Tag Archive for: california pension reform

Pension Reform Waits for California Supreme Court

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With markets fitfully advancing after a nearly two year pause, the need for pension reform again fades from public discussion. And it’s easy for pension reformers to forget that even when funds are obviously imperiled, with growing unfunded liabilities and continuously increasing demands from the pension funds, hardly anyone understands what’s going on. Unless you are sitting on a city council and facing a 10 percent budget deficit at the same time as your required pension contribution is increasing (again) by 20 percent, pension finance is eye-glazing arcana that is best ignored.

But when your local government has reached the point where it’s spending nearly as much on pensions as it spends on base salaries, and pension finance commands your attention, you still can’t do much. Pension reforms were approved by voters in San Jose and San Diego, among other places, but their impact was significantly reduced because of court challenges. Similarly, a moderate statewide pension reform passed by California’s legislature and signed by Governor Brown in 2013 has been repeatedly challenged in court.

The primary legal dispute is over what is referred to as the “California Rule.” According to this interpretation of California contract law, pension benefit accruals – the amount of additional pension benefit an employee earns each year – cannot be reduced, even for future work. Reformers find this appallingly unfair, based on the fact that when California’s public employee pension benefit accruals were enhanced, the enhancement was applied retroactively. Suddenly increasing a pension benefit by 50 percent or more, not only for future work, but for decades of work already performed, is a big part of why California’s pension funds are in the precarious shape they’re in today.

While pension benefits can be changed for new employees, there are over a million state and local government employees in California who are already working and whose pension benefit formulas – even for future work – cannot be changed unless the California Rule is struck down. Several active court cases are challenging the California Rule, and because of the decisive impact the eventual rulings in these cases may have, pension reformers have largely put their efforts on hold. So what’s the latest?

Earlier this year, in the case Cal Fire Local 2881 v. CalPERS, the California Supreme Court struck down one of the challenges to the state’s 2013 pension reform act. The plaintiffs argued that the ability of retirees to purchase so-called “airtime”was a constitutionally protected vested benefit that could not be taken away. Purchasing “airtime” was a common practice whereby upon retirement, a pension recipient could make a payment and in exchange have more years of service added to their pension formula, increasing their annual pension for the rest of their life. This was however a narrow ruling, only stopping purchases of airtime. The ruling did not address the larger issue of the constitutionality of the California Rule.

Additional cases pending before the California Supreme Court that could be decided next year are coming with lower court opinions of great interest to reformers. In the case Marin Association of Public Employees v. Marin County Employees’ Retirement Association, the appellate court opinion included the following: “While a public employer does have a ‘vested right’ to a pension that right is to a ‘reasonable’ pension – not an immutable entitlement to the most optional formula of calculating the pension. The legislature may prior to the employee’s retirement, alter the formula, thereby reducing the anticipated pension.” If the California Supreme Court embraces that opinion in a broad ruling, it is possible the California Rule could be the casualty.

For two decades now in California, when it comes to pensions, “reasonable” has become a contentious word. Back in 1999, pension benefit formulas were still reasonable and financially sustainable. But starting in 1999, in most state and local government agencies, pension benefits were increased by roughly 50 percent, at the same time as the age of eligibility was lowered. Also beginning around this time, pension “spiking” became more common, where not only could “airtime” be purchased, but overtime pay, on-call pay, call-back pay, vacation and sick leave sold back, and recruitment bonuses could all be added to the base salary when calculating retirement pensions. These many changes are the reason California’s state and local public employee pension funds are financially stressed and demanding increasing payments that government agencies cannot afford.

The following information, recently compiled by Retirement Security Initiative, provides details on the recently settled Cal Fire Local 2881 v CalPERS case, along with four active cases before the California Supreme Court. Depending on how they are decided, options for pension reformers in the coming years could be greatly expanded.

California Pension Cases before the State Supreme Court

SUMMARY STATUS – DECIDED:

Cal Fire Local 2881 v. CalPERS
In March 2019, the California Supreme Court upheld one of Governor Brown’s (modest) changes to retirement benefits in PEPRA for public employees: eliminating the opportunity to purchase “airtime.” The court determined that this perk was different than the core pension benefit and therefore able to be modified.

PENDING:

Alameda County Deputy Sheriff’s Association, et al. v. Alameda County Employee’s Retirement Association
The Deputy Sherriff’s Association (and others) are challenging the elimination of overtime pay, on-call pay, call-back pay, vacation and sick leave sold back, recruitment bonuses, and other items from pension calculations. The appellate court upheld most of the modifications under the same reasoning of Marin. Both sides have asked for the Supreme Court to review.

Marin Association of Public Employees v. Marin County Employees’ Retirement Association
Four local unions challenged the elimination of callback and standby pay from their pension calculations. In a departure from California Rule, appellate court ruled the modifications were legal and employees only have a right to a reasonable pension. Court of Appeal sided against the unions. It is currently pending in the California Supreme Court.

Hipsher v. Los Angeles County Employees Retirement Association
The PEPRA law allows the modification of public pension benefits for public employees who are convicted of a felony for behavior while performing official duties. The court of appeals upheld the ability to alter the benefits in these narrow circumstances but requires due process for public employees. It is now awaiting review from the California Supreme Court.

McGlynn v. State of California
Six trial judges petitioned for retirement benefits for when they were elected in 2012, rather than when they took office in January 2013, which was after PEPRA changes. All courts have sided with the state. It is now pending review from the California Supreme Court.

DETAILED STATUS – DECIDED:

Cal Fire Local 2881 v. CalPERS
Supreme Court Case: S23995

Summary:  This case presented the following issues: (1) Was the option to purchase additional service credits pursuant to Government Code section 20909 (known as “airtime service credits”) a vested pension benefit of public employees enrolled in CalPERS? (2) If so, did the Legislature’s withdrawal of this right through the enactment of the Public Employees’ Pension Reform Act of 2013 (PEPRA) (Gov. Code, §§ 7522.46, 20909, subd. (g)), violate the contracts clauses of the federal and state Constitutions?

The Supreme Court’s decision in March 2019:  “We therefore affirm the decisions of the trial court and the Court of Appeal, which concluded that PEPRA’s elimination of the opportunity to purchase ARS credit did not violate the Constitution.”

Notable quotes from the Supreme Court’s opinion:  “We conclude that the opportunity to purchase ARS credit was not a right protected by the contract clause. There is no indication in the statute conferring the opportunity to purchase ARS credit that the Legislature intended to create contractual rights. Further, unlike core pension rights, the opportunity to purchase ARS credit was not granted to public employees as deferred compensation for their work, and here we find no other basis for concluding that the opportunity to purchase ARS credit is protected by the contract clause. In the absence of constitutional protection, the opportunity to purchase ARS credit could be altered or eliminated at the discretion of the Legislature.” (page 3)

“In this regard, plaintiffs argue that a contractual right with respect to the opportunity to purchase ARS credit should be found because public employees reasonably expected that the opportunity would continue to be made available for the duration of their employment. The only cited basis for those “reasonable expectations,” however, is the belief that the opportunity to purchase ARS credit would continue to exist in the future because it “was in effect for ten years.” The argument proves too much. We have never held that statutory terms and conditions of public employment gain constitutional protection merely from the fact of their existence, even if they have persisted for a decade. Such a rationale would directly contradict the general principle that such terms and conditions are not a matter of contract and are generally subject to legislative change.” (page 35)

“Because we conclude that California’s public employees have never had a contractual right to the continued availability of the opportunity to purchase ARS credit, the question of whether PEPRA worked an unconstitutional impairment of protected rights does not arise.” (page 45)

Undecided Questions:  Two major issues remain open, perhaps to be decided in the other pending cases:
1) The degree of protection for unearned benefits for future work by current employees.
2) The circumstance under which vested benefits can be changed once vested and whether a “comparable” benefit must be provided.

DETAILED STATUS – PENDING:

Alameda County Deputy Sheriff’s Association, et al. v. Alameda County Employee’s Retirement Association
Supreme Court Case: S247095
19 Cal. App. 5th 61 (1st Dist. 2018), review granted, 413 P.3d 1132 (Cal. Mar. 28, 2018).

Summary:  This case includes the following issue: Did statutory amendments to the County Employees’ Retirement Law (Gov. Code, § 31450 et seq.) made by the Public Employees’ Pension Reform Act of 2013 (Gov. Code, § 7522 et seq.) reduce the scope of the pre-existing definition of pensionable compensation and thereby impair employees’ vested rights protected by the contract clauses of the state and federal Constitutions?

In the courts below:  Deputy Sheriff’s union and others sued challenging the elimination of overtime pay, on-call pay, call-back pay, vacation and sick leave sold back, recruitment bonuses, and other items from pension calculations. The appellate court upheld most of the modifications under the same reasoning of Marin, but held some of the changes were illegal and would send others back to the trial court for further review. Both sides of this case asked the State Supreme Court for review.

Status:  Briefing in Progress. Supplemental Briefs in response to friends of the court briefs. As of October 17, 2019, the most recent document was filed May 29, 2019.

Marin Association of Public Employees v. Marin County Employees’ Retirement Association
Supreme Court Case: S237460
2 Cal. App. 5th 674 (1st Dist. 2016), review granted, 383 P.3d 1105 (Cal. Nov. 22, 2016).

Petition for review after the Court of Appeal affirmed the judgment in an action for writ of administrative mandate. The court ordered briefing deferred pending the decision of the Court of Appeal, First Appellate District, Division Four, in Alameda County Deputy Sheriff’s Assn. v. Alameda County Employees’ Retirement Assn., A141913[, or further order of the court].

Four local unions challenged the elimination of callback and standby pay from their pension calculations. In a departure from California Rule, appellate court ruled the modifications were legal and employees only have a right to a reasonable pension.

Court of Appeal conclusion:  “As will be shown, while a public employer does have a “vested right” to a pension that right is to a “reasonable” pension – not an immutable entitlement to the most optional formula of calculating the pension. The legislature may prior to the employee’s retirement, alter the formula, thereby reducing the anticipated pension.” Marin Ass’n. of Pub. Emps. v. Marin Cnty. Employees’ Ret. Ass’n, 206 Cal. Rptr. 3d 365, 380 (Cal. Ct. App. 2016), appeal pending in California Supreme Court, 383 P.3 1105 (2016).

Hipsher v. Los Angeles County Employees Retirement Association
Supreme Court Case: S250244

Petition for review after the Court of Appeal modified and affirmed the judgment in an action for writ of administrative mandate. The court ordered briefing deferred pending decision in Alameda County Deputy Sheriff’s Assn. v. Alameda County Employees’ Retirement Assn., S247095, which includes the following issue: Did statutory amendments to the County Employees’ Retirement Law (Gov. Code, § 31450 et seq.) made by the Public Employees’ Pension Reform Act of 2013 (Gov. Code, § 7522 et seq.) reduce the scope of the pre-existing definition of pensionable compensation and thereby impair employees’ vested rights protected by the contracts clauses of the state and federal Constitutions?

The California Rule is described in Hipsher v. Los Angeles County Employees Retirement Assn., 24 Cal.App.5th 740, 754-754 (2018) “… with respect to active employees any modification of vested rights must be (1) reasonable, (2) bear material relation to the theory and successful operation of a pension system and (3) be accompanied by a ‘comparable new advantage,’” but that court noted that, after the Marin decision, there is no “must” related to a modification of a comparable new advantage and a modification need not be so accompanied. Id. At 754.

McGlynn v. State of California
Supreme Court Case: S248513

Petition for review after the Court of Appeal affirmed the judgment in an action for writ of administrative mandate. The court ordered briefing deferred pending decision in Alameda County Deputy Sheriff’s Assn. v. Alameda County Employees’ Retirement Assn., S247095, which includes the following issue: Did statutory amendments to the County Employees’ Retirement Law (Gov. Code, § 31450 et seq.) made by the Public Employees’ Pension Reform Act of 2013 (Gov. Code, § 7522 et seq.) reduce the scope of the pre-existing definition of pensionable compensation and thereby impair employees’ vested rights protected by the contracts clauses of the state and federal Constitutions?

Six judges who were elected to the superior court in mid-term elections in 2012, but who did not take office until January 7, 2013, maintain they are entitled to benefits under the Judges’ Retirement System II (JRS II), which were effect at the time they were elected, rather than at the time they assumed office.

Court of Appeal conclusion:  “We conclude, as did the trial court, that the judges did not obtain a vested right in JRS II benefits as judges-elect, but rather obtained a vested right to retirement benefits only upon taking office, after PEPRA went into effect. We also conclude PEPRA’s provisions pertaining to fluctuating pension contributions do not violate the non-diminution clause of the California Constitution (Cal. Const., art. III, § 4), nor do they impermissibly delegate legislative authority over judicial compensation (Cal. Const., art. VI, § 19).” (pages 1-2)

ADDITIONAL REFERENCES

CalPERS Annual Valuation Reports – main search page

Moody’s Cross Sector Rating Methodology – Adjustments to US State and Local Government Reported Pension Data (version in effect 2018)

California Pension Tracker (Stanford Institute for Economic Policy Research – California Pension Tracker

Transparent California – main search page

The State Controller’s Government Compensation in California – main search page

The State Controller’s Government Compensation in California – raw data downloads

California Policy Center – How much will YOUR city pay CalPERS in a down economy?

California Policy Center – California Rule Does Not Protect “Airtime”

California Policy Center – Resources for Pension Reformers (dozens of links)

California Policy Center – Will the California Supreme Court Reform the “California Rule?”

This article originally appeared on the website California Globe.

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How Can California Reduce the Costs of Incarceration?

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California Governor Gavin Newsom has agreed to give state prison correctional officers a 3 percent raise. According to the Legislative Analyst’s Office, there is “no evident justification” for this raise.

A recent article in the Sacramento Bee summarizes portions of the LAO report, writing “The last time the state compared state correctional officers’ salaries to their local government counterparts, in 2013, state correctional officers made 40 percent more than officers in county-run jails, according to the LAO analysis,” and, “Since 2013, salary increases for state correctional officers have increased by a compounded 24 percent, according to the LAO.”

Within the LAO report, it is made clear that the rising cost for pensions is a major factor in escalating compensation costs for California’s prison guards. In theory, the cost to provide pension benefits is reasonable. The so-called “normal cost” of a pension is how much you have to pay if your pension system is fully funded. Unfortunately, that’s a big if. Today, the normal cost is only a small fraction of total pension costs. Most of the money going to CalPERS is to pay down their unfunded liability, built up over years of insufficient annual payments, along with lower than projected investment returns, and benefit enhancements that were justified using overly optimistic financial projections. CalPERS, the pension system that serves the California Correctional Officers, is underfunded by at least $138 billion. It is only 71 percent funded.

To see how this translates into the cost of individual pension benefits for California’s prison guards, useful information can be had by downloading raw data for state agencies from the California State Controller’s “public pay” online database. For example, using the most recent available data from the State Controller, in 2017 there were 21,558 prison guards who worked full time that year and were eligible for a “3@50” pension (pension equals three percent, times years worked, times final year base pay – eligibility at age 50). The average base pay for these guards was $87,460. Their average pension cost was $40,061, forty five percent.

State Controller data also offers insight into how much the modest PEPRA reforms of 2013 reduced pension costs, since California’s Dept. of Corrections also had 7,161 prison guards who in 2017 worked full time and were eligible for a “2.5@55” pension – in some cases this reduction was due to PEPRA. Their average base pay was $93,054, and their average pension contribution was $21,716, which equates to 23 percent, only half as much.

It’s easy to rail against the pay and pension benefits collected by public employees in California. And in the case of overpaid, underworked state and local bureaucrats who often are incompetent and indifferent towards business owners and homeowners who are trying in good faith to navigate California’s ridiculously excessive rules and regulations, that ire is appropriate. But before leveling that criticism at California’s correctional officers, one might consider what it takes to manage the criminally insane, or members of international gangs with friends inside and outside of prison, or, for that matter, the general prison population of thieves, thugs, wastrels and predators. If it’s such a cush job, go apply.

Nonetheless, especially when it comes to California’s pensions, something’s got to give. One solution which could be done overnight, without legislation or litigation if the CCPOA would agree, would be to reduce the pension multiplier from 3.0 percent to 2.5 percent for all future work by all correctional officers regardless of hire date. The three percent accrual for work performed to-date would be preserved. This single change could save the state tens of billions.

Government union members need to understand something unequivocally: There is no special interest in California that even approaches government unions in terms of raw political power. With great power comes great responsibility.  Conscientious members of these unions should demand this power is used for the common good.

In the case of the prison guards, that would not only involve a voluntary, and significant concession on the question of pensions, as described. It would involve aggressive political involvement in correcting some huge, and very recent, policy mistakes. To cite just one example, California’s Prop. 47, the so called “get out of jail free” law, needs to be repealed through a ballot initiative. Somehow, the tens of thousands of drug addicts, drunks, and mentally ill who currently constitute the bulk of California’s unsheltered homeless need to be cost-effectively reincarcerated.

California’s prison guards union can and should play a productive role in reforming the laws that prevent society from getting these most problematic of the homeless off the streets. They should then work creatively with legislators and local authorities to figure out how best to help these people. Why can’t state and local mental health professionals in partnership with the Dept. of Corrections build less expensive work camps for nonviolent addicts and alcoholics, where they could dry out and contribute to society? Why does it have to cost $71,000 per year to incarcerate the average prisoner in California? Why are comparable amounts necessary to shelter the homeless? This is ridiculous.

There’s more. Instead of demanding annual raises in an attempt to cope with the cost-of-living in California, why aren’t government unions supporting policies that might lower California’s cost-of-living? Support an overhaul of California’s excessive environmentalist legislation – why does it take six years or more to build an apartment building in California, when it only takes months in other states? Support deregulation of land development, because high-density infill is an exercise in futility unless it’s matched by new construction on open land within this vast, nearly empty state. Support nuclear power, and reform ill-conceived renewables mandates. Et cetera.

California’s prison guards union may wish to think outside the cell.

This article originally appeared on the website of the California Policy Center.

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The Coming Impact of Pension Payments on California’s Cities, and How Reforms Could Happen

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AUDIO: Part One – Employer contributions to pension systems for state/local workers are set to double in the next six years, best case. Ways agencies are trying to increase taxes and cut services to find the money – 10 minutes on 1440 AM KUHL Santa Barbara – Edward Ring on the Andy Caldwell Show.

AUDIO: Part Two – A discussion of how California’s pension crisis began, what potential reforms could make pensions financially sustainable, and the organizations that could successfully push these reforms – 10 minutes on 1440 AM KUHL Santa Barbara – Edward Ring on the Andy Caldwell Show.

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Pension Rhetoric vs. Pension Reality

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As  California’s public employee retirement system teeters on the verge of complete financial collapse, defenders of the current system continue to deny this, often accusing reformers of being “public servant bashers.” But politically motivated rhetoric will not change financial reality – or the pursuit of reforms so private workers don’t endure punitive taxation to sustain a privileged class of government employees. Last week the Sacramento Bee published a guest viewpoint written by Bruce Blanning, the Executive Director of the Professional Engineers in California Government. His commentary, entitled “State retirement benefits make an easy – and unfair – target,” invites a rebuttal.

The “real truth” about CalPERS, and other public employee pension funds, is they have consistently overestimated their long-term rates of return, adjusted for inflation. Currently CalPERS official rate of return, used for projecting the funds they will have available in the future, is 4.75%. This rate exceeds key long-term indicators that should govern these projections. For example, the inflation adjusted rate of return for the Dow Jones stock index for the period 1925 through 2008 averaged 2.8% per year. Similarly, the real rate of global economic growth for the period 1950 through 2000 averaged barely 4.0% per year, and this rate was skewed upwards by debt-fueled, unsustainable growth during the 1990’s. Even at a rate of 4.75% per year, CalPERS and the other pension funds are in a precarious state, because their asset values have been hammered in the last few years and will have to bounce back at rates in well in excess of 4.75% per year if they are to remain solvent (for more on these calculations, ref. Maintaining Pension Solvency).

Another “real truth” about public employee pensions is they currently collect benefits in retirement far in excess of what private sector workers can expect from social security. Public sector workers accrue retirement benefits according to a formula that grants them between 2% and 3% of their final year’s salary, times the number of years they worked. The 3% formula, for example, means that a public sector worker who spent 25 years in the workforce would receive a pension equivalent to 75% (3% times 25 years) of their final salary when they retire – with annual adjustments upwards for inflation. This benefit often begins when public sector workers retire in their early 50’s. An apples-to-apples comparison with social security provides for about 0.7% per year in retirement “pension” for private sector workers, which is at best one-third what a public sector worker receives – even though the private sector worker retires 15 years later! And social security doesn’t begin until one reaches their mid-sixties. When defenders of California’s public sector pensions – such as Blanning – reference an “average” pension for public sector workers of only $2,100 per month, they are not mentioning the fact that this number includes pensions for workers who were only in the public workforce a few years – and these workers would therefore also be receiving social security.

In the past, public sector workers received a pension that exceeded social security because they made less during the years they worked. But this has changed completely, and today, public sector workers, on average, make more than private sector workers. They also enjoy far more paid time off – they often get 26 paid days ala the “9/80” program (where they work 9 hours per day for 9 days, then get a paid day off, i.e., 26 paid days off per year), 12 “personal days,” anywhere between 10 and 20 vacation days, plus between 14 and 17 paid holidays. Find a private sector job that provides 75 paid days off per year. California is already one of the most heavily taxed states in the U.S., yet while roads and aqueducts crumble, taxpayer-funded public employees enjoy lives of inordinate privilege and security. And if public employees earned market rates of pay and benefits, like the rest of us, there would be no deficits (ref. California’s Personnel Costs).

Perhaps the most questionable of Blanning’s arguments was this one: “Of that $2,100 [the “average” monthly benefit of a retired public servant in CalPERS], only $1 of every $8 is paid by the employer, which means the taxpayer. The rest is paid through employee contributions and earnings on the investments.” If you dissect this, it is hard to follow exactly what Blanning is trying to say. Because if this means the state (on behalf of the taxpayers) is only paying 1/8th of the funding growth required by CalPERS for each worker for their portion of the retirement fund, this suggests the other 7/8ths is being covered either by the workers themselves through withholding from their paychecks, or by fund growth through investment returns. This, in-turn, suggests Blanning is saying that CalPERS expects virtually all of its funding to come from return on investments, since most public sector workers don’t even have half their retirement fund inputs withheld from their paychecks – which is what private workers contribute to social security via withholdings. Many public pension recipients don’t have anything withheld from their paycheck to go towards their pension fund.

If California’s public employee pension benefits are not dramatically reduced, hopeful rhetoric aside, the California taxpayer is liable. Pension fund managers were over-optimistic in their projections, and using more conservative scenarios their pension funds are already insolvent. Under the current arrangement, public employees, who pay very little of the costs of their future benefits in the form of withholding from their paychecks, are expecting to receive defined retirement benefits that dwarf anything a private sector worker can reasonably expect in their own retirement. And under the current arrangement, these taxpayers are supposedly going to pay – through even higher taxes (and fees) – the difference between what public employee pension funds expect to earn in the market, and what they actually earn in the market. Until the whole system is reformed, that is the reality in California today.

To suggest that the pay and retirement benefits that public employees currently enjoy is guaranteed by the California constitution or by “contract” is to ignore reality. California’s constitution can be amended by a citizen’s initiative. And the “contracts” that created these grossly inequitable and financially disastrous public employee benefits were the product of public sector labor unions exercising inordinate and unjustified influence over state and local politicians. This is the crux of the problem, and must be reformed along with reforms to reduce public sector pay and benefits. Public employees, through their unions, pour millions of dollars into political campaigns every year in California. They currently exercise nearly absolute control over California’s state and local governments. When the people collecting the benefits are controlling the politicians who grant the benefits, no contract should be considered inviolable – particularly when the alternative is bankruptcy.