Pension initiative may empower local reforms

The leaders of two local pension reforms, former San Jose Mayor Chuck Reed and former San Diego Councilman Carl DeMaio, are working with a coalition on a statewide initiative to help local governments make cost-cutting pension reforms.

DeMaio called the proposal a “tool kit” for local officials to “fix the problems in a manner that reflects their community’s ability.” Reed said the proposal would enable “measures that people can do to make their own decisions in their own communities.”

During a break at the Reason Foundation’s third annual Pension Summit in Sacramento last week, the two men said they are “on the same page” and working with a coalition on the details of a proposed initiative for the November 2016 state ballot.

DeMaio said the state constitutional amendment would apply to the state, cities, counties, other local governments, and the University of California — all the “instrumentalities” of California government.

DeMaio
“I’m very big on making certain that when we move ahead on reform that it’s unassailable in the courts,” said DeMaio.

The California Public Employees Retirement System, which opposed pension cuts in three recent city bankruptcies, and the state Public Employment Relations, which tried to block the San Diego and San Jose reforms, would be covered by the initiative.

“They will have no ability but to implement faithfully the voter’s initiative,” De Maio said.

A case in point for local empowerment: A drive led by David Grau and others gathered enough signatures to place an initiative on the ballot last fall to switch new Ventura County employees to a 401(k)-style plan.

But a superior court judge removed the initiative from the ballot, ruling that nothing in the 1937 act covering 20 county pension systems allows them to “opt out or terminate” through a countywide initiative or a vote of the county supervisors.

Empowering the reform process is a big change from past statewide proposals for a specific plan, such as former Gov. Arnold Schwarzenegger’s briefly backed 401(k)-style plan in 2005 or Reed’s lower-cost pension option in 2013. None made the ballot.

“One size doesn’t fit all,” said De Maio.

Reed
Reed said a statewide initiative should be “simple and easy to explain.” He said a “big omnibus” pension proposal is difficult to explain and easy for opponents to mischaracterize.

A structural initiative is common ground for a Democrat (Reed) and a Republican (DeMaio) who led the campaigns for two very different local pension reforms overwhelmingly approved by voters in June 2012.

The San Diego initiative, overcoming a PERB lawsuit to keep it off the ballot, switched all new hires except police from pensions to 401(k)-style individual investment plans now common in the private sector.

In San Jose, the reform gave current workers the option, for pensions earned in the future, of paying more or receiving a lower pension. A superior court blocked the option. Reed said other parts of the initiative have saved $80 million to $100 million so far.

Another thing the two battle-tested reformers have in common is experience in laying the groundwork, moving in steps, and not trying to do everything at once, which seems to be the current strategy of the statewide initiative.

Before the big reform in 2012, Reed changed the San Jose pension boards, adding independence and expertise. He backed two successful ballot measures in 2010 limiting police and firefighter arbitration and allowing switches to lower pension plans.

DeMaio backed a ballot measure in 2006 requiring voter approval of pension increases, city council approval in 2008 of a “hybrid” combining a lower pension and 401(k)-style plan, and a 50-50 employer and employee split of pension costs in 2009.

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Dozens of government employees picketed the appearance of Reed and DeMaio at the Reason pension summit, an early warning from a coalition of public employee unions that a pension initiative may be opposed at every step, including the first one.

Schwarzenegger dropped his 401(k)-style plan in April 2005 after emotional union television ads contended death and disability would be eliminated for police and firefighters and their families, a claim the governor disputed.

After former Assemblyman Roger Niello, D-Sacramento, filed a pension reform initiative in 2011, the union coalition picketed a luxury auto dealership he partly owned, with one sign saying, “Pensions not Porsches.”

Major donors to a new initiative might face the same campaign tactics. The number of voter signatures needed to place a constitutional amendment on the ballot next year is 585,407, down sharply from 807,615 last year due to low voter turnout in November.

But several million dollars probably would be needed for a signature drive, particularly to screen for false signatures (opponents are sometimes accused of providing) and to gather a surplus as a safety cushion.

A news release from the union coalition, Californians for Retirement Security, said the new initiative is expected to be financed by “Texas billionaire John Arnold, a former Enron executive” who contributed to the Reed and Ventura County initiatives.

In San Diego, paid signature gatherers for the pension reform initiative posted at retail stores were often joined by “blockers,” union members and others who urged shoppers not to sign the petition.

Time and money may be needed for court battles after an initiative is filed. Reed dropped his initiative last year contending that Attorney General Kamala Harris gave the measure an “inaccurate and misleading” summary that made voter approval unlikely.

Dan Pellissier of California Pension Reform suspended a pension initiative drive in 2012 “after determining the attorney general’s false and misleading title and summary makes it nearly impossible to pass.”

Pension reform had strong support in a Public Policy Institute of California poll in January last year. Public pensions were “at least somewhat of a problem” for 85 percent of likely voters, and 73 percent supported switching new hires to 401(k)-style plans.

“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 said in a news release last month.

“It is clear that politicians in Sacramento are not serious about reforming unsustainable pension benefits for government employees, so voters must take the matter into their own hands and impose reform at the ballot box,” DeMaio said.

Dave Low, chairman of Californians for Retirement Security, had a different view in a news release issued by the union coalition last week.

“This new effort is likely to eliminate retirement security for millions of more Californians, worsen economic inequality in our state, and undermine the ability to attract and retain quality firefighters, teachers, police and other public servants,” Low said. “We are confident we can defeat it.”

Originally published by Calpensions.com

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

10 Reasons to Support Mileage-based User Fees

The debate over gas taxes or mileage-based user fees to fund road construction and maintenance is heating up. Proponents of gas tax increases argue now is the time to proceed because lower gasoline prices would lessen the blow on consumers and blunt political opposition. In California, a commission to study road usage charges and establish a pilot program for mileage charges has begun meeting. Assembly Speaker Toni Atkins has revealed her quest for non-specific fees to pay for road maintenance.

Fuel taxes have been used as the prime method to fund roads since Oregon implemented a gas tax in 1919. Because fuel taxes are charged per gallon, the tax has dropped proportionately with the advent of electric, hybrid, and fuel-efficient vehicles.

Taxpayer advocates have complained that money for the roads has been used for other purposes, especially during the recession. Meanwhile, some electric car users say the gas tax should be increased as if there is no cost to the roads from electric vehicles even though electric car manufacturers and purchasers have received subsidies from the state.

Perhaps surprising to some, the idea of a mileage user fee is supported by the small government, libertarian Reason Foundation and one its founders, transportation expert Robert Poole.

Along with Adrian Moore, Poole produced a report last year supporting mileage based user fees for highways. While the study expressly deals with federal highways, the discussion over mileage base fees could also apply to state roads.

Poole and Moore list ten reasons why supporting a mileage user fee is the best way to fund transportation. As Poole summarized those reasons:

  • Reason 1: Per-mile tolling is a direct, rather than indirect, user fee. Motorists would pay for the amount of service they received; they would pay providers directly for providing that service; and they would know exactly how much they were paying and what they were getting for it.
  • Reason 2: Per-mile tolling is a sustainable long-term funding source for long-term infrastructure, which does not depend on the energy source used to propel the vehicles. Its transparency should help rebuild trust in the highway funding system.
  • Reason 3: Per-mile tolls can be tailored to the cost of each road and bridge, rather than being averaged across all types of roads, from neighborhood streets to massive Interstates; this ensures adequate funding for major highway projects like Interstate reconstruction and modernization.
  • Reason 4: Per-mile tolling reflects greater fairness, since those who drive mostly on Interstates will pay higher rates than those who drive mostly on local streets.
  • Reason 5: If per-mile tolling is implemented as a true user fee, it will be self-limiting, dedicated solely to the purpose for which it was implemented (and enforceable via bond covenants with those who buy toll revenue bonds).
  • Reason 6: Per-mile tolling will guarantee proper ongoing maintenance of the tolled corridors, since bond-buyers and other investors legally require this as a condition of providing the funds.
  • Reason 7: Per-mile tolling also provides a ready source of funding for future improvements to the tolled corridor.
  • Reason 8: Toll financing means needed projects, such as reconstruction and widening, can be done when they are needed, and paid for over several decades as highway users enjoy the benefits of the improved facilities.
  • Reason 9: A per-mile tolling system using all-electronic tolling can easily implement variable pricing on urban expressways to reduce and manage traffic congestion.
  • Reason 10: Per-mile tolling would be the first big step toward replacing fuel taxes with mileage-based user fees—something that most of the transportation research and policy community has concluded should eventually happen.

Concluded Poole: As this policy brief makes clear, the fuel tax was never an “ideal user fee”. It should be replaced with a direct charge for highway services that is sustainable, fair, efficient and—for major highways and bridges—tailored to the capital and operating cost of individual facilities. This system should not create privacy concerns by enabling governments to track where and when people travel, and should give motorists choices in how to pay for their miles traveled.

Others have argued that money for the roads should come from state surpluses or from re-directing revenues dedicated to the high-speed rail project.

The debate over road maintenance costs has begun in earnest.

Originally published by Fox and Hounds Daily

Millennials and Pensions – Do They Know Public Pension Systems Need Reform?

After the midterm election results there has been a lot of talk about the young people who didn’t turn out to vote. There are around 8 million millennials, people ages 18-to-35, in California. And the conventional wisdom has been that since they helped elect President Obama twice, they’ll continue to help elect Democrats. But what about all that debt piling up on their backs?

The non-partisan Legislative Analyst’s Office predicts $340 billion in debt, deferred payments, pension costs and other liabilities will be on California’s balance sheets for years to come. Gov. Jerry Brown’s latest budget dedicates just over $10 billion to pay down this debt, barely making a dent in the problem.

The largest pension system in the state, the California Public Employee Retirement System has not reported their actuarial values of assets and liabilities for 2013 yet, but out of its four defined benefit plans, it has an unfunded liability of about $60.6 billion. In 2013, CalPERS only contributed 87.7 percent of their annual required contributions, not even making a full payment.

The states teachers’ retirement system, CalSTRS, had an unfunded liability of $70.5 billion in 2012 and $73.7 billion in 2013. In 2013, CalSTRS paid only 44.12 percent of their annual required contributions. Governor Brown worked with the Legislature to increase contributions — since they are controlled by statute — but his plan is to increase payments over the next five years and spread the costs to school districts and teachers. This will likely increase burdens on local public school budgets and impact their general fund spending priorities.

The University of California retirement system had an unfunded liability of $11.6 billion in 2012 and $13.8 billion in 2013. In 2013, they paid only 35.7 percent of their annual required contributions. This recently prompted the university regents to increase tuition on students to pay for a bloated bureaucracy and massive pension liabilities.

In total, taking the public statements of all the state systems at face value, the California defined benefit pension system had $142.7 billion in unfunded liabilities in 2012 (the figure for 2013 is not available as CalPERS has not provided the data). The aggregate funded ratio for the whole system in 2012 was 77 percent, compared to 90 percent in 2003. In 2013, the state only paid 65.6 percent of their aggregate annual required contributions.

It should be noted that if the state systems had simply paid their full contribution every year during 2003-2013, the cumulative missed contribution plus the associated returns is more than $41 billion. Instead, these missed payments have become compounding debt for which future generations will be responsible.

In 2012, Governor Brown signed a set of nominal pension reforms that capped some pension costs, though most of the changes only impacted new employees. However, CalPERS recently contravened both the spirit and the letter of the law and allowed 99 specialty pays to be counted as base pay for purposes of calculating pensions. This not only boosted the costs of the state pension fund, it also put many localities who contract with CalPERS in the unenviable position of accommodating higher costs on their employees and pensioners as these calculations put pressure on their bottom lines.

While state government retirees collect handsome guaranteed pensions, young taxpayers will foot the bill. This has particularly serious ramifications for the millennial generation, who are sinking under the weight of public debts and obligations made by people years before they were even born. Paying those debts leaves far less money to fund government services and amenities they’d like to focus on, like education, public safety, roads, water systems, parks, beaches and libraries.

More fundamental reform is needed to depoliticize pension benefits and policies, make pensions fair to government workers and accountable to taxpayers in a simple and transparent manner. Further, government employees deserve retirement accounts that they own, are portable and transferable, without the penalties associated with the current politician-controlled system. Reform also needs to eliminate unfunded liabilities on future generations.

Millennials won’t be the only losers if our elected officials do not have the courage to reform the state’s broken pension systems. The status quo may endanger our public institutions for generations to come. But reform won’t happen unless millennials get informed and engaged.

Lance Christensen directs the Pension Reform Project at Reason Foundation.