California County News

LAO Raises Concerns in Analysis of Initiative Proposals Reforming Pensions; Legal Questions?

Back in November, the organization California Pension Reform filed two controversial initiative proposals with the goal of qualifying one for the ballot. Both are currently pending before they enter circulation for signature-gathering and their aim is to implement major reforms, such as requiring employees to increase their pension contributions, termination of abuses such as career ending spiking and retroactive benefit increases, and greater transparency. The Bee points out that “One measure would put future employees in hundreds of state and local pension funds into 401(k)-style plans instead of the current defined-benefit retirements guaranteed by employers. The other proposal puts future workers into "hybrid" plans blending the two types of accounts.” You can read fuller details about both proposals here.

The LAO recently released its analysis of both measures and noted that either one is likely to result in a legal battle if it’s passed by voters because of alterations that would be imposed on pension guarantees to current workers. The LAO’s analysis is somewhat muddled in that it points out clear effects are difficult to determine, but the analysis does argue that either initiative could potentially increase costs and force local governments to pay higher salaries to stay competitive. The LAO states the following about costs and investment returns:

“Under this measure, future employees’ hybrid plans would contain defined benefit pension components that are considerably smaller than those offered to current employees. Total contributions to pension systems for future employees’ defined benefits, therefore, will be much smaller than the total current contributions related to current and past employees. Defined benefit pension plans would experience a reduction in their incoming cash flow that would become more substantial over the coming few decades, as future employees grow to a larger share of the public workforce. These reductions in cash flow could cause many California pension plans to shift their allocation of investments to ensure they can meet existing benefit obligations, thereby reducing their average annual future investment returns. In general, when pension plans have to assume lower investment returns in this manner, their estimated normal costs increase, as do estimates of their unfunded liabilities. For these reasons, in the short and medium term (perhaps over the next two or three decades), these changes could result in public employers having to contribute over $1 billion more per year (in current dollars) to cover pension costs of current and past employees.”

Too Transparent? Investment Magazine Makes the Case for San Diego’s Pension Fund

The San Diego County Employees Retirement Association is facing scrutiny for the dismissal of a worker who raised concerns about investment risks, and the worker has been fighting his termination with a lawsuit. While the former employee claims he had a responsibility to blow the whistle and speak out about portions of the fund exceeding their risk, the fund points out that at no point has it failed to comply with risk policies. The worker is looking for $500,000 in damages and the case has grabbed attention because, as the Union-Tribune reports, “Experts say his predicament raises interesting questions about balancing the public good of transparent government and an agency’s right to enforce its own policies.”

On the subject of transparency, the magazine aiCIO (Asset International for Chief Investment Officers) recently featured an article entitled, “Is Transparency Killing San Diego?” It’s not a headline you see every day. The article claims that San Diego’s pension fund receives the worst media coverage out of all systems in Southern California. The article questions, “Yet, is it the fund's attempts at good governance, and not poor investment decisions, that are causing its problems?” The author of the article points out that a majority of the board’s appointment members lack financial experience and argues the following with respect to transparency:

“The difference between SDCERA and other public funds is its transparency, which manifests with the fund posting video of its board meetings on its website. Combine this with a relatively contentious local political environment in conservative San Diego and a board susceptible to public pressure, and you have a recipe for—well, an SDCERA-type problem."

You can read the whole feature here.

Pension Officials in Sonoma Look to Avoid Further Legal Action; Release More Pension Data

We’ve relayed previously that much like other county pension systems in the state, Sonoma County lost a prolonged legal battle to block the release of retiree names and figures. Back in September Sonoma publicly released such pension data and it was revealed that 98 retirees receive pensions higher than $100,000. In an update, the county’s pension officials have now agreed to release even more pension figures so that the public can understand how benefits are calculated and how additional perks are factored into compensation.

The newspaper the Press Democrat first filed the lawsuit back in 2010 and now the pension system will have to pay its legal fees, which are nearly $100,000. Other pension systems across the state have faced criticism for incurring thousands in legal fees fighting cases that continue to rule against privacy in favor of disclosure. Sonoma will pay the newspaper $93,516 and notably it also paid $106,000 in legal fees to fight the case.

Recently the newspaper and the pension system resolved outstanding issues as to how much information had to be disclosed to the public. The Press Democrat reports what the prior release was lacking, from its perspective:

“The records, however, did not show information about retirees' years of employment and final compensation — both of which are used to calculate pensions — or give details about retirees' former department or job class. Also withheld was information about extra pay and benefits county employees get on top of their salaries that can boost final compensation and increase pensions.”

Pension officials could have opted to fight the release of the extra data with more legal action (and costs), but the retirement board opted to forego that route and made the expanded information available. Notably, the newspaper is being charged $8,000 for receiving the information due to the staff time it will take to collect data and it will provide it at some point in January.

Contra Costa Pension System Files Lawsuit to Dispute County’s Authority over Wage Cuts

Contra Costa County’s pension system is fighting the county over wage and benefit cuts that were imposed upon staff at the County Employees' Retirement Association—a move the retirement agency has deemed illegal. Twelve top and midlevel managers faced cuts under a vote from supervisors and now a civil lawsuit has been filed over who has rightful control to determine the compensation of employees at the pension system.

While the county exerted its influence in terms of handing out pay reductions (and pay increases have also been negotiated in the past), the retirement agency filed suit because it posits that the system is an independent entity and that paychecks should be left intact.

However, it is worth noting that the pension system’s staff is technically considered county employees due to a state law that was put in the books in 1937. The Contra Costa Times reports that Supervisor John Gioia has commented legislative action would be necessary if the agency was to officially split its staff from the county’s staff and he stated the following:

“The association has been happy to take without objection all the pay and benefit hikes negotiated at the county in prior years. I suggest that instead of using public money to wage a legal battle against the county that they use the money to pursue legislation and gain full independence. I would support it."

Supervisors did reverse course on imposing a pay cut on the pension system’s CEO because she was hired by the board of directors.

Study Concludes State’s Pension Systems are Facing a $500 Billion Shortfall

Around a year ago we relayed that Stanford University Professor and former Democratic Assemblyman Joe Nation had released a report on the huge unfunded liabilities of the state’s pension systems. At the time, the report, released by the Stanford Institute for Economic Policy Research, concluded that local pension systems alone were nearly $200 billion short. Nation has now released a new report in conjunction with the Stanford outfit and the organization California Common Sense. The latest report posits that California’s three major pension systems (CalPERS, CalSTRS, and UC System) under a low-risk discount rate have a total unfunded liability of $500 billion, which is 17 percent higher than the $425 billion shortfall that was projected back in 2010.

The report states that the “annual cost to the state of delaying pension solutions is $3.4 million per day.” Here are some other highlights from the report:

• Even at a 7.75 percent discount rate, the funded status for CalPERS and CalSTRS remains below 80 percent. Private-sector pension plans are labeled “at risk” if their funded status falls below 80 percent.
• The combined unfunded liability for CalPERS, CalSTRS, and UCRP under the 6.2 percent discount rate is $290.6 billion, equal to more than three state General Fund budgets. That figure represents an unfunded amount per household of nearly $24,000.
• Simulations of asset growth indicate that the probability of CalPERS assets falling short of obligations is 82 percent
• CalPERS must earn an annual average of 9.0 percent for the next 16 years to achieve even odds that its assets are greater than or equal to 80 percent of liabilities.
• Assuming a 6.2 percent discount rate and other minor demographic changes, current state spending on pensions is likely to increase from $4.8 billion in 2011-2012 to $14.6 billion, or the equivalent of 17.3 percent of current General Fund expenditures

You can read the full report here. In terms of solutions, the report argues that “pension system reforms include benefit reductions, such as prospective reductions for current employees, greater cost sharing, and governance reforms, particularly changes in pension system accounting methods and assumptions.” The report also criticizes the governor’s pension proposal as too modest in the savings it will provide.

CalPERS responded to the study with the following statement:

“The study is written from a perspective that is intended to exaggerate perceived costs and the instability of pension systems. The report's findings were based on low discount rates to artificially magnify unfunded liabilities.  It is important to remember that CalPERS invests in a highly diversified portfolio that includes stocks, real estate, and other assets that have historically earned significantly higher returns than the rates assumed in the study.”

Contra Costa Workers Protest Cuts to Pay and Benefits; Boards Holds Off on Imposing Contract

The Contra Costa County Board of Supervisors came close to declaring an impasse in negotiations with a coalition of its five large public employee unions, which would have resulted in the imposition of higher pension contributions and pay cuts across-the-board of 3.2 percent. In response, hundreds of county workers recently packed the board’s chambers to protest the cuts and there were over three hours of testimony. Consequently, the board ended up delaying a decision on imposing a contract and instead will allow talks to continue until the board’s next meeting. Contra Costa County Administrator David Twa informed the board there was reason to believe a deal could eventually be reached. The Contra Costa Times reports on further background info:

“In 2009, the coalition was the first set of unions to accept wage and benefit cuts. Workers took unpaid furloughs and the county capped its contribution to health premiums. The county settled with its midlevel managers in September after threatening to impose their contract. The union members agreed to 2.75 percent pay cuts and will pay more for their benefits.”

The county is looking to save $20 million a year and does not want to cover workers' increased health insurance costs, which has led to bitter opposition. The five unions subject to the negotiations are the Public Employees Union Local One, Service Employees International Union Local 102, American Federation of State, County and Municipal Employees (AFSCME) Locals 2700 and 512 and the Western Council of Engineers---all of which have over 4400 county employees.

Voters Say Local Govt Pensions Are Too Generous in Latest Field Poll; Support Guv’s Plan

According to the results of the latest Field Poll, a plurality of California voters feel pension benefits for most state and local government workers are too generous. Back in the fall of 2009, around 32% of voters felt that benefits were too generous and now that number stands at 41%. Thirty-five percent view current benefits as just right. The difference in views between Republicans and Democrats is also worth noting, as 58% of GOP voters say pension benefits for state and local government workers are too generous in comparison to 34% of Democrats. The Field Poll indicates the following about the impact on views when a union worker is part of a household:

“There are significant differences in the Californians’ views about the level of public pensions between voters living in union vs. non-union households. Nearly half of voters living in households where a union member resides (48%) thinks that the pension benefits received by most state and local workers are about right, with about equal proportions saying they are too generous (27%) as not generous enough (22%). By contrast, a plurality of voters living in non union households (45%) see these pensions as too generous, while 32% think they are about right and 13% say they are not generous enough.”

And when it comes to the governor’s pension plan proposals, Brown may be pleased to learn that a little over half of voters say the plan strikes the right balance and 24% think it doesn’t go far enough. Overall, there was uniformity in voter reactions to Brown’s proposals among Democrats, Republicans, and non-partisans. Read the Field Poll’s full results here and a table from the poll’s report can be seen below:

Deciphering Trends: NYT Argues Public Sector Workers are Retiring Sooner

Are older public sector employees speeding up their retirement plans in light of cutbacks and pension criticism? The New York Times argues in a recent (and lengthy) article that older workers simply feel they have little reason to stick around anymore as budget woes continue to take their toll at the state and local level and many workers say they don’t want to be scapegoats. California is pointed to as a prime example and it is reported that CalPERS has experienced an increasing retirement rate over the last five fiscal years. The Times notes:

“But increasingly workers fear a permanent shift away from the traditional security of government jobs, and they are making plans to get out now, before salaries and retirement benefits retreat further.”

While many governments have benefited from shedding workers through cost-savings, others have found themselves not only short on staff members but also short on expertise and valuable knowledge possessed by older workers.

Nevertheless, some experts contend it’s far too early to conclude that the nation is experiencing any trend with respect to public sector retirement and some data indicates rates have stayed relatively stable. Furthermore, one has to take into the account the recession, as many workers have even delayed retirement due to the poor economy and hesitance to move.

Public Sector, Inc., which is affiliated with the Manhattan Institute, has criticized the New York Times article in a post that reads: “The two surveys cited in the piece show that while some workers are speeding up their retirement, many are choosing to delay it. And in 2008, when the recession first hit, many workers decided to stay put for a few more years. Second, aside from a few anecdotal quotes, there is little to suggest that the primary cause for most workers is displeasure with states' requiring more furlough days, salary freezes, and greater contributions to pension and health benefits.” Read more of the outfit’s criticisms here.

Governor Makes Public Appeal for his Pension Plan at Joint Committee Hearing

We relayed recently that the Joint Conference Committee on Public Employee Pensions met for a second hearing recently to examine the governor’s 12-point pension proposal. It was the committee’s first hearing at the Capitol and a special guest was in attendance: Governor Brown. The governor was on hand to defend his proposals, as it has already been met with skepticism as well as harsh criticism from unions. Brown commented, “Without pension reform I don’t think we will have the credibility to ask the people to do other things that are very much needed.”  The governor was referencing his other major proposal, which is that he plans to ask voters to raise taxes in November. The governor’s pension plan will reportedly save $4 billion to $11 billion over 30 years. However, the Bee points out that the Governor’s plan was met with a tepid response by the committee and comments fell short of an endorsement:

“Some public employee unions have argued that the hybrid plan would undercut retirement security for future workers, while groups proposing pension overhauls of their own for the ballot say Brown's plan would not go far enough. The state's two major pension systems, as well as the nonpartisan Legislative Analyst's Office, have questioned the legality of parts of the plan, particularly provisions affecting current workers.  Brown and officials testifying on his administration's behalf defended the legality of his proposal. [...]  Brown will need the support of both Democrats and Republicans in both houses to place the parts of his plan that require voter approval on next year's ballot.”

During one notable exchange, the governor critiqued CalPERS for suggesting that the elimination of the defined benefit plan for new employees “would threaten its actuarial soundness.’’ In response, the governor pointedly stated, “Well, that tells you you’ve got a Ponzi scheme, because you have to keep bringing in new members and the current system itself is not in a sustainable position. I don’t accept that, and we don’t want to close it off anyway.’’

The UCLA Faculty Association summarizes that county representatives made the following points during the testimony: “Noted that there were many plans. They are already negotiating two-tier arrangements and other features such as increased contributions similar to the governor’s plan. Doubts raised about hybrid proposal. Total compensation point made (if you cut pensions, you have to raise something else).”

You can hear testimony of the governor’s public appeal here:

Bipartisan Panel Set to Discuss Guv’s Pension Reform Plan in Next Round of Hearings

Back in October, the Joint Legislative Conference Committee on Public Employee Pensions began its work examining the governor’s 12-point pension reform plan by hosting a hearing in the city of Carson. The bipartisan panel of six state lawmakers plans to host a series of hearings and the next one is scheduled to take place on December 1st at the State Capitol. State Sen. Gloria Negrete McLeod is the co-chair of the committee and recently commented that “I am hopeful that the final outcome of these hearings will be a package that achieves real and measurable reform that has broad support and represents a consensus agreement.” The last hearing in Carson featured comments from local government representatives to discuss actions and solutions that have been taken at the city/county level. You’ll recall that the governor proposed his pension plan at the end of October and recently GOP lawmakers have called for a special legislative session to address Brown’s proposal. Below you’ll find an agenda for the committee’s next meeting this week:

12-1-11 Agenda for CA Legislature Joint Pensions Committee Hearing