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 – […] Read More

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.

https://www.nationalreview.com/podcasts/national-reviews-radio-free-california-podcast/episode-113-never-mind-the-virus-heres-the-venice-beach-homeless-party/

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 […] Read More

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 […] Read More

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 […] Read More

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 […] Read More

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.

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

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

To see how this translates into the cost of individual pension […] Read More

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 […] Read More

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 […] Read More

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 […] Read More