Tag Archive for: pension reform

California Supreme Court Finally Rules on Case Affecting Pensions

On Thursday the California Supreme Court issued its ruling in the case Alameda County Deputy Sheriff’s Association vs Alameda County Employees’ Retirement Association. In plain English, this was a case where attorneys representing government unions were challenging pension reforms enacted by California’s state legislature in 2013. The ruling, which had the potential to empower dramatic changes to pension benefit formulas, was measured. But it is generally considered a victory for the plaintiffs.

Pete Constant, CEO of the Retirement Security Initiative, which advocates “fair and sustainable public sector retirement plans,” found the ruling encouraging, stating “the court has confirmed that the public interest is of utmost concern when determining whether public pensions need reform.”

What advocates for financially sustainable pensions are up against is the so-called “California Rule,” an interpretation of California contract law that dramatically limits the ways in which elected officials, or voters in a ballot measure, can modify pension benefits for public employees. The prevailing interpretation of the California Rule is that it prohibits changes to pension benefit formulas for active public employees, even for work they have not yet been performed.

In practical terms, obeying the California Rule means that whatever pension benefit package was in place on the date a public employee was hired must be maintained throughout their career. If it is changed, the employee must be given a compensatory new benefit of equal value.

Pension benefit formulas for California’s state and local public employees are typically calculated based on three variables – how many years the employee worked, how much the public employee earned in their final year of employment, and a “multiplier” that is applied to the product of these two values. For example, a public employee who has worked for 30 years, making $100,000 in their final year of work, whose pension “multiplier” was 3 percent, would get a pension equal to 30 x $100K x 3%, or $90,000.

During Jerry Brown’s second eight year stint as Governor of California, he consistently advocated for pension reform, claiming the unforeseen and escalating costs to fund public employee pensions were putting an unsustainable burden on civic budgets and taxpayers. The reform he pushed through the California State Legislature, the Public Employee Pension Reform Act of 2013 (PEPRA), was an attempt to curb what were seen as abuses in public pension systems. Passage of PEPRA immediately generated litigation by attorneys representing public sector unions.

In an earlier case decided in 2019, Cal Fire Local 2881 v. California Public Employees’ Retirement System, the court upheld PEPRA’s prohibition of the purchase of so-called “airtime,” which manipulated a pension calculation variable by increasing the number of years an employee worked.

In this case, the court upheld PEPRA’s amended definition of another pension calculation variable, how much they earned in their final year of employment. This PEPRA provision was designed to “exclude or limit the inclusion of additional types of compensation in an effort to prevent perceived abuses of the pension system.”

The various ways in which PEPRA attempted to end these practices that critics refer to as “pension spiking” have been repeatedly challenged by public employee unions in court. Relying on the California Rule, the union argument might reduce to this: “if pension spiking was a common and accepted practice at the time we were hired, then we relied on the ability to eventually spike our pensions back when we made the decision to enter public service. It is a vested right which cannot be taken away.”

The court did not agree. Buried in its nearly 100 page opinion was the following: “They [the provisions of PEPRA] were enacted for the constitutionally permissible purpose of closing loopholes and preventing abuse of the pension system… Further, it would defeat this proper objective to interpret the California Rule to require county pension plans either to maintain these loopholes for existing employees or to provide comparable new pension benefits that would perpetuate the unwarranted advantages provided by these loopholes.”

The implications for future reform are mixed. Jon Holtzman, a partner with the Renne Public Law Group and an expert on the laws governing public sector pensions, was encouraged, saying, “This is a very positive ruling. The court concluded there was not a contractual right to spiking. A more notable aspect of the decision is they once and for all dispelled the notion that if you take away a benefit that you must give a comparable benefit.”

There are two ways this ruling chips away at this core element of the California Rule. First, as noted, the court does not recognize the obligation to “perpetuate the unwarranted advantages provided by these loopholes” by providing a comparable benefit when the loophole is closed. The second way this ruling undermines the California Rule is more ambiguous.

The concurring opinion summarizes this ambiguity. Justice J. Cuellar writes “The test the court applies here is merely a specific application, fit for this situation, of a more general inquiry: whether a reduction in pension rights without any comparable new advantages is ‘reasonable’ and ‘necessary’ to further ‘an important state interest…'”

There’s a lot to unpack here. First, the ruling does not invalidate the prevailing interpretation of the California Rule, it makes clear the court is looking at a specific application – namely, what constitutes pension eligible pay when calculating a retirement pension. Secondly, it is implying that if the plaintiff can demonstrate that a provision of PEPRA, or any other pension reform that might come along, requires unnecessary or unreasonable reductions to pension benefits in pursuit of “an important state interest,” then the California Rule may still be applicable, preventing those reforms. Finally, though, what constitutes an “important state interest?”

This question awaits another court case for further clarification, and it could be the answers continue to arrive only in the context of specific applications of the question. Yet on this question hinges the ability of pension reformers to enact more meaningful modifications to public sector pension formulas. At what point does modifying public sector pensions become an “important state interest?” When they’ve become too expensive? They’re already too expensive. Or when the burden of paying them propels an agency into bankruptcy? And what if instead of bankruptcy, agencies – cities and counties and special districts – simply cut services and staff in order to cover operating deficits, and leave the pensions intact?

Pete Constant, commenting on the limited scope of today’s ruling, said “with the uncertainty we’re seeing today, this would have been a good time for the California Supreme Court to issue a broad decision.”

Carl DeMaio, the former San Diego City Councilman who has spent decades pushing for pension reform, was less subtle. In a blistering press release, he said “By crafting a narrow ruling that sidesteps the fundamental flaws with the notorious California Rule, the California Supreme Court seems hell bent on forcing California taxpayers to bear the excessive costs of unsustainable pension payouts for state and local government employees.”

They’re both right. The economic uncertainty ahead for California’s public agencies, as Constant warns, will demand further action to reduce pensions. Pension payouts, as DeMaio says, are excessive and unsustainable.

Future reforms, either initiated by the legislature, citizen initiatives, or bankruptcy courts, may have to take aim at more substantial elements of pension benefit formulas. To list just a few: reducing the multiplier for future work, reducing the cost-of-living adjustment for retirees, requiring active public employees to personally contribute more to the pension system via payroll withholding.

The ruling this week did not go far enough. But it reinforced earlier precedents that make clear the California Rule will not apply in all cases, and it left open the door to define an “important state interest” in a manner that is broad enough to empower more substantial reforms in the future.

This article originally appeared on the website California Globe.

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Never Mind the Virus, Here’s the Venice Beach Homeless Party!

AUDIO – In-depth conversation with National Review podcast host Will Swaim covering an assortment of topics relevant to California: the Venice Beach homeless during the COVID-19 lockdown, plastic bags and the recycling and re-use scam, and the perennial topic of pension reform.


Post-Coronapocalypse Pension Reform Checklist for California

In a perfect world, California’s state and local public employees would receive exactly the same retirement benefits as federal employees. They would receive a modest defined benefit, a contributory 401K, and they would participate in Social Security.

Unfortunately, in California, while some state and local public employees are offered 401Ks, and many participate in Social Security, all of them rely inordinately on a defined benefit pension. Far from being modest, even the most minimal examples of defined benefit plans for California’s state and local government workers provide roughly twice the value of the typical defined benefit offered federal workers. And where there’s twice the value, there’s twice the cost.

In reality, however, twice the cost would be a bargain. It’s much worse than that, and very little has been done. In 2013, the PEPRA (Public Employee Pension Reform Act) legislation lowered pension benefit formulas in an attempt to restore financial sustainability to California’s public employee pensions. But these revisions, which resulted in defined benefit formulas only about twice as generous as the federal formulas, only applied to new employees.

California’s Pension Systems Were Crashing Before the Coronapocalypse

Two years ago, and after more than eight years of a bull market in the stock market indexes, CalPERS, which is by far the largest pension system in California, had already announced that contributions from participating agencies were going to roughly double. They posted “Public Agency Actuarial Valuation Reports” that disclosed the details per agency.

At the time, in partnership with researchers at the Reason Foundation, the California Policy Center used these reports from CalPERS to summarize the impact on 427 cities and 36 counties (download full spreadsheet). As shown on the table below, two sets of numbers are presented – payments to CalPERS for the 2017-2018 fiscal year, and officially estimated payments to CalPERS in the 2024-25 fiscal year.

The most important distinction one should make when reviewing the above data is the difference between the “normal” and the “catch-up” payments. The so-called “normal contribution” is the amount the employer has to contribute each year to maintain an already fully funded pension system. The “catch-up” or “unfunded contribution” is the additional amount necessary to pay down the unfunded liability of an underfunded pension system.

As can be seen in the example of Millbrae (top row, right), by 2024, the “catch-up” contribution will be nearly six times the amount of the normal contribution. But in the PEPRA reforms, new employees are only required to contribute via payroll withholding to 50 percent of the “normal” contribution.

A separate California Policy Center analysis, also published two years ago, attempted to estimate how much total payments statewide would increase if all of the major pension systems serving California’s state and local public employees were to require similar levels of payment increases. The analysis extrapolated from the consolidated CalPERS projections for their participating cities and counties and estimated that in sum, California’s state and local government employers would have paid $31 billion into the 87 various pension systems in 2018, and by 2024 this payment would rise to $59.1 billion.

As noted at the time, and now more than ever, this was a best case scenario.

A Financial Snapshot of CalPERS Today

The next chart, below, depicts financial highlights for CalPERS – either officially reported or projected – in a format which ought to be publicly disclosed, every quarter, in this format, from every state and local public pension system in California. The first two columns depict data as reported by CalPERS for their most recent two fiscal years, ended 6/30/2018 and 6/30/2019. The final column, which consists of CPC estimates (not provided by CalPERS), shows how their financial condition could appear three months from now.The first thing to note from the above chart is the fact that CalPERS was only 70 percent funded (“funded ratio,” bottom line) in June of 2019. The next thing to note, and this is crucial, is that the actuarial estimates of the total pension liability lags behind one year. That is, the $504.9 billion reported “actuarial accrued liability” is reported as of 6/30/2018, even though that figure is used to report the funded ratio as of 6/30/2019.

Take a deep breath, because the significance of this delay requires further discussion. From page 122 of CalPERS most recent CAFR, here are the trends for the actuarial accrued liability: 6/30/2009 = $294B, 2010 = $308B, 2011 = $328B, 2012 = $340B, 2013 = $375B, 2014 = $394B, 2015 = 413B, 2016 = 436B, 2017 = $465B, and 6/30/2018 = $504B. Based purely on the trend, is there any reason to believe this liability will not exceed $550 billion by June 30, 2020, two years later? Why isn’t that estimate being made?

There’s more. Why are actuaries permitted to have an entire extra year to complete their estimate of the total pension system liability, when changing single variables will cause the estimate to massively fluctuate? Sure, it is a complex exercise, and at some point an official calculation, based on all known data, should be reported that amends a preliminary estimate. But if, for example, you vary the earnings projection downwards from 7.0 percent to 6.0 percent – which needs to be done sooner not later – using calculations provided by Moody’s Investor Services, the amount of the CalPERS liability soars from $550 billion to $621 billion. You don’t split hairs when you’re being scalped.

And what about the employer contribution (second row of data)? Why did it go down from $20 billion in 2018 to $15 billion in 2019? From the “Basic Financial Statements” in the CalPERS CAFRs for the last few years, here are the totals for payments by employers: 2015 = $10.2B, 2016 (page 38-39) = $11.0B, 2017 = $12.4B, 2018 (page 40-41) = $20.0B. With the payment for FYE 6/30/2019 back down to $15.7B, the trends suggest that the large payment of $20.0 billion in 2018 was an anomaly. But assume that much money will come again from employers in 2020. But based on historical trends, probably not more than that. Yet.

Where does this put CalPERS?

All of this discussion is to explain the reasoning behind the figures in column three on the above chart. What might be materially different? What estimate isn’t best case? Does anyone believe CalPERS will actually break even in the return on their invested assets between 6/30/2019 and 6/30/2020? Does anyone believe the most accurate estimate of the total liability belongs anywhere south of $550 billion, particularly when they’re still using a discount rate that’s too high? And yet this puts CalPERS in what is arguably the worst shape it’s ever been, at 64 percent funded as of this June.

This paints a very grim big picture. CalPERS is on track to collect over $20 billion from taxpayers in the current fiscal year, and CalPERS, while the biggest pension system, only manages just over 40 percent of the state and local government pension assets in California. This suggests that the total taxpayer contribution to California’s state and local government pension systems in 2020 is already up to around $50 billion. And it isn’t nearly enough.

Steps to Reform CalPERS and all of California’s pension systems

1 – Admit the long-term rate of return projection is too high for calculating the value of pension liabilities. Move it down to 6 percent. Increase the required “normal contribution” accordingly, and, in turn, increase the share required from active employees via withholding.

2 – Once a more reasonable long term rate of return projection is adopted by the pensions systems, the goal of pension reform should be to stabilize pension system payments at some maximum percent of total personnel costs. With cooperation from union leadership, agree on what that maximum percent should be, then determine how to spread benefit reductions in an equitable manner between new hires, current employees, and retirees.

3 – For all state and local government employee pension plans in California, start providing consolidated quarterly financial summaries (without gimmicks), using the above chart as an example. Include a footnote indicating how much of the total employer contribution is for the unfunded liability vs the normal contribution.

4 – If a pension system falls below 80 percent funded, agree on an escalating series of remedies to be implemented to bring the funded ratio back up. They would include suspension of COLA, prospective further lowering of the annual multiplier for active workers, retroactive lowering of the annual multiplier for active workers, reduction of the retiree pension payment, and increasing the required payment to the pension plan by active workers via withholding.

5 – Pressure the California State Supreme Court to swiftly hear and rule on the cases Alameda County Deputy Sheriff’s Ass’n. v. Alameda County Employees Retirement Ass’n (filed 1/8/2018), and Marin Ass’n of Pub. Employees v. Marin Cnty. Employees Retirement Ass’n (filed 8/17/2016). These cases may provide clarity on the “California Rule,” which currently is interpreted as prohibiting lower pension benefit accruals, even for future work.

6 – With or without a decisive ruling (or any ruling) on the California Rule, work with government union leadership to revise pension benefits. If union leadership is uncooperative and the courts fail to offer an enabling ruling, than as a last resort, to bring the unions back to the negotiating table, lower salaries, current benefits, and OPEB benefits.

7 – In the long run, move towards a system modeled after the federal system. This would be a logical next step, following in the footsteps of PEPRA. It would create three basic tiers of public sector workers in California, the pre-PEPRA workers (who may submit to lower benefit accruals for future work), the post-2013 hires who are subject to the PEPRA reforms, and new hires starting in, for example, 2021, who would enjoy retirement benefits similar to what Federal employees receive.

The Ripple Effect of Unreformed Pensions

There are two problems with a bullish outlook today. First of all, the great returns of the past few years may have been unsustainable, a super bubble. And then that super bubble was not popped by a pin, but rather by a wreaking ball, the Coronapocalypse. There are tough economic times ahead.

In a severe downturn it is conceivable that annual taxpayer contributions to California’s public employee pensions systems will not merely soar from around $50 billion in 2020 to $60 or $70 billion within a few years. They could go even higher. For example, over the total three year period through June 2020, it is quite possible that CalPERS will collect more from taxpayers – $65 billion – than it will have earned in investment returns – $52 billion.

This is the new reality of public sector pensions in California. And because taxpayers have been increasingly on the hook to bailout these pensions, taxes have increased, services have been cut, and there has been a gradual wearing away of trust by citizens in their local governments. This is why, for the first time in decades, more local taxes and bonds were rejected by voters in March 2020 than were approved. Absent pension reform, this backlash has just begun.

So-called “crowding out” of other public services in order to pay for pensions doesn’t just impel an insatiable drive for higher taxes. It also works its way into higher fees, building fees in particular. Infrastructure investments such as connector roads and parks for new housing subdivisions used to come largely out of municipal operating budgets. It was a fair trade – the city builds the roads, the builders sell the homes, and the new residents pay taxes. But now, all of those costs are paid for by the builders and passed on to the home buyers. The rising cost of pensions can be directly tied to the unaffordable cost of homes.

Pensions for state and local government employees in California are literally three to five times as costly as Social Security, and at least twice as costly as the Federal Retirement System. Ultimately, this disparity divides Americans and undermines what it means to be an American citizen. Why should public employees care if Social Security is inadequate, if they don’t depend on it? Why should they care if all public benefits offered private taxpayers is diluted, or if citizenship itself becomes less meaningful, if their membership within the public sector is the primary source of their security?

America is entering difficult economic times. Maybe one good thing to come out of this will be a willingness on the part of public sector union leadership to make common cause with all of California’s workers, and agree to reasonable concessions on pensions that will help everyone living in this great state.

This article originally appeared on the website California Globe.

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Pension Reform Waits for California Supreme Court

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


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.


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.


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.


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)


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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Were Pension Benefits Enhanced Without Due Process?

In 1999, at the height of the stock market runup fueled by the internet bubble, California’s state legislature passed SB 400, which increased pension benefits for officers with the California Highway Patrol. Over the next several years, pension benefits were similarly increased for government employees working in nearly every one of California’s cities, counties, state agencies, schools and special districts. But in California’s wine country, a case is quietly moving forward that argues these pension benefits were enhanced without due process.

The case, George Luke vs Sonoma County, is based on California Government Code Section 7507, which prohibits adoption of retirement benefit plan increases unless the approving agency first (1) retains an enrolled actuary, (2) who prepares an actuarial report, (3) which estimates future annual costs of the increases, and (4) the estimate of future annual costs are made available to the public at a meeting at least two weeks before the agency approves the increases.

The lawsuit was originally filed in 2017 and dismissed the following year by a trial court judge who said it didn’t meet statute of limitation requirements. But in his initial appeal, Luke is arguing that his claim isn’t barred by the statute of limitations since his taxpayer dollars are still going toward the increased benefits.

This week the most recent development in this appeal is a reply brief filed with the first appellate district court which argues “the judgement of dismissal must be reversed because the lower court misapplied the doctrine of continuous accrual.” The plaintiffs argue that the legal doctrine of continuous accrual means that each time pension benefits are recalculated – which would be every time the County makes a pension payment – the clock is reset on the statute of limitations.

Pension reform activists throughout California may wish to read “A New Approach to Pension Reform – How to Prepare,” written by Sonoma County pension activist Ken Churchill in March, 2019. This article explains in plain English how California Government Code Section 7507 may have been violated by agencies that granted pension benefit enhancements between 1999 and around 2006. The article also presents step-by-step instructions for anyone wishing to investigate this possibility in their city or county, both in terms of how to look for statutory violations, and in terms of what specific public records can be requested to document possible violations.

Pension reform activists also may wish to have expert legal review of the most recent appellant’s reply brief, which can be downloaded here.

The stakes could hardly be higher. Pension funds in California, despite a runup in the value of investments in stocks, real estate, and bonds, that has lasted for over a decade, are only about 70 percent funded. Even now, as the inevitable end of a prolonged bull market draws nigh, CalPERS and the other major California public employee pension systems have only lowered their projected average annual return percentage to 7 percent. Even if they achieve that rate over the next several years, CalPERS has already announced that most of their client agencies will need to nearly double their annual employer contribution rates over the next five years, mostly to pay off the huge unfunded liability associated with being only 70 percent funded.

The impact of the pension benefit enhancements that began in 1999 cannot be easily overstated. A typical pension benefit is based on the following formula: Years worked, times annual salary paid in final full year of employment, times a percentage “multiplier.” Back in 1999, for example, a California Highway Patrol Officer typically had a pension formula based on a multiplier of 2.0 percent. That is, when they retired after, say, 30 years of work, their pension would be calculated based on their final salary, times 30 times 2.0 percent, i.e., their pension would be equal to 60 percent of their final salary.

If that were all there were to that revision, one would expect that for years prior to 1999, the retiree’s multiplier would remain 2.0 percent, and for years they worked after 1999, it would be set at the new 3.0 percent. But the revisions to pension formulas went well beyond increasing the multiplier by 50 percent for years of work in the future. These multipliers were changed retroactively, meaning that the new higher multiplier applied to past years of work as well. In practice, this meant that for someone who worked 30 years and was retiring in 2000, one year after the benefits were enhanced, they would get 90 percent of their final salary as a pension, instead of 61 percent (29 x 20% + 1 x 3.0%).

It gets worse. These pension benefit revisions also lowered the age at which a retiree is eligible for full pension benefits from 55 to 50. A recent analysis by Ken Churchill, looking at the impact of these changes in Sonoma County, found that for public safety employees, the average age of retirement fell from 57 prior to the pension benefit enhancements to only 52 after the increase. This compounds the impact of enhancing pension benefits. Lowering the age of eligibility to receive a pension didn’t just happen in Sonoma County, it happened almost everywhere. Receiving pension benefits, on average, five years sooner, not only increases the amount of the lifetime pension payments by five years worth of payments, it also lowers the amount of pension contributions into the fund by five fewer years of work.

Beginning especially around 2009 when markets around the world endured a severe downward correction, pension activists have succeeded in making pension reform a recurring topic for policymakers. But undoing the financial damage caused by the wave of benefit increases that swept through California’s public agencies between 1999 and 2006 has proven very difficult.

In 2013, the PEPRA (Public Employee Pension Reform Act) legislation restored pension benefits for new hires back down closer to pre 1999 levels. But the so-called “California Rule,” an interpretation of California contract law that has prevailed thus far in court battles, has prevented changing pension benefit multipliers, even if only for future work. The moral justification for this escapes a lay observer, insofar as multipliers were increased not just for future work, but retroactively.

The ongoing litigation on the issue of failure to notify the public of the future annual cost as required by Government Code Section 7507 violations of due process may provide another avenue on which to apply pressure for meaningful pension reform. Defined benefit pensions, when they are based on reasonable multipliers and conservative rate of return assumptions, can remain a financially sustainable way to provide retirement security to public servants.

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

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Will Unions Promote Defined Contribution Plans the Way They Promote Pensions?

The virtue of a defined contribution plan is that once the employer has made their contribution, the employer’s obligation is fulfilled. The employee’s retirement benefit is based on a “defined” contribution – typically some fixed percentage of their base pay – that money is invested, and the retiree lives on the accumulated savings and interest. Often, with the same amount invested, these plans can offer participants a more lucrative retirement than a pension.

Given the potential of defined contribution plans to sometimes outperform pensions, why are public employee unions seemingly focused almost exclusively on the alternative, the so-called “defined benefit” pension? Far more common in the public sector, these defined benefit plans offer the retiree a guaranteed “defined” amount in the form of fixed payments for as long as they live, usually adjusted upwards each year for inflation. What the employer has to contribute to the fund is undefined and fluctuates as needed to maintain those promised payments.

The problem, however, with defined benefits is they were sold as costing taxpayers very little, when in fact the employer contributions over the past twenty years have soared. To say those undefined employer payments to the pension funds have “fluctuated,” in order to keep those defined benefits flowing, is to indulge in the understatement of the century.

Back in 1999, during the internet bubble, when California’s public employers consented to an increase to the value of their promised defined benefits of well over 50 percent, the pension funds claimed it wouldn’t cost anything. The stock market was roaring, and apparently would roar forever.

Today, despite years of relentless increases to the required pension contributions by employers, most of California’s major public employee pension funds are only about 70 percent funded, with steep annual hikes in required contributions scheduled for the next several years. There is no end in sight.

So while a defined benefit may protect a retiree from mortality risk, where they outlive their savings, or market risk, where they happen to retire during a prolonged bear market and their savings evaporate, under the defined benefit plan all that risk is shifted to the taxpayer.

The cold fact that confronts California’s public employee pension systems is this: Their plans, which today are only around 70 percent funded despite the longest bull market in U.S. history, will not be able to financially withstand several years of poor returns on investment. The longer it is before defined benefits are right-sized to the capacity of state and local government to make contributions, the larger those benefit cuts will be.

Meanwhile, many government employers offer defined contribution plans to supplement defined benefit pensions. Given the precarious financial state of pensions, these defined contribution plans should not be attended to as an afterthought.

Some Defined Contribution Plans Are Better Than Others

Wading successfully through the arcana of retirement finance is a tedious exercise, but too much is at stake to avoid making the attempt. And it seems that California’s government unions, which have been universally consistent in making employee pensions run on autopilot, have not been nearly so proactive to ensure their members find the right defined contribution plan.

Since 1958, government employees have had the opportunity to make tax deferred contributions to retirement savings accounts as authorized by IRS Section 403(b). But these early 403(b) plans were marketed to public employees by insurance companies that had already been selling similar plans as tax sheltered annuities.

So far so good. But these plans, which are still aggressively marketed by insurance agents to public employees, carry much higher costs. Most of them have an entry fee – paid back to the salesperson as a commission – as high as 11 percent. Many of them have earnings that capped at rates as low as 3 percent. It isn’t uncommon for them to have a surrender charge as high as 15 percent. All of them charge annual maintenance fees – usually hidden from the plan participant – typically far in excess of more competitive mutual fund based plans that have emerged more recently.

An example of a good plan is the 403(b) option known as Pension2, offered by the California State Teacher’s Retirement System (CalSTRS). Pension2 offers a variety of low-cost index fund options and only charges annual administrative fees equal to 0.25% of the participant’s account balance. But Pension2 does not have an aggressive sales force pushing its product – which of course is one of the primary reasons the product is such a good deal. Other low cost 403(b) options are offered by Fidelity and Vanguard.

Why aren’t the unions encouraging their members to invest in these products? Maybe because the California Teacher’s Association offers its own 403(b) plan, which has an annual administration fee of $95 per participant – regardless of fund balance. By selling its own retirement product, the union loses its ability to act as a credible advisor to its members.

Another excellent option for public employees who want supplemental defined contribution benefits is an IRS 457(b) plan created by their employer in conjunction with a financial firm. Los Angeles Unified School District’s 457(b) plan administered by Voya won an award from the National Association of Government Defined Contribution Administrators (NAGDCA) for excellence and innovation. This excellent 457(b) plan is a good alternative to the 27 403(b) plans being sold to LAUSD educators, mostly by insurance companies.

Why isn’t the United Teachers of Los Angeles (UTLA) recommending this plan to its members? Recent history would suggest that UTLA thinks its members are undercompensated, and one easy way to improve teacher compensation is to reduce the overheads they pay on retirement savings.

While other unions have agreed to LAUSD automatically enrolling employees in their award-winning 457(b) plan UTLA has steadfastly refused. So instead of protecting member savings, salespeople pushing obsolete, needlessly expensive versions of a defined contribution plan continue to ply the halls of California’s schools.

Edward Ring is a co-founder of the California Policy Center and served as its first president. This article first appeared on the website of the California Policy Center.

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How Can California Reduce the Costs of Incarceration?

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.

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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Why Are Public Safety Unions Supporting Teachers Unions?

During the Los Angeles teachers strike earlier this year, an article in the ultra-left publication The Nation offered an excellent glimpse into the mentality of strikers and their supporters. The article begins by describing a scene in front of an LAUSD middle school on day three of the strike. A truck driver has arrived to make a delivery to the school, and the picket line won’t budge. Police have been called.

What happens next? According to The Nation, “The line holds. The police don’t make good on their threats to cite or arrest teachers, and the truck and police cars drive off. One of the officers even gets on his radio before he leaves and says, ‘Don’t let them come between us. We support you!'”

It would take an expert to determine whether this conduct falls within the boundaries of normal police discretion or constitutes a minor act of civil disobedience in solidarity with the strikers, but it doesn’t take an expert to determine whose side this officer was on. “We support you.”

Police, along with the firefighters who on January 19th actually marched by the hundreds through downtown Los Angeles to support the teachers strike, can be applauded for wanting to support teachers and students. They can be applauded for doing what they think is right, especially if they think they are helping the next generation of Americans get a quality public education. But what if everything the teachers union is trying to do is wrong?

For starters, funding for traditional public schools is not undermined by the presence of charter schools. Public schools receive public revenues based on enrollment, and public school classrooms, according to one of the union’s own stated grievances, are bursting. There are more students than the system can handle, so charters siphoning off some of these students cannot possibly be the reason for inadequate operating revenue. What about funds for capital improvements?

In November 2018 California’s voters approved over $15 billion in local school improvement bonds. In November 2016, voters approved over $24 billion in local school improvement bonds; June 2016, $6.2 billion; November 2014, $11 billion. There should be no shortage of funds to upgrade public schools, because the success rate for local school improvement bonds in California is over 90 percent, and tens of billions have been allocated over just the past few years. We should be asking where, if we’ve allocated nearly $60 billion over just the past five years to maintain and upgrade schools in an era of stable enrollment, did all that money go?

With respect to operating revenue, the biggest reason for deficits is the crushing burden of funding retirement benefits. The reason the teachers union opposes charters is because it leaves a smaller pool of LAUSD traditional school students, i.e., less revenue, to pay down their unfunded liability for retirement benefits – nearly $7.0 billion for pensions, and nearly $15 billion for pensions.

At the very least, the teachers union should tell the truth: We want more students so we will have more revenue because we demanded and received retirement benefits that were excessively generous and financially unsustainable. Better yet, they could “negotiate” lower benefit formulas and higher personal contributions through payroll withholding.

Instead, the teachers union wants to kill charter schools, and the police and firefighter unions are helping them. But all these unions ought to recognize that their retirement benefits are not more important than providing quality education. And at least police and fire unions have not destroyed the effectiveness of their organizations. Can the teachers union make that claim?

No. They can’t. The teachers unions in California are the worst thing that’s ever happened to public education. Set aside for a moment their leftist agenda that they use every opportunity to bring into the classroom, or their economic demands that reflect innumeracy and greed in equal measure. Just refer to the 2014 Vergara vs. California case for a defining example of just how much damage these unions are doing to California’s public schools.

The plaintiffs in this case sued to modify three work rules, (1) a longer period before granting tenure, (2) changing layoff criteria from seniority to merit, and (3) streamlined dismissal policies for incompetent teachers. These plaintiffs argued the existing work rules had a disproportionately negative impact on minority communities, and proved it – view the closing arguments by the plaintiff’s attorney in this case to see for yourself. But a California State Appellate Court reversed the lower court’s ruling, and the California Supreme Court refused to take the case. To put it mildly, California’s public schools continue to suffer.

Instead of embracing reforms such as proposed in the Vergara case, the teachers union is trying to unionize charter schools. And instead of agreeing to retirement benefits reform, the LAUSD teachers union went on strike. Post strike, the financial challenges facing LAUSD are worse than ever.

To cope? More money, of course. The LAUSD school board has called for a new parcel tax in Los Angeles, Measure EE, to address their budget deficits. As reported by Jon Coupal of the Howard Jarvis Taxpayers Association, the board is calling for a special election with “the intention to keep voter turnout very low.” Needless to say, in low turnout elections, the union’s ballot harvesting machine virtually assures that this new tax will pass.

Blaming charter schools for financial challenges facing traditional public schools is a huge deception, and it’s working. According to polling conducted by the Public Policy Institute of California, while California’s voters support, by a narrow margin, charter schools, a majority of them have “concerns about the fiscal impacts [of charters] on traditional public schools.” Spreading this deception allows the teachers union to deflect growing evidence that charters – at least the non-unionized ones – are doing a better job at educating at-risk youth. Thankfully, not everyone is listening to these unions.

Three branches of the NAACP in California have now filed resolutions with their state board opposing a moratorium on charter schools. They have correctly observed that the academic performance of African American students is significantly better in charter schools. Hopefully the momentum of this grassroots support for charters from members of the African American community will be an eye opener. As it is, union controlled school districts from Los Angeles to Oakland are declaring a moratorium on new charter schools, and some are pushing for a statewide ban.

Anyone wanting more insight into the mentality and strategy of the teachers union in California should carefully read the pro-union article in The Nation. Consider this quote from the UTLA president: “the union can’t just have a small bargaining team that meets with the district when a contract is up. It has to be in constant contact with membership, through an ongoing process of identifying and developing leaders. Teachers are elected as leaders at the school or chapter level; then those chapters are grouped into clusters that have their own leaders, all of them in regular contact with the union leadership.”

Get it? Union commissars in every school. Not one per school. Many. If you want to know what sort of coercive group-think culture this breeds, read “Standing Up to Goliath,” by veteran public school teacher Rebecca Friedrichs.

How about this, from a LAUSD history teacher: “She sees the union’s focus on racial justice not merely as a feel-good sound bite but as a reflection of the reality faced by so many of their students: undocumented students, students who are harassed by police in their neighborhoods only to run into school police (LAUSD has its own police force) in the schools, and students being gentrified out of their homes. She organizes with Students Deserve, a grassroots group that has been inspired by Black Lives Matter’s divest/invest framework and is part of what she says is a different way of thinking about a labor-community alliance.”

“Focus on ‘racial justice’.” “Harassed by police.” “Inspired by Black Lives Matter.” What sort of history might one expect these impressionable young students to be studying in her classroom? Do you support this sort of biased education?

Police, and their unions, ought to ask themselves: Who is more likely to help them improve their relationship with disadvantaged communities? Is it history teachers who are inspired by Black Lives Matter, the teachers union, the far-left wing of the NAACP, or journalists at media outlets like The Nation?

Or is it the rebellious branches of the NAACP who have looked at the data, and support charter schools? At the least, police and firefighter unions might stay neutral on these conflicts. The LAPPL might use their resources to fight for things affecting their ability to do their jobs. Litigate and overturn Jones vs. the City of Los Angeles, or launch a ballot initiative to reverse Prop. 47.

The teachers unions are not your friends.

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Citizen Reformers Set to Transform Oxnard’s Politics

Oxnard has got a problem. The city’s contributions to CalPERS, which totaled $23 million in their fiscal year 2016-17, are going to increase to $45 million by 2024-25.

Where is this money going to come from? As reported last week, the “skyrocketing pension costs” have already led Oxnard’s Mayor to call for “painful cuts.” But if pension payments are set to double in just the next six years, where will all these cuts come from?

Meanwhile, in Oxnard, a small group of local activists, led by Aaron Starr, a local executive with a financial background including a CPA, are working to qualify five reform initiatives. If they gather the signatures required for each initiative, residents of the City of Oxnard will vote on them in November 2020.

The process of filing a citizens initiative is relatively straightforward. One reference is Ballotpedia, which provides a good summary of laws governing the local ballot measures in California.

In Oxnard, for example, there are 82,000 registered voters, and in order to place a local initiative onto the ballot, ten percent of registered voters have to sign a petition. In practice, it is advisable to collect 40-50 percent more signatures than the minimum necessary to qualify. For Oxnard, that would mean 12,000 gross signatures are necessary to qualify each ballot measure.

Citizen sponsored ballot measures to repeal local taxes or implement other reforms are common, but not as common as proposals and counter-proposals initiated by local city councils, school boards, and county boards of supervisors, to increase local taxes or authorize new borrowing.

For example, in November 2018, California’s voters were asked to approve 259 new local taxes, totaling an estimated $1.6 billion in new annual collections. At the same time, they were asked to approve 125 local bonds totaling $18 billion, which would add estimated annual repayments of $1.2 billion. Typically, around 70 percent of local tax increases and around 80 percent of local bond borrowings are approved by voters.

Nonetheless, some of the local initiatives to repeal taxes or implement other reforms have been successful. During this decade, San Jose and San Diego voters both voted to reform pensions, and despite bitter court disputes, much of those reforms have remained intact. In June 2016, local activists and Glendale residents William A. Taliaferro and John M. Voors successfully led a tax repeal effort in that city. And very recently, in April 2018, Sierra Madre residents Earl Richey and David McMonigle successfully led a tax repeal effort in that city.

What is unique about the Oxnard efforts is that five of them are being proposed at once. This is a model that might well be emulated by citizen reformers elsewhere in California. The cost to qualify one local reform initiative, vs. the cost to qualify five local reform initiatives, is not linear. Typically when a signature gatherer succeeds in getting a registered voter to sign one ballot petition, they’ll be willing to sign the rest of them. And when campaigning for reform initiatives, there might be a benefit to having a slate of initiatives. Voters might find it motivating to know that they have a chance to support a coherent package of several mutually reinforcing reforms that offer the potential for dramatic improvements to their local governance.

As summarized in this article in the Ventura County Star on May 4, 2019, the ballot measures that Starr and his colleagues are circulating for signatures are:

Oxnard Fiscal Transparency and Accountability Act, which would make the city treasurer, an elected official, the head of the finance department.

Keeping the Promise for Oxnard Streets Act, which would deny the city certain sales tax revenue if it fails to maintain streets to specific levels.

Oxnard Term Limits Act, which would limit the mayor and council members to no more than two consecutive four-year terms.

Oxnard Open Meetings Act, which would require city meetings to begin no earlier than 5 p.m. and allow public speakers no less than three minutes to comment.

Oxnard Permit Simplicity Act, which would reform the permitting system with training, new guidelines and an auditing process that would lead an applicant to obtain a permit in one business day.

One day? One day? In Sacramento County, there are business owners who have waited several months, and often over a year to get permits. Ditto for Sonoma County. Ditto for a lot of places in sunny California. As if business owners don’t have bank loans to service and employees to pay, while they wait for their permits.

As for pension reform? Perhaps Oxnard’s officials need to urgently explore ways to reduce the city’s obligation to CalPERS, since they may soon be more accountable than ever to the citizens they serve.

Clearly if all of these reform measures are passed by Oxnard’s voters, they will have a comprehensive impact. Imagine the impact of dozens, or hundreds of groups of local activists, applying this same strategy of filing multiple initiatives, in jurisdictions throughout California.

Title and Summary documents for the five proposed ballot measures in Oxnard are already publicly available (by the way, it is the city attorney, and not the initiative proponents, that prepares the Title and Summary). To download the official Title and Summary for each of these ballot propositions, click on the following links:

Oxnard 2020 – Finance – Ballot Title & Summary

Oxnard 2020 – Streets – Ballot Title & Summary

Oxnard 2020 – Term Limits – Ballot Title & Summary

Oxnard 2020 – Meetings – Ballot Title & Summary

Oxnard 2020 – Permits – Ballot Title & Summary

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

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Why is San Diego’s Pension Settlement Estimate So Much Money?

In 2012, San Diego voters approved Proposition B, a pension reform measure that replaced pensions for new hires with a 401K plan. Seven years later, it is possible this reform will be completely unwound, because union attorneys have successfully argued that the city didn’t “meet and confer” with the unions before putting the reform measure on the ballot for voter approval.

As reported two weeks ago, the U.S. Supreme Court refused to hear the city’s argument that the San Diego’s mayor, who supported Prop. B, was exercising his right to free speech, and to force him to meet and confer with the unions prior to supporting Prop. B would have been a violation of that right.

Since then, the case has been returned to the original appellate court, which on 3/25 ruled that the city must “meet and confer over the effects of the initiative and to pay the affected current and former employees represented by the Unions the difference, plus seven percent annual interest, between the compensation, including retirement benefits, the employees would have received before the initiative became effective and the compensation the employees received after the initiative became effective.”

This ruling raises more questions as it answers. For example, does this ruling definitely require the city to pay those employees affected by Prop. B? This is unclear, because the next sentence of the ruling seems to offer the city a way out, by stating:

“The City’s obligation to comply with the compensatory remedy extends until completion of the bargaining process [the “meet and confer”]… …before placing a charter amendment on the ballot that is advanced by the City and affects employee pension benefits and and/or other negotiable subjects.”

In plain English, it appears the court has ordered the City of San Diego to meet and confer, then if an impasse is reached, to place an amended version of Prop. B in front of the voters. But this raises another question – did the City of San Diego really put Prop. B on the ballot, violating the meet and confer requirement?

The actual proponents of the measure, Steve Williams, TJ Zane, and April Boling, were private citizens. They put Prop. B on the ballot, and the funds used to qualify Prop. B and campaign for Prop. B were all privately sourced. San Diego’s mayor supported Prop. B, but only did so after these private parties had announced their campaign. Prop. B would have been put before voters, and likely passed, with or without support from the mayor.

For this reason, if and when a settlement is reached between the City of San Diego and the unions, a lawsuit will be filed on behalf of the true proponents, arguing that there never was a “meet and confer” requirement, since the initiative originated outside of city hall. But how much money is really at stake?

While some of those close to the case maintain that estimating how much it would cost to “make whole” the employees affected by Prop. B is getting “into the weeds,” these might be very big weeds, or they may be insignificant weeds. Nobody seems to have any idea if these weeds are microscopic cilia, or Sequoiadendron giganteum.

Why Do News Reports Estimate Such A Huge Potential Liability to the City of San Diego?

According to a report in the San Diego Union Tribune, “Estimates of the city’s costs have ranged from $20 million to $100 million based on a variety of factors, but a precise estimate isn’t possible without a comprehensive actuarial analysis.” That’s quite a range of estimates, with a huge number of huge variables affecting the calculation. But possibly the biggest question is why are these estimates of the city’s costs so high? Three simple examples illustrate why this is a compelling question.

In all cases, the same basic assumptions apply. On the three charts below, these assumptions are highlighted in yellow. It is assumed that the 4,000 employees affected by Prop. B were hired over the past six years in equal increments, i.e., 667 new hires per year. It is assumed that their average 401K eligible (or pension eligible) salary is $70,000 per year. It is also assumed that the amount the city contributed into a 401K on behalf of these employees was the same as the amount they would have contributed into the pension fund. More on that later. For these examples, that contribution is assumed to be nine percent.

As can be seen in the first case, if you assume that the annual earnings percent for the 401K fund is equal to the amount earned by the pension fund, seven percent per year, than the amount by which the pension fund balance would exceed the 401K fund balance is zero. The next two cases show the financial impact if these earnings percentages differ.

As can be seen in the second case, below, if the 401K fund outperforms the pension fund, by earning ten percent per year compared to a fixed seven percent, which the pension fund uses as its long-term average annual return for actuarial purposes, then the impact of Prop. B on the affected employees is actually positive, with the City of San Diego in a position of having overcompensated these employees by giving them a 401K plan.

In the third case, it is assumed the pension fund, earning seven percent per year, has outperformed the 401K fund, which is only assumed to have earned four percent per year. Since it is typically an option for 401K plan participants to select a low risk investment option, for many of the 401K participants this may have occurred. But as can be seen on the chart below, even if every one of the 4,000 new employees selected this option, the city’s liability would only total around $6.5 million.

Reviewing these three cases, it begs the question: Where are analysts coming up with a “$20 to $100 million” estimate of potential costs to the City of San Diego to move these 4,000 employees from a 401K plan onto a pension plan, or goose their 401K plan to make it equal to the value of the pension benefits they would have accrued by now? Certain things can be ruled out.

For example, you can rule out the possibility that the pension eligible salary estimate of $70,000 is too low. Because even if it were much higher, say $100,000 on average, that would only increase the amount of the liability by 30 percent. Similarly, you can rule out the timing of these hires as a critical variable, because even if you hired two-thirds of them in the first three years, instead of only half of them in the first three years, you would only increase the liability in Case Three (pension fund outperforming 410K) from $6.5 million to $8.0 million.

This leaves two critical variables that must account for the high estimates for the city’s potential liability, the annual earnings percent, or the percent of salary paid into either the pension fund or the 401K plan. The annual earnings percent can be ruled out immediately, because while the pension fund experiences earnings that vary widely from year to year, they rely on a long-term average rate-of-return that rarely changes. When these earnings assumptions do change, they change very little. It would be interesting to see how one might argue that the extraordinary returns the pension fund may have realized during 2017, when the stock market exploded, would have to be taken into account, since only the long-term average rate-of-return assumption is relevant to actuarial valuations and determining contribution amounts. And in any case, 401K plans also saw their values explode in 2017, probably cancelling out that effect. Which leaves only one variable for consideration – the percent paid into the pension fund. And this is THE critical variable.

Here you can come up with extraordinary numbers indeed. For example the City of San Diego currently pays 72 percent of pension eligible payroll (SD CAFR, page 192) into their pension fund. And if you plug that number into Case One, leaving every other assumption unchanged, the cost to “make whole” these 4,000 new hires affected by Prop. B is $719 million. Clearly, the entire substance of the “meet and confer” just mandated by the appellate court will focus on what this contribution should have been. And that’s worth a few more thoughts, because there’s a reason the contribution percentage is an outrageous 72 percent.

As reported two weeks ago, and as documented in the 2018 financial report for San Diego’s pension fund (SDCERS CAFR page 91), the city’s pension fund liabilities exceed its assets by $2.8 billion. This means that most of the payments the city is making to their pension fund is to catch up after falling so far behind. But should new employees have these catch up payments considered part of their pension benefit? This brings up interesting contradictions.

First of all, every new employee’s individual pension benefit is, theoretically, kept fully funded merely by making the so-called “normal contribution.” That is the amount that has to be invested in the pension fund in, for example, 2018, to earn interest over time so there will eventually be enough money to pay for the amount of future retirement benefit that was earned in 2018. How much are these “normal contributions” as a percent of payroll? Typically they aren’t very much, which is why the pension plans fell behind. They also fell behind, way behind, when pension benefits for City of San Diego employees were retroactively enhanced, back in the early 2000s. But is any of that the fault (or the benefit) of the new hires? Of course not.

There’s a lot of hypocrisy at work here. The higher the rate-of-return assumption, logically, the lower the normal contribution, since less money has to be contributed each year if you think that money is going to earn more in interest over time. And since public employees typically have to pay a share of their normal contribution via withholding, their unions have used their influence on the pension fund boards to keep that interest rate assumption higher than it might otherwise be. Another glaring, albeit abstruse hypocrisy is the fact that whenever watchdog organizations call attention to the lavish “total compensation” averages for public employees, amounts that are invariably elevated based on huge per employee “catch up” contributions to the pension funds, the union spokespeople counter with the argument that these catch up, or “unfunded contributions” shouldn’t be included. Fair enough. Then they should not be included in any settlement agreement, either.

Which brings us to the final question: What is a reasonable “normal contribution” to San Diego’s pension plan for the 4,000 mostly miscellaneous employees (police were exempt) affected by Prop. B? Is nine percent per year sufficient? And if so, then why are we talking about a settlement estimate in the tens of millions, instead of mere millions?

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

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