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

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

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

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

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

Current Situation in Sonoma County

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

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

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

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

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

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

The Pension Increases May Have Been Illegal

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

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

1. Cap the Employer Contribution

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

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

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

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

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

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

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

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

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

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

4. Improve Pension Board Governance

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

5. Establish Greater Transparency

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

6. Mandate Public/Private Pay Equity

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

7. Return Spending Authority to Voters 

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

6. Eliminate Conflicts of Interest

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

7. Improve Public Oversight

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

This article was originally published by the California Policy Center

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

More Than 100 Local Governments Pursue Tax Hikes to Meet Soaring Pension Bills

TaxesNine months after a League of California Cities report warned that pension costs were increasingly unsustainable, more than 100 local governments in the Golden State are asking voters for tax hikes on Nov. 6 – which Bond Buyer says is nearly double the record of 56 set in November 2016.

The Nov. 6 measures are on top of 36 city and county taxes that went before voters in the June 2018 primary.

Historically, local hikes in sales and hotel taxes are approved at least 60 percent of the time in California. They’re generally linked to a specific local need – not growing labor costs. With CalPERS’ bills to local governments on track to double from 2015 to 2025, such claims would seem dubious this election year.

Nevertheless – aware that voters likely would be cool to the idea of raising taxes to pay for pensions far more generous than those in the private sector – even now, many local elected leaders depict the hikes as necessary to pay for public safety or for fixing potholes and longer library hours.

Local officials assert hikes are about adding services

In the lead-up to the June primary, virtually the entire city leadership ranks in Chula Vista campaigned for a half-cent sales tax hike on the grounds that it was crucial to adding dozens of badly needed police officers and firefighters.

The tactic worked as Chula Vistans backed the increase. But city leaders’ claims of a coming public-safety hiring spree were impossible to square with the numbers from the city’s budget office. In April, it warned of “bleak” times ahead for San Diego County’s second-largest city, including an annual structural deficit that could reach $26.6 million by 2023 – with surging pension bills mostly to blame.

In Santa Ana, where voters are being asked to raise sales taxes by 1.5 percentage points on Nov. 6, the campaign for the tax hike rarely mentions pension costs.

But once again, a city bureaucrat framed the tax hike in more candid fashion.

“We’re not immune to the labor cost increases that are occurring throughout the state of California and throughout the country. We need to be able to provide additional services to the community. The question before the voters is what level of services do they want from their government?” Jorge Garcia, a top aide in the Santa Ana city manager’s office, told Bond Buyer.

Santa Ana’s pension bill is expected to go from $45.1 million in 2017-2018 to $81.2 million by 2022-2023 – an 80 percent increase.

‘The cause of this point-blank is CalPERS’

But some politicians have no patience with misleading narratives. “The cause of this point-blank is CalPERS and our pension fund,” Lodi Councilwoman JoAnne Mounce said in June when the Lodi City Council decided to put a half-cent sales tax on the Nov. 6 ballot.

As the League of California Cities reported in January, “With local pension costs outstripping revenue growth, many cites face difficult choices that will be compounded in the next recession. Under current law, cities have two choices – attempt to increase revenue or reduce services.”

The severity of the pension crisis is illustrated by the fact that it is sharply worsening in a period in which there is often seemingly good news on the fiscal front.

State revenue is expected to go up in 2018-19 for a 10th straight year.

County assessors report a 6.5 percent increase in property taxes this year. That’s triple the rate of inflation and comes even with Proposition 13 preventing increases of more than 2 percent on homes, businesses and other properties that didn’t change hands.

In July, CalPERS announced a second straight year of above-average earnings on its investment portfolio, which rose in value to $357 billion.

This prompted a news release from a top state union leader disputing talk of CalPERS’ poor health.

“While it’s important not to focus on one-year returns, these returns continue the long-term trend of CalPERS performing above or near its long-term discount rates and once again defying the sky-is-falling predictions of system critics,” wrote Dave Low, executive director of the California School Employees Association.

But despite the good returns, as of July, CalPERS only had 71 percent of funds needed to pay for its long-term financial liabilities, the Sacramento Bee reported. That’s far below the 80 percent funding level that is considered the absolute minimum for a healthy pension system.

This article was originally published by CalWatchdog.com

How Government Unions Are Destroying California

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

California was once the state that everyone looked up to. With the best weather and natural resources, we were full of hope and innovation. We had the best public schools, a world class system of higher education, the best freeways, infrastructure to provide fresh water to our growing population, which also doubled as a source of clean energy through hydro-electric power, a business-friendly environment where entire industries grew in entertainment, aerospace and technology, making our economy virtually recession-proof.

Then in 1978, then-governor Jerry Brown signed an executive order that imposed union-shop collective bargaining on public agencies in California, and the rise of public-sector union power began.

Today, public-sector unions are the most powerful political force in our state. They control a majority of our state Legislature and might control a supermajority in November if a few swing districts fall their way. No politician, Democrat, Republican or Independent, acts without considering how it will affect the union agenda.

These government unions press 100 percent for a progressive agenda, and they consistently agitate for increased spending. In two areas, the quality of our public education system and the financial health of our cities and counties, the consequences of government union power have been catastrophic.

Public Schools

The teachers’ unions, usually a local affiliate of the California Teachers Association, control most of our school boards, leading to control of our public schools. It is more than a coincidence that our public schools rank near the bottom in every category among the 50 states.

As lobbyists for staff and teachers, who are paid to run our public schools, public sector unions fight to maintain the status quo. They protect incompetent teachers, they permit excellent teachers to be dismissed in layoffs, they actively oppose charter schools, they fight poor parents who try to employ Parent Trigger Laws, and they conduct an active campaign 24/7 against any form of school choice.

The financial power of teachers unions:

  • There are over 266,255 public school teachers in California.
  • Each pays at least $1,000 in union dues annually.
  • The CTA acknowledges spending up to 40 percent of those dues explicitly on politics. That is $106 million per year.
  • If the lawyers in Friedrichs are right — that all public union spending is political — the actual total is $266 million per year.
  • Unions for non-teacher staff also are active. There are 215,000 school staff employees who are members of the CSEA (California State Employees Association), who each pay approximately $500 annually in dues. If all of those dues are spent on politics, that adds $107 million more for political spending annually.
  • The total spent by public education unions alone is estimated to be $373 million per year – just in California.

Pensions

Police and firefighter unions do the most damage at the local level. They have attained unsustainable pensions, known as “3%@50”, meaning that a member of that bargaining unit is eligible at age 50 for a pension equivalent to 3% of his highest salary times their number of years of service. While the age of eligibility has been raised for new public safety employees entering the workforce, the vast majority of active police and firefighters still retain these “3%@50” benefits. So at age 50, a 20-year veteran can retire with a pension equivalent to 60% of their highest year’s salary, which can be manipulated through spiking, and a 30-year veteran is eligible for 90% of his or her highest salary.

These pension requirements are held under the “California Rule” to be irreversible. In other words, once they have been adopted, democracy is incapable of turning off the spigot. With the spigot running constantly, communities go bankrupt. First, they cut other services. Then they increase taxes. Then they refuse to pay bondholders, so no one will invest again.

Current unfunded liabilities in California:

At CalPERS: $93.5 billion (ref. page 120, “Funding Progress,” CalPERS 6-30-2015 financial report).

At CalSTRS: $72.7 billion (ref. page 118, “Funding Progress,” CalSTRS 6-30-2015 financial report).

Local Unfunded Liabilities add considerably to this total, since CalPERS, with assets of $301 billion, and CalSTRS, with assets of $158 billion, only constitute 62 percent of California’s $752 billion in state and local pension fund assets. If all of these systems in aggregate were 75 percent funded, which is probably a best case estimate given the poor stock market performance since the official numbers were released, the total unfunded pension liabilities for California’s state and local government workers would be $256 billion.

And $256 billion in unfunded liabilities, a staggering amount, still understates the problem for two reasons: First, these pension funds may not succeed in securing a 7.5 percent average annual return in the coming decades. If not, then they will not earn enough interest to prevent their funding ratios from getting even worse. Also, this doesn’t take into account “OPEB,” or “other post employment benefits,” primarily health insurance. The unfunded OPEB liability just for Los Angeles County is officially recognized at over $30 billion.

A realistic estimate of the total unfunded liabilities for retirement obligations to state and local workers in California is easily in excess of $500 billion. These benefits, which are financially unsustainable and far more generous than the taxpayer funded benefits available to ordinary private sector workers, were forced upon local and state elected officials through the unchecked p0wer of government unions.

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Bob Loewen is the chairman of the California Policy Center.

Pension Reform Duo Sets Target on 2016

The dynamic duo of California pension reform are teaming up in 2016.

Former San Diego City Councilman Carl DeMaio and former San Jose Mayor Chuck Reed, both of whom successfully passed pension reform in their respective cities during their time in office, announced Wednesday their plans to work together on a statewide pension reform measure for the 2016 ballot. Reformers hope to take advantage of easier ballot measure qualifying rules that require the lowest number of signatures in decades.

“Without serious pension reform in California, we face a future of cuts to important services and more tax revenues diverted to unsustainable pension payments,” Reed, a Democrat, said in a press release announcing the effort.

The group points to independent numbers which show the state’s pension liabilities have increased 3,000 percent in a decade. Last November, then-State Controller John Chiang (now state treasurer) pegged the state’s total unfunded pension liability from 130 public pension systems at $198 billion, a dramatic increase from just $6.3 billion in 2003.

Redux of San Diego pension reform fight

Last year, while DeMaio was preoccupied with his campaign for Congress against Rep. Scott Peters, Reed unsuccessfully tried to qualify a similar statewide pension reform measure. However, that effort stalled during the qualification stage over a dispute with Attorney General Kamala Harris over wording for the title and summary. This time around, he’ll benefit from DeMaio’s experience as a grizzled veteran of ballot-measure shenanigans.

“We have done a lot of legal work to make sure this initiative is bulletproof,” DeMaio, a Republican, told Reuters. “Because the unions are going to throw the kitchen sink at us.”

DeMaio knows full well the extent to which organized labor will go to thwart pension reform. In 2011, he led the effort to qualify San Diego’s Comprehensive Pension Reform measure for the 2012 ballot. The CPR measure forced all new employees into a 401(k)-style plan and capped contribution levels for current employees.

Labor organizers deployed activists to block signature gatherers and frighten potential signatories with misleading claims that signing would put them at risk of identity theft. At the time, longtime San Diego political operative T.J. Zane, who now serves asexecutive director of the San Diego Republican Party, described the San Diego-Imperial Counties Labor Council’s signature-blocking efforts as “unprecedented in its scope and ferocity.”

After the measure qualified for the ballot, San Diego voters overwhelmingly passed Proposition B in June 2012 by a two-to-one margin.

Chuck Reed: Pension reform in San Jose

At the same time DeMaio was reforming pensions in San Diego, Reed, then-mayor of San Jose, was leading a similar effort in Silicon Valley. Reed’s Measure B passed by an even larger margin: 70 percent to 30 percent. The Wall Street Journal praised Reed’s efforts and described him as “that rare creature, a Democrat in a liberal bastion who is nonetheless focused on salvaging government finances while inviting the wrath of public unions and their political allies.”

Ultimately, courts effectively gutted the most important provisions of Reed’s measure.

“San Jose’s was the most far-reaching, in that it challenged the core obstacle to serious pension reform in California,” Steven Greenhut, one of the state’s leading experts on pension reform, wrote at City Journal. “But a Santa Clara County Superior Court judge gutted the reform measure, saying San Jose could cut its employees’ pay, but not their pension benefits.”

Even after the negative court rulings, Reed’s successor has begun to further distance the city from Measure B in a bid to make “peace in the city’s pension wars.”

Broad-based coalition for reform

The proposed statewide pension measure for 2016 already has received some harsh criticism as the work of two washed-up politicians.

“2 out-of-work pols @carldemaio & Chuck Reed plan to attack @CalPERS, retirees with #pension measure in 2016,” tweeted Democratic political consultant Steven Maviglio. CalPERS is the California Public Employees’ Retirement System, America’s largest public-pension system.

In anticipation of push-back from local governments, state pension funds and organized labor, Reed and DeMaio have made it a point to build a broad-based coalition that sets aside their different political parties.  The coalition also will include David Grau of the Ventura County Taxpayers Association. Last year, after collecting thousands of signatures, Ventura County’s pension reform proposal was removed from the ballot, according to CalPensions.com.

“CalPERS has dedicated itself to preserving the status quo and making it difficult for anybody to reform pensions,” Reed recently said of the effort. “This is one way to take on CalPERS, and yes, CalPERS will push back.”

It’s unclear whether the proposed ballot measure will be drafted as a statute, which requires 365,880 valid signatures, or a constitutional amendment, which requires 585,407 valid signatures.

Originally published on CalWatchdog.com

San Francisco’s Pension Crisis

A day before Halloween, glorious San Francisco weather brought hundreds of participants to “Pet Pride Day” at Golden Gate Park. As drums pounded and electrified folk tunes blared, children and parents, many in costume, paraded before a reviewing stand with their pets: dogs, cats, birds, a prize-winning hawk, chinchillas, rats, snakes, and even a puppy perched on a pony. Between a tent providing low-cost rabies injections and another offering “doggie makeovers” stood Jeff Adachi, the city’s public defender, shaking hands with passersby. As a lone campaign aide waved a bright blue ADACHI FOR MAYOR sign behind him, the candidate, a long shot in a crowded field of 16 mayoral aspirants, asked voters what was on their minds.

While several mentioned the push to let dogs run off-leash in more city parks—San Francisco supposedly has more dogs than children—others peppered Adachi with questions about bread-and-butter issues. Why was it was so tough to turn a property into condos? Why were the city’s schools so bad? Why were the ranks of the homeless growing? What was the environmental impact of lining parks’ soccer fields with ground-up tires? Why did the police ignore open-air drug dealing in the Tenderloin? Did Adachi support the Central Subway Transit Project extending a branch of the city’s subway to Chinatown—a boondoggle whose cost has spiraled out of control?

What almost no one mentioned, however, was the issue that prompted Adachi to run for mayor in the first place: pension reform. Adachi’s demand that city employees start paying more into their own pensions has not only defined him as a public figure but made him anathema to San Francisco’s political establishment—that is, the mayor, the Board of Supervisors (San Francisco is both a city and a county, so its board serves as city council), and the powerful public-sector unions.

“Pension reform is a tough issue,” Adachi tells me as we travel to the site of his next campaign appearance, a farmer’s market. “Unlike many other campaign issues, it’s hard to explain. It’s not ‘Save the Redwoods.’” Still, Adachi is largely responsible for having turned the issue of pension reform from a conservative talking point into a mainstream cause in liberal San Francisco. He is running as a “pragmatic progressive”—in fact, one of the most liberal candidates in the race. He argues that the underfunded pension obligations undertaken by irresponsible mayors risk not only bankrupting the city but also “crowding out” essential city services upon which middle-class citizens depend.

In San Francisco, a popular vacation destination, signs of that “crowding out” abound. The streets are filled with potholes that the city can’t afford to fix. Though the city earns much of its income from tourism, since 2010 it has imposed stiff fines for parking on the street during holidays, much to the concern of local businesses. For the second summer in a row, San Francisco has been unable to offer summer school to some 10,000 public school students because of a $1 million budget cut in the program. School budget cuts cause particular concern, since the city’s poorly rated school system is often cited as a major cause (along with a stagnant economy and high unemployment) of the flight of middle-class residents with children. Last year, the city’s parks budget was cut in half, while spending on services for seniors and those with AIDS was reduced by 30 percent. San Francisco taxpayers now spend one out of every six tax dollars on city employee benefits, Adachi says.

Though Adachi has been the city’s public defender for nine years, his devotion to pension reform makes him feel like a “consummate outsider.” “I’m the guy in the sci-fi movie who keeps yelling, ‘They’re coming, they’re coming,’” he jokes. But Adachi’s warnings about the city’s precarious finances and the “unsustainable” costs of unfunded pension liabilities have helped change the nature of the debate, analysts say. In late October, Governor Jerry Brown unveiled a 12-point proposal to limit the size of future pension liabilities. And thanks to Adachi, two competing pension-reform proposals will appear on Tuesday’s ballot: the one he drafted, Proposition D, which would save the city $1.7 billion in the next decade, he says; and Proposition C, a compromise measure supported by the current mayor, Ed Lee, the public-employee unions, and the rest of the city establishment. That might save as much as $1.4 billion over the same period, pension experts say.

“Win or lose,” says Corey D. Cook, an associate professor of political science at the University of San Francisco, “as a progressive candidate, Adachi can take credit for helping shift the ground of this debate. Pension reform is now very much in the air.” According to Cook’s latest polling for both the mayoral contest and the dueling pension-reform proposals, the odds seem to favor Lee, the first Chinese-American mayor in the history of a city whose population is about 30 percent Chinese. Widely regarded as a consensus candidate, Lee was appointed by then-mayor Gavin Newsom after he became California’s lieutenant governor ten months ago. Lee promised not to run for a new term, but he changed his mind and (having decided not to accept public money) has raised far more money for his campaign than any of the other candidates.

For this year’s election, San Francisco is inaugurating a complicated voting system that allows voters to rank their top three choices among the candidates. Oakland used this “ranked-choice” or “instant-runoff” system last year and got puzzling results, with the eventual victor, Jean Quan, not receiving the most first-place votes in the initial tally. In a column in the San Francisco Chronicle, kingmaker and former mayor Willie Brown (who, like most of the city’s political establishment, has endorsed Lee) says that the system has “thrown the whole town for a loop.” With 16 candidates “clamoring for attention” in a “town so disconnected,” Brown bets that half of the city’s 450,000 registered voters “give up in frustration.”

By any standard, Adachi, 52, is an unusual candidate. The great-grandson of Japanese immigrants who came to San Francisco in 1890, he was raised in Sacramento, where he attended public school. His parents and grandparents were interned for four years during World War II by the U.S. government at a camp in Arkansas. Given 24 hours to pack and leave their homes, his parents were not bitter, Adachi told me: “They never talked about it until I began asking questions.” That injustice undoubtedly helped shape his determination to defend the poor and vulnerable. In 2002, he ran for public defender—the San Francisco PD is the only elected one in California—against the city’s powerful political machine. Though outspent four to one, he scored an upset victory. But that wasn’t enough for a man who boasts about what the San Francisco Chronicle calls his “masochistic work ethic.” Adachi’s own friends describe him in similar terms: “relentless,” “super-intense,” a “micromanager,” a “dog with a bone.” Adachi lives comfortably, but by San Francisco standards not lavishly, in a $1.5 million house in upscale St. Francis Wood. His wife, Mutsuko, is a stay-at-home mom; their 11-year-old daughter attends private school. Somehow, Adachi found time to write two novels, and he lifts weights at 5 every morning.

Lean and fit, Adachi seems perpetually in motion. His foot never stops tapping as he tells me how pension reform became his cause. His interest began in 2009, when a civil grand jury report concluded that the cost to taxpayers of city-worker pensions would grow from $175 million to $700 million by 2018, crowding out welfare and other services. (That’s not even counting the unfunded pension liability—“bureaucratese for ‘the debt we’ll saddle our children with,’” Adachi says—which currently exceeds $3 billion.) More than a third of San Francisco’s nearly 30,000 city employees earned over $100,000, the report said, but many made little or no contribution toward their pensions.

Adachi succeeded in getting a pension-reform measure on the November 2010 ballot. Opposed furiously by most of the city’s unions, Proposition B went down to defeat, 57 percent to 43 percent. Adachi refused to give up. He revised the measure (weakening some key provisions, pension reformers complain), organized another petition drive, and put his watered-down Prop. D on this year’s ballot. Like the ill-fated Prop. B, the new measure would postpone the impending pension crunch by stopping pension “spiking,” limiting retirement benefits to 75 percent of salaries, and requiring city employees to contribute a greater percentage of their salaries to their pensions. Workers earning less than $50,000 would not be required to pay more than 7.5 percent, while those making over $200,000 could contribute as much as 16 percent in years when the pension fund was earning less than anticipated. Adachi’s plan would also prohibit pensions from topping $140,000 annually. (Former police chief Heather Fong, who retired two years ago at 53, got an annual pension of $264,000.)

To counter Adachi’s new plan, Mayor Lee and his union allies draftedProposition C, which, like Adachi’s plan, would require city employees to contribute 7.5 percent of their salaries to their pensions. And like Proposition D, it would also require them to pay more if the fund was performing poorly—but only up to 13.5 percent of their salaries. Steven Greenhut, an expert on the pension crisis who writes a weekly column in the San Francisco Examiner (and who contributes regularly to City Journal), calls Prop C. a “half-measure . . . designed mainly to take votes from Adachi’s real measure.” To Adachi’s dismay, Lee not only gave the police and firefighters’ unions a 4 percent compensation hike to offset the 3 percent increase in the pension contributions that they would have to make if Prop. C passed; the mayor also cut a deal with those unions to exempt them from Adachi’s Prop. D in case it passed. (Lee declined to be interviewed.) According to figures from the city controller’s office, uniformed police earned average annual wages and benefits last year of $166,607 per officer. Firefighters fared even better, earning an average total compensation of $178,732.

Adding insult to injury, the city’s controller, a Lee ally, skewed what was supposed to be an independent assessment of the rival measures to minimize the expected savings from Adachi’s Prop. D. Greenhut says that the controller used a ten-year timeframe to analyze the projected savings from Prop. D, rather than the customary 25-year timeframe, though the savings would increase dramatically in the later years because the reforms would apply mainly to new hires. It was such shenanigans that prompted Adachi to enter the race for mayor, which he did only hours before the filing deadline in August. “He had no money, no staff, no organization, nothing,” says Ryan Chan, Adachi’s 23-year-old campaign manager, who volunteered to help and wound up managing the fly-by-night operation. Adachi is thick-skinned: accused of being anti-union, a closet Tea Party Republican, and a Republican in progressive’s clothing, he ignores critics and plows ahead.

Still, the pension-reform proposals have thoughtful critics. Max Neiman, senior resident scholar at the Institute for Government Studies at UC Berkeley, recently suggested that the legality of both Propositions C and D would be challenged in court if passed. Both measures, argued Daniel Borenstein, a columnist for the Contra Costa Times, would place a disproportionate burden on the majority of city workers. These rank-and-file employees, he pointed out, would essentially subsidize the much better organized police and firefighters, who have far more lucrative plans and constitute 11,000 of the city’s 34,000 public-service employees. “There’s no reason that general workers, represented by a less-influential union, should have their rates dragged up by the spiraling cost of generous police and firefighter pensions,” Borensteinwrote. As Heather Knight observed in the Chronicle, the average pension for a retiree from the fire department was $108,552; from the police department, $95,016; from all other city agencies, $41,136.

Corey Cook thinks that prospects are poor for Adachi’s measure. “Mayor Lee’s proposition really took the air of the drive for deeper reform,” he says. “And one must ask whether having a consensus among the mayor, the unions, and the Board of Supervisors on the need for some reform isn’t better than the additional savings that Jeff Adachi’s measure would bring.” But Melissa Griffin, a reporter for theSan Francisco Examiner who has covered the mayoral race and the pension contest and anchored three of the mayoral debates, sees little indication that the gravity of the pension crisis has sunk in with city voters. Questions at the debates focused mostly on the shortage of affordable middle-class housing and the flight of middle-income families from San Francisco. “Folks appear to be more worried about their own ability to stay in San Francisco and less about services for the indigent,” Griffin wrote in the Examiner. “The theme this year is ‘Charity Begins at Home.’”

David Crane, a former adviser to Governor Arnold Schwarzenegger who has pressed for pension reform at the state level, thinks that neither Adachi’s nor Lee’s proposition goes far enough. “Neither revision covers existing public-sector workers, just future employees,” he says. Crane thinks that the municipal-pension crisis is far more severe than Americans realize: “Cities are broke; they have no cushion.” And when those cities are forced to make good on their pension promises, “services will cease and people will move. For cities, this is the Number One challenge.”

(Judith Miller is a contributing editor of City Journal, an adjunct fellow at the Manhattan Institute, and a FOX News contributor. This article was first published in City Journal.)

Pension initiative faces two tests: funding, courts

A pension reform group that filed two versions of an initiative yesterday faces two tests: raising $3 million to place the proposal on the November ballot next year, and a court battle over making current workers pay more for their pensions if the measure passes.

As public pension costs have risen while government services are being cut in a weak economy, the reform group has filed initiatives in the past, which failed to attract funding even though some polls have shown 70 percent support for pension reform.

This time the group, now led by Dan Pellissier, raised $250,000 for polling and legal experts before filing initiatives designed to withstand court challenges and quickly cut government pension costs, particularly important for some struggling cities.

He said the next step is to raise about $3 million, enough to pay for a drive to gather 1.3 million voter signatures and provide a cushion well above the minimum needed to place a state constitutional amendment on the ballot.

“Not today,” Pellissier said, when asked at a news conference if the group had the money. “But we have some commitments for future funding, and we have what we think is a good path in order to raise that amount of money.”

He said George Shultz, a former U.S. secretary of state in the Reagan administration, is a part of the campaign team and “has a tremendous amount of influence with major donors.”

In addition, Mike Genest, a finance director for former Republican Gov. Arnold Schwarzenegger, said he was “happy to be part of what’s become a pretty large coalition of people who have been trying for quite some time to make some progress on this issue.”

Aaron McLear, Schwarzenegger’s former press secretary, told the news conference fundraising should be aided by having agreement among reformers, who have not always been “on the same page,” and a firm proposal to show potential donors.

But some separation quickly emerged when Marcia Fritz, president of the California Foundation for Fiscal Responsibility, told the Sacramento Bee she was “not a part of this,” even though she was mentioned at the news conference.

The California Pension Reform group led by Pellissier is a spin-off from the foundation founded by the late former Assemblyman Keith Richman, R-Northridge. Pellissier, a former Richman aide, said the initiative is a Richman “legacy.”

Fritz article in the Los Angeles Times yesterday urged legislators to find “common ground” for taxpayers and public employees “within the framework” of a pension reform proposed by Gov. Brown, some parts requiring voter approval.

Pellissier and Genest said the governor’s plan needs to be “more aggressive.” They were skeptical that Democratic legislative legislators and their union allies will agree to the governor’s plan, much less add more cuts in employer costs.

“It is possible, very unlikely, that the Legislature could pass something that would be strong enough to have our team decide that we would not move ahead with our proposal,” said Pellissier.

Brown’s proposal is designed to avoid a court challenge on a key issue: The widely held view that court rulings mean pensions promised state and local government employees on the date of hire can’t be cut without a new benefit of equal value.

The reform group’s plan is designed to withstand a court challenge because current workers could be required to “pay more for their same benefits and for a share of unfunded liabilities.”

In the reform group’s initiatives a curb on “spiking” (boosting pensions by cashing out unused sick leave, vacation time and other things to increase final pay) covers current workers, not just new hires as in the governor’s proposal.

Fritz’s article mentions a curb of one “abuse” that is in the governor’s plan but not in the reform’s group plan: a limit on “double-dipping” or the collection of a government pension and paycheck.

“We think there are some issues with folks who retire and their life circumstances change,” Pellissier said. “Their spouse dies and they have obligations they have to meet. We weren’t really comfortable weighing in heavily on double-dipping.”

Like the governor’s plan, the reform group’s initiatives have curbs on other abuses: retroactive benefit increases, the purchase of service credits or “air time” to boost pensions, and contribution “holidays” or reductions for employers and employees.

But the big difference is that the governor’s plan calls for “equal sharing” by employers and employees of the “normal” pension costs, what actuaries say is needed to pay for the current year.

That does not include the debt or “unfunded liability” that soared after the stock market crash and a weak economy dropped investment earnings well below the typical pension fund forecast, 7.75 percent, which critics say is too optimistic.

The governor’s budget last May estimated that the unfunded liability for the three state pension funds (CalPERS, CalSTRS and UC Retirement) was $121 billion over the next 30 years, not counting an additional $60 billion for retiree health.

A Stanford graduate student report last year, using a lower earning forecast of 4.1 percent, estimated that the unfunded liability for the three state retirement systems is about $500 billion.

The reform group’s initiatives address the unfunded liability by requiring equal “normal” cost contributions for employer and employees, except when the funding level of the system drops below 80 percent using federal private-sector pension standards.

Then government contributions to the normal cost would be limited to 6 percent of pay for most workers and 9 percent for police and firefighters. Employees would pick up the remainder of the normal cost until funding returns to 80 percent, potentially a significant increase over time.

Pellissier said employee contributions would be limited to an increase of 3 percent of pay a year. Current employees would have the option of switching to a lower-cost plan for new hires.

The original version of the initiative gives new hires a 401(k)-style plan. The alternative version would give new hires a “hybrid” similar to the governor’s proposal that combines a lower pension with a 401(k)-style plan and Social Security, if available.

Many public pension systems are below 80 percent funding now using government standards. Pellissier estimated that switching to private-sector standards could drop funding an additional 10 to 15 percent.

The reform group expects to pick one version of the initiative after they receive titles and summaries and an analysis by the Legislative Analyst, probably a week before Christmas.

Pellissier said the goal is to begin circulating petitions for signatures in early January. He said the signatures should be submitted by April 20 to ensure qualification for the November ballot.

(Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. This story was originally posted on Calpensions.)

San Francisco pension debate puts politics ahead of policy

From the SJ Mercury:

As San Francisco voters head toward a Tuesday decision on dueling pension reform measures, we see what happens when politics obfuscates policy.

Even the most thoughtful residents will have a hard time evaluating the measures and appreciating the magnitude of the problem because politicians, union leaders and the media have, for the most part, mistakenly turned this into partisan warfare rather than examining the sobering numbers and the details of the proposed plans.

As a result, for example, most have overlooked how both plans — Measure C led by Mayor Ed Lee and Measure D spearheaded by Public Defender Jeff Adachi — would place a disproportionate burden on the majority of city workers, who would be essentially subsidizing police and firefighters.

(Read Full Article)

The Union’s Occupation

Until recently, it’s been tough to pinpoint precisely where Occupy Los Angeles ends and public-employee union activism begins. For weeks, a large contingent of teachers’ union activists has mingled among the several hundred progressive malcontents encamped on the north lawn of Los Angeles City Hall. But the emergence of a new movement—“Occupy LAUSD”—will just about obliterate any distinctions between the two groups. Last week, 500 Los Angeles Unified School District teachers marched about a mile to demonstrate in front of their district’s headquarters. A few dozen hard-core activists joined them, camping out for five days before ending the “occupation” Saturday with a large union pep rally.

Truth is, parents and taxpayers—to say nothing of thousands of hard-working teachers—have plenty to gripe about. L.A. Unified is a picture of dysfunction, bureaucratic bloat, and massive waste. The second-largest school district in the United States, LAUSD has a $7 billion budget and enrolls (“educates” isn’t quite the word) around 600,000 students. The district is home to both the glistening, half-billion-dollar Robert F. Kennedy Community Schools complex, opened last year on the former site of the Ambassador Hotel (where Kennedy was assassinated in 1968), and Locke High School, one of the worst-performing high schools in California. Only 55 percent of LAUSD students graduate from high school after four years. The district is hindered, in large part, by its 350-page contract with United Teachers Los Angeles (UTLA), which enshrines seniority over quality and leaves younger, tatealented teachers most vulnerable to pink slips. Yet as Los Angeles education blogger Anthony Krinsky notes, despite three consecutive years of layoffs, “we have more teachers per student than we had 5 years ago, 10 years ago, 15 years ago, and 20 years ago.” For all of the manpower, student performance remains stagnant.

But the demonstrations at 4th Street and South Beaudry Avenue had little to do with those concerns. For Occupy LAUSD, all of the district’s problems could be solved with more money, more teachers, and less student testing. It’s no coincidence that the Occupy leaders were all top officials with the UTLA, which represents 40,000 LAUSD teachers, or that the marches and rallies preceded preliminary contract negotiations that had been scheduled for this week. What’s more, Occupy LAUSD got backing from the California Teachers Association (CTA), the California Federation of Teachers, and dozens of local teachers’ unions around the state. The CTA is the most powerful lobbying organization in Sacramento; it has spent more than $210 million in the past decade on lobbying, supporting liberal causes and Democratic candidates almost exclusively. The CTA’s state council recently authorized expending $8 million on next year’s elections, a number that’s likely to rise. (To be fair, however, new CTA president Dean Vogel wasn’t lying on Saturday when he counted himself among “the 99 percent.” With an annual salary of just under $290,000, Vogel is in merely the top 4 percent of American earners.)

Unlike the Occupy Wall Street protesters in Lower Manhattan, whose consensus-driven committees have offered an inchoate list of complaints and a hodgepodge of utopian remedies, Occupy LAUSD has issued demands easy to divine. They are precisely the same demands that UTLA has made for months, with derisive references to the rapacious “1 percent” tacked on to align the union’s public-relations campaign with the Occupy zeitgeist. Foremost among the demands is the union’s insistence that district officials use a $55 million budget surplus to rehire up to 1,200 teachers laid off in the past year. One teachers’ union activist—writing for the Socialist Worker, no less—summarized the larger goals of the occupation: “Tax the 1 percent to fully fund our schools; keep our schools public—by the 99 percent, for the 99 percent; and democratic community-based schools, not corporate Wall Street reform.”

District officials reacted to the union-led occupation with frustration and dismay. Superintendent John Deasy, a reliable liberal, professed his bewilderment at the protests in front of his office. “Occupy LAUSD is both misinformed and contrary to the spirit and intent of Occupy Wall Street, Occupy L.A., and the other laudable movements for economic justice that have sprung up around the country and the world over the last month,” Deasy said in a statement. “It is an insult for these protesters to equate a school district that during the past four years has experienced a $2 billion loss of dollars in state and federal funding, with policies and institutions that have systematically hurt the poor and middle class.” Deasy’s befuddlement may have been confounded further by Occupy LAUSD’s response. “It is hard for him to understand what the 99 percent movement is really about because he represents the worst of the 1 percent,” said Jose Lara, a board member of UTLA and chief spokesman for Occupy LAUSD.

For people like Lara, the “1 percent” consists of people such as Microsoft’s Bill Gates and Los Angeles real-estate mogul Eli Broad, both of whom support charter schools and contribute heavily to education-reform efforts. References to “keeping schools public” and rejecting “corporate Wall Street reform” are code for long-standing union opposition to school choice and suspicion of private philanthropy. Gates and Broad come up again and again in union talking points. “We reject the premise that the 1 percent billionaires—Bill Gates and Eli Broad—should be allowed to seize our public schools by buying seats on school boards that dismantle our schools, lay off thousands of teachers, and then award dozens of public schools to private charters, while denying teachers collective bargaining rights,” reads an October 22 UTLA press release outlining the themes of Saturday’s rally.

Beyond union rabble-rousing ahead of what’s sure to be a contentious contract negotiation, Occupy LAUSD highlights a stark and widening disagreement about what American public education should be. With their billion-dollar endowments, Gates and Broad are powerful players among an ideologically diverse coalition of reformers that includes conservative Republicans, Milton Friedman libertarians, and urban Democrats. But Gates and Broad are hardly the prime movers or the last word in education reform—a point that UTLA and its left-wing union allies refuse to concede. In general, reformers hold that public education should teach students how to be autonomous, knowledgeable, and self-governing citizens. The how and the wherematter less than the what. So reformers advocate empowering parents with a range of options, whether they’re charters or “virtual schools” or opportunity scholarships aimed primarily (but not exclusively) at lower-income families. Traditional public schools should compete with alternative models. Excellent teachers should be rewarded with higher pay. Bad teachers should be eased out of the system.

When Deasy took office this summer, he laid out a handful of proposed contract changes, including more school-site flexibility with hiring (thus curtailing the “dance of the lemons”), overhauling tenure rules, and experimenting with merit pay. Occupy LAUSD opposes every one of those ideas. For the occupiers, public education means tax-funded schools operated by union-organized administrators and teachers with little testing and accountability and no choice. Seen in that light, Occupy LAUSD is less radical than reactionary.

(Ben Boychuk is an associate editor of City Journal, where this article first appeared.)

Why You Should Care about Pension Reform

The current pension reform debate – with proposals from the governor and now from a team of Republicans via ballot initiative – is drawing considerable media attention.

It’s hard to understand why.

The debate has almost nothing to do with the broader public.

The pension changes being talked about won’t change all that much or save much money for other public programs. And the plans being offered don’t respond to the real problem in matters of retirement savings.

The problem? That the number of Americans participating in retirement plans is on the decline.

You read that right. I just finished reading a chilling new report from Michael Calabrese of the New America Foundation (full disclosure: I’m a New America fellow). His conclusion:  “the majority of American adults do not participate in any retirement saving plan—whether pension or 401(k) or Individual Retirement Account (IRA). Participation in employer-sponsored plans peaked in the late 1970s and appears to be at its lowest level in more than 30 years.”

In that context, any debate about public pensions that doesn’t talk about the lack of retirement savings is missing the point. The question ought to be how do we increase retirement security for the broad majority of Americans – by getting them to save and participate in retirement plans. Because that’s the real unfunded obligation – those who don’t have retirement savings will have to rely more on Social Security or other forms of public assistance.

So if you want meaningful pension reform (meaningful enough for the public to care), a proposal must focus on ways to reshape public employee pensions not merely to save money but to provide some sort of basis for greater retirement savings by people who don’t work for the government.

And the California reforms on the table don’t meet either test. Both Brown’s plan and the initiatives filed this week would set up two-tiered pension systems – different for current and new employees. The savings in such systems are likely illusory because two-tiered pension systems are unstable (they end up becoming one tier again in good times) and because savings from new employees are likely to be minimal (especially in an era when there aren’t many new employees).

And yes, both Brown’s plan and the initiatives demand more in contributions from current employees. That’s good – but it’s not enough. If current employees are going to be asked to take hits – and they should be asked, and pressured to do so – they should be asked to move into defined benefit programs that are so safe and sustainable that other Californians and their employers outside the public sector could participate in them.

That kind of program would require not only more in contributions from employees (and from employers) but also much more conservative assumptions about investment returns.

That would mean less in pensions for public workers – but much, much more in retirement, and in retirement security for the rest of us.

For now, however, the pension reform debate remains one of those Sacramento conversations that has almost nothing to do with the lives of Californians.

(Joe Mathews is a Journalist and Irvine senior fellow at the New America Foundation, Fellow at the Center for Social Cohesion at Arizona State University and co-author of California Crackup: How Reform Broke the Golden State and How We Can Fix It (UC Press, 2010). This article was first published in Fox & Hounds.)