrowing for construction and upgrades of public schools. Also on November 8th, Californians approved 171 local bond measures, authorizing over $22 billion in additional financing for construction and upgrades of public schools.

This new borrowing is only to construct and upgrade K-12 and community college campuses. Total K-12 enrollment in California has been stable at around 6.3 million students for over a decade. Community college enrollment in California is about 2.1 million students. This means that this latest round of borrowing equates to $3,735 per student. And similar sums are thrown at California’s K-12 schools and community colleges for construction and upgrades every two years. What gives?

One of the most obvious problems with voter approved bonds in California is the preference given school bonds. Proposition 39, passed in Nov. 2000, reduced the supermajority needed to pass a bond issue ballot question from 66% to 55%. Meanwhile, all other public construction bonds still need the 66% supermajority. Inevitably, this law has resulted in abundant money flowing into school construction, while neglecting roads and other public infrastructure.

We asked State Senator John Moorlach, the only licensed CPC to hold office in California’s state legislature, and one of the most financially savvy individuals in Sacramento, to comment on what might constitute a “good” bond. Here is his checklist:

(1) Plan: A detailed plan that itemizes what projects will be funded with the bond proceeds is essential. How will bonds be issued and proceeds spent? Most bond measures fall short of providing itemized budgets that clearly explain the use of funds, which magnifies the opportunities for wasteful spending.

(2) Oversight: How will the implementation of the projects funded by a bond be monitored. Who will sit on the oversight board and how will people with conflicts of interest be screened out. What authority will the citizen board have if they uncover misuse of funds? Will they be able to stop work on a project?

(3) Terms: The devil is in the details. A fairly written bond contract will have a ratio of total principal and interest payments to principal of between two-to-one and three-to-one. But bonds still slip through, avoiding informed scrutiny by a financial expert, that can have ratios of total payments to principal amount as high as ten-to-one. Costs of issuance are another area where abuse occurs. A fairly written bond contract will award the underwriters between one and two percent. A small bond, say, under $10 million, may command a fee of around three percent. More than that is unfair to taxpayers.

(4) Reserves: How much cash will be set aside so that district won’t return with more requests for money? Many school districts have new bond measures on the ballot every two years. But the payments on these each of these bonds, not subject to any Prop. 13 restrictions, increase property tax assessments for thirty years or more. With school enrollment in California stable for over ten years, where is this money going?

(5) Maintenance: It is common to see the term “deferred maintenance” listed as one the uses of proceeds for a proposed bond. When new construction is financed with a bond, how much cash will be set aside to maintain these facilities? Equally pertinent, why can’t this maintenance be funded out of operating budgets?

(6) Promotional Funding: Is the campaign supporting a bond paid for by the people who’ll benefit from the bond? There is a clear conflict of interests when the most active participants in the paid political debate over whether or not voters should support a new bond proposal are the underwriters who will collect fees, the construction firms who will do the work, and the teachers unions who will always favor more facilities on their campuses.

(7) Project Labor Agreements: If the bond doesn’t explicitly prohibit cost-boosting Project Labor Agreements, then it is likely they will be incorporated. By excluding non-union shops from the bidding process, project costs are inflated by between 10% and 40%, all of which is borned by taxpayers.

A California Policy Center study released in 2015, “For the Kids” – Comprehensive Review of California School Bonds,” estimated that between 2000 and 2014, California’s voters approved, on average, $10 billion per year on new school bonds. Since then, through November 8th, voters have approved at least another $40 billion of new school bonds. Not including the interest on bonds still outstanding that were issued before 2000, the interest and principal payments on this $180 billion in school bond borrowing costs taxpayers at least $11.7 billion per year.

Adopting these seven criteria to evaluate bonds will go a long way towards ensuring that bond debt is approved by informed voters, and that the proceeds serve the people, especially the students, instead of special interests.

Ed Ring is the vice president of research policy for the California Policy Center.

Californians Approve $5 Billion per Year in New Taxes

For the last few years, using data provided by the watchdog organization CalTax, we have summarized the results of local bond and tax proposals appearing on the California ballot. Nearly all of them are approved by voters, and this past November was no exception.

With only a couple of measures still too close to call, as can be seen, 94 percent of the 193 proposed local bonds passed, and 71 percent of the proposed local taxes passed. Two years ago, 81 percent of the local bond proposals passed, and 68 percent of the local tax proposals passed. No encouraging trend there.

Outcome of Local Bond and Tax Proposals – November 2016

outcome-of-local-bond-and-tax-proposals-november-2016

A simple extrapolation will provide the following estimate: Californians just increased their local tax burden by roughly $4 billion, in the form of $1.9 billion more in annual interest payments on new bond debt, and $2.1 billion more in annual interest on new local taxes. But that’s not even half the story.

California’s voters also supported state ballot initiatives to issue new bond debt and impose new taxes. Prop. 51 was approved, authorizing the issuance of $9 billion in new bonds for school construction. Prop. 55 extended until 2030 the “temporary” tax increase on personal incomes over $250,000 per year, and Prop. 56 increased the cigarette tax by $2 per pack. The cost to taxpayers to service the annual payments on $9 billion in new bond debt? Another $585 million per year. Even leaving “rich people” and smokers out of the equation, California voters saddled themselves with nearly $5 billion in new annual taxes.

But as they say on the late-night infomercials, there’s more, much more, because California’s state legislators don’t have to ask us anymore if they want to raise taxes. November 2016 will be remembered as the election when a precarious 1/3 minority held by GOP lawmakers was broken. California’s democratic lawmakers, nearly all of them controlled by public sector unions, now hold a two-thirds majority in both the state Assembly and the state Senate. This means they can raise taxes without asking for consent from the voters. If necessary, they can even override a gubernatorial veto.

And they will. Here’s why:

There are three unsustainable policies that are considered sacrosanct by California’s state lawmakers and the government unions who benefit from them. (1) They are proud to have California serve as a magnet for undocumented immigrants and welfare recipients. (2) They are determined to continue to overcompensate state and local government workers, especially with pensions that pay several times what private workers can expect from Social Security. (3) They have adopted an uncritical and extreme approach to resolving environmental challenges that has created artificial scarcity of land, energy and water, an asset bubble, and a neglected infrastructure that lacks the resiliency to withstand large scale natural disasters or civil emergencies.

All three of these policies are extremely expensive. “Urban geographer” Joel Kotkin, writing in the Orange County Register shortly after the Nov. 8 election, had this to say about these financially unsustainable policies:

“This social structure can only work as long as stock and asset prices continue to stay high, allowing the ultra-rich to remain beneficent. Once the inevitable corrections take place, the whole game will be exposed for what it is: a gigantic, phony system that benefits primarily the ruling oligarchs, along with their union and green allies. Only when this becomes clear to the voters, particularly the emerging Latino electorate, can things change. Only a dose of realism can restore competition, both between the parties and within them.”

Despite the increase in consumer confidence since the surprising victory of Donald Trump in the U.S. presidential election, the stock and asset bubble that has been engineered through thirty years of expanding credit and lowering rates of interest is going to pop. The following graphic, using data from Bloomberg, explains just how differently our economy is structured today compared to 1980 when this credit expansion began.

1980-vs-2016

As can be easily seen from their price/earnings ratios today, publicly traded stocks are grossly overvalued. Equally obvious is that interest rates have fallen as low as they can go. For more discussion on how this is going to affect the economy, refer to recent California Policy Center studies “How a Major Market Correction Will Affect Pension Systems, and How to Cope,” and “The Coming Public Pension Apocalypse, and What to Do About It.” Despite healthy new national optimism since Nov. 8th, the economic fundamentals have not changed.

California’s democratic supermajority legislators, and the government unions who control them, are going to have a lot of explaining to do when the bubble bursts. For decades they have successfully fed their unsustainable world view to the media and academia and the entertainment industry. For over a generation they have brainwashed California’s K-12 and college students into militantly endorsing their unsustainable world view. This year they conned California’s taxpayers into approving another $5 billion in new annual taxes. But the entire edifice exists on borrowed time.

Ed Ring is the vice president of research policy at the California Policy Center.

California’s Government Unions are the Most Powerful in the U.S.

The Commonwealth Foundation, a think tank based in Pennsylvania, has recently released a study entitled “Transforming Labor – A Comprehensive, Nationwide Comparison and Grading of Public Sector Labor Laws.” It ranked every state in terms of the relative power of public sector unions. California, along with tiny Maryland, were the only states that got an F.

public-sector-labor-lawsIf you view the map presented in the Commonwealth study, there is a strong correlation between states controlled by the GOP vs those controlled by Democrats. Nearly all the Democrat controlled states with large urban populations get D grades, with the notable exceptions of Florida (C), and Texas (A). We can perhaps learn something from the outliers – why did Texas get an A and why does Montana get a D? But California is in a class by itself.

When performing this analysis, the studies author, Priya M. Abraham, created a checklist called “State Labor Comparison” that provides criteria for grading each state. California failed in every category:

(1) Is collective bargaining legal for government workers?  –  Yes.

(2) What items may be negotiated in collective bargaining?  –  Salaries, Hours, Pensions, Fringe benefits, Other terms.

(3) How are unions certified?  –  Mandatory card check, Optional card check.

(4)  Do unions have a right to exclusive representation of workers?  –  Yes.

(5)  Are there provisions for union release time?  –  Yes, by law.

(6)  Are there union membership opt-out windows?  –  Written in union contracts.

(7)  Are union contract negotiations open to the public?  –  May be closed.

(8)  Is binding arbitration required during collective bargaining impasses?  –  Yes, for some.

(9)  Is there paycheck protection?  –  No.

(10)  Right to Work?  –  No.

(11)  Legality of public worker strikes?  –  Legal for some.

Most everyone understands the obvious consequences of California’s status as the most enabling state in the U.S. for government unions. By the time most people read this, there is a good chance that Democrats will have captured a super-majority in the state legislature, allowing them to raise taxes at will. Also obvious, decades of increasing political control by government unions has lead to a state judiciary that consistently favors government unions. This happens not only in nearly all cases involving pension reform, but also in those cases addressing education reform. For example, the recent ruling against the Vergara plaintiffs who, gasp, wanted to reform the union work rules that have nearly destroyed public education in California.

There’s a deeper corruption, however, that is less obvious but even more consequential, and that is the effect union controlled government has on California’s business and financial communities. Corporations that want to do business in California understand that all legislation goes through the unions for approval. All of it. So they make deals, and implicit in any deal is that the union agenda – more government pay and benefits, more government employees, and more taxes and borrowing – is never challenged by the business community.

The financial sector also must adapt, and they’ve outdone themselves. In lieu of pension reform or proper bond oversight, financial firms make billions investing money for the union-controlled government pension funds and underwriting government bonds. For any partner at a financial firm in California to advocate pension reform would be financial suicide. They do what they’re told, or they go out of business.

The high-tech community in the Silicon Valley is probably the most tragic example of how government union power has corrupted an industry. A nefarious convergence of interests has evolved between government unions, utility companies, and high-tech entrepreneurs, to create artificial scarcity of land, energy and water. Hiding behind overstated environmentalist concerns, they have imposed de-facto rationing on Californians. This enables tax revenue that might have been used for infrastructure to instead go to paying government worker salaries and feeding the pension funds. At the same time, it takes the utility rate hikes that might have financed additional infrastructure and feeds it to Silicon Valley “entrepreneurs,” who develop expensive “green” energy solutions, along with systems that eventually will mandate every major household appliance be internet enabled, connected to smart meters, and capable of charging punitive rates if a consumer, for example, runs their clothes dryer at the “wrong” time.

If one refers again to the map showing public union power by state, another correlation becomes clear – union power, generally, is concentrated in states with the highest costs of living. California is again champion in this respect. Artificial scarcity has rendered prices in California for land, energy and water among the highest in the nation. State and local taxes are also among the highest in the nation. California is Exhibit A for how public unions and elite oligarchs have combined forces to create challenges for ordinary people that amount to outright oppression.

If the 2016 election will be remembered for anything, it will be remembered as a time of populist awakening. Americans in unprecedented numbers have registered their discontent with a system they consider rigged. But not once in what was one of the most visible national elections in American history did anyone, anywhere, identify the root cause of government overreach and capitalist corruption:  Government unions.

Ed Ring is the vice president of policy research for the California Policy Center.

This piece was originally published by the Flash Report.

Nov. Election Sees More than $34 Billion in Local Borrowing and Local Tax Increases

Money

New local taxes and new local borrowing are a regular phenomenon in California elections, but this year our government union-controlled politicians have outdone themselves. Let’s compare:

November 2014 – $11 billion in new borrowing proposed via 118 local bond measures, 81 percent passed. Of the 117 local proposals for new taxes, 68 percent passed.

June 2016 – $6.2 billion in new borrowing proposed via 48 local bond measures, an estimated 93 percent passed. Of the 42 local proposals for new taxes, an estimated 66 percent passed.

November 2016 – $32.2 billion in new borrowing via 193 local bond measures, and 224 local proposals for new taxes!

Not only do these general and primary and special election tax and bond measures accumulate year after year, but they nearly always pass! The primary source for this information is the California Tax Foundation, who have just produced another excellent guide “Local Tax and Bond Measures 2016.” This time, they have not only compiled a list of all of the proposed local taxes and bonds, but for each of the proposed new local taxes, they have compiled the projected annual collections. The result is stunning.

2016 California Local Tax and Bond Measures

2016-california-local-tax-and-bond-measures

As this table reports, $32.2 billion in new borrowing is being proposed, nearly all of it for schools and colleges. At 5.0 percent annual interest with a 30 year repayment plan, this borrowing will cost property owners another $2.0 billion per year in increased property taxes. If over 90 percent of these bonds are approved by voters, as recent history indicates is likely, California’s taxpayers will suddenly have saddled themselves with nearly $30 billion in new government debt.

Also as reported on the above table, the 224 proposed tax increases are estimated to cost taxpayers at least $2.9 billion per year. “At least,” because CalTax was unable to find revenue projections for 29 of them. And while “sin taxes” on marijuana and soda promise to bring in $58 million and $18 million, respectively, it is sales tax, that everyone pays, that will bring in most of the revenue, over $2.3 billion.

Because local taxes are numerous and dispersed onto hundreds of differing ballots across the state, they don’t get the visibility that state tax increases generate. But collectively they are just as significant. California’s Prop. 30, passed by voters in 2012, generated about $6.0 billion per year. That same tax, which was supposed to be temporary, will be extended through 2030 if voters approve Prop. 55 this year. But if you compare this statewide tax to the proposed local taxes, $2.9 billion per year, along with required payments on the local bonds, $2.1 billion per year, you are adding another $5.0 billion annual burden to taxpayers.

Passing Prop. 30 was a major fight. Similarly, Prop. 55 has huge visibility with voters. But because nearly all of the local measures pass, and because dozens if not hundreds of them appear on the ballot every election, local taxes and bonds matter more. Invisible, ongoing and ever expanding, they are silently elevating the cost-of-living for ordinary Californians as much or more than state taxes.

Where does this money really go? Why is there an insatiable thirst for more taxes and more borrowed funds?

One word: Pensions. One cause: Government unions and their allies in the financial community, who together comprise what is by far the most potent political lobby in California.

May 2016 analysis by the California Policy Center, using the most recent data available from the U.S. Census Bureau, estimated that during 2014, California’s 80+ independent state/local government employee pension systems received $30.1 billion in contributions (ref. table 2-A). Later in that same report, on table 2-C which is displayed below, one can see how much these pension systems actually need to remain financially healthy. At a minimum, they are collecting $8.0 billion per year LESS than they need. And that is if the investments they’ve made yield an annual return of 7.5 percent per year for the next 30 years. At the modest reduction of that projection to 6.5 percent – which even CalPERS has announced they are going to phase in as their new projection for calculating required annual contributions, these pension systems are collecting $22.2 billion per year LESS than they need.

California State/Local Pension Funds Consolidated
2014 – Est. Funding Status and Required Contributions at Various ROI

california-state-and-local-pension-funds-consolidated

If California’s state and local government workers participated in Social Security like the rest of California’s workers, instead of receiving guaranteed defined benefit pensions that on average pay FOUR TIMES what Social Security recipients can expect, there would be no insatiable need for more money for the pension systems. Even if California’s state and local government workers merely received defined benefits that paid, on average, TWICE what Social Security recipients can expect, these pension funds would currently have surpluses. Moreover, there would be money left over in local municipal and school district operating budgets to maintain facilities, instead of having to perpetually borrow.

Six billion dollars per year ala Prop. 30 and Prop. 55. Another $5 billion per year thanks to new proposed local taxes and borrowing just this November. And it’s not even close to enough. California’s state and local government pension systems are going to need somewhere between $50 to $60 billion per year to stay afloat, and currently they’re collecting barely more than half that much.

No wonder there’s the perennial scramble for more. More. MORE.

*   *   *

Ed Ring is the president of the California Policy Center.

Average Costa Mesa Firefighter Makes Nearly $250,000 Per Year. Why? Pensions.

Does that fact have your attention? Because media consultants insist we preface anything of substance with a hook like this. And it even has the virtue of being true! And now, for those with the stomach for it, let’s descend into the weeds.

According to payroll and benefit data reported by the city of Costa Mesa to the California State Controller, during 2015 the average full-time firefighter made $240,886. During the same period, the average full-time police officer in Costa Mesa made $201,330. In both cases, that includes the cost, on average, for their regular pay, overtime, “other pay,” the city’s payment to CalPERS for the city’s share, the city’s payment to CalPERS of a portion of the employee’s share, and the city’s payments for the employee’s health and dental insurance benefits.

And if you think that’s a lot, just wait. Because the payments CalPERS is demanding from Costa Mesa – and presumably every other agency that participates in their pension system – are about to go way up.

We have obtained two innocuous documents recently delivered to the city of Costa Mesa from CalPERS. They are entitled “SAFETY FIRE PLAN OF THE CITY OF COSTA MESA (CalPERS ID: 5937664258), Annual Valuation Report as of June 30, 2015,” (click to download) and a similar document “SAFETY POLICE PLAN OF THE CITY OF COSTA MESA (CalPERS ID 5937664258), Annual Valuation Report as of June 30, 2015,” (click to download). Buried in the bureaucratic jargon are notices of significant increases to how much Costa Mesa is going to have to pay CalPERS each year. In particular, behold the following two tables that appear on page five of each letter:

Projected Employer Contributions to CalPERS  –  Costa Mesa Police

employer-contributions-to-calpers

Projected Employer Contributions to CalPERS  –  Costa Mesa Firefighters

projected-employer-contributions-to-calpers-costa-mesa-firefighters

In the rarefied air of pension arcana, pension systems can get away with a lot. If you’re a glutton for punishment, read these notices from CalPERS in their entirety and see if, anywhere, they bother to explain the big picture. They don’t. The big picture is this:  For years CalPERS has underestimated how much they are going to pay in pensions and they have overestimated how much their investments will earn, and as a result they are continuously increasing how much cities have to pay them. This notice is just the latest in a predictable cascade of bad news from pension systems to cities and other agencies.

Coming down to earth just a bit, consider the two terms on the above charts, “Normal Cost %” and “UAL $.” It would be proper to wonder why they represent one with a percentage and one with actual dollars, but rather than indulge in futile speculation, here are some definitions. “Normal Cost” is how much the city pays (never mind that the city also pays a portion of the employee shares – we’ll get to that) into the pension system if it is fully funded. The reason pension systems are NOT fully funded is because, again, year after year, CalPERS underestimated how much they would pay out in pensions to retirees and overestimated how much they would earn. Read this disclaimer that appears on page five of the letters: “The table below shows projected employer contributions … assuming CalPERS earns 7.5 percent every fiscal year thereafter, and assuming that all other actuarial assumptions will be realized.”

And when the “Normal Cost” payments aren’t enough, and the system is underfunded, voila, along comes the “UAL $,” that bigger catch-up payment that is necessary to restore financial health to the fund. “UAL” refers to “unfunded actuarial liability,” the present value of all eventual payments to retirees, and “UAL $” refers to the payments necessary to reduce it to a healthy level. Notice that for firefighters this catch-up payment is set to increase from $4.2 million in 2017 to $6.8 million in 2022, and for police it is set to increase from $5.8 million in 2017 to $10.1 million in 2022. This is in a small city that in 2015 employed an estimated 125 full-time police officers and 75 full-time firefighters.

As always, it must be emphasized that the point of all this is not to disparage police or firefighters. No reasonable person fails to appreciate the work they do, or the fact that they stand between us and violence, mayhem, catastrophe and chaos. And it is particularly difficult for those of us who are part of the overwhelming majority of citizens who appreciate and respect members of public safety to have to disclose and publicize the facts of their unaffordable pensions.

The following charts, using data downloaded from the CA State Controller, put these costs into perspective:

Average and Median Employee Compensation by Department
Costa Mesa – Full time employees – 2015

average-and-median-employee-compensation-by-department

In the above chart, before sorting by department and calculating averages and medians, we eliminated employees who worked as temps or only worked for part of the year. This provides a more accurate estimate of how much full-time workers really make in Costa Mesa. Bear in mind that most part-time employees still receive pension benefits, as will be shown on a subsequent chart. As it is, during 2015 the average full-time police officer in Costa Mesa was paid total wages of $121,636, about 15 percent of that in overtime. But they then collected another $79,694 in city paid benefits, including $59,337 paid by the city towards their pension, AND another $11,562 that the city paid towards their pension that the State Controller vaguely describes as “Defined Benefit Paid by Employer.” Total 2015 police pay: $201,330.

Also on the above chart, one can see that during 2015 the average full-time firefighter in Costa Mesa was paid total wages of $150,227, about 32 percent of that in overtime. They then collected another $90,659 in city paid benefits, including $72,202 paid by the city toward their pension, and as already noted, another $10,440 that the city paid toward the employee’s share of their pension. Total 2015 firefighter pay: $240,886.

To distill this further, the following chart shows, per full-time employee, just how much pensions cost Costa Mesa in 2015 as a percent of regular pay.

Average Employer Pension Payment as % of Regular Pay
Costa Mesa – Full-time employees – 2015

average-employer-pension-payment-as-of-regular-pay

As the above chart demonstrates, employer payments for full-time employee pensions during 2015 already consumed a staggering amount of budget. For police, every dollar of regular pay was matched by 80.5 cents of payments by the city to CalPERS. For firefighters, every dollar of regular pay was matched by a staggering 94.4 cents of payments by the city to CalPERS.

The next chart shows the impact this has on the city of Costa Mesa budget. Depicting total payroll amounts by department, it compares the same variables, total employer pension payments as a percent of total regular pay. As can be seen, the percentages are nearly the same, despite this being for the entire workforce including temporary and part-time employees, some who may not have pension benefits (most do), and many who do not receive top tier pension formulas which the overwhelming majority of full-time public safety employees still receive. As can be seen, for every dollar of regular police pay, CalPERS gets 75 cents from the city, and for every dollar of firefighter pay, CalPERS gets 92 cents from the city.

Total Employer Pension Payment as % of Regular Pay
Costa Mesa – All active employees; full, part-time and temp – 2015

total-employer-pension-payment-as-of-regular-pay

At this point, the impact of CalPERS stated rate increases can be fully appreciated. And because this article, already at nearly 1,000 words, has violated every rule of 21st century social media engagement protocols – keep it short, shallow, simple and sensational – perhaps the next paragraph should be entirely written in bold so it is less likely to be lost in the haze of verbosity. Perhaps a meme is in here somewhere. Perhaps an inflammatory graphic that shall animate the populace. Meanwhile, here goes:

Once CalPERS’s announced increases to the “unfunded payment” are fully implemented, instead of paying $10.9 million per year for police pensions, Costa Mesa will pay $15.2 million per year, i.e., for every dollar in regular police pay, they will pay $1.04 toward police pensions. Similarly, instead of paying CalPERS $6.4 million per year for firefighter pensions, Costa Mesa will pay $9.1 million per year, i.e., for every dollar in regular firefighter pay, they will pay $1.30 towards firefighter pensions.

Wow.

So just how much do Costa Mesa’s retired police and firefighters collect in pensions? Repeatedly characterized by government union officials as “modest,” shall we report and you decide? The following table, using data originally sourced from CalPERS and downloaded from Transparent California, are the pensions earned by Costa Mesa retirees in 2015. Excluded from this list in order to present a more representative profile are all pre-2000 retirees, since retirement pensions were greatly enhanced after the turn of the century, and it is those more recent pensions, not the earlier ones, that are causing the financial havoc. Also excluded because the benefit amounts are not representative and the retirement years are not disclosed, are all “beneficiary” pensions, which survivors receive.

Average Pensions by Years of Service
Costa Mesa retirees – 2015

average-pensions-by-years-of-service

While these averages are impressive – work 30 years and you get a six-figure pension – they grossly understate what Costa Mesa public safety retirees actually get. There are at least four reasons for this: (1) The data provided doesn’t screen for part-time workers. Many retirees may have put in decades of service with the city, but only worked, for example, 20-hour weeks. They would still accrue a pension, but it would not be nearly as much as it would be if they’d worked full time. (2) Nearly all full-time employees are also granted “other post-employment benefits,” primarily health insurance. It is reasonable to assume that for public safety retirees, the value of these other post employment benefits is at least $10,000 per year. (3) Because CalPERS did not disclose what department retirees worked in during their active careers, this data set is for all of Costa Mesa’s retirees. That means it includes miscellaneous employees who receive pensions that are, while very generous, are not nearly as good as the pensions that public safety retirees receive. (4) While recent reforms have begun to curb this practice, it has been common at least through 2014 for retirees to purchase “air time,” wherein for a ridiculously low sum they are permitted to claim more years of service than they actually worked. It is common for retirees, for example, to purchase five years of air time, so when their pension benefit is initially calculated, instead of multiplying, for example, 20 years of service times a 3.0 percent multiplier times their final salary, they are permitted to claim 25 years of service.

All of this, of course, is dense gobbledygook to the average millennial Facebook denizen, or, for that matter, to the average politician. To be fair, it’s hard even for the financial professionals hired by the public employee unions to acknowledge that maybe 7.5 percent (or even 6.5 percent) annual investment returns will not continue for funds as big as CalPERS, or that history is no indicator of future performance. And even if they know this, they’re under tremendous pressure to keep silent. So the normal contribution remains too low, and the catch-up payments mushroom.

Finally, to be eminently fair, we must acknowledge that since modest bungalows on lots so small you have to choose between a swing set or a trampoline for the kids are now going for about a million bucks each in most of Orange County, making a quarter million per year ain’t what it used to be. But there’s the rub. Because until the people who work for the government are subject to the same economic challenges as the citizens they serve, it is very unlikely we’ll see any pressure to lower the cost of living. Everything – land, energy, transportation, water, materials, etc. – costs far more than it should, thanks to deliberate political policies and financial mismanagement that creates artificial scarcity. But hey – artificial scarcity inflates asset bubbles, which helps keep those pension funds marginally solvent.

Cost-of-living reform, if such a thing can be characterized, must accompany pension reform. What virulent meme might encapsulate all of this complexity?

Ed Ring is the president of the California Policy Center.

If Police Unions Were Abolished and Police Associations Were Restored

Police tapeEarlier this month the New York Times ran an editorial entitled “When Police Unions Impede Justice.” They make the point that collective bargaining agreements for police employees often make it very difficult to hold police officers accountable for misconduct. When you have nearly 1 million sworn police officers in the United States, you’re bound to have a few bad apples. According to the NYT, these collective bargaining agreements discourage citizens from lodging misconduct complaints, micromanage investigations, and minimize disciplinary sanctions.

This isn’t news. It’s one of the reasons collective bargaining agreements for police officers are especially problematic. The other big problem with collective bargaining agreements for members of public safety are the often excessive and unaffordable benefit packages they’ve “negotiated” with the politicians whose careers are made or broken by these same unions. So what if police unions were abolished?

One may argue that abolishing police unions in favor of police associations – which could not engage in collective bargaining – would actually benefit all parties. An immediate benefit would be greater accountability for police officers. Why wouldn’t greater individual accountability be supported by the overwhelming majority of police officers who are conscientious, humane, compassionate members of the communities they serve? In turn, why wouldn’t greater police accountability foster rapprochement in neighborhoods where mistrust has developed between citizens and law enforcement?

With respect to pay and benefits for police officers, the risks of abolishing collective bargaining may be overstated. As it is, rates of base pay for police officers are not excessive by market standards. If they were, it would be easier to hire police officers. The primary economic problem with police compensation is retirement benefits, which in California now easily average over $100,000 per year for officers retiring in their 50’s after 25+ years of service. As the unions defend these excessive pensions, younger officers are left with far less generous benefits. The perpetually escalating contributions the pension funds demand – for all public employees – are behind virtually all tax increases being proposed in California. It can’t go on.

So abolishing collective bargaining for police would lead to several benefits (1) more police accountability and improved community relations, (2) minimal impact on base police pay, and (3) quicker resolution of financial challenges facing pensions, which will increase the probability that the defined benefit will be preserved, and will increase the potential retirement benefit available to the incoming generation of new police officers.

Apart from ending collective bargaining agreements, abolishing police unions in no way abolishes the ability of police officers to organize in voluntary associations to pursue common professional and political objectives. Before we had unionized police forces, police associations were very influential in civic affairs and could be again. And there are broader political objectives that may animate these police associations, beyond protecting bad cops and fighting for financially unsustainable retirement benefits. Police and other public safety employees, whether they are part of a union or part of a voluntary association, should think carefully about where the United States is headed. This is especially true in California.

The most dangerous risk of politically active police unions is the fact that whenever government fails, whenever our common culture is undermined, whenever social programs breed more problems than they solve, we need to hire more police officers. And whenever government expands to regulate and manage more aspects of our lives, we need to hire more police officers. Social upheaval and authoritarian government create jobs for police officers. For a police union that wants more members, a failing society and an authoritarian government suits their agenda.

For this reason, police officers have a choice to make. Do they really want to enforce the laws emanating from the climate fascists, the tolerance fascists, the sensitivity fascists, the equality fascists, the multi-cultural fascists – the entire ostensibly anti-fascist fascist gang of elitists who currently control public policy in California? Do they want to deploy drones to monitor whether or not someone got a permit to install a window in their bathroom, or watered their lawn on the wrong day? Do they want to fine or arrest people who aren’t willing to adhere to speech codes, or who refuse to hire less qualified employees in order to fulfill race and gender quotas? Do they want to police a society that has fragmented irretrievably because we continued to import millions of unskilled, destitute individuals from hostile cultures, than indoctrinated their children in union-ran public schools to falsely believe they live in a racist, sexist society?

It’s a tough choice. Will politically active police organizations redirect some of their resources to support policies that might actually reduce the number of police we need? Abolishing collective bargaining may make the right choice easier, because police will then be less immune to the economic and social havoc the elitists are currently imposing on the rest of us.

Ed Ring is the president of the California Policy Center.

How Government Unions are Hypocrites that Betray the Public

UnionGovernment unions are not unions in any traditional sense of the word. They elect the bosses they “negotiate” with. They are paid through compulsory taxes rather than via a company that has to earn a profit in the competitive market. And they operate the machinery of government which allows them extraordinary latitude to intimidate any business interests who may challenge their agenda.

Among the informed, these assertions are beyond serious debate. Even supporters of government unions acknowledge them – just not on the record. But to inform the public, it is probably too abstract to question the legitimacy of government unions because they “elect their own bosses,” “use taxpayers money instead of earned profits” or “control the bureaucracy.” Perhaps instead it is better to explain how union control of government harms people in their everyday lives.

To that end, here is a partial list of how the actions of government unions contradict their rhetoric, and betray the public they are supposed to serve:

(1) Demonizing “Profits.” From the classroom teacher to the professionally prepared press release, the rhetoric of government unions promotes the idea that “corporate profits” are unjust. The academic focus from primary school through public universities is invariably swayed, thanks to government unions, to challenge the capitalist system. Yet without profits there are no tax revenues. Governments survive financially because corporations make profits. Government unions support legislation that has made California the toughest state in the U.S. to do business. The impact: Brainwashed youth, and fewer successful companies offering fewer good jobs.

(2)  Demonizing “Millionaires and Billionaires.” Government union rhetoric frequently resorts to accusing anyone who wants to expose their destructive hypocrisy as funded by “millionaires and billionaires,” as if that should automatically nullify their arguments. These unions have carefully nurtured a public hostility and resentment towards individual wealth. The problem, however, is that almost anyone who retires after a full career in public service is a millionaire – often many times over. The average full career pension for California’s state and local government workers is over $70,000 per year. The ordinary private sector worker would have to save at least $1.5 million to generate a $70,000 annuity for the rest of their life – with no guarantees. The impact: Higher taxes and reduced services to support government worker pensions that make them all millionaires, leaving the rest of us behind to pay for it.

(3) Defending “Working Families.” That is one of the mantras of the government unions. Fighting for the “working families.” But how does this work in reality? California is one of the hardest states to practice a profession or trade. Certifications and licenses require prohibitive amounts of time and money, excluding the most deserving, aspiring citizens. Workman’s Compensation insurance rates are among the highest in the U.S., making it much harder for small companies to compete and grow their businesses. Crippling regulations. Absurdly time consuming and expensive permitting processes. The impact: Reduced upward mobility, far less opportunities for low income entrepreneurs.

(4) Always “For the Children.” The level of hypocrisy here almost defies description. Government unions have imposed their agenda on education, turning public schools into propaganda mills, indoctrinating students to believe their success or failure in life is primarily determined by whether or not they have “privilege,” and whether or not the state provides sufficient benefits, instead of teaching them the skills they will need to succeed in life on their own. Government unions have defeated any meaningful attempts to hold teachers accountable, or allow principals and superintendents to effectively manage. What they have done to California’s rising generation of students can be accurately characterized as child abuse. The impact: A generation of Californians who are unprepared to assume the responsibilities of adulthood.

(5) Respect for “Contracts.” The selective moral outrage mustered by government unions when it comes to “contracts” is exemplified by their response to pension reformers who want to lower the pension benefit formulas – just for work to be performed in the future. Because back in 1999, these same unions lobbied successfully to raise pension benefit formulas not just from then on, but back to the day each active government worker began their career. According to the same body of California contract law, they claim these retroactive benefit increases were justified, yet they fight – and win – in court whenever anyone tries to decrease these same benefits only from now on. The impact: Taxpayers are condemned to bail out these financially unsustainable pensions.

(6)  Fighting “Big Money in Politics.” The problem with this ersatz fight by government unions is simple: In state and local elections in California, nobody spends as much money as government unions. Just government unions, just in California, collect and spend over $1.0 billion per year in dues. About one-third of that, nearly $700 million every election cycle, is spend explicitly on politics and lobbying. An equal share probably goes to public education campaigns designed to promote the government union agenda. There is no special interest anywhere with the means, much less the desire, to challenge these unions. They are active in every political contest, no matter how small or how big, with access to as much cash as they need. The impact: Unions are the “big money in politics,” and their interests trump the public interest.

(7) Fighting “Big Business.” By now it should be clear enough – “big business” has no interest in challenging government unions. They collude instead, in a partnership where the government unions – who control legislation that will either favor or thwart business interests – are the dominant partner. And why shouldn’t big business partner with government unions? When oppressive regulations drive innovative competitors out of business, the monopolistic established corporations have the financial resources to comply. Why not let excessive government regulations destroy the competition? The impact: Less innovation, fewer new jobs, higher prices to consumers.

(8) Fighting “Wall Street.” This is the most ridiculous claim of all by government unions. Because when government unions successfully negotiate pay, benefit and hiring decisions that cause government deficits, Wall Street firms make billions underwriting new bond issues. And when government unions negotiate pension benefit enhancements, the union controlled pension funds invest even more money with Wall Street firms including hedge funds and private equity funds. Government is Wall Street’s biggest customer. The Wall Street influenced policies that have destroyed the ability of ordinary Americans to save for retirement or buy an affordable home have been a boon to the super rich and the pension funds. The impact: The government union alliance with Wall Street is a major factor in the hollowing out of America’s middle class.

The fact that most Californians still don’t understand the difference between government unions and private sector unions should come as no surprise. Government unions have spent literally billions of dollars over the past decades, hiring the best professional public relations talent in the world, to convince Californians they are on their side. But they’re not. Quite the contrary. Their hypocrisy is only matched by their corrosive impact on our economy, our freedom, and our democracy.

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Ed Ring is the president of the California Policy Center.

Average “Full Career” CalPERS Retirement Package Worth $70,000 Per Year

Calpers headquarters is seen in Sacramento, California, October 21, 2009. REUTERS/Max Whittaker

“‘What makes the ‘$100,000 Club’ some magic number denoting abuse other than the claims of anti-pension zealots?’ said Dave Low, chairman of Californians for Retirement Security, a coalition of 1.6 million public workers and retirees.”

This quote from a government union spokesperson, and others, were dutifully collected as part of Orange County Register reporter Teri Sforza’s eminently balanced reporting on the latest pension data, in her August 8th article entitled “The ‘100K Club’ – public retirees with pensions over $100,000 – are a growing group.”

In the article, Sforza’s team evaluated data released by Transparent California on 2015 CalPERS pensions, and reported the number of pensioners receiving $100,000 or more per year was 3.5% of total retirees, up from 2.9% in 2013. That truly does seem like a low percentage, but it ignores two key factors, (1) the total retiree pool includes people who only worked a few years and barely vested a pension, and (2) the total retiree pool includes people who worked many decades, sometimes 30 or 40 years or more, but they only worked part-time during their lengthy careers.

So if you restrict your pool of participants to those who worked a full career, and retired within the last 10 years, what percentage of those retirees would belong to the $100,000 club? As it turns out, there are 75,279 CalSTRS retirees who worked more than 25 years and less than 35 years, retiring after 2006. And as it turns out, 9,763 of them, or 13%, are receiving pensions in excess of $100,000 per year.

Moreover, CalSTRS doesn’t report the value of retirement health benefits and other retirement benefits, which almost certainly exceed $10,000 per year. If you make this reasonable assumption, you now have 14,901 CalPERS retirees, or 19% of our 75,279 pool of full career retirees, receiving a retirement package worth over $100,000 per year. Worth noting – we didn’t have the data necessary to screen the part-timers out of this pool. If we did, the numbers would be higher.

So if you use the appropriate denominator, the “$100 Club” isn’t 3.5% of the pie, it’s 19%, but so what? It’s still not a very big slice. Here’s where the flip-side of “full career pension” comes into play. Most people don’t work 25-35 years in public service. But most of them do vest their pension benefits, which can be vested in as little as five years. What happens when someone quits after five years, and only goes on to collect, say, a $20,000 per year pension? Someone else is hired, they work five years, and they also qualify to eventually collect a $20,000 per year pension. Then someone else, and then someone else – until you have three or four (or more) people who are all going to receive a $20,000 per year pension – for a job that one person could have performed if they’d stayed with the agency for a full career.

This is a critical point to understand. The significance of “full career” pensions is this: The taxpayer will fund pensions at that level of generosity, even if the benefit is split among multiple partial career participants – people who presumably worked elsewhere (where they also saved for retirement) during the majority of their careers. Should you expect a $100,000 per year pension if you only worked for five years? Of course not. But that’s what taxpayers are funding – whether it goes to one person, or to five people who worked a few years each to collectively fill one person’s full-career position in government.

This is why, when you are considering whether or not pensions are fair and affordable, the full career average pension is the only relevant measure. So what is the full career average?

For CalPERS in 2015, participants with between 25 and 34 years of work who retired in the last ten years, on average, received a pension of $60,277.  Add to that the value of their retirement health benefits and other retirement benefits and the average was probably closer to $70,000 per year.

Just for comparison, for Orange County (OCERS) retirees in 2015, participants with between 25 and 34 years of work who retired in the last ten years, on average, received a pension of $73,628.  Add to that the value of their retirement health benefits and other retirement benefits – information which OCERS also refuses to provide – and the average was probably over $80,000 per year. As for the OCERS “$100,000 Club”? Within the pool of full career retirees as described, and accounting for retirement health benefits, 31% of them were members. Nearly one in three.

Public sector spokespersons frequently point out that public employees don’t get Social Security. Actually, about half of them do get Social Security, but never mind that detail. Because the maximum Social Security benefit, which one must wait until they are 68 years old to receive, is a whopping $31,668 per year.

Calling critics of this double standard “anti-pension zealots” is lazy rhetoric. The problem with defined benefits is not that they exist. The problem is that we have set up a system where public employees operate under a set of retirement benefit formulas and incentives that are roughly four times better than what private sector workers can expect. Yet these private sector workers pay the taxes to fund these pensions and bail them out when the investment returns falter.

Ed Ring is the president of the California Policy Center.

Quality Education Remains Thwarted by Teachers Unions

shocked-kid-apAn article in today’s American Prospect, of all places, offers an in-depth look at just how little progress has actually been made toward restoring quality education to California’s public school students. Because the article appears in a publication that is “dedicated to American liberalism,” and because “American liberalism” depends more than anything else on billions in annual political contributions from government unions, you almost have to read between the lines to realize who the bad guys are.

Nonetheless, “California’s Ed Reform Wars,” by Rachel Cohen, all 3,200 words of it, is a fine piece of work. Read it closely, if you can stomach the facts. The bad guys – a matter of opinion, of course – are the government unions. The victims? California’s students, and the future of this great state.

Covered first is the uncertain fate of the Vergara case, funded by wealthy activists – many of them liberals – in the Silicon Valley. The plaintiffs are public school students whose case was founded on the argument that union work rules, specifically the policies governing tenure, layoff and dismissal policies, cause disproportionate harm to students in low-income communities. During round one, two years ago in a Los Angeles courtroom, reformers were mesmerized by the brilliant closing arguments of the lead attorney for the plaintiffs, along with the ruling by the judge in the case, who emphatically agreed.

That was then. In April of this year, by a 3-0 vote, the California Court of Appeals unanimously struck down the original Vergara v. California decision. The case will now go to the California Supreme Court. Its chances aren’t great.

But shouldn’t elected officials, not the courts, make policy decisions? In a perfect world, that would certainly be true, but in California’s state Legislature, as Cohen herself writes, “Following the original Vergara decision, Republican lawmakers introduced a package of three bills to extend the time it would take a teacher to earn tenure, to repeal the “last-in, first-out” statute that makes layoff decisions based on seniority, and to establish an annual teacher evaluation system. These bills, however, got nowhere in the Democratic-controlled statehouse.”

Here’s where the story gets interesting. Because then a democratic assemblywoman who takes money from government unions, Susan Bonilla, tried to push legislation through that might reform at least some of the employment statutes that protect bad teachers. Cohen writes:

“Bonilla proposed, among other things, giving principals the option of waiting until a teacher’s third or fourth year to grant tenure, and placing poorly performing teachers in a program that would provide increased professional support. If the ineffective teacher received another low performance rating after a year in this program, Bonilla’s legislation would enable schools to fire the teacher through an expedited process.”

Might that be watered down enough? Might that not have a chance? For the children?

Forget it. Despite endorsements including one from the editorial board of the Los Angeles Times, the teachers union issued an “action alert” to their members, calling the bill “an all-out assault” by “corporate millionaires and special interests.” The bill was going to go nowhere in California’s union-controlled legislature. So Bonilla tried again. As Cohen reports:

“In June, Bonilla introduced an amended version of her bill, one that would require new teachers to work for three years before becoming eligible for tenure. Her bill no longer included provisions to create a new teacher evaluation system, to require teachers with poor performance reviews to be laid off before those with less seniority, and to remove many of the dismissal rules that administrators found frustrating.”

Not much left there. Just a bill to marginally extend the probationary period before teachers acquire tenure. But still it was opposed by the unions, and it died in committee by a vote of 9 to 2. The two legislators who voted in favor were due to be termed out and therefore could vote their consciences.

When it comes to government unions, perhaps the teachers union most of all, the lack of support for bipartisan reform is not a mystery. Government unions in California collect and spend over $1 billion each year, which gives them the ability to financially dominate any election, anytime, anywhere, whenever they choose. But there’s more to it. These unions use their financial and organizational power to anoint not only politicians, but also bureaucrats, teachers, and anyone in the business community who may have any need to work with the government bureaucracy. They can anoint, or they can target. Best friend or worst enemy? Take your pick.

Liberals know this, but they tolerate the teachers union because along with all that money the union gives their candidates, the union political agenda matches their own – bigger government, more regulations. They don’t understand, course, that more regulations favor big business and destroy entrepreneurs who deliver the competitive innovations that have improved our lives. And they certainly don’t put enough importance on innovation in education.

Someday liberals may care enough “for the children” to stand up to the teachers union. Don’t hold your breath.

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Ed Ring is the president of the California Policy Center.

Appreciating Police Officers, Challenging Police Unions

Police carIn the wake of tragic and deadly attacks on police officers, those of us who have never wavered in our support for the members of law enforcement, but have questioned the role of police unions and have debated issues of policy surrounding law enforcement have an obligation to restate our position. Civil libertarians and fiscal conservatives have disagreements with police unions which were summed up quite well recently by guest columnist Steve Greenhut, writing in the Orange County Register. Here are some of the principal concerns:

Police unionization protects bad officers and stifles reform. Lack of transparency into investigations of police misconduct aids and abets the worst actors. Police unions often support laws designed to extract increased revenue from citizens in the form of excessive fines. The “war on drugs” and militarization of law enforcement can further increase the tension between police and the populations they serve. And, of course, police unions fight relentlessly for increases to compensation and benefits, especially straining the budgets of cities.

To have a balanced discussion on these topics, however, it is necessary to revisit why police work has become more controversial and more expensive. Here are some of the reasons:

(1)  The value of life has never been higher. A century ago, when the life expectancy for Americans was 49, tragic deaths were commonplace. Compared to Americans in 1916, Americans today on average can expect an additional three decades of productive life, and premature death is proportionately more traumatic. This means the premium that police officers deserve for their service is higher than it’s ever been, and should be.

(2)  The expectations we have for law enforcement have never been higher. Along with longer lives, Americans suffer less crime. For nearly forty years, in nearly all categories, crime has steadily diminished. While there remains enough crime to generate a daily barrage of lurid local news reports, we enjoy more safety and security than at any time in history. We are getting this service thanks to our police forces, and better service deserves better pay.

(3)  The complexity of crime has never been higher. Crime itself has become far more sophisticated and menacing, morphing into areas unimaginable even a generation ago – cybercrime, global terrorism, financial crimes, murderous gangs, international criminal networks, foreign espionage, asymmetric threats – the list is big and gets bigger every year. Countering these threats requires more capable, better compensated personnel.

(4)  The statistical risk to police officers, even in the wake of recent tragedies, may remain low, but that could change in an instant. In the event of severe civil unrest or well coordinated terrorist attacks such as we saw in Sept. 2011, hundreds or even thousands of officers could find themselves on the front lines of a cataclysm. Statistics are not necessarily predictive, and police officers live with this knowledge every day.

So how do civil libertarians and fiscal conservatives manage their debates with police unions while conveying their respect for police officers? First, by acknowledging the complexity of the issues. Police should make more money than ever before – the debate should start there, not end there. Police have to be armed to the teeth, because in a free republic, the citizens themselves are armed to the teeth. That’s the choice we made, and unless we want to disarm the citizenry, we can’t disarm the police. These are fundamentals where there should be agreement.

Beyond that, it is necessary to appeal to the patriotism and decency that animates the vast majority of members of law enforcement, and ask them: Please work with us to curb the inherent excesses of police union power. Of course we have to get bad cops off the street. Of course we have to come up with effective non-lethal uses of force. Of course we have to figure out how to fund police departments without levying excessive fines. And of course we have to face a challenging economic future together, where police are partners with the people they serve, not an economically privileged class. Is this possible? One may hope so.

There’s more. If police unions are going to be intimately involved in the politics of law enforcement and the politics of police compensation, and they are, they may as well start getting involved in other causes where their membership may find common cause with civil libertarians and fiscal conservatives. Police officers see first hand how welfare destroys families and how public schools fail our children. So why aren’t they fighting to replace welfare with workfare and why aren’t they fighting to destroy the teachers union? You can say what you will about police unions, but they did NOT turn this nation into a lawless hellhole, quite the opposite. The teachers union DID destroy public education. So help us reduce their influence.

Similarly, police officers need to decide if they really feel like enforcing the myriad environmental harassment laws that are criminalizing everything from installing a window or water heater without a building permit to watering your lawn on the wrong day. The global environmentalist movement – of which California is ground zero – has become fascism masquerading as anti-fascism. It has become neo-colonialism masquerading as concern for indigenous peoples. It was a previously noble movement that has been hijacked by cynical billionaires, monopolistic corporations, and corrupt financial special interests. In its excess today, it has become a despicable scam. Help us to crush these corrupt opportunists before our freedom and prosperity is obliterated.

These thoughts, perhaps, are challenges that civil libertarians and fiscal conservatives might offer up to the police unions of America.

This piece was originally published by the Flash Report

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