Public-Employee Unions Trample Our Public Services

SACRAMENTO – In a short 1814 fable from Russian poet Ivan Krylov, the Inquisitive Man spends three hours at a natural history museum and tells his friend he “saw everything there was to see and examined it carefully” and found it “all so astonishing.” The friend then asks what he thought of the elephant. The man retorted: “(D)on’t tell anybody – but the fact is that I didn’t notice the elephant!”

That is the origin of the phrase, “the elephant in the room.” It means, as Cambridge Dictionary explains, “an obvious problem or difficult situation that people do not want to talk about.” There are many reasons people ignore a 10,000-lb. creature blocking their way, but often it involves cowardice. It’s too hard – or controversial – to discuss how it got there and how to get rid of it.

This is an obvious allegory to California’s state government. Gov. Gavin Newsom recently proposed a new bond measure to fund programs to deal with the state’s homelessness crisis. California already spends several billion dollars a year on the problem. Localities such as Los Angeles spend as much as $1 million per unit on housing for homeless people, yet the problem keeps getting worse.

Last year, California spent approximately $136 billion on its public schools. The latest data shows dramatic drops in test scores, with only a third of the state’s students meeting math-proficiency standards. If you’re apt to solely blame the pandemic shutdowns, consider that a 2019 study found only 30 percent of students proficient in reading.

Throughout California, pension costs keep rising, grabbing a larger share of local budgets and crowding out public services. Despite a previous $97.5-billion budget surplus, California has been remarkably unable to fix its creaky transportation system, improve public-school performance, provide adequate water supplies during the recent drought, deal with misbehaving police officers, provide safe and user-friendly transit systems and, well, you name it.

Just try to name one California agency that’s known for its efficiency and high levels of service. (It’s a trick question.) Nevertheless, the Legislature and governor spend enormous time and resources trying to address these intractable problems through various tax-increase proposals, legislation, reforms, oversight commissions, inspector generals, auditors, lawsuits and bond measures. Yet the public never sees substantive improvement.

The reason is everyone is politely avoiding the giant pachyderm. I’m referring to the state’s public-sector unions, which – thanks to their enormous financial might and legions of members – control the Capitol. The California Teachers’ Association is the most-powerful voice in education. Police and fire unions are the best-funded and most muscular political players at the local level. The prison guards’ union has an inordinate influence in corrections policy.

Unions aren’t entirely to blame for California’s myriad problems and crises, but they provide a heckler’s veto to any reform idea that could realistically improve public services. Consider how vociferously teachers’ unions opposed school reopenings. Lawmakers rarely propose any idea that would antagonize any of the state’s easily antagonized unions. Imagine running a business where the employees could immediately quash any proposal that might help consumers or reduce operating costs.

“Through their extensive political activity, these government-workers’ unions help elect the very politicians who will act as ‘management’ in their contract negotiations – in effect handpicking those who will sit across the bargaining table from them,” noted Daniel DiSalvo in a 2010 article in National Affairs. No wonder California’s municipal firefighters earn on average more than $200,000 a year – even as the state complains about an inadequate number of firefighters.

Sadly, no one with power even mentions these obvious roadblocks as they seek to reform any aspect of any public service. The progressive Democrats who control Sacramento are attached at the waist to public-sector unions, so they sidestep the elephant even though it’s trampling (and pooping) on their favorite programs. They side with this well-heeled special interest – and with workers who earn unfathomable compensation packages – even though it hurts the poor.

Republicans will thankfully blast CTA and SEIU, but they take a “don’t see the elephant” approach when it comes to police unions – who protect abusive officers the same way that teachers’ unions coddle their incompetents. Like all unions, the police and prison-guard varieties actively lobby for higher taxes and derail even the most modest proposed changesin how their departments operate. Policing is a tough job, but that doesn’t mean we can’t improve oversight and revamp procedures.

“Accountability is basically nonexistent in American government,” wrote Philip K. Howard in his new bookNOT Accountable: Rethinking the Constitutionality of Public Employee Unions. “Performance doesn’t matter. … Police unions, teachers unions, and other public sector unions have built a fortress against supervisory decisions. Political observers rue union power but treat it as a state of nature.”

Click here to read the full article in the OC Register

Average Pay for Manhattan Beach Firefighters is $328,000 Per Year

Compensation and benefits for public safety personnel is a fraught topic

Negotiations between the Manhattan Beach Firefighters Association and the Manhattan Beach City Council have been stalled since May, when an impasse was announced. As reported in a local publication serving Manhattan Beach and nearby cities, firefighters and their supporters packed a July 19 city council meeting to urge the council to alter its stance in labor negotiations.

In the article, “Firefighters from Manhattan Beach and their supporters storm City Hall,” some of the firefighter union’s positions were noted. One of them was for the firefighters to receive “the same cost of living salary increases the other city unions received over the last 3.5 years, a period during with MBFA has not received an increase.”

In that regard, it would be useful to report what full time firefighters with the Manhattan Beach Fire Department earned in 2021, using data downloaded from the State Controller’s website.

A few things should be called out in the above chart. First – the employee compensation data the City of Manhattan Beach reported to the State Controller did not include any allocation of the payment the city makes towards the unfunded pension liability. This means the numbers you see in the “pension” column are for the so-called “normal cost” and therefore no argument can be made that they are inflated. One could make the argument that since no allocation whatsoever is made to active duty firefighter compensation to account for the city’s substantial unfunded pension debt, the average per firefighter pension costs reported here are understated. But that’s material for another story.

Next, the context in which Manhattan Beach firefighters claim they have not received cost of living increases commensurate with what other city unions received over the last 3.5 years might reasonably include how much firefighters earn in other cities. Here, using 2020 data, is average compensation for full time firefighters in the 25 largest city departments in California. The yellow highlighted top four all include payments on the unfunded pension liability in their reported data and therefore probably overstate the total compensation. As can be seen, however, even taking that into account, only one city, Santa Clara, reports total compensation in excess of Manhattan Beach. None of the other cities are even close. This data is one year old, but it is a safe bet that Berkeley, for example, did not increase its total firefighter compensation by 28 percent ($71,000) in one year [(328/257)-1].

Finally, what stands out with respect to Manhattan Beach firefighter compensation is the large amount of overtime they’re earning, $94,000. None of the major cities have anything close to that in overtime expense. Why is this?

In a letter the City Council released on July 19, the city attempted to explain this, writing:

The Firefighters’ Association has repeatedly stated they receive overtime for hours worked beyond their normal hours. This is not true. Just because a firefighter receives overtime does not mean they are working time over their regularly scheduled hours. For example, a firefighter can be on vacation for two shifts but work another shift in the same week and receive overtime. Similarly, two firefighters can work each other’s vacation shifts and receive overtime without working any additional hours. This is because vacation, holiday leave, and injury pay count as “hours worked” to qualify for overtime.

One of the City’s proposals to reduce overtime addresses the current system in which every shift taken as leave is automatically backfilled with overtime by allowing shift trades (two firefighters working for each other). This proposal allows employees to take the same amount of time off while reducing the payment of time and a half overtime when firefighters are not working any additional hours. This, in effect, limits the number of shifts that will be backfilled on an overtime basis. The City is also proposing to remove the ability to convert unused sick leave into vacation, which creates further backfill of overtime. The Association has not agreed to these simple provisions because it will reduce the amount of overtime pay they receive.

In plain English, what the city council is saying is that Manhattan Beach firefighters game the rules to collect overtime even though they aren’t working extra hours. It is reasonable for the city council to attempt to rewrite the rules so this will stop.

Compensation and benefits for public safety personnel is a fraught topic, and hyperbole does nothing to foster constructive outcomes. How much should a firefighter make? It’s fine to throw out statistics that prove the average life span of a retired California firefighter is actually somewhat greater than that of the public at large, or that statistically, a cashier behind a liquor store counter is more likely to die on the job than a firefighter. But that fails to take into account the fact that a horrific conflagration, such as the World Trade Center bombing, could alter those statistics overnight, and firefighters go to work with that knowledge every day. Liquor store clerks, as we have learned, provide essential services, but they’re not the ones who come running to help when our house is burning down, or a family member is having a medical emergency.

Using statistics also can overlook the fact that the value of life has never been so precious. A century ago, disease, war, and accidents claimed lives with such frequency that death was a normal part of life. Today, especially in a city as wealthy as Manhattan Beach, death is never routine. Citizens therefore have never had higher expectations of their fire departments than they have today, and better service is going to cost more. Unfortunately, this makes it hard to argue with a firefighter who is a member of the community and believes they deserve a raise. But in Manhattan Beach, with respect, they don’t.

Firefighters that collect a pay and benefits package in excess of $300,000 per year are not underpaid. Maybe they can’t afford a home in Manhattan Beach. But that’s because nobody can afford a home in Manhattan Beach. Maybe it’s gotten harder to recruit firefighters. But that’s because it’s gotten harder to recruit anyone to take jobs in recent years.

Firefighters in Manhattan Beach should ask themselves: Is my job harder than one in San Diego, where the average firefighter pay and benefits package is less than half what it is in Manhattan Beach? Clearly it’s not. Work through a Saturday night in downtown San Diego, and compare that to working the night shift on a weekend in Manhattan Beach. There are over 30,000 full time firefighters in California. To pay all of them what firefighters make in Manhattan Beach, instead of what firefighters make in San Diego, would cost taxpayers $4.5 billion per year.

Click here to read the full article at the California Globe

Pension Costs Hitting Home — Hard

Stanislaus Consolidated Fire Protection District came into being 14 years ago when four small fire departments serving farms and small towns east of Modesto merged.

The district now flirts with insolvency, a case study in how rapidly growing costs for pensions and other employee benefits are clobbering local governments.

Four years ago, Stanislaus Consolidated had 80 employees, most of them firefighters, and more than $13 million in revenues. However, as budget documents reveal, its expenses, mostly for salaries, were already beginning to outstrip income.

The district’s operational shortfall in 2015-16 was exacerbated by a new expense item, an extra $330,858 bite by the California Public Employees Retirement System, which is anxiously trying to offset its $100 billion in investment losses during the Great Recession and prevent its enormous “unfunded actuarial liability” (UAL) from growing.

Cities and fire districts throughout the state are being hammered particularly hard by CalPERS’ extra levies for UAL because their “public safety” employees — police officers and firefighters — have California’s most generous pension benefits and therefore its highest employer costs.

Even with the extra CalPERS charge in 2015-16, Stanislaus Consolidated’s retirement costs were not overwhelming, about 32% of wages and salaries for the district’s employees. But the UAL squeeze was about to get tighter.

It jumped to $397,981 the next year and $517,834 in 2017-18. The agency’s 2019-20 budget sets aside $842,404 for UAL, contributing to a financial freefall.

The district’s persistent operating deficits caused the small community of Oakdale, located just outside its boundaries, to cancel fire protection contracts worth $3.5 million a year to the district. Oakdale is now served by Modesto’s fire department.

With the loss of revenue from Oakdale, the district was compelled to slash operations, shrinking its staff to just 59. But its retirement costs continued to swell, reaching 46% of payroll this year.

Late last month, the fire district’s chief, Michael Whorton, announced the closure of one fire station, citing a $925,000 operational deficit in the current budget — a number not much higher than the budget’s $842,404 UAL payment.

“We are definitely going to open it back up,” Whorton told the Modesto Bee. “We just have to close it right now because of finances and we will open it again as soon as we can.” However, he could not say when, and if, Station 23 will be reopened.

Residents served by Station 23 are nervous about the cut, the Modesto Bee reported. “That leaves us very vulnerable,” Barbara Heckendorf said. “I don’t know where (the firefighters) are going to be coming from.”

“It’s not something that we want to do,” Whorton said, “but we have to be financially responsible for the department. We just need to get our finances in line.”

That won’t be easy. CalPERS has told the district that its mandatory UAL payment will top $1 million within two years.

Throughout California, local officials have complained loudly about the ever-rising CalPERS assessments, saying they’ll have no choice but to cut services unless local voters are willing to raise taxes.

CalPERS officials, on the other hand, contend that they also have no choice because their investments haven’t fully recovered from the last recession and they must improve their balance sheet to cope with the next downturn.

Meanwhile, CalPERS investment returns continue to fall below expectations, thus widening the gap between its assets and what it needs to cover pension promises.

In rural Stanislaus County, where wildfire is always a threat, it means having fewer fire trucks and fewer firefighters to respond when it hits.

This article was originally published by CalMatters.org

New state-run IRA for private sector opens July 1

A new state workplace retirement savings program, CalSavers, will open to an estimated 250,00 to 300,000 employers on July 1 — offering an automatic IRA payroll deduction for the 7.5 million California workers with no retirement plan on the job.

The massive program, expected to handle billions in savings, is voluntary for employees. If they don’t opt out in 30 days, they are automatically enrolled. Once in the plan, they can opt out at any time, and then opt back in if they choose.

For businesses with five or more employees, the program is mandatory. They must offer employees CalSavers, or a qualified retirement plan chosen by the employer, to avoid a penalty for repeated non-compliance of $750 per employee.

CalSavers opens July 1 to all eligible employers and to the self-employed on Sept 1. Compliance deadlines begin for businesses with over 100 employees June 30, 2020; over 50 employees June 30, 2021, and five or more employees June 30, 2022.

The CalSavers goal is to help the nearly half of all California workers, with little beyond Social Security, who are projected to retire into hardship. Their average annual income is $35,000. Two-thirds work for businesses with less than 100 employees.

“Workers with a payroll deduction savings option are 15 times more likely to be on a path to retirement security, and 20 times more likely when it’s automatic enrollment,” says CalSavers, citing AARP.

CalSavers launches after a difficult 11-year journey. Finance groups objected to government competition and overreach. Labor groups wanted protection against investment losses. Conservatives and taxpayer groups feared more state retirement debt.

Former state Sen. Kevin de Leon, D-Los Angeles, whose initial legislation failed in 2008 and 2009, obtained legislation for a feasibility and marketing study in 2012, and the final authorizing legislation in 2016.

During the 2008 presidential campaign, Barack Obama and John McCain endorsed an automatic IRA for individual tax-deferred retirement savings, a proposal made in 2006 by J. Mark Iwry of the Brookings Institution and David C. John of the Heritage Foundation.

Former President Obama’s repeated budget proposals for an automatic IRA failed in Congress. A National Conference on Public Employee Retirement Systems paper in 2011 proposed a model automatic IRA for states to adopt and gave it a name, Secure Choice.

“The NCPERS plan reflected the recognition by public employees that the quality of their own retirement coverage could be at risk if their counterparts in the private sector lack access to a retirement system,” a Center for Retirement Research at Boston College report said in 2016.

CalSavers was formerly known as Secure Choice. Two states have already launched automatic IRA programs, OregonSaves and Illinois Secure Choice, and three other states are developing automatic IRAs, New Jersey, Maryland, and Connecticut.

California joined other states in successfully urging the Obama administration to provide a “safe harbor” labor regulation exempting automatic IRAs from a federal law for private-sector pensions, the Employee Retirement Income Security Act (ERISA).

After President Trump took office in 2017, the Republican-controlled Congress, through the rarely used Congressional Review Act, passed fast-track legislation signed by the new president that repealed the 2016 safe harbor regulation.

The authorizing legislation for CalSavers says the program can’t be covered by ERISA, which has burdensome regulations and could expose employers to liability. CalSavers believes it’s exempt from ERISA without the added security of a safe harbor.

Last March, a federal judge ruled in a Howard Jarvis Taxpayers Association suit that CalSavers is not preempted by ERISA. U.S. District Judge Morrison England Jr. dismissed the Jarvis claim with “one final leave to amend” due to the importance of the issue.

“We are very confident we are on strong legal ground,” Katie Selenski, CalSavers executive director, said last week.

CalSavers pilot participation snapshot as of May 29, 2019

CalSavers emerged from the legislative gauntlet with an unusual limit for a new state program: no cost to taxpayers. It’s roughly similar to two smaller savings programs also run out of the state treasurer’s office: ScholarShare for college and CalABLE for disabilities.

Half of the $1 million donated for a CalSavers feasibility study came from the Laura and John Arnold Foundation, vilified by some for pushing pension reform. Two public employee unions contributed $100,000 each, state SEIU and the California Teachers Association.

CalSavers, operating with a state startup loan that will be repaid by saver fees, has spent about $3.3 million so far. The program is expected to save taxpayers money in the long run by reducing the need for public assistance to impoverished elders.

The CalSavers staff remains small under the authorizing legislation requiring the use of private-sector contractors. Ascensus is the administrator, handling record keeping, a customer service call center, and the website used by savers to monitor and change their accounts.

State Street runs four investment funds: money market, target date based on retirement age, bonds, and global equity. Newton runs an ESG fund screened for environmental, social and corporate governance factors.

AKF is the general consultant, Meketa the investment consultant, and K&L Gates the legal and regulatory advisor. The nine-member CalSavers board includes the state treasurer, controller, finance director, four gubernatorial appointees, and two legislative appoinitees.

CalSavers formed a number of working groups with employers and employees during the design of the program. Experience was shared by the Oregon plan, launched two years ago, and the Illinois plan started last year. Both are administered by Ascensus.

Easing problems small businesses have faced in offering retirement plans, CalSavers has no employer fees, cuts the burden of selecting and administering a plan, and the employer is not a sponsor with fiduciary liability.

Employers register with CalSavers, send an employee roster, enable a payroll deduction, and then provides roster updates. Employers do not contribute to employee savings accounts, answer questions about the program, or encourage or discourage participation.

For employees, the preselected or default CalSavers payroll deduction is 5 percent of pay, automatically increasing 1 percent a year to 8 percent of pay. But savers can change their payroll deduction rate at any time.

A Roth IRA is standard, allowing withdrawals without penalties or taxes. A traditional IRA option will be available by the end of the year. If the employee moves to another job, the savings can be transferred or left with CalSavers.

If savers don’t choose their funds, CalSavers puts the first $1,000 into the money market fund, with little risk of investment loss, and contributions after that into a target date fund based on the age of the saver.

The fee CalSavers charges savers, which is how the program is sustained, are expected at launch to total 0.825 to 0.95 percent (82.5 cents to 95 cents for every $100 per year) and then drop as the program grows to among the lowest in the industry.

Most of the total charge is a program administration fee for day-to-day operations and repaying the startup loan with interest. The rest is a fee for managing investments, ranging from 0.025 percent to 0.15 percent depending on the investment option chosen by the saver.

During a pilot that received its first contributions Jan. 3, CalSavers worked with 60 employers to test the program. Most of the results so far (see chart) are from the first wave of 30 employers and generally meet expectations, including the opt-out rate of 22 percent.

One of the challenges that CalSavers faces now is moving from the close attention given employers during the pilot phase to a more automated routine as the program grows, Selenski, the executive director, told the CalSTRS board last month.

Another challenge is the lack of a budget for advertising and marketing as the program launches, Selenski said. Her presentation to the CalSTRS board was part of a cost-cutting grassroots campaign to spread awareness of the program and urge others to do the same.

“Every dollar we spend out of that loan is a dollar that is coming out of the pockets of our savers,” Selenski said.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

Rising California Pensions Costs Major Concern for Credit Rating Agencies

CalSTRS1A new Public Policy Institute of California poll shows the number of state residents worried about the cost of government pensions is at a 14-year low. In recent remarks to the Commonwealth Club in San Francisco, new state Superintendent of Public Instruction Tony Thurmond rejected the idea that pension costs were generally a major problem for school districts around the state.

But a recent comprehensive review by the Bond Buyer painted a starkly different picture. Based on interviews with officials in credit-rating agencies and the state’s Fiscal Crisis Management Action Team (FCMAT), as well as reviews of financial records from large school districts across the state, it forecast a wave of state takeovers of districts under the provisions of a 1991 state law that provides emergency loans to districts that can’t pay bills. But the loans come with the condition that district superintendents and school boards lose considerable autonomy over their budgets, which must have as a first priority repaying the loan to the state.

Nine districts have taken out such loans since 1991, and the Sacramento City Unified School District could become the 10th this fall when it is expected to run out of dwindling cash reserves.

A Fitch Ratings analysts told the Bond Buyer that about 50 of the 124 school districts it tracks have such low reserves that if an economic slowdown froze or reduced state revenue, those districts could quickly lose their capacity to pay bills. The same problems seen by Fitch in the larger districts that it monitors are likely to be seen in the 1,000-plus smaller districts it doesn’t track.

Low birth rate hurts enrollment

Since California’s overall population keeps going up, that’s obscured a key complication in school finances: The fact that school enrollment in much of the state is in the middle of a broad, long-term decline driven by changing demographics and birthrates that in 2017 hit an all-time low for the Golden State. FCMAT CEO Michael Fine estimates that 65 percent of the state’s 1,200 districts have fewer students than they used to. Perhaps the most dramatic decline is in Inglewood Unified, where present enrollment is 8,000 – about 40 percent of what it was in 2004.

Because state funding is based on the Average Daily Attendance formula, the enrollment declines can hammer districts even in a decade in which state funding for education has increased by more than 70 percent. That’s because many school districts don’t reduce their staffs by an amount equal to the lost enrollment. A FCMAT report on Oakland Unified issued last May called this a key factor in the financial strain faced by the district.

Another issue is that retirement benefits in some districts don’t just include pensions from the California State Teachers’ Retirement System. Some districts, including Los Angeles Unified and Sacramento City, offer generous health insurance to retirees for as long as they live.

S&P rating service downgraded LAUSD’s bonds last month. Fitch downgraded some of Sacramento City’s bonds in February, and further downgrades seem certain.

CalSTRS needs booming market

Officials with CalSTRS remain optimistic that healthy investment returns can reduce CalSTRS’ present unfunded liabilities of about $100 billion. Boom markets on Wall Street have at times allowed CalSTRS to keep mandatory pension contributions relatively flat for years at a time.

But the 2007 recession hammered CalSTRS, forcing the Legislature and Gov. Jerry Brown to pass a bailout measure in 2014 that will roughly double annual contributions from districts, the state and teachers by July 2020, when its final increase is phased in.

But hopes that profitable investments will be a big help in reducing liabilities aren’t coming to pass. The Sacramento Bee reported recently that CalSTRS only had a 1.62 percent return on its portfolio for the first eight months of fiscal 2018-19 and was not expected to meet its target of a 7 percent annual return.

This article was originally published by CalWatchdog.com

A tale of two cities and blocked pension reforms

san diegoA San Diego city attorney urged an appeals court last week to order talks with unions on repaying 4,000 employees for pensions illegally replaced by 401(k)-style plans under an initiative, a cost some estimate could reach $100 million.

If the talks result in agreement, the city attorney suggested the pact could go back to voters for approval. Though not mentioned by the attorney, that’s what happened to another cost-cutting pension reform in San Jose also approved by two-thirds of voters in June 2012.

The two reforms had different cost-cutting curbs. But both had trouble in the courts. The San Diego reform was overturned. The San Jose reform lost a key provision. Both also were found by a powerful state labor board to have failed to bargain with unions in good faith.

In the end, San Diego seems likely to have increased pension costs, not cut them. San Jose got some cuts in pension costs, but not the big one. The winner, for better or worse, seems to be the status quo in pension protection.

Last August the state Supreme Court ruled that former San Diego Mayor Jerry Sanders, the city’s designated bargaining agent, violated state labor law when he did not bargain or “meet and confer” with unions before pushing the reform initiative.

“He consistently invoked his position as mayor and used city resources and employees to draft, promote, and support the Initiative,” the ruling said. “The city’s assertion that his support was merely that of a private citizen does not withstand objective scrutiny.”

The Supreme Court ordered a three-justice appeals court panel, which upheld the San Diego reform two years ago, to “address the appropriate judicial remedy.” The appellate court had not done so previously because of its ruling of no violation.

At the hearing last week, Travis Phelps, a city attorney, urged the court to order city bargaining with the unions on the reform initiative and any repayment for losses, possibly resulting in an alternative to the reform initiative that could be placed before voters.

An attorney for four city unions, Ann Smith, urged the court to adopt the state Public Employment Relations Board traditional order to “make employees whole for any losses” with an interest rate of 7 percent, the pension fund earnings forecast at the time.

“In every instance the status quo ante must be restored in full or otherwise employers are encouraged to violate the act” that requires bargaining, Smith said, because they could keep some of the gain.

Estimates of complying with the board order have ranged from $20 million to $100 million, depending on a variety of factors, the San Diego Union-Tribune newspaper reported last week.

Smith said the court had not received a compelling argument that the labor board abused its discretion in ordering a make whole remedy. She said the state Supreme Court ruling noted that labor board rulings have received high court deference in the past

In a suggestion apparently not mentioned in the briefs, Smith said the make whole remedy could be applied to city employees represented by unions, but not to managers and other city employees who are not members of unions.

The Proposition B pension reform initiative approved by voters in 2012 has not been invalidated. New city hires are still receiving a 401(k)-style retirement plan rather than a pension.

The state labor board said it lacks the authority to invalidate the initiative. What the state Supreme Court said about invalidating the initiative resulted in a clash of metaphors at the hearing.

Smith said the Supreme Court did not tell the appeals court to invalidate Proposition B but “they dropped all the bread crumbs on that trail.” Justice Richard Huffman said he was “long past reading Supreme Court tea leaves.”

The city attorney, Phelps, argued that a voter-approved initiative can only be overturned through a separate “quo warranto” process filed in superior court. He said citizen backers of the initiative, barred from labor board proceedings, presumably could testify.

Phelps said problems would be created if the appeals court, as the union attorney urged, made a straight invalidation of the initiative without modification or ordering bargaining to seek a solution.

About 4,000 employees hired since the reform have individual vested rights to the matching employer contributions to their 401(k)-style retirement plan, 9.2 percent of pay for miscellaneous employees and 11 percent of pay for firefighters and lifeguards.

“You can’t simply take that away,” Phelps said.

Retroactively enrolling employees in the city pension plan who have been in the 401(k)-style plan would require approval of the IRS, he said, which is not a given. He said tax exemption for the city and its employees could be at risk.

Smith said a quo warranto hearing is not needed because of the Supreme Court ruling of a procedural error and that hearing from the citizen proponents doesn’t matter at this point, drawing a rebuke from Justice Huffman.

“The notion that we can invalidate their measure, based on PERB’s facts without the participation of the proponents, strikes me as not the kind of process I’m used to,” Huffman said.

Smith said the state Supreme Court has reiterated that local initiative rights are not absolute. They must be “harmonized” with statewide rights, she said, which proponents had the opportunity to do before and after the initiative passed.

An attorney for the citizen proponents of the initiative, Alena Shamos, said a make whole remedy would gut the intent of the initiative, a response to the “crisis” of high pension costs, and would be the same as invalidation.

“We would agree with the city that meet and confer would be the proper remedy,” Shamos said, which could result in fines and penalties for the city.

A PERB attorney, Joseph Eckhart, said allowing initiative rights to override state bargaining law would undermine the case as much as if there had been no violation. He said any remaining dispute after city and union bargaining would go back to the labor board.

The San Diego reform excluded police and was limited to new hires, avoiding the San Jose reform’s clash with police and the “California Rule,” a series of state court rulings that prevents cuts in the pension offered at hire unless offset with a new benefit.

A key part of the San Jose measure pushed by former Mayor Chuck Reed gave current employees an option: pay more for a pension or begin earning a smaller pension in the future.

The option for current employees who have vested rights, unlike new hires, was overturned by a superior court judge citing the California Rule. But much of the measure placed on the ballot by the city council was allowed.

Reed and other reformers thought the option for current workers might get a long-sought review of the California Rule by the state supreme court. But the superior court ruling was not appealed as the reform battle continued for three more years.

In November 2014 Councilman Sam Liccardo was elected mayor, defeating a union-backed candidate reportedly supported by an $800,000 campaign. A day later two PERB rulings said the reform measure was not bargained in good faith.

Liccardo announced a settlement in 2015 that dropped an appeal of the superior court ruling and avoided a long and costly battle over nine union lawsuits. Reed endorsed the settlement expected to save the city $3 billion over 30 years and aid police retention.

In March 2016 the city used a quo warranto procedure to repeal Measure B in superior court, allowing a more generous pension plan to attract police to a long-depleted force working mandatory overtime.

In November of that year 61 percent of San Jose voters approved Measure F, a replacement for the original reform backed by a coalition of labor and business leaders, including Liccardo and police and firefighter union officials.

Supporters said Measure F would lock in pension savings and end years of bitter union-management fighting and litigation. Opponents said it was a capitulation to unions that allowed retroactive pension increases and other cost increases.

As San Diego awaits the appeals court ruling on a Proposition B remedy, the U.S. Supreme Court announced today that it will not review the city’s appeal based on the state Supreme Court ignoring Sanders’ First Amendment free speech rights.

Click here for video of the appeals court hearing, March 11 beginning at 2:30.

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

This article was originally published by CalPensions.com

Latest Pension Ruling Likely To Create Future Uncertainty

CourtFor the second time in two years, the California Supreme Court has released a ruling on a large state issue that analysts say creates new uncertainty going forward.

Last week, the court issued its long-awaited decision in a court case involving a Sacramento local firefighters union that alleged a provision of the 2012 pension reform measure approved by the Legislature and signed by then-Gov. Jerry Brown was illegal under the “California Rule.” That’s the legal concept stemming from a 1955 state Supreme Court ruling that holds the terms of a public employee’s pension benefit cannot be reduced for years not yet worked, only kept the same or increased.

Cal Fire Local 2881 said that the pension reform’s ban on “air time” – the purchase of service credits to enhance pensions – violated the California Rule. But a unanimous state Supreme Court said “air time” was not a comprehensively bargained or legislatively approved vested right.

Yet in the lead opinion, Chief Justice Tani Cantil-Sakauye (pictured) explicitly said she was not taking a position on the California Rule question of whether pension terms could be changed going forward for years not worked.

This mixed message produced media confusion. Some news bulletins declared the justices had approved allowing a rollback of local benefits. Others suggested the California Rule had dodged a bullet.

Was ‘California Rule’ weakened or untouched?

Interest groups were similarly split.

Officials with the League of California Cities saw the court’s willingness to change the terms of pensions on a relatively minor issue as a sign it was open to a significant weakening of the California Rule. The league and many like groups hope for a state Supreme Court ruling that echoes a lower court’s ruling that pensions are not “immutable.” They were heartened by Cantil-Sakauye specifically noting the state had raised the retirement age from 67 to 70 for current as well as prospective employees.

But the Californians for Retirement Security, which represents 1.6 million public employees and former public employees, declared victory after noting that Cantil-Sakauye had specifically said “air time” was changeable because it was not a vested right – unlike basic pension formulas basing retirement checks on years worked times a percent of late-career salary.

The group and others also cited a concurring opinion written by Justice Leondra Kruger and joined by Justice Goodwin Liu that held that government employers could not “withdraw” from the pension terms established upon initial employment by “an implied unilateral contract.”

The state Supreme Court is expected to eventually take up at least two more cases involving union objections to the 2012 pension reform, so the sanctity and extent of the California Rule is likely to remain in the news. In his final year in office, Gov. Jerry Brown repeatedly urged the court to give governments the option to change future pension terms as pension costs have crowded out local, county and school programs and services. Brown’s office defended the 2012 reform law before the high court because of concern that state Attorney General Xavier Becerra was not eager to defend it.

Like 2017 case, ruling seen as murky, not clarifying

But in the meantime, last week’s ruling seems as murky as the court’s decision in the 2017 California Cannabis Coalition v. City of Upland case. Previously, Proposition 218, approved by voters in 1996, had been understood to require that any tax whose revenue would go to a special purpose – building a sports arena, adding libraries, etc. – had to be approved by a two-thirds vote.

Upending decades of precedent, the state Supreme Court held in a 5-2 decision that the two-thirds threshold applied only to ballot measures initiated by local governments. Because they were not local government measures, those qualified by citizen initiatives only needed simple majority support to be enacted.

In dissent, Justice Kruger took square aim at the idea that this interpretation was what voters expected in 1996 when they made it harder for local governments to raise taxes.

Kruger wrote, “A tax passed by voter initiative, no less than a tax passed by vote of the city council, is a tax of the local government, to be collected by the local government, to raise revenue for the local government. None of this could have been lost on the electorate that, also by initiative, amended the California Constitution to set ground rules for voter approval of local taxes.”

This article was originally published by CalWatchdog.com

What Recent Pension Ruling Means for California’s Taxpayers

pension-2Last week, the California Supreme Court issued a ruling in Cal Fire Local 2881 v. CalPERS, a case involving public employee pensions. For taxpayers, the decision was a mixed bag. On the plus side, the court refused to find a contractual right to retain an option to purchase “air time,” a perk that allowed employees with at least five years of service to purchase up to five years of additional credits before they retire. Under this plan, a 20-year employee could receive a pension based on 25 years of contributions.

On the negative side, the high court left intact, for now, the so-called California Rule, which has been interpreted as an impediment to government entities seeking to reduce their pension costs. The rule, unique to California, provides that no pension benefit provided to public employees via a statute can be withdrawn without replacement of a “comparable” benefit, even as deferred compensation for services not yet provided.

The unanimous 54-page opinion by the Supreme Court resulted in a wide variance of headlines and social media posts. The Associated Press read “California’s Supreme Court upholds pension rollback.” Ironically, a conservative reform group sharply criticized the decision for failing to repeal the California rule outright while another conservative policy organization called it a “victory for taxpayers.”

So what was it?

To read the entire column, please click here.

Pension Funds, Meet the “Super Bubble”

Earlier this month, outgoing California Governor Jerry Brown predicted “fiscal oblivion” if California’s state and local agencies are not granted more flexibility to modify pension benefits. As if to help Governor Brown make his point, U.S. stock indexes took an obliging plunge. The Dow Jones average cratered in December, dropping nearly 16 percent in three weeks, from 25,826 on December 3rd to a low of 21,792 on December 24th. And whither hence? Nobody knows.

If history and trends are any indication, however, “up” is unlikely. Depicted on the chart below is the performance of the Dow Jones Index from 1995, when the markets began first showing signs of “irrational exuberance,” to the extremely exuberant present day. Clearly shown are the past two bubbles, the internet bubble of 2000, the housing bubble of 2007, and what we may call the “super bubble” or “everything bubble” of 2018.

Dow Jones Stock Index – 1995-2018 

It doesn’t take an economist to notice a pattern here. The Dow Jones Index, which tracks closely with all publicly traded equities in the U.S., more than doubled in the four year heady run-up to its January 2000 peak, than went into decline for nearly four years, before doubling again between 2004 and 2007. Then when the housing bubble popped, the Dow went off a cliff, dropping to half its 2007 peak in little over a year. In the ten years since 2009, the Dow has exploded again, tripling to a high of 26,743 in September 2018. What now? Visually, at least, another correction is past-due.

There are all kinds of economic reasons why what is visually indicated on the above graph is exactly what’s going to happen. At best, we may hope for stocks to merely stop going up, which is sort of what happened after the internet bubble popped. But what’s different this time?

One key difference is that this time, lowering interest rates is not an option. In January 2000 the Federal Funds rate was 5.5 percent. By June of 2003 it had dropped to 1.0 percent. When interest rates drop, stocks become relatively better investments than fixed rate investments. Lower interest rates also induce more people to borrow, creating liquidity, stimulating consumer spending, which helps corporate earnings which drives up stock prices. The cause and effect is reflected in the stock market history – by 2003, after lowering interest rates by 4.5%, the stock market finally began to recover.

In October 2006 the rate had risen to 5.25 percent. In September 2007, as home sales were starting to drop, it was lowered to 4.75 percent. When the housing bubble popped, and the stock market crashed, the Federal Reserve responded by steady lowering of the Federal Funds Rate. By December 2016 it had dropped to 0.25 percent, the lowest rate possible. What should be of concern, is that the rate today, 2.5 percent, is only half as high as it was during the past peaks. During the previous two bull markets, the Federal Reserve was able to bounce the rate up to around 5 percent before the bears came calling. This time, assuming we’ve hit the peak, only half that increase, to 2.5 percent, was achievable.

A consequence of low interest rates is more borrowing, which is a good thing if that borrowing stimulates economic growth that translates into investments in productivity. But borrowing has not been used to stimulate productive investments. Instead, much of the corporate borrowing over the past decade has been used to finance stock buy-backs. This is a dangerous strategy, causing short-term growth in earnings per share, but loading debt onto corporate balance sheets that will have to be refinanced at interest rates that are increasing, at the same time as investment in research and modernizing plant and equipment has been neglected.

In recent years, borrowing has also been an overused tool of government, starting with the federal government. Federal borrowing accelerated in mid-2008, and hasn’t slowed down since, climbing to over $21 trillion by the 3rd quarter of 2018. As interest rates rise, servicing this debt will become far more difficult. Meanwhile, all U.S. credit market debt – government, corporate, and consumer – has continued to increase. After dipping slightly to $54 trillion in the wake of the burst housing bubble, it was up to a new high of $68 trillion by the end of 2017.

When interest rates fall, not only is the stock market stimulated. Bonds make payments at fixed rates, so when the market rate drops, the price of these bonds increases, since they can be sold for whatever price will give the buyer the same return as the current market rate. Interest rate reductions also cause housing prices to rise, since when interest rates are low, people can afford bigger mortgages since they will be making lower monthly payments. The opposite is also true, which is unfortunate for investors. All else held equal, rising interest rates means lower prices for bonds and housing.

What does this mean for pension funds?

When the super bubble pops this time, all assets will drop in value. Everything pension funds are invested in, equities, bonds, and real estate, will all drop in value. Even if extraordinary measures are taken to stop the decline – such as the fed purchasing corporate bonds – there will be nowhere to run. Public sector pension funds have not prepared for this day of reckoning. CalPERS, for example, in its most recent financial statements was only 71% funded. That would be ok at the end of a bear market, but at the end of a bull market, that is a disaster waiting to happen.

As it is, using CalPERS as an example, government agencies are going to have to nearly double their annual payments. The primary reason for this increase appears to be so the participating agencies will eliminate their unfunded liability on a 20 year repayment schedule. To-date, agencies were making those repayments on a 30 year term, and using creative accounting to minimize the payment amounts in the early years. CalPERS does not appear to have lowered the amount they are expecting their investments to earn, and this is critical. Because while they have lowered their expected rate of return to “only” 7.0 percent, they have also quietly lowered their long-term assumed inflation rate. This means they are still relying on nearly the same real rate of return for their investments.

When the super bubble pops, the challenges facing pension funds will not be the only economic problem facing Americans. Unwinding the debt accumulated during a credit binge lasting decades will impact all sectors of the economy. The last thing the fragile finances of government agencies will need is even higher required contributions to the failing pension funds. Instead those running these pension systems need to try new approaches, including modifying benefit formulas, but also redirecting investments into local infrastructure projects – projects that not only create jobs, but address practical and urgent goals such as building resilient, upgraded backbones for supplying water, energy, and transportation.

In early 2019, the California Supreme Court is about to issue one of its most consequential rulings ever, in the case CalFire Local 2881 vs. CalPERSIt is possible this ruling will grant government agencies (and voters) more flexibility to modify pension benefits. Such an opportunity cannot come too soon, if fiscal oblivion is to be avoided when the super bubble finally pops.

How Local Governments Can Reform Pensions IF the “California Rule” is Overturned

pension-2In December of 2018, the California Supreme Court will hear arguments in what is generally referred to as the Cal Fire pension case. The ruling could potentially overturn what is commonly referred to as the “California Rule.” The current interpretation of the rule is that pension benefits, once increased, cannot be reduced for existing employees even for future years of service without the agency providing a benefit of equal value to the employee.

What reforms would become possible if the Supreme Court rules that changes for future years of service are not protected by the California Rule?

To demonstrate how this ruling could be a game changer and open the door to pension reform for nearly every city and county in California, this article uses the potential savings for various reform options for the County of Sonoma.

It should be noted that any changes to the pension system if there is a favorable ruling by the court would need to be made by the governing body of each agency and if they refuse to act, could also be made by the taxpayers through the voter initiative process.

Current Situation in Sonoma County

The pension system for Sonoma County employees was founded in 1945 and up until 1993 was a sustainable and affordable system that paid career employees 2% per year of service. This would mean, for example, that after a 35 year career a retiree would collect a pension equal to 70% of their final base salary. Sonoma County employees are also eligible to receive Social Security benefits. Over the first 48 years until 1993, the pension system had accrued $355 million in total pension liabilities (money owed to retirees and earned to date by current employees).

But then, due to a series of illegal pension increases back to the date people were hired in 1998, 2003, 2004 and 2006, pensions for employees with only 30 years of employment jumped (including “spiking”) to 96% of their gross pay. After the first increase, the liability had doubled from the 1993 $355 million amount to $793 million in 1999. The liability doubled again in 9 years and hit $1.9 billion in 2009. Last year, in 2017 the pension liability reached $3.34 billion, a staggering 941% growth over 24 years.

The Growth of Sonoma County’s Pension Liability
$=Billions

To pay off the soaring liability, Sonoma County issued pension obligation bonds in 1994, 2003 and 2010 totaling $597 million dollars of principal. Paying off the bonds with interest will cost taxpayers $1.2 billion on top of their normal pension contributions. Currently, the County owes $650 million in principal and interest on the bonds that will cost them an average of $43 million per year until 2030.

In addition, the County’s contribution to the pension system (including debt service on the pension obligation bonds) has grown from $8 million in 1998 to $117 million in 2017. In other words, we have a serious math problem on our hands. While tax revenues have been growing at 3% per year, pension and healthcare costs have grown by 19%. Something has to give. In Sonoma County we have two choices, do nothing and pay higher taxes for fewer services, or, if possible (depending on the outcome of the Supreme Court case), reform our pension system to make it more equitable for taxpayers and more secure for employees and retirees.

So far, money has been taken from our roads and infrastructure maintenance budgets and the County has borrowed $597 million to pay for pensions. Soon, more and more money is going to come from cuts to fire and police protection, and services for those to in need. The retroactive pension increases not properly funded have essentially created a debt generation engine that sticks our children and grandchildren with enormous debt for services received in the past.

The Pension Increases May Have Been Illegal

In 2012 responding to a complaint I filed, the Sonoma County Civil Grand Jury could not find any evidence that the County followed the law when pensions were increased. The California Government Code in Section 7507 requires that the public be notified of the future annual cost of the increase. However, records show that all of the retroactive pension increases were enacted without determining the future annual costs and the public was never notified. This is a serious issue since public notification is the only protection taxpayers have. In addition, documents uncovered by New Sonoma indicate that the agreement was for the General employees to pay 100% of the past and future cost of the increase and Safety employees to pay 50% of the cost. This requirement was never enforced by the Sonoma County Retirement Association as it should have, so the vast majority of the costs for the benefit increases have been illegally borne by the County’s taxpayers.

These same increases were enacted at the state and local level from 1999 to 2008 for almost every public agency throughout the state. Cursory investigations of other cities conducted by the California Policy Center and Civil Grand Jury’s in Marin and Sutter county found similar violations at every agency investigated. A lawsuit is currently under appeal that would void illegal increases back to the date they were enacted which would in Sonoma County’s case save taxpayers $1.2 billion over the years ahead. But even if this case fails, other reform options may be available soon as a result of a favorable supreme court ruling. Here they are:

1. Cap the Employer Contribution

A lot of problems could be fixed at the governance level if employees felt the impact of growing unfunded liabilities. As long as the current situation of the employer/taxpayer covering 100% of the unfunded liability and debt service on the bonds exists, the problem will continue to grow and reforms will be minimal because all actuarial losses fall on the taxpayer.

Capping the employer contribution at 15% of salary (still 5 times what private sector employers contribute to retirement funds for their employees) would cut pension costs in Sonoma County from $117 million to $55.4 million, a savings to the county of $61.6 million per year. And as pension costs increase over the years ahead, the employees will pay all the costs associated with the growth.

2. Split All Pension Costs 50/50 Between the County and Employees

Currently the employer contribution is 19% of payroll. The current pension bond debt service, all paid for by the employer, is 11.3% of payroll. The current employee contribution is 11.6% of payroll. Therefore Sonoma County’s total pension costs in 2017 were 42% of payroll.

Capping employer contributions at 50% of pension costs or 21% of payroll would save the county $50 million per year, a cost that would be borne by employees in additional pension contributions.

3. Provide an Opt Out for Employees to a 401k Plan

Instead of forcing employees to contribute 21% of their take-home pay to their pension, a 401k option could be created.

Existing employees could be provided with the option of moving the present value of their future pension benefit into a 401k account and opting out of the defined benefit pension system. Going forward, the County could provide them with a 10% of base salary 401k contribution which the employee could match for a 20% contribution. Then, if the employee wanted to turn their account balance into a defined benefit for life, they could purchase an annuity upon retirement using their 401k funds.

Studies show young people entering the workforce prefer the portability of a 401k plan because they don’t see themselves in the same career their entire lives. Defined benefit pension funds also punish folks who leave the system early and highly reward those that stay because they are back loaded by design.

A lot of folks might also choose this option because they may be worried about the soundness of their pension plan, which in Sonoma County’s case, they should be.

4. Improve Pension Board Governance

Require a majority of non pension fund members on the Sonoma County Employee Retirement Association (SCERA) board or move the servicing of the fund, if possible to a private entity because of the conflicts of interest that exist when board members are also part of the pension system.

5. Establish Greater Transparency

Establish a COIN Ordinance to require the County Supervisors to hire an outside negotiator during contract negotiations and to provide the public with the cost impact of any changes to the citizens ahead of approval.

6. Mandate Public/Private Pay Equity

Require the County to perform a prevailing wage study and offer new County hires salaries that are similar to what Sonoma County residents earn in the private sector for work requiring comparable education and skills.

7. Return Spending Authority to Voters 

Require voter approval of any pension obligation bonds, and require voter approval of any increases to pension formulas or increases to salaries in excess of inflation.

6. Eliminate Conflicts of Interest

Do not allow elected officials to be members of the pension system due to the obvious conflict of interest.

7. Improve Public Oversight

Create a permanent Citizens Advisory Committee on Pensions that would provide an annual study of the pension system and track the success of pension reform efforts and provide recommendations to the Board of Supervisors. All reports prepared by the committee will be posted on the Committee’s webpage on the County’s website. The committee would have the power to perform accounting and regulatory compliance audits of the Sonoma County Retirement Association, investigate any evidence of illegal acts, and recommend appropriate remedies to the Board of Supervisors. A description of any violations and any committee recommendations will be posted on the Committee’s webpage on the County’s website.

This article was originally published by the California Policy Center

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Ken Churchill has over 40 years of business and financial management experience as founder, CEO and CFO of a solar energy company and environmental consulting firm. In 2012 after discovering the county illegally increased pensions without the required public notification of the cost he founded New Sonoma, and organization of financial experts and citizens to investigate the increase and inform the public. Information on New Sonoma and their findings and court case can be found at www.newsonoma.org.