Unfunded Pension Costs Driving Huntington Beach to Become More Like Ferguson, MO

It’s been 19 months since the U.S. Department of Justice released its scathing report on the Ferguson Police Department. Chief among the DOJ’s findings: Ferguson’s law enforcement practices were “shaped by the city’s focus on revenue rather than public safety needs.” Nearly every policing activity – including tickets, misdemeanor fines and court fees – was seen as an income opportunity.

That model led to tension between police and citizens, disrupting families and the community. When a white police officer shot and killed Michael Brown, a black 18-year-old, on August 9, 2014, a city balancing on a knife’s edge toppled quickly into chaos.

Now what might be called Ferguson’s worst practices have been brought to Huntington Beach.

Last month, as the Orange County Register reported, the City Council approved a plan to hire a city prosecutor to handle misdemeanors.

“A significant number of misdemeanors go unprosecuted,” City Attorney Michael Gates told the Register, adding that the prosecutor will “add a lot of teeth to our laws.”

“There will be a whole class of crimes that will now be prosecuted where the DA may not have gotten to them,” Gates said. “We will prosecute every one of them until conviction.”

This comes on the heels of a proposal pushed through the council last year to substantially raise city fees and fines. Confronting a rising price tag for compensation for police and firefighters, then councilman, now mayor, Jim Katapodis put forward the plan as a means to cover the cost, and additional police officers.

Parking in front of a handicapped ramp will now cost you $356, an incredible jump from its former cost of $55. A glass container on the beach? Skateboarding? They’ll cost you $175 each, up from $125. There are others.

It’s not entirely surprising that Katapodis’ main public policy objective has been to increase the number of law enforcement officers to pre-recession numbers. He has spent his professional career in and around law enforcement. Police and fire unions have been staunch supporters, first backing Katapodis in 2010, when he ran for City Council while still an LAPD sergeant. According to Katapodis, adding more sworn officers is essential to ensure a safe city and should come at whatever cost necessary.

But over the last few years violent crime has been falling. And suspending basic accounting – adding more officers at higher pay – has driven Huntington Beach’s finances into the red.

City Council member Erik Peterson, who voted against the fee increases, said he didn’t understand how the city can start paying salaries without knowing how much they’ll receive from the increased fees.

In fact, H.B. owes $300 million on pensions for its retired city workers. That number was high enough to warrant a 2013 Moody’s investigative review. That review didn’t lead to a downgrade, but it’s a red flag.

In H.B., the Police Department is being expanded literally at the expense of the public, setting police against residents in a struggle not for public safety but for revenue. Critics say the mayor and City Council majority don’t even know how much revenue that parasitic system will generate. It’s equally clear they haven’t considered its costs. It cost Ferguson almost everything.

Matt Smith is a graduate student at Princeton Seminary, and a Journalism Fellow at the California Policy Center in Tustin.

For Nov. 8th: $32B in Local Borrowing, $2.9B in Local Tax Increases

New local taxes and new local borrowing are a regular phenomenon in California elections, but this year our government union controlled politicians have outdone themselves. Let’s compare:

November 2014 – $11 billion in new borrowing proposed via 118 local bond measures, 81% passed. Of the 117 local proposals for new taxes, 68% passed.

June 2016 – $6.2 billion in new borrowing proposed via 48 local bond measures, an estimated 93% passed. Of the 42 local proposals for new taxes, an estimated 66% passed.

November 2016 – $32.2 billion in new borrowing via 193 local bond measures, and 224 local proposals for new taxes!

Not only do these general and primary and special election tax and bond measures accumulate year after year, but they nearly always pass! The primary source for this information is the California Tax Foundation, who have just produced another excellent guide “Local Tax and Bond Measures 2016.” This time, they have not only compiled a list of all of the proposed local taxes and bonds, but for each of the proposed new local taxes, they have compiled the projected annual collections. The result is stunning.

2016 California Local Tax and Bond Measures
20160927-uw-local-taxes

As this table reports, $32.2 billion in new borrowing is being proposed, nearly all of it for schools and colleges. At 5.0% annual interest with a 30 year repayment plan, this borrowing will cost property owners another $2.0 billion per year in increased property taxes. If over 90% of these bonds are approved by voters, as recent history indicates is likely, California’s taxpayers will suddenly have saddled themselves with nearly $30 billion in new government debt.

Also as reported on the above table, the 224 proposed tax increases are estimated to cost taxpayers at least $2.9 billion per year. “At least,” because CalTax was unable to find revenue projections for 29 of them. And while “sin taxes” on marijuana and soda promise to bring in $58 million and $18 million, respectively, it is sales tax, that everyone pays, that will bring in most of the revenue, over $2.3 billion.

Because local taxes are numerous and dispersed onto hundreds of differing ballots across the state, they don’t get the visibility that state tax increases generate. But collectively they are just as significant. California’s Prop. 30, passed by voters in 2012, generated about $6.0 billion per year. That same tax, which was supposed to be temporary, will be extended through 2030 if voters approve Prop. 55 this year. But if you compare this statewide tax to the proposed local taxes, $2.9 billion per year, along with required payments on the local bonds, $2.1 billion per year, you are adding another $5.0 billion annual burden to taxpayers.

Passing Prop. 30 was a major fight. Similarly, Prop. 55 has huge visibility with voters. But because nearly all of the local measures pass, and because dozens if not hundreds of them appear on the ballot every election, local taxes and bonds matter more. Invisible, ongoing, and ever expanding, they are silently elevating the cost-of-living for ordinary Californians as much or more than state taxes.

Where does this money really go? Why is there an insatiable thirst for more taxes and more borrowed funds?

One word:  Pensions. One cause:  Government unions and their allies in the financial community, who together comprise what is by far the most potent political lobby in California.

A May 2016 analysis by the California Policy Center, using the most recent data available from the U.S. Census Bureau, estimated that during 2014, California’s 80+ independent state/local government employee pension systems received $30.1 billion in contributions (ref. table 2-A). Later in that same report, on table 2-C which is displayed below, one can see how much these pension systems actually need to remain financially healthy. At a minimum, they are collecting $8.0 billion per year LESS than they need. And that is if the investments they’ve made yield an annual return of 7.5% per year for the next 30 years. At the modest reduction of that projection to 6.5% – which even CalPERS has announced they are going to phase in as their new projection for calculating required annual contributions, these pension systems are collecting $22.2 billion per year LESS than they need.

California State/Local Pension Funds Consolidated
2014 – Est. Funding Status and Required Contributions at Various ROI

20160516-CPC-Ring-pension-liabilities

If California’s state and local government workers participated in Social Security like the rest of California’s workers, instead of receiving guaranteed defined benefit pensions that on average pay FOUR TIMES what Social Security recipients can expect, there would be no insatiable need for more money for the pension systems. Even if California’s state and local government workers merely received defined benefits that paid, on average, TWICE what Social Security recipients can expect, these pension funds would currently have surpluses. Moreover, there would be money left over in local municipal and school district operating budgets to maintain facilities, instead of having to perpetually borrow.

Six billion per year ala Prop. 30 and Prop. 55. Another five billion per year thanks to new proposed local taxes and borrowing just this November. And it’s not even close to enough. California’s state and local government pension systems are going to need somewhere between $50 to $60 billion per year to stay afloat, and currently they’re collecting barely more than half that much.

No wonder there’s the perennial scramble for more. More. MORE.

 *   *   *

Ed Ring is the president of the California Policy Center.

The Case for Limited Government is Now Stronger Than Ever

I have studied U.S. and California politics in particular since the mid-1990s, and believe the case for limited government is stronger now, than at any other time in history.

A series of emerging trends have coalesced to produce a political environment that makes it very unwise to try to enact sweeping policy change in today’s political environment (with the exception of an outright repeal of failed government programs).

A major treatise could be written on the subject, but here are some of the key considerations that led me to this conclusion.

First, there has been a noticeable decline in the quality of our elected leaders. To put it bluntly, many politicians are just in it for themselves and purport to pursue the public’s interest only as a means to their own ends.

The ramifications of this trend are huge and have served to give public interests more power over the political process and make it impossible in many cases to enact legislation that is within the public’s interest.

Second, the country’s political economy has gotten increasingly complex which makes it more difficult than ever to craft responsible public policy that is capable of addressing a policy problem not only today, but over a significant time period.

Third, the increasing polarization in the electorate, and reflected in U.S. governing bodies, make it extremely difficult, and more commonly impossible, to substantially revise a public policy once it has been approved.

Many examples could be provided to prove the validity of these assertions, but let’s look at a few case studies.

At the federal level, there is no better recent example than Obamacare. The policy was sold as being the best of all worlds expanding coverage, reducing costs, and improving the business climate in the process.

The only thing Obamacare has done well is expand coverage, but this has come at a great cost in the form of double digit annual cost increases on individuals, business, and government itself.

Without question, the program needs some major fixes to restore at least short-term viability and there are no signs that the political consensus needed to bring such change could be achieved. The result is a government program that is completely unsustainable, but has nonetheless provided health coverage to tens of millions more Americans which makes it impossible for anyone to advocate an outright repeal without a replacement.

Obamacare is looking like another example of a major government program that was enacted with very good intentions, but cannot be made sustainable over the long-run due to the huge complexity of the issue and the inability of the U.S. Congress to come anywhere close to the consensus needed to reform it. Two other examples: Social Security and Medicare, both unsustainable, yet almost politically untouchable.

At the state level, the pension crisis is an excellent example which holds ramifications for the long-term health of state government that equal or exceed Obamacare, Social Security, and Medicare combined.

The Public Employee Pension Crisis has the potential to entirely bankrupt the State of California

The Public Employee Pension Crisis has the potential to entirely bankrupt the State of California and all of its public agencies. Stanford University had measured the unfunded pension liabilities at $950 billion in 2013, but more recent estimates peg the debt at around $1.5 trillion for 2016.

 

In California, the level of retirement benefits provided to public employees is unaffordable to most public agencies in California, and is not currently being covered through contributions raised from public employers, and to a far less extent public employees.

The result is a massive run up is debt for nearly all state and local public agencies in California. In 2013, the total debt for unfunded pension liabilities was estimated at $950 billion, according to Stanford University. But more recent calculations for 2016, peg the debt at $1.5 trillion 50% higher due to major investment losses and soaring benefit costs.

Public pension debt alone in California is currently estimated to equal $77,000 per household in 2013, according to Stanford University’s pension tracker.

Despite the magnitude of the current pension crisis, there are only a handful of California Legislators who will even publicly admit that the pension crisis is a major issue in California. This is due to the fact that the state’s public employee unions control the California Democratic Party, and the Democrats run the California State Legislature.

The state’s pension crisis has the potential to bankrupt the State of California and nearly all of its public agencies, but there is not the faintest sign of a political consensus that will even admit that there is a major problem here, let alone consider a solution.

Furthermore, absent changes to the state’s pension system it makes no sense to further increase state and local tax revenues (i.e. tax and fee increases) since these increased revenues will simply go to fund overly generous and unsustainable public employee benefit costs which are increasing at 10-25% per year on average.

Private conversations with Republican legislators, who are the minority, indicate that they understand the issue and the need for reform but there is nothing to be gained by them going out on the issue short of a critical mass for reform.

Democrat legislators, on the other hand, support the status quo because the public employee unions bankroll their campaigns and the Democratic Party, and most if not all have already signed pledges to the state’s public employee unions to only increase public employee compensation, regardless of the consequences for the state.

Although the necessity for Pension Reform in CA seems to be obvious, many legislators seem unwilling & therefore unable to address the issue, largely due to the strong influence of Public Employee Unions when it comes to campaign financing of many within the state legislature.

Although the necessity for Pension Reform in CA seems to be obvious, many legislators seem unwilling & therefore unable to address the issue, largely due to the strong influence Public Employee Unions possess when it comes to campaign financing of many within the state legislature.

 

The state’s unsustainable public pension system is another example of a large government program gone bad, but nothing can be done to fix it given the circumstances of the state’s current political environment.

One last case study regarding the need for limited government is the state’s regulatory climate, which has an obvious parallel at the federal level but I will confine my discussion to the State of California.

The State of California’s regulatory climate is credited with being a key factor, along with high taxes, for encouraging more than 10,000 businesses to relocate out of state in recent years.

In a recent Inside Source interview with Stanford University Economics Professor Roger G. Noll, Noll states that California’s regulatory policies and practices are deeply flawed, but not necessarily enough to “drag Silicon Valley to Texas.”

Noll said most California legislators lack the capacity and inclination to craft responsible regulatory policy and that most regulation considered by the California Legislature is deeply flawed.

“We have pretty much a bankrupt system, it is rare to have a bill that is well crafted,” Noll stated.

Yet this does not stop the Democrat Legislature from developing bill after bill that seeks to regulate the California economy in almost every way imaginable. The sad truth is that the vast majority of this legislation is deeply flawed and will do more harm to the state’s business climate while providing little if any public benefit other than a political sound byte.

Moreover, most Democrats develop and pass regulatory legislation as a means to advance their careers and the policy agendas of their supporters, as opposed to advancing the public interest.

Thus, we have a Democrat majority whose primarily occupation is advancing their own agenda, as opposed to the public’s interest, without regard for the long-term consequences for the state’s business climate and economy.

If the Legislature cannot craft legislation in such as way that is beneficial and cost-effective it should just leave the issue alone, which brings us full circle to the need for limited government.

The increased complexity of the economy has dramatically increased the number of issues that can be regulated as well as the potential for harmful effects from poorly crafted legislation, which has become the rule in California, not the exception.

In other words, the best thing the California Legislature can do on most regulatory issues is do nothing. But political motivations necessitate the opposite due to a decline in the quality of our public leaders, primarily if not exclusively California Democrat politicians.

Then California Treasurer Bill Lockyer (D) saw this trend in 2010, noting that most of the legislation considered and passed in the California State Assembly is “junk” but lawmakers “move it along” to keep the special interests happy.

Lockyer also chastised the Democrat Legislature for its inability to address the state’s pension crisis because of who elected them (i.e. public employee unions) stating that it will “bankrupt the state” if nothing is done.

In short, government has reached a point in California, as well as at the federal level, where politicians cannot address the most important issues (i.e. failing government programs) due to political realities, but commonly do the wrong things in the areas where they can act.

The only solution is limited government. First, we must prevent more government programs from going on the books that will inevitably become unsustainable or unworkable, but impossible to fix. And second, we must limit politicians from advancing their own private agendas through legislation that actually does more harm than good.

About the Author: David Kersten is an expert in public policy research and analysis, particularly budget, tax, labor, and fiscal issues. He currently serves as the president of the Kersten Institute for Governance and Public Policy – a moderate non-partisan policy think tank and public policy consulting organization. The institute specializes in providing knowledge, evidence, and training to public agencies, elected officials, policy advocates, organization, and citizens who desire to enact public policy change.

Proposition 13 Is Safe — For Another Few Weeks

The Legislature is in adjournment, and with lawmakers at home campaigning for reelection, they are unable to engage in their favorite pastime of undermining Proposition 13 and its protections for California taxpayers.

However, this time out is only a brief respite from the Sacramento politicians’ inexorable pursuit of taxpayers’ wallets, the ferocity of which matches the dedication and intensity of a bear going after honey.

This December, after the election, lawmakers will reconvene to kick off the next two-year legislative session. During the just completed session, with great effort, taxpayer advocates were able to blunt a number of major efforts to modify or undermine Proposition 13, and, as surely as Angelina and Brad will be appearing on the covers of the supermarket tabloids, these attacks on taxpayers will begin anew when the Legislature is back in session.

Bills will be introduced to make it easier to raise taxes on property owners as well as to cut the Proposition 13 protections for commercial property, including small businesses. There may even be an effort to place a surcharge on all categories of property, an idea that was put forward by authors of an initiative that nearly collected enough signatures for placement on this year’s November ballot.

Accompanying the legislative fusillade will come the usual arguments that local government, or schools, or infrastructure, or the homeless, or the elderly, or (fill in the blank with the program or cause of your choice), or all of the preceding, need more money.

Government at all levels has become a militant special interest and its Prime Directive is to increase revenue – to take in more taxpayer dollars that is – and more is never enough.

California appears to have become a state constantly looking for new mechanisms of generating more revenue from its taxpayers in order to fund what is already the countries most compensated  public employees.

California appears to have become a state constantly looking for new mechanisms of generating more revenue from its taxpayers in order to fund what is already the countries most compensated public employees. If the Legislature ever successfully removes the protections associated with Proposition 13, Proposition 218, and the Right to Vote on Taxes Act, the fiscal burden upon CA taxpayers could be enormous.

 

The dirty little secret behind why government has changed from a service entity, dedicated to meeting the needs of its constituents, to a rapacious overlord, is that since being granted virtually unfettered collective bargaining rights in 1977, California’s state and local government workers have become the highest compensated public employees in all 50 states. With the high pay comes high union dues, collected by the employing entity and turned over to the government employee union leadership. These millions of dollars can then be used as a massive war chest to elect a pro-union majority in the Legislature and on the governing bodies of most local governments. And since these elected officials’ political futures are dependent on the goodwill of their union sponsors, there are almost no limits on what they will be willing to do to extract more money from taxpayers to be shoveled into ever increasing pay, benefits and pensions for government workers. (Government employee pension debt is several hundred billion dollars).

Literally, the only protections that average folks have from a total mugging by state and local governments are Proposition 13 and Proposition 218, the Right to Vote on Taxes Act. These popular propositions put limits on how much can be extracted from taxpayers by capping annual increases in property taxes, requiring a two-thirds vote of the Legislature to raise state taxes and guaranteeing the right of voters to have the final say on local tax increases.

It is easy to see why these taxpayer protections are despised by the grasping political class and their government employee union allies. This is also why taxpayers will have to work hard to preserve them.

Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization, dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.

Average Costa Mesa Firefighter Makes Nearly $250,000 Per Year. Why? Pensions.

Does that fact have your attention? Because media consultants insist we preface anything of substance with a hook like this. It even has the virtue of being true! And now, for those with the stomach for it, let’s descend into the weeds.

According to payroll and benefit data reported by the City of Costa Mesa to the California State Controller, during 2015 the average full-time firefighter made $240,886. During the same period, the average full-time police officer in Costa Mesa made $201,330. In both cases, that includes the cost, on average, for their regular pay, overtime, “other pay,” the city’s payment to CalPERS for the city’s share, the city’s payment to CalPERS of a portion of the employee’s share, and the city’s payments for the employee’s health and dental insurance benefits.

And if you think that’s a lot, just wait. Because the payments CalPERS is demanding from Costa Mesa – and presumably every other agency that participates in their pension system – are about to go way up.

We have obtained two innocuous documents recently delivered to the City of Costa Mesa from CalPERS. They are entitled “SAFETY FIRE PLAN OF THE CITY OF COSTA MESA (CalPERS ID: 5937664258), Annual Valuation Report as of June 30, 2015,” (click to download) and a similar document “SAFETY POLICE PLAN OF THE CITY OF COSTA MESA (CalPERS ID 5937664258), Annual Valuation Report as of June 30, 2015,” (click to download). Buried in the bureaucratic jargon are notices of significant increases to how much Costa Mesa is going to have to pay CalPERS each year. In particular, behold the following two tables that appear on page five of each letter:

Projected Employer Contributions to CalPERS  –  Costa Mesa Police

20160920-uw-calpers-fire

Projected Employer Contributions to CalPERS  –  Costa Mesa Firefighters

20160920-uw-calpers-fire

In the rarefied air of pension arcana, pension systems can get away with a lot. If you’re a glutton for punishment, read these notices from CalPERS in their entirety and see if, anywhere, they bother to explain the big picture. They don’t. The big picture is this:  For years CalPERS has underestimated how much they are going to pay in pensions and they have overestimated how much their investments will earn, and as a result they are continuously increasing how much cities have to pay them. This notice is just the latest in a predictable cascade of bad news from pension systems to cities and other agencies.

Coming down to earth just a bit, consider the two terms on the above charts, “Normal Cost %” and “UAL $.” It would be proper to wonder why they represent one with a percentage and one with actual dollars, but rather than indulge in futile speculation, here are some definitions. “Normal Cost” is how much the city pays (never mind that the city also pays a portion of the employee shares – we’ll get to that) into the pension system if it is fully funded. The reason pension systems are NOT fully funded is because, again, year after year, CalPERS underestimated how much they would pay out in pensions to retirees and overestimated how much they would earn. Read this disclaimer that appears on page five of the letters: “The table below shows projected employer contributions…assuming CalPERS earns 7.5 percent every fiscal year thereafter, and assuming that all other actuarial assumptions will be realized….”

And when the “Normal Cost” payments aren’t enough, and the system is underfunded, voila, along comes the “UAL $,” that bigger catch-up payment that is necessary to restore financial health to the fund. “UAL” refers to “unfunded actuarial liability,” the present value of all eventual payments to retirees, and “UAL $” refers to the payments necessary to reduce it to a healthy level. Notice that for firefighters this catch-up payment is set to increase from $4.2M in 2017 to $6.8M in 2022, and for police it is set to increase from $5.8M in 2017 to $10.1M in 2022. This is in a small city that in 2015 employed an estimated 125 full-time police officers and 75 full-time firefighters.

As always, it must be emphasized that the point of all this is not to disparage police or firefighters. No reasonable person fails to appreciate the work they do, or the fact that they stand between us and violence, mayhem, catastrophe and chaos. And it is particularly difficult for those of us who are part of the overwhelming majority of citizens who appreciate and respect members of public safety to have to disclose and publicize the facts of their unaffordable pensions.

The following charts, using data downloaded from the CA State Controller, put these costs into perspective:

Average and Median Employee Compensation by Department
Costa Mesa – Full time employees – 2015

20160920-uw-costamesa-ftcomp2015bydept

In the above chart, before sorting by department and calculating averages and medians, we eliminated employees who worked as temps or only worked for part of the year. This provides a more accurate estimate of how much full-time workers really make in Costa Mesa. Bear in mind that most part-time employees still receive pension benefits, as will be shown on a subsequent chart. As it is, during 2015 the average full-time police officer in Costa Mesa was paid total wages of $121,636, about 15% of that in overtime. But they then collected another $79,694 in city paid benefits, including $59,337 paid by the city towards their pension, AND another $11,562 that the city paid towards their pension that the State Controller vaguely describes as “Defined Benefit Paid by Employer.” Total 2015 police pay:  $201,330.

Also on the above chart, one can see that during 2015 the average full-time firefighter in Costa Mesa was paid total wages of $150,227, about 32% of that in overtime. They then collected another $90,659 in city paid benefits, including $72,202 paid by the city toward their pension, and as already noted, another $10,440 that the city paid toward the employee’s share of their pension. Total 2015 firefighter pay: $240,886.

To distill this further, the following chart shows, per full-time employee, just how much pensions cost Costa Mesa in 2015 as a percent of regular pay.

Average Employer Pension Payment as % of Regular Pay
Costa Mesa – Full-time employees – 2015
20160920-uw-costamesa-pension-as-percent-of-reg-pay

As the above chart demonstrates, employer payments for full-time employee pensions during 2015 already consumed a staggering amount of budget. For police, every dollar of regular pay was matched by 80.5 cents of payments by the city to CalPERS. For firefighters, every dollar of regular pay was matched by a staggering 94.4 cents of payments by the city to CalPERS.

The next chart shows the impact this has on the City of Costa Mesa budget. Depicting total payroll amounts by department, it compares the same variables, total employer pension payments as a percent of total regular pay. As can be seen, the percentages are nearly the same, despite this being for the entire workforce including temporary and part-time employees, some who may not have pension benefits (most do), and many who do not receive top tier pension formulas which the overwhelming majority of full-time public safety employees still receive. As can be seen, for every dollar of regular police pay, CalPERS gets 75 cents from the city, and for every dollar of firefighter pay, CalPERS gets 92 cents from the city.

Total Employer Pension Payment as % of Regular Pay
Costa Mesa – All active employees; full, part-time and temp – 2015
20160920-uw-costamesa-empl-pension-pmt-as-percent-of-reg-pay

At this point, the impact of CalPERS stated rate increases can be fully appreciated. And because this article, already at nearly 1,000 words, has violated every rule of 21st century social media engagement protocols – keep it short, shallow, simple, and sensational – perhaps the next paragraph should be entirely written in bold so it is less likely to be lost in the haze of verbosity. Perhaps a meme is in here somewhere. Perhaps an inflammatory graphic that shall animate the populace. Meanwhile, here goes:

Once CalPERS’s announced increases to the “unfunded payment” are fully implemented, instead of paying $10.9M per year for police pensions, Costa Mesa will pay $15.2M per year, i.e., for every dollar in regular police pay, they will pay $1.04 toward police pensions. Similarly, instead of paying CalPERS $6.4M per year for firefighter pensions, Costa Mesa will pay $9.1M per year, i.e., for every dollar in regular firefighter pay, they will pay $1.30 towards firefighter pensions.

Wow.

So just how much do Costa Mesa’s retired police and firefighters collect in pensions? Repeatedly characterized by government union officials as “modest,” shall we report and you decide? The following table, using data originally sourced from CalPERS and downloaded from Transparent California, are the pensions earned by Costa Mesa retirees in 2015. Excluded from this list in order to present a more representative profile are all pre-2000 retirees, since retirement pensions were greatly enhanced after the turn of the century, and it is those more recent pensions, not the earlier ones, that are causing the financial havoc. Also excluded because the benefit amounts are not representative and the retirement years are not disclosed, are all “beneficiary” pensions, which survivors receive.

Average Pensions by Years of Service
Costa Mesa retirees – 2015

20160920-uw-costamesa-pensions

While these averages are impressive – work 30 years and you get a six-figure pension – they grossly understate what Costa Mesa public safety retirees actually get. There are at least four reasons for this: (1) The data provided doesn’t screen for part-time workers. Many retirees may have put in decades of service with the city, but only worked, for example, 20-hour weeks. They would still accrue a pension, but it would not be nearly as much as it would be if they’d worked full time. (2) Nearly all full-time employees are also granted “other post-employment benefits,” primarily health insurance. It is reasonable to assume that for public safety retirees, the value of these other post employment benefits is at least $10,000 per year. (3) Because CalPERS did not disclose what department retirees worked in during their active careers, this data set is for all of Costa Mesa’s retirees. That means it includes miscellaneous employees who receive pensions that are, while very generous, are not nearly as good as the pensions that public safety retirees receive. (4) While recent reforms have begun to curb this practice, it has been common at least through 2014 for retirees to purchase “air time,” wherein for a ridiculously low sum they are permitted to claim more years of service than they actually worked. It is common for retirees, for example, to purchase five years of air time, so when their pension benefit is initially calculated, instead of multiplying, for example, 20 years of service times a 3.0% multiplier times their final salary, they are permitted to claim 25 years of service.

All of this, of course, is dense gobbledygook to the average millennial Facebook denizen, or, for that matter, to the average politician. To be fair, it’s hard even for the financial professionals hired by the public employee unions to acknowledge that maybe 7.5% (or even 6.5%) annual investment returns will not continue for funds as big as CalPERS, or that history is no indicator of future performance. And even if they know this, they’re under tremendous pressure to keep silent. So the normal contribution remains too low, and the catch-up payments mushroom.

Finally, to be eminently fair, we must acknowledge that since modest bungalows on lots so small you have to choose between a swing set or a trampoline for the kids are now going for about a million bucks each in most of Orange County, making a quarter million per year ain’t what it used to be. But there’s the rub. Because until the people who work for the government are subject to the same economic challenges as the citizens they serve, it is very unlikely we’ll see any pressure to lower the cost of living. Everything – land, energy, transportation, water, materials, etc. – costs far more than it should, thanks to deliberate political policies and financial mismanagement that creates artificial scarcity. But hey – artificial scarcity inflates asset bubbles, which helps keep those pension funds marginally solvent.

Cost-of-living reform, if such a thing can be characterized, must accompany pension reform. What virulent meme might encapsulate all of this complexity?

 *   *   *

Ed Ring is the president of the California Policy Center.

If Police Unions Were Abolished and Police Associations Were Restored

Earlier this month the New York Times ran an editorial entitled “When Police Unions Impede Justice.” They make the point that collective bargaining agreements for police employees often make it very difficult to hold police officers accountable for misconduct. When you have nearly 1.0 million sworn police officers in the United States, you’re bound to have a few bad apples. According to the NYT, these collective bargaining agreements discourage citizens from lodging misconduct complaints, micromanage investigations, and minimize disciplinary sanctions.

This isn’t news. It’s one of the reasons collective bargaining agreements for police officers are especially problematic. The other big problem with collective bargaining agreements for members of public safety are the often excessive and unaffordable benefit packages they’ve “negotiated” with the politicians whose careers are made or broken by these same unions. So what if police unions were abolished?

One may argue that abolishing police unions in favor of police associations – which could not engage in collective bargaining – would actually benefit all parties. An immediate benefit would be greater accountability for police officers. Why wouldn’t greater individual accountability be supported by the overwhelming majority of police officers who are conscientious, humane, compassionate members of the communities they serve? In turn, why wouldn’t greater police accountability foster rapprochement in neighborhoods where mistrust has developed between citizens and law enforcement?

With respect to pay and benefits for police officers, the risks of abolishing collective bargaining may be overstated. As it is, rates of base pay for police officers are not excessive by market standards. If they were, it would be easier to hire police officers. The primary economic problem with police compensation is retirement benefits, which in California now easily average over $100,000 per year for officers retiring in their 50’s after 25+ years of service. As the unions defend these excessive pensions, younger officers are left with far less generous benefits. The perpetually escalating contributions the pension funds demand – for all public employees – are behind virtually all tax increases being proposed in California. It can’t go on.

So abolishing collective bargaining for police would lead to several benefits (1) more police accountability and improved community relations, (2) minimal impact on base police pay, and (3) quicker resolution of financial challenges facing pensions, which will increase the probability that the defined benefit will be preserved, and will increase the potential retirement benefit available to the incoming generation of new police officers.

Apart from ending collective bargaining agreements, abolishing police unions in no way abolishes the ability of police officers to organize in voluntary associations to pursue common professional and political objectives. Before we had unionized police forces, police associations were very influential in civic affairs and could be again. And there are broader political objectives that may animate these police associations, beyond protecting bad cops and fighting for financially unsustainable retirement benefits. Police and other public safety employees, whether they are part of a union or part of a voluntary association, should think carefully about where the United States is headed. This is especially true in California.

The most dangerous risk of politically active police unions is the fact that whenever government fails, whenever our common culture is undermined, whenever social programs breed more problems than they solve, we need to hire more police officers. And whenever government expands to regulate and manage more aspects of our lives, we need to hire more police officers. Social upheaval and authoritarian government create jobs for police officers. For a police union that wants more members, a failing society and an authoritarian government suits their agenda.

For this reason, police officers have a choice to make. Do they really want to enforce the laws emanating from the climate extremists, the tolerance extremists, the sensitivity extremists, the equality extremists, the multi-cultural extremists – the entire ostensibly anti-extremist extremist gang of elitists who currently control public policy in California? Do they want to deploy drones to monitor whether or not someone got a permit to install a window in their bathroom, or watered their lawn on the wrong day? Do they want to fine or arrest people who aren’t willing to adhere to speech codes, or who refuse to hire less qualified employees in order to fulfill race and gender quotas? Do they want to police a society that has fragmented irretrievably because we continued to import millions of unskilled, destitute individuals from hostile cultures, than indoctrinated their children in union-ran public schools to falsely believe they live in a racist, sexist society?

It’s a tough choice. Will politically active police organizations redirect some of their resources to support policies that might actually reduce the number of police we need? Abolishing collective bargaining may make the right choice easier, because police will then be less immune to the economic and social havoc the elitists are currently imposing on the rest of us.

 *   *   *

Ed Ring is the president of the California Policy Center.

RELATED POSTS

Appreciating Police Officers, Challenging Police Unions, July 26, 2016

Public Safety Unions and the Financial Apocalypse, May 17, 2016

The Challenges Facing Conservatives Who Support Public Safety, March 22, 2016

In Search of a Legitimate Labor Movement, January 19, 2016

Pension Reform Requires Empathy, not Enmity, October 20, 2015

Public Sector Union Reform Requires Mutual Empathy, June 16, 2015

Can Unionized Police Be Held Accountable for Misconduct?, June 23, 2015

Pension Reformers are not “The Enemy” of Public Safety, April 20, 2015

Conservatives, Police Unions, and the Future of Law Enforcement, January 6, 2015

Police Unions in America, December 9, 2014

Conservative Politicians and Public Safety Unions, May 13, 2014

How Much Does Professionalism Cost?, March 11, 2014

California Business Community Should Not Enable High Cost Government

The business community is in a very tough position in California.  The California Legislature is completely controlled by the Democratic Party and its pro-labor base.

The California Republican Party and Republicans candidates are their most natural allies but Republicans are only viable in a relatively small minority of legislative races.

The result is that the California business community must build alliances with the pro-labor Democrats and foster good relationships with the Democratic leadership and their power base—the state’s public employee unions.

The rise of the so-called “moderate Democrat” is perhaps the best manifestation, which is essentially a Democrat that tends to vote pro-business on some select issues, and pro-labor on many other issues, particularly those that relate to public employee compensation.   

But the real danger here is that the California Business Community finds itself in the precarious position of actually enabling “high cost government,” characterized by higher taxes and a deteriorating business climate.

Big business will almost always oppose a tax increase that impacts them directly, but they tend to stay neutral or even support tax increases on other taxpayer classes such as small businesses and individuals.

Prop. 30 from 2012 is a perfect example.  The measure temporarily increased income taxes on individuals and businesses earning over $250,000 per year, and also included a ¼ sales tax hike with the $6-8 billion in annual revenues going to education.

The business community did not like it but they tolerated it because the state was in a difficult financial position, and the tax was supposed to be temporary.  Certain segments of the business community, particularly small business, still strongly opposed Prop. 30 (and oppose Prop. 55 as well) because their members are directly impacted and less able to shoulder the brunt of the tax increase.

Prop. 55 on the November 2016 ballot seeks to extend the Prop. 30 tax increases for another 12 years, and is projected to raise nearly double the revenue, $8-11 billion annually.

Prop. 55 on the November 2016 ballot seeks to extend the “temporary” Prop. 30 tax increases for another 12 years

Big business in California has not mobilized a campaign to defeat Prop. 55 despite the fact that it represents a “broken promise” and is essentially a permanent tax increase.

The California Chamber of Commerce and Cal-Tax have voted to oppose the measure, but have not committed significant resources because Prop. 55 primarily impacts small business and individual taxpayers.

The California Business Roundtable continues to be neutral but is scheduled to reconsider its position in mid-September.  Many local chambers of commerce have also stayed off Prop. 55 because they have a large number of representatives of the education community on their boards.

Another consideration is that the business community may not see a path to victory, short of spending in excess of $10 million or more, and they still may not win.  Prop. 55 is supposedly polling above 60%, but still likely vulnerable if a major opposition campaign is mounted given that Prop. 30 only passed with a 55% Yes vote.

I believe that it is in the California business community’s interest to strongly oppose any major tax increase because proponents of higher taxation in California will keep coming back for more, albeit with a bigger war chest and more determination.

The reality is that the cost California government is growing at an unsustainable pace due to the inability of the California Democrat Legislature, as well as most locally elected officials, to adequately control public employee benefit costs, particularly pension and health care.

For example, state and local debt is already at all-time highs despite record revenues, with total debt for public employee compensation costs estimated to be in excess of $1.3 trillion as of 2013, and likely is closer to $2 trillion in 2016.  Calpers debt has increased by more than 50% since 2014, jumping to an estimated $150 billion in 2016 due to heavy investment losses and things are not projected to get any better.

Something is very wrong here—the state has amassed record revenues, but public spending and debt is still climbing at unsustainable rates of 10-25% per year.   And next to nothing is being reinvested in California in the form of roads and improved infrastructure.

These facts may not be altogether clear to anyone who has not studied the fiscal condition of state and local governments in California, and who has intimate knowledge of the state’s public employee unions.

I would encourage the California business community to become more serious about controlling the cost of government because even if the immediate tax increase at hand (Prop. 55 and others) does not directly impact your members this time around, next time it will, particularly once the more favorable revenue options are exhausted.

Over the long-term, California’s approach to taxation has been to max out every tax revenue source available to it, and that’s why we have the highest income taxes (13.3%), the highest sales taxes (9.5%), the highest gas taxes, and the list goes on and on.

The most important fact to recognize is that there will literally be no end to the amount of tax increases, and their negative economic impacts, that the public employee unions and hospitals interest will “need” to fund public sector costs that are rising far in excess of the ability of taxpayers and the state’s economy to pay for them.

To stem this trend, a strong public case will need to be presented to voters about the accelerated decline of the business climate in California, and its consequences for the state’s future.

The only alternative to fighting an ever increasing state tax burden is to continue to raise taxes higher and higher on a shrinking economic base, something the Democrats appear to be completely at peace with, but something that is disastrous for the future of the state’s economy and its residents.

At some point in the not so distant future, the only choice the California business community will have is to flee California for greener pastures as the more than 10,000 businesses have done in recent years.

About the AuthorDavid Kersten is an expert in public policy research and analysis, particularly budget, tax, labor, and fiscal issues. He currently serves as the president of the Kersten Institute for Governance and Public Policy – a moderate non-partisan policy think tank and public policy consulting organization. The institute specializes in providing knowledge, evidence, and training to public agencies, elected officials, policy advocates, organization, and citizens who desire to enact public policy change.

Court Pension Decision Weakens ‘California Rule’

The one thing some pension reformers say is needed to cut the cost of unaffordable public pensions: give current workers a less costly retirement benefit for work done in the future, while protecting pension amounts already earned.

It’s allowed in the remaining private-sector pensions. But California is one of about a dozen states that have what has become known as the “California rule,” which is based on a series of state court decisions, a key one in 1955.

The pension offered at hire becomes a “vested right,” protected by contract law, that cannot be cut, unless offset by a new benefit of comparable value. The pension can be increased, however, even retroactively for past work as happened for state workers under landmark legislation, SB 400 in 1999. 

Last week, an appeals court issued a ruling in a Marin County case that is a “game changer” if upheld by the state Supreme Court, said a news release from former San Jose Mayor Chuck Reed, who wants to put a pension reform initiative on the 2018 ballot.

Mayor Chuck Reed considered it a “game-changer” when a Marin County Court rejected the rigid interpretation of the California Rule of vested rights, ruling that although an employee has a vested right to a pension, their only right is to a ‘reasonable pension,’ one without benefit spiking

 

Justice James Richman of the First District Court of Appeal wrote that “while a public employee does have a ‘vested right’ to a pension, that right is only to a ‘reasonable’ pension — not an immutable entitlement to the most optimal formula of calculating the pension.

“And the Legislature may, prior to the employee’s retirement, alter the formula, thereby reducing the anticipated pension. So long as the Legislature’s modifications do not deprive the employee of a ‘reasonable’ pension, there is no constitutional violation.”

The ruling came in a suit by Marin County employee unions contending their vested rights were violated by a pension reform enacted in 2012 that prevents pension boosts from unused vacation and leave, bonuses, terminal pay and other things.

These “anti-spiking” provisions apply to current workers. The major part of the reform legislation, including lower pension formulas and a cap, only apply to new employees hired after Jan. 1, 2013, who have not yet attained vested rights.

The California Public Employees Retirement System expects the reform pushed through the Legislature by Gov. Brown to save $29 billion to $38 billion over 30 years, not a major impact on a current CalPERS shortfall or “unfunded liability” of $139 billion.

Similarly, legislation two years ago will increase the rate paid to school districts to the California State Teachers Retirement System from 8.25 percent of pay to 19.1 percent, while the rate paid by teachers increases from 8 percent of pay to 10.25 percent.

The limited teacher rate increase followed the California rule. The new benefit offsetting the 2.5 percent rate hike vests a routine annual 2 percent cost-of-living adjustment, which previously could have been suspended, though that rarely if ever happened.

While mayor of San Jose four years ago, Reed got approval from 69 percent of voters for a broad reform to cut retirement costs that were taking 20 percent of the city general fund. A superior court approved a number of the measure’s provisions.

But a plan to cut the cost of pensions current workers earn in the future by giving them an option (contribute up to an additional 16 percent of pay to continue the current pension or switch to a lower pension) was rejected by the court, citing the California rule.

In a settlement of union lawsuits, Reed’s successor locked in some retirement savings but dropped an appeal of the option. Reed, a lawyer, thinks the California rule is ill-founded and likely to be overturned if revisited by the state supreme court.

He has pointed to the work of a legal scholar, Amy Monahan, who argued that by imposing a restrictive rule without finding clear evidence of legislative intent to create a contract, California courts broke with traditional contract analysis and infringed on legislative power.

“California courts have held that even though the state can terminate a worker, lower her salary, or reduce her other benefits, the state cannot decrease the worker’s rate of pension accrual as long as she is employed,” Monahan wrote.

In the ruling last week, Justice Richman describes the setting for the reform legislation: soaring pension debt after the financial crisis in 2008-09 and a Little Hoover Commission report in 2011 urging cuts in pensions current workers earn in the future.

He cites several court rulings in the past that conclude cuts in pensions earned by current workers are allowed to give the pension system the flexibility needed to adjust to changing conditions and preserve “reasonable” pensions in the future.

Some of the court rulings cited allowed changes in retirement ages, reductions of maximum possible pensions, repeals of cost-of-living adjustments, changes in required service years, pensions reduced from two-thirds to one-half of salary, and a reasonable increase in pension contributions.

“Thus,” Richman wrote, “short of actual abolition, a radical reduction of benefits, or a fiscally unjustifiable increase in employee contributions, the guiding principle is still the one identified by Miller in 1977: ‘the governing body may make reasonable modifications and changes before the pension becomes payable and that until that time the employee does not have a right to any fixed or definite benefits but only to a substantial or reasonable pension.’”

Richman’s ruling makes several references to a unanimous state Supreme Court decision in 1977 in Miller v. State of California. He said the foundation of the unions’ constitutional appeal is a “onetime variation” in one word in another ruling.

“To be sustained as reasonable, alterations of employees’ pension rights must bear some material relation to the theory of a pension system and its successful operation, and changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages,” the state Supreme Court said in Allen v. City of Long Beach (1955).

Richman said a 1983 state Supreme Court decision (Allen v. Board of Administration) changed “should” have a comparable new advantage to “must,” citing two other State Supreme Court decisions that said “should” and an appeals court decision that said “must.”

In a decision a month later, he said, the Supreme Court used “should” while referring to a comparable new benefit and has continued to use “should” in all rulings since then.

“It thus appears unlikely that the Supreme Court’s use of ‘must’ in the 1983 Allen decision was intended to herald a fundamental doctrinal shift,” Richman said, citing two rulings that “should” is advisory or a recommendation not compulsory.

The 39-page decision written by Richman and concurred in by Justices J. Anthony Kline and Maria Miller makes other points in its rejection of a rigid view of the California rule and pension vested rights.

“The big question for pension reformers is whether or not the California Supreme Court will agree,” Reed said in a news release from the Retirement Security Initiative. “If it does, the legal door will be open for Californians to begin to take reasonable actions to save pension systems and local governments from fiscal disaster.”

There was no immediate word from the Marin Association of Public Employees and other county employee unions last week about whether the appeals court decision will be appealed to the Supreme Court.

About the Author: Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. He is currently a Publisher for CalPensions.com.

Average "Full Career" CalPERS Retirement Package Worth $70,000 Per Year

“‘What makes the ‘$100,000 Club’ some magic number denoting abuse other than the claims of anti-pension zealots?’ said Dave Low, chairman of Californians for Retirement Security, a coalition of 1.6 million public workers and retirees.”

This quote from a government union spokesperson, and others, were dutifully collected as part of Orange County Register reporter Teri Sforza’s eminently balanced reporting on the latest pension data, in her August 8th article entitled “The ‘100K Club’ – public retirees with pensions over $100,000 – are a growing group.”

In the article, Sforza’s team evaluated data released by Transparent California on 2015 CalPERS pensions, and reported the number of pensioners receiving $100,000 or more per year was 3.5% of total retirees, up from 2.9% in 2013. That truly does seem like a low percentage, but it ignores two key factors, (1) the total retiree pool includes people who only worked a few years and barely vested a pension, and (2) the total retiree pool includes people who worked many decades, sometimes 30 or 40 years or more, but they only worked part-time during their lengthy careers.

So if you restrict your pool of participants to those who worked a full career, and retired within the last 10 years, what percentage of those retirees would belong to the $100,000 club? As it turns out, there are 75,279 CalPERS retirees who worked more than 25 years and less than 35 years, retiring after 2006. And as it turns out, 9,763 of them, or 13%, are receiving pensions in excess of $100,000 per year.

Moreover, CalPERS doesn’t report the value of retirement health benefits and other retirement benefits, which almost certainly exceed $10,000 per year. If you make this reasonable assumption, you now have 14,901 CalPERS retirees, or 19% of our 75,279 pool of full career retirees, receiving a retirement package worth over $100,000 per year. Worth noting – we didn’t have the data necessary to screen the part-timers out of this pool. If we did, the numbers would be higher.

So if you use the appropriate denominator, the “$100 Club” isn’t 3.5% of the pie, it’s 19%, but so what? It’s still not a very big slice. Here’s where the flip-side of “full career pension” comes into play. Most people don’t work 25-35 years in public service. But most of them do vest their pension benefits, which can be vested in as little as five years. What happens when someone quits after five years, and only goes on to collect, say, a $20,000 per year pension? Someone else is hired, they work five years, and they also qualify to eventually collect a $20,000 per year pension. Then someone else, and then someone else – until you have three or four (or more) people who are all going to receive a $20,000 per year pension – for a job that one person could have performed if they’d stayed with the agency for a full career.

This is a critical point to understand. The significance of “full career” pensions is this: The taxpayer will fund pensions at that level of generosity, even if the benefit is split among multiple partial career participants – people who presumably worked elsewhere (where they also saved for retirement) during the majority of their careers. Should you expect a $100,000 per year pension if you only worked for five years? Of course not. But that’s what taxpayers are funding – whether it goes to one person, or to five people who worked a few years each to collectively fill one person’s full-career position in government.

This is why, when you are considering whether or not pensions are fair and affordable, the full career average pension is the only relevant measure. So what is the full career average?

For CalPERS in 2015, participants with between 25 and 34 years of work who retired in the last ten years, on average, received a pension of $60,277.  Add to that the value of their retirement health benefits and other retirement benefits and the average was probably closer to $70,000 per year.

Just for comparison, for Orange County (OCERS) retirees in 2015, participants with between 25 and 34 years of work who retired in the last ten years, on average, received a pension of $73,628.  Add to that the value of their retirement health benefits and other retirement benefits – information which OCERS also refuses to provide – and the average was probably over $80,000 per year. As for the OCERS “$100,000 Club”? Within the pool of full career retirees as described, and accounting for retirement health benefits, 31% of them were members. Nearly one in three.

Public sector spokespersons frequently point out that public employees don’t get Social Security. Actually, about half of them do get Social Security, but never mind that detail. Because the maximum Social Security benefit, which one must wait until they are 68 years old to receive, is a whopping $31,668 per year.

Calling critics of this double standard “anti-pension zealots” is lazy rhetoric. The problem with defined benefits is not that they exist. The problem is that we have set up a system where public employees operate under a set of retirement benefit formulas and incentives that are roughly four times better than what private sector workers can expect. Yet these private sector workers pay the taxes to fund these pensions and bail them out when the investment returns falter.

 *   *   *

Ed Ring is the president of the California Policy Center.

Teachers Union Hits Taxpayers with ‘Money Club’ Again

The California Teachers Association has just dropped $10 million into its campaign to extend the “temporary” income tax hike voters approved when they passed Proposition 30 in 2012. Proposition 55, which will appear on this November’s ballot, would extend the highest income tax rates in all 50 states for another dozen years.

Four years ago, the muscular union, called by many in Sacramento the “Fourth Branch of Government,” spent over $11 million to convince voters to increase sales and income taxes. The campaign, paid for by government employee unions and led by Gov. Jerry Brown, repeatedly promised voters the higher taxes would last only a few years and then go away.

These ultra-high tax rates are scheduled to end in 2018 and union leaders are panicking. If the tax increase ends, there may be less money to fund increases in member pay and benefits.

Spending big money on politics is not unusual for the deep pocketed CTA which receives its funding from mandatory dues. Those dues, withheld from members’ paychecks whether they like it or not, can total more than $1000 a year for a single teacher. Recall that CTA laid out $58 million in opposing several worthy reform measures in a 2005 special election including one reform that would have capped state spending. Union leaders like a guaranteed cash flow so it should come as no surprise if they put out an additional $10 million, or more, to support the Proposition 55 income tax extension. For backers of Proposition 55, spending millions in return for billions of tax dollars is considered a bargain.

The campaign will, no doubt, target low information voters with messages about how, “it’s for the children.” It is standard operational procedure for tax promoters to use children as human shields when advancing a tax increase tied to education. Not to be mentioned is that the union’s interest is solely in increasing pay and benefits, including generous pensions, for members who are already paid more than $20,000 above the national average. And don’t forget that a national education union leader once famously said “when school children start paying union dues, that’s when I’ll start representing the interests of children.”

The California Teachers Association has spent $10 million dollars into extending the Prop. 30 “temporary tax”

 

Some will argue that ultra-high taxes should be maintained because public employees deserve to be well paid. They are. According the Department of Labor, California is the state with the best paid state and local government employees.

Our state is running a multi-billion-dollar surplus, yet Proposition 55 backers want to continue the ultra-high taxes that are already pushing businesses, and the jobs they provide, to relocate out of state. And it’s not just businesses. The list of high wealth individuals including professional athletes and entertainers who have bailed out of California is a mile long.

But the deleterious impact of high taxes is wholly lost on the union bosses. Their attention is, no doubt, on the latest news from the California State Teachers’ Retirement System. The second-largest U.S. public pension fund earned a paltry 1.4 percent return on investments in the fiscal year just ended, missing its target of 7.5 percent for the second straight year.  This raises questions about the fund’s management and whether or not it will be able to meet its obligation to 896,000 current and retired teachers.

Of course, taxpayers remain the guarantor of all public employee pensions so, in all fairness, the Proposition 55 income tax extension could come to be called the “pension tax.” And the teachers union is prepared to use its massive “money club” on voters to make sure Proposition 55 passes and the taxpayers’ dollars are there.

Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.

The Consequences of Weak Pension Earnings

Several reporters have asked about the consequences of CalPERS’s weak investment earnings. Although CalPERS has not issued an actuarial report since June 30, 2014, one can draw an inference that its Unfunded Liability has grown about $50 billion since then, to $140 billion. Here is how you get there:

Start from this chart on page 120 of CalPERS’s 2015 annual report:

The “Actuarial Accrued Liability (AAL)” in column three shows pension liabilities as of 6/30/14 were $395 billion, up from $210 billion nine years earlier. That’s a 7.27% annual growth rate, which makes sense since pension liabilities grow at the discount rate (7.5%), less any amortization. Assuming the same 7.27% growth rate, AAL as of 6/30/16 should have climbed to roughly $454 billion.

The “Actuarial Value of Assets” in column one shows assets as of 6/30/14 were $301 billion. CalPERS earned 2.4% in the 2015 fiscal year and 0.61% in the most recent fiscal year ending 6/30/16. (CalPERS also received pension contributions from employers and employees but, as indicated on page 42 of its annual report, in 2015 those were less than benefit payments. Let’s give CalPERS the benefit of the doubt and assume that contributions = benefit payments and therefore the impact on Assets was neutral.) This would mean that Assets as of 6/30/16 should have climbed to roughly $310 billion.

$310 billion in Assets less $454 billion in AAL = $144 billion in Unfunded AAL (UAAL), up $51 billion from $93 billion in UAAL as of 6/30/14 (see column four).

Every $1 of UAAL translates into about $3 of cuts to public services (because UAAL’s accrue interest at 7.5%). Hence, $51 billion of additional UAAL translates into about $150 billion of additional cuts. These numbers are by their nature rough but they should provide a sense of the magnitude. CalPERS should endeavor to report on a timely basis.

 

CalPERS only obtained a 0.61% return on investments for fiscal year 2016 despite establishing pension promiseS based on a 7.5% interest

 

NB: It’s important to note that UAAL can grow significantly even when CalPERS has good years. Look again at the chart. The UAAL in column four more than tripled to $93 billion even though CalPERS earned a very respectable 6.6% annual return on investment during that period. Indeed, during the last five years of that chart CalPERS earned 12.5% per annum and the stock market doubled yet the UAAL grew $44 billion. As explained here, CalPERS must earn much more than its expected rate of return to shrink the UAAL.

PS: If you are looking for someone to blame, don’t point the finger at CalPERS’s investment staff. They are not responsible for markets reverting to the mean and they had plenty of good years before the last two years. And don’t blame government employees and retirees. They did not cause this problem. You should blame your elected officials and pension fund board members. Together they are responsible for hiding the true size of pension promises at the time they are made and failing to properly fund those promises when they are made. They are continuing to do so — and thereby creating new UAAL’s every day.

About the Author: David Crane is a Lecturer in Public Policy at Stanford University, SIEPR Research Scholar and president of Govern For California. From 2004 – 2010 he served as a special advisor to Governor Arnold Schwarzenegger and from 1979-2003 he was a partner at Babcock & Brown, a financial services company. Crane also serves as a director of Building America’s Future, California Common Sense and the University of California’s Investment Advisory Group. Formerly he served on the University of California Board of Regents and as a director of the California State Teachers Retirement System, California High Speed Rail Authority, California Economic Development Commission, Djerassi Resident Artists Program, Environmental Defense Fund, Legal Services for Children, Jewish Community Center of San Francisco, Society of Actuaries Blue Ribbon Panel on the Causes of Public Pension Underfunding, and Volcker-Ravitch Task Force on the State Budget Crisis.

Pensions and Taxes Increase While Labor Unions go Unchallenged

In January 2015, the Manhattan Institute’s Steve Malanga, writing in the Wall Street Journal about public pension costs gulping down tax raises, quoted me saying that no matter what local politicians tell voters, when you see tax increases, think pensions.

To paraphrase Ronald Reagan: Here I go again!

Recent accounts indicated that the California Public Employees’ Retirement System (CalPERS) unfunded pension liabilities have increased because CalPERS investment revenue has dropped. Yesterday on this site, David Kersten cited the dramatic increase of CalPERS unfunded liabilities rising from $93 billion two years ago to $150 billion today.

More to the point, Sacramento Bee columnist Dan Walters wrote, “CalPERS has been demanding hundreds of millions of dollars in additional contributions from state and local governments – hitting cities particularly hard…”

 

Despite a 42% growth in California’s general fund budget compared to 2011, the state continues to propose new tax increases and extensions.

 

With the obligation for more local taxes going to cover pension costs is it just a coincidence that so many tax increase measures are popping up on local ballots?

I don’t think so.

Sure, there will be specific reasons that local governments say they need more tax revenue. More for police or transportation or the homeless, they will say. The governments would have more revenue for those services if they did not have greater obligations for underfunded pensions.

It’s not like revenues have declined recently in government coffers. The state general fund budget is up 42% since Jerry Brown came into office in 2011. Local governments also are enjoying revenue increases, but the call for more taxes keep coming.

Take San Francisco, which could see 8 different tax increases on the November ballot. We just learned that property tax collections in the City by the Bay dramatically increased 9%. And, the city government still needs all that revenue from 8 new tax increases?

Money in government budgets is fungible to some extent. If you cover specific agency costs with a targeted tax increase, that frees up general fund money for other items, including pensions.

 

Nathan Brostrom, Chief Financial Officer for the University of California, told the Sacramento Bee that tuition hikes could be avoided if the state would assist in funding its retiree costs. He explained that the school believed it was not getting what was promised from the Prop. 30 tax hikes.

 

When the University of California declared a shortage of money a couple of years ago much angst surrounded the need to raise already high tuitions. What was the money needed for? As I wrote at the time, the UC’s chief financial officer told the Sacramento Bee that tuition hikes could be avoided if the state helped with retirement costs.

It wasn’t only the university system that saw money diverted for retirement costs. The aforementioned article by Steve Malanga in the Wall Street Journal was subtitled: Remember that ‘temporary’ tax hike for California schools? Most is now going to public worker retirements.

Ironic that the extension of those temporary taxes, Proposition 55, is on the ballot while the retirement system sputters—or is it?

As David Kersten pointed out in his column, “California Democratic politicians are too tied to their base which is the public employee unions, and are unable to make decisions that will benefit the state’s future and prevent financial catastrophe.”

That’s consistent with what I heard from one prominent Democrat who wondered with a state budget increase of more than a third over five years why so many state agencies say they don’t have enough money. The politician answered the question by saying it was because of pension and health care costs and that the majority Democrats would not take on the unions over that issue.

Too bad. That means it falls to the taxpayers. Either they pay up or reform the system on their own.

About the Author: Joel Fox is Editor of Fox & Hounds and President of the Small Business Action Committee. This article originally appeared in Fox & Hounds and appears here with permission.

CalPERS Sinks Further into Fiscal Insolvency

Orange County Register reporter Teri Sforza quietly released a story  that blows the whistle on another fiscal bombshell of bad news at the California Public Employees’ Retirement System (CalPERS).

The story states that according to unofficial preliminary numbers from CalPERS the fund lost about 2% of its market value in the 2015-16 fiscal year that just ended–which represents an estimated $28.5 billion increase in the fund’s unfunded liabilities, according to my rough calculations.

The fund assumes a 7.5% per year annual return despite the fact that no investment officer in the country believes that is achievable in the current environment.

Stanford Professor Joe Nation estimates CalPER’s total unfunded liabilities have increased to an estimated $150 billion, compared to $93 billion just two years ago, according to the Orange County Register report.

 

CalPERS investments returned 2.4% for fiscal year 2015, far below its 7.5% target.

 

And if one assumes a more realistic 4% rate of return (a “Treasury” or “risk-free” rate) the funded liability for Calpers alone is now $412 billion, or the equivalent of three state general fund budgets, Nation said.

For anybody who knows the numbers, and I do, CalPERS is speeding down the track toward financial catastrophe but none of the state’s leading Democrats will even acknowledge that there is a major problem here.

And this ignorance of the problem by California Democrat politicians is perhaps what is most upsetting to me and the small community of pension reform advocates that fully understand the magnitude of the problem and what this means for the state’s future.

The lone voice in the legislature for reform continues to be Sen. John Moorlach (R-Costa Mesa) who has a significant background in public finance and accounting.

“What has me baffled is that this is causing me great anxiety, but it does not seem to have the same impact on my colleagues in Sacramento,” Moorlach said.

Inside sources say most if not all California Republican State Legislators in Sacramento understand the magnitude of the problem but there is not much to be gained politically by going out on the issue prior to a critical mass being reached for reform.

The true culprit for this code of silence in the Legislature is the state’s powerful public employee unions, their political threats, failed logic, and propaganda on the issue.

Dave Low, chairman of Californians for Retirement Security, says the pension reformers are a case of “crying like Chicken Little about how the sky is falling,” according to the Orange County Register report.

Low and the state’s public employee union bosses are playing a dangerous game here that will inevitably blow up in their face and result in major financial hardship, lost benefits, and jobs for their public employees at some point in the not so distant future.

Low won’t even acknowledge a problem with the escalating liabilities, and this is the same position taken by the California Democrat Legislature.

This is an unconscionable policy position to anyone who cares about the future of our state and illustrates why the California Democrat Party is no longer fit to lead California.

California Democrat politicians are too tied to their base which is the public employee unions, and are unable to make decisions that will benefit the state’s future and prevent financial catastrophe.

This whole facade is rapidly deteriorating and the problem will soon become so big that nobody will be able to ignore it.

The only question, is whether it will be too late to save the State of California and its local governments from financial disaster at this point, or whether we will first cross a point of no return that permanently saddles our public agencies and state taxpayers with trillions of dollars in debt that we cannot afford to pay.

About the Author: David Kersten is an expert in public policy research and analysis, particularly budget, tax, labor, and fiscal issues. He currently serves as the president of the Kersten Institute for Governance and Public Policy – a moderate non-partisan policy think tank and public policy consulting organization. The institute specializes in providing knowledge, evidence, and training to public agencies, elected officials, policy advocates, organization, and citizens who desire to enact public policy change.

California Pensions Take Above-Average Tax Bite

California pension funds take a bigger share of tax revenue than the national state average, a research website shows. Why the growing costs are outpacing the norm is not completely clear.

A prime suspect for some would be overly generous pensions, particularly what critics say is an “unsustainable” increase for police and firefighters widely adopted to match a big increase given the Highway Patrol by SB 400 in 1999.

The Public Pension Database does not have information on the formulas that determine pension amounts, like the Highway Patrol’s “3 at 50” or three percent of final pay for each year served at age 50.

One problem is the wide range of pension formulas, made even more complex by a recent national wave of cost-cutting reforms. Under a California reform three years ago, most new hires must pay more toward their pensions and work longer and retire at an older age to earn the same pension as workers hired before the reform.

 

Keith Brainard is the Research Director for the National Association of State Retirement Administrators (NASRA)

 

“Trying to compare plan benefits in one state with another state has become complicated,” said Keith Brainard, research director for the National Association of State Retirement Administrators.

Brainard started the database now operated jointly by NASRA and the Center for Retirement Research at Boston College and the Center for State and Local Government Excellence.

Several web-based seminars have been held to show how the “big data” can be used by researchers, government officials, media, and others. Trends and patterns can be identified, comparisons made, and the findings displayed in charts.

A chart on the database shows the amount of tax revenue taken by California public pensions was slightly below the national average in 2001. Then from 2003 to 2005 the California pension tax bite climbed well above the national average, maintaining a gap that by 2013 was about a third higher.

In rough terms, the public pension share of California tax revenue in fiscal 2013 was 8 percent by fiscal 2013 compared to a national average of 6 percent.

 

Source: Public Plans Database and Census of Governments.

Source: Public Plans Database and Census of Governments.

 

 

In an interview, Brainard mentioned two factors for the above-average share of tax revenue taken by California pensions. Most California government workers, including teachers and many police and firefighters, do not receive Social Security.

Only 40 percent of state and local government employees in California receive Social Security, according to the database. The Social Security coverage in some other large states: New York 99 percent, Florida 95 percent, and Texas 47 percent.

The cost of using the federal Social Security program to provide part of the retirement benefit (6.2 percent of pay each from the employer and the employee) would not show in data about the share of tax revenue taken by state and local pensions.

Another factor: The period covered by the research begins around 2000 when the three big state pension funds were spending a “surplus” from a stock-market boom not only on increased benefits but on lower employer contributions.

The California Public Employees Retirement System, which covers about half of all non-federal government workers in the state, sponsored the retroactive SB 400 rate increase for all state workers and dropped employer rates to near zero in 1999 and 2000.

Then as the stock market dipped, CalPERS had to begin raising employer rates not only to cover pension increases (AB 616 in 2001 authorized a bargaining menu for local government employees) but also to regain funding lost by the big employer rate cuts.

In addition to CalPERS, the California plans in the database include the California State Teachers Retirement System, the University of California Retirement System, the Los Angeles County Employees Retirement Association, and 11 other local systems.

The data covers most of the public pension members in California, but far from all of the pension systems. An annual report from the state controller lists 131 separate California retirement systems, many of them relatively small.

California systems in the database, with two major exceptions, paid their full Annual Required Contribution (ARC) to cover the annual or “normal” cost of pensions earned each year and the large debt from previous years, the “unfunded liability.”

Debt often is created when pension fund investments, expected by big California funds to earn 7.5 percent a year, fall short of the target, which critics contend is overly optimistic. Among other factors that can create debt is longer than expected life spans.

The California State Teachers Retirement System is listed on the database as paying only 50.9 percent of the ARC in 2013. Unlike other systems, CalSTRS could not raise employer rates. Now long-delayed legislation two years ago to pay the full ARC will more than double school rates by 2020, cutting deep into budgets.

CalSTRS spent its small and brief “surplus” around 2000 on several benefit increases and rate cuts. The pension fund was shorted when a quarter of the teacher contribution, 2 percent of pay, was diverted for a decade into a supplemental 401(k)-style individual investment plan for teachers with a guaranteed minimum return.

Three years ago, a Milliman actuarial report said if CalSTRS had kept its 1990 structure without the rate and benefit changes around 2000, pensions would have been 88 percent funded instead of 67 percent. A much smaller rate increase could have closed the funding gap.

The UC Retirement Plan is listed on the database as paying 63.9 percent of the ARC. A large surplus prompted the plan to give employers and employees a remarkable two-decade contribution “holiday.”

Most made no payments to the UC pension fund from 1990 to 2010. The surplus, driven by investment returns and other factors, peaked with a 156 percent funding level in 2000.

As painful rates were set to resume in a time of tight budgets, a UC task force said in 2010 that if normal cost contributions had been made during the two decades, the system would have been 120 percent funded instead of 73 percent.

CalPERS has not calculated how much of its current funding gap results from the pension increases and rate cuts during the surplus years. But a CalPERS chart showed that SB 400 accounted for 18 percent of the state worker employer contribution increase between 1997 and 2014.

Nearly half of the state worker contribution increase, 46 percent, was due to investment gains and losses, demographic and actuarial changes, and higher employee contribution rates. Payroll increases accounted for 31 percent of the change.

Critics say the SB 400 “3 at 50” formula has the most impact in local government, where police and firefighters are a major part of the budget. The big cities (Los Angeles, San Francisco, San Diego, San Jose, and Oakland) have their own pension systems and are not in CalPERS.

Public pensions have not recovered from huge investment losses during the recession. The Center for Retirement Research reported last monththat the 160 plans in the Public Pension Database were 74 percent funded last year, 72 percent under new accounting rules.

The Center’s report showed that from 2001 to 2015 the CalPERS funding level dropped from 111.9 percent to 74.5 percent. During the same period, the CalSTRS funding level fell from 98 to 67 percent and UC funding plunged from 147.7 to 81.7 percent.

About the Author: Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. He is currently a Publisher for CalPensions.com.

What Brexit Could Mean for Public Pensions

Since Britain’s stunning vote to leave the European Union, U.S. markets have already plummeted and markets around the world are in mayhem.  Economists warn that the vote will continue to have adverse consequences on financial institutions and markets around the globe, including the U.S., for an unforeseen amount of time.

So what does that mean for public pensions?

Most American public employee retirement systems are heavily invested in stocks because they are counting on high investment returns to cover huge gaps in funding, which were created by decades of over-promising benefits and underfunding annual contributions.

 

U.S. stocks resumed a selloff sparked by Britain’s shock vote to leave the European Union, with the Dow Jones Industrial Average falling more than 300 points on Monday, June 27, 2016.

 

As a result, public employee retirement systems have become unsustainable and the problems have been compounded by continually increasing benefits based on unrealistic and risky market expectations. So when the stock market turns negative, as inevitably it will, pensioners will run the risk of losing their retirements or taxpayers will be left picking up the shortfall.  High risk investment practices are particularly dangerous in periods of market volatility because of the potential for big losses that cannot be recovered before the next recession.

If pension systems were set up with less risk (as they once were), more sharing of that risk and lower return expectations, then the real cost of retirement benefits would be more apparent to everyone and retirees could count on being paid what they have earned.

Today’s state and local public employee pension system is already in crisis with more than $1 trillion in unfunded liabilities. Brexit should be the wake-up call drastically needed for policymakers to turn the tide and make the systems sustainable. If they don’t get control of the public pension crisis now, events like a Brexit mean more and more plans will get further and further behind on their funding obligations. And the consequences for taxpayers and retirees are dire, as we have seen in Detroit and Puerto Rico.

About the Author: Charles Rufus “Chuck” Reed  is an American politician and lawyer. Chuck Reed served as the 64th Mayor of San Jose, Calif., from 2007 to 2014. During his tenure as mayor of America’s 10th largest city, he introduced and passed more than 80 fiscal and open government reforms, including a comprehensive pension reform bill that was approved by the voters in 2012. Chuck’s work on pension reform has paved the way for many other cities to tackle their own fiscal retirement planning.

Protecting CA Students From Pension Costs

“The secret to stellar grades and thriving students is teachers,” writes The Economist in a recent editorial. One study cited by the magazine found that “in a single year’s teaching the top 10% of teachers impart three times as much learning to their pupils as the worst 10% do” and another “estimates that if African-American children were taught by the top 25% of teachers, the gap between blacks and whites would close within eight years.” The magazine argues that a rigorous form of pedagogy can “make ordinary teachers great” and that “the biggest gains will come from preparing new teachers better and upgrading the ones already in classrooms.”

But California is radically boosting pension spending instead. Legislation bailing out California’s teacher pension fund requires a doubling of spending on pensions to more than $10 billion per year, leaving that much less for preparing, hiring, paying and upgrading active teachers. $10 billion is nearly three times more than the state spends on California State University or the University of California. Needless to say, California cannot deploy a sufficient number of great teachers for six million students when so much of its education budget is being diverted to pensions.

It didn’t have to be this way. The least expensive time to address underfunded pensions is early, before interest compounds. But state legislators a decade ago bet differently and citizens lost, resulting in the $240 billion* bailout. At this stage protecting students requires three ugly solutions, all of which must be in the mix:

Higher Taxes: Government employee unions have already placed a tax increase initiative on the November ballot. But education’s share of the tax increase is largely consumed by the pension cost increase, producing little benefit for active teachers and other services.

Lower Services: Rising retirement costs have already crowded out public services such as welfare, courts, parks and higher education despite sharply higher state revenues and tax increases. California is already one of ten US states spending more on retirement costs than on higher education. The bailout means more crowd-out, plus Governor Brown has warned of reduced revenues as the stock market cools, implying even less money for higher education and other services. More cuts to services isn’t the answer.

Benefit Cuts: No individual gets rich on a teacher pension in California but the combination of compound interest and hundreds of thousands of beneficiaries produces a huge bailout cost. Retired teachers did not cause the pension problem, but neither did students, welfare recipients, taxpayers and other citizens already paying for rising pension costs, and neither did young and future teachers whose jobs, compensation and training will — in the absence of concessions by retirees — be sacrificed to the pension cost increase. Everyone must chip in to solve this problem. As a start, California should look to legislation in Rhode Island and New Jersey temporarily suspending annual pension increases for current and future retirees until plans are better funded.

 

Source: California Legislative Analyst’s Office

 

The state must not allow past pension promises to devour student futuresOnly the governor and state legislature can fix this problem. Charities cannot make up for $10 billion per year and the federal government is not likely to intervene in a financial issue of California’s own making. To succeed in an increasingly competitive world, California’s public school students require a full roster of great teachers. The governor and legislature must compel retirees to share in the cost.

*N.B.: More pension cost increases will be needed down the road because the teacher pension fund employed unrealistic assumptions when proposing the bailout (i.e., the bailout will cost more than $240 billion) and continues to use unrealistic assumptions when establishing contributions for new pension promises, creating additional unfunded obligations.

About the Author: David Crane is a Lecturer in Public Policy at Stanford University, SIEPR Research Scholar and president of Govern For California. From 2004 – 2010 he served as a special advisor to Governor Arnold Schwarzenegger and from 1979-2003 he was a partner at Babcock & Brown, a financial services company. Crane also serves as a director of Building America’s Future, California Common Sense and the University of California’s Investment Advisory Group. Formerly he served on the University of California Board of Regents and as a director of the California State Teachers Retirement System, California High Speed Rail Authority, California Economic Development Commission, Djerassi Resident Artists Program, Environmental Defense Fund, Legal Services for Children, Jewish Community Center of San Francisco, Society of Actuaries Blue Ribbon Panel on the Causes of Public Pension Underfunding, and Volcker-Ravitch Task Force on the State Budget Crisis.

Prop. 13 is California Taxpayers Only “Saving Grace”

Proposition 13 is certain to continue to be a hot topic in 2016 and beyond as “reformers” continue to work on mobilizing a statewide effort to enact a “split-roll” that raises billions of dollars in increased property taxes from California businesses.

I have worked in and around Prop. 13 in one form or another for my entire career and have collected more data and research on its impacts that anybody else I have ever come in contact with.

I have since ended that research for the “reform” side, because I came to appreciate Prop. 13 for what it truly is–the last line of defense that California taxpayers have against elected officials who refuse to control “unsustainable” and “unaffordable” spending at both the state and local levels of government. 

For those new to Prop. 13, it is a California ballot measure passed in 1978 that places a 1% limit on local property tax rates, unless a “change in ownership occurs,” and limits assessment increases to 2% per year.

At the state level, Prop. 13 requires that any measure which would raise revenues to be enacted by a 2/3 vote of the Legislature.  At the local level, Prop. 13 requires taxes raised by local governments for a designated or special purpose to be approved by 2/3 of voters and a majority for general tax increases.

 

Stanford University Economist, Roger Noll, stated that “ever increasing, burdensome taxes and fees is the single largest concern facing California businesses.”

 

Sure, Prop. 13 is not perfect, far from it.   But the reality is that there is perhaps no public policy in California that is more effective at safeguarding taxpayers against the inability of California politicians, particularly those of the Democratic stripe, from overspending and then sticking taxpayers with the bill.

With the State of California $400 billion in the red, and most local governments in the same situation, you don’t hear anyone arguing with the fact that California government has a huge spending and debt problem.

Moody’s Investor Services agrees with this assessment, having prepared a report that finds California to be the least prepared state to weather a financial storm due to its fiscal policies and inability to reform its tax system.

Without Prop. 13, California elected officials would have “carte blanc” to push the state’s $1 trillion and growing pension problem onto state and local taxpayers, serving to further exacerbate the problem.  A whole host of other state and local taxes and fees would inevitably become viable proposals overnight in the absence of Prop. 13’s protections.

The ongoing explosion in fees and tax exactions on businesses at the local level is perhaps the best indicator of what would happen if Prop. 13 did not exist—turning an already steady and increasing flow of new local taxes and fees into the equivalent of an unchecked dam-break flood of new taxes and fees on California taxpayers.

Stanford University economist Roger Noll says that the problem of ever increasing, burdensome local taxes and fees is the single most legitimate concern that California businesses express about the state’s system of state and local finance.

Opponents of Prop. 13 cite tax equity and fairness as reasons to “reform” Proposition 13 by switching away from a “change in ownership” trigger for market reassessment to a “periodic reassessment of commercial property at market value.”

Furthermore, reformers say Prop. 13 is not “fair” because it heavily taxes new investment and rewards  “long-time” landowners—resulting in heavily disparate property tax amounts.

They say that the only fair way is to bring all businesses who receive a “tax break” under Prop. 13 up to market value and then send billions of dollars in increased property tax revenues to Sacramento to spend as they please.

My primary issue with this line of reasoning is that Sacramento has already proven that it cannot manage the existing tax dollars it gets from the state’s property tax responsibly so why on earth would we send them a flood of new tax dollars?

Second, the entire state and local tax system is riddled with similar inequities so why are reformers choosing to single out Prop. 13 for “reform”?  California’s major taxes are all characterized by extremely high rates and a very limited or loophole-ridden base.

The result is that those who pay the tax pay full boat, and those who can take advantage of loopholes get a break.  The reality of the situation is that all tax “reformers” in California want to increase tax revenues by leaving the rates the same, closing the loopholes, and sending billions of dollars in increased revenues to Sacramento to poorly manage.

True tax “reform” would be to close the loopholes and lower the base to make the change revenue neutral—but there is not a single tax “reformer” in California that I know of who is pushing for revenue neutral tax reform.

This is the method that nearly all significant successful attempts at tax reform utilized including President Reagan’s 1986 tax overhaul—widely lauded as one of the most successful tax reform efforts of all-time.

Reagan’s 1986 tax reform was “revenue neutral” but hailed by politicians of all stripes for simplifying the tax code, broadening the base and reducing the rates—a win win for everyone, not just those who want more tax dollars.

About the Author: David Kersten is an expert in public policy research and analysis, particularly budget, tax, labor, and fiscal issues. He currently serves as the president of the Kersten Institute for Governance and Public Policy – a moderate non-partisan policy think tank and public policy consulting organization. The institute specializes in providing knowledge, evidence, and training to public agencies, elected officials, policy advocates, organization, and citizens who desire to enact public policy change.

$6.2 Billion in New Borrowing on June 7th Primary Ballot

They are overshadowed by one of the most tumultuous Presidential primary campaigns in decades, but California’s June 7th primary ballot has local tax and bond proposals in numbers that, in aggregate, ought to be generating vigorous public debate. Next week voters will be asked to approve 46 local bond measures totaling $6.18 billion in new debt, along with 52 local tax proposals. If history is any indication, more than 80% of them will pass.

Tax activists and politicians who brand themselves as “tax fighters” often point to alarming levels of state government debt, along with state taxes that are among the highest in the nation – but when they do, they are calling attention to a surprisingly small fraction of the big picture. Because most of California’s taxes and borrowing are assessed and spent at the local level. A California Policy Center study from 2013 entitled “How Big Are California’s State and Local Governments Combined?,” using 2011 data, calculated direct state government spending at $54.0 billion. The same study calculated total local government spending at $311.1 billion, nearly six times as much. The numbers have changed over the past five years, but the proportions have remained the same.

Total-CA-Budgets_Table-2r5

California government borrowing follows the same pattern, as shown on the next table. Even if you don’t include the unfunded liabilities for pensions and retirement health coverage – amounts vary by several multiples depending on what return-on-investment assumptions are made – as can be seen, five years ago, the total state government bond debt was $132.6 billion, whereas the total local government bond debt was nearly twice as much at $250.3 billion.

Total-CA-Budgets_Table-1r4

School bond debt just keeps piling up at the local level. Because it only requires a 55% majority for approval, compared to two-thirds for most other forms of proposed government borrowing, it is the most likely to appear on the ballot, and the most likely to pass. As a 2015 California Policy Center study entitled “For the Kids – Comprehensive Review of California School Bonds” uncovered, on average, local voters have approved $10 billion in local school bond borrowing every year from 2001 through 2014. Is all of this necessary?

This year is on track to beat the average. Because these bond and tax proposals are usually concentrated on the November ballot, where they are more likely to be approved by general election voters. It is surprising to find $6.2 billion in proposed new borrowing on the ballot this June.

If you want to learn the details regarding the new taxes and bonds being voted on next week, refer to the document prepared every election by CalTax, “2016 Local Elections.” For example, you will see there are three new taxes proposed on marijuana, 20 new parcel tax proposals, 14 sales tax  proposals, one hotel tax proposal, 4 utility tax proposals, 9 “miscellaneous” tax proposals, and one business tax proposal. Nearly all of these taxes are either extensions of “temporary” taxes that would otherwise be set to repeal, or tax increases, or completely new taxes. In only one case, in the Southern California city of Glendale, is a tax proposal on the ballot to repeal an existing utility tax.

The problem with repeals, or no votes of any type, is that the tax proposal just comes up again on the next election cycle. Eventually, almost all of them pass. In November 2014, as reported in the UnionWatch post “Final Results: 81% of Local Bonds Passed, 68% of Local Taxes Passed,” here’s what happened in that election: “Of the 118 local bonds, 96 were passed, and 22 were defeated. Of the 171 local tax proposals, 117 were passed, and 54 were defeated.”

If at first you don’t succeed, try, try again.

There is an alternative to more taxes and more borrowing. To avoid new taxes, revise pension benefits for existing workers so that – just from now on – the retirement benefits accrue at the lower pre-1999 rates, which are financially sustainable without new taxes. Instead of new borrowing, return control of schools to principals and parents, instead of the teachers unions, a simple step that will yield positive educational outcomes that all the new school buildings in the world cannot hope to replicate.

 *   *   *

Ed Ring is the president of the California Policy Center.

CalChamber Opposes “Virtually Permanent” Prop 30 Tax

With the California Chamber of Commerce announcing yesterday that it will oppose the Proposition 30, income tax extension, the question arises if a campaign will come together to match the financial firepower that the teachers, medical professionals and other public employee unions bring to the table in support of the measure.

Officially, the word from the Chamber is that it is opposed to the extension but nothing has been announced about a potential campaign … yet.

Proponents of the 12-year income tax extension filed signatures recently to get the measure on the ballot.

CalChamber noted in the release announcing opposition to the initiative that it did not oppose Proposition 30 in 2012. The measure was supposed to be temporary to deal with a financial crisis.
However, CalChamber declared that the extension would make the tax “virtually permanent, even when the state’s budget is balanced.”

The Chamber’s announcement comes on the heels of word from the California Business Roundtable (CBRT) that the decision to organize a campaign in opposition to the Prop 30 extension will depend on actions taken by the legislature on business issues.

 

Rob Lapsley, President of the California Business Roundtable (CBRT)

Rob Lapsley, President of the California Business Roundtable (CBRT)

 

CBRT president, Rob Lapsley, told the Sacramento Business Journal that the Roundtable will watch if the legislature tackles health care and education reforms along with specific bills of interest to the business community such as the requirement to give employees a seven days notice before changing work shifts.
Lapsley emphasized that the Roundtable’s decision would also rest on how the Prop 30 extension may impact the state’s economic health.

One issue the CalChamber raised in opposition to the extension was the problem of revenue volatility tied to higher income taxes. The Chamber feared significant reduced revenue to the state during future recessions.

Keeping the higher income tax rates for income over $250,000 could also hurt small businesses that pay taxes through the business owners’ income. In a recent BizFed poll in Los Angeles County, a key finding was that “personal income taxes have the most impact on small business (of 100 employees or less).”

Will concern from the business community over the Prop 30 extension effort gel into a campaign to stop the initiative that will be backed by millions of dollars in union support?

About the Author: Joel Fox is Editor of Fox & Hounds and President of the Small Business Action Committee. This article originally appeared in Fox & Hounds and appears here with permission.

Public Safety Unions and the Financial Apocalypse

Imagine for a moment that two premises are beyond serious debate: (1) That there will be another financial crisis within the next five years that will equal or exceed the severity of the one experienced in 2009, and (2) That the political power of public safety unions will prevent local governments from enacting pension reforms sufficient to avert a financial disaster when and if the next financial crisis hits.

What will these public safety unions do?

It’s distressingly easy for politicians to dismiss both of these premises, but since for the moment we’re not, imagine the following: Major European banks have declared insolvency because their debtors have all defaulted on payments, the Chinese stock market has collapsed because their export markets are shrinking instead of growing, and the deflationary contagion reaches American shores. Across the nation, speculative buying is replaced by panic selling. Housing prices fall, defaults accumulate, and the pension funds lose half their value overnight. In a cascading cycle reminiscent of 1929, deflation sweeps the global economy.

Meanwhile, pension reform has been limited to incremental adjustments to the pension benefits for new employees. Millions of retirees and active public safety workers still expect pensions that are roughly equivalent to the amount they made at the peak of their careers. But the money won’t be there.

How will public safety unions use their political power to address this challenge?

If the present is any indication, the solutions won’t be pretty. In San Jose and San Diego, public safety unions lead the charge to roll back local pension reforms enacted by voters. In counties across California, public safety unions lead the charge to undermine in court the reforms enacted by the State Legislature in the Public Employee Retirement Act of 2014. That’s all fine while the economic bubble continues to inflate. But what do we do when it pops? What do we do when there’s no money?

When challenging public safety unions to exercise their political power to advocate on issues other than law and order or their own compensation and benefits, a reasonable response is that public safety unions, like any government union, shouldn’t be involved in politics. The problem with that response is that they already are. Government unions, and their partners in the financial community, are a major cause of the economic bubble we’re experiencing. Their insatiable appetite for high returns, 7% or more, compels the financial engineering that creates unsustainable economic growth. When the crash comes, government unions will blame “Wall Street.” But in reality, they will share the blame, because they didn’t want to admit that their pension benefits relied on unsustainable rates of economic growth.

If there is another economic crash, public safety unions will face a choice. They can use their political power to strip away every remaining service that local government performs that isn’t related to public safety, raise taxes, and support “fees” on everything from green lawns to vehicle miles driven. They can support the creation of an authoritarian, oppressive state, raising revenue through rationing and regulating our water, energy, land use, home improvement, etc., at levels that make today’s annoying excesses seem trivial. They can hide behind environmentalism and egalitarianism to tax the last bits of vitality and freedom out of ordinary productive citizens. They can even hide behind faux libertarian ethics to charge exorbitant fees for rescue services, or profit from draconian applications of asset forfeiture laws. If they do this, it may be enough for them. But the price on society will be hideous.

There is an alternative.

Public safety unions can recognize that sustainable economic growth occurs when people have fewer impediments to running their private businesses. They can recognize that large corporations use regulations to eliminate their smaller competitors, and that excessive regulations of land, energy and water are the reasons that California has such a high cost of living. They can recognize that competitive resource development and cost-effective infrastructure development can only be achieved when the environmentalist lobby and their allies – the corporate and financial elites – are confronted and forced to accept less crippling restrictions.

Better yet, public safety unions can begin to recognize these political precepts NOW, before the financial apocalypse. Along with hopefully accepting more pension reforms instead of always fighting them, these unions can also protect their members’ futures by fighting for economic reform and more rational environmentalist restrictions. The sooner these reforms are adopted at the state and local level, the more resilient our economy will be when the economic implosion occurs. If pension benefit cuts are inevitable, because the money isn’t there anymore, with economic and environmentalist reforms the cost-of-living will also be cut.

America’s excessive public employee pension benefits have created a four trillion dollar monster, pension funds ravaging the world in search of high returns during the late stages of a credit expansion that has granted present growth at the expense of future growth. The day of reckoning is coming. Public safety unions can help prepare, for their own sake as well as for the sake of the citizens they are sworn to protect.

 *   *   *

Ed Ring is the president of the California Policy Center.

RELATED POST:
The Coming Public Pension Apocalypse, and What to Do About It

CA Democrats are Not Standing Up for "Working Families"

It’s election season, so every California Democrat politician is out there on the campaign trail, precinct walking with their “friends” in labor, and speaking to labor organizations and anyone else who will listen.  They are speaking with one voice–that ” we are proud to stand up for working families.”

This may sound like a great tag line, and is surely based on recommendations by campaign consultants, polling and focus groups, and perhaps most importantly resonates strongly with their organized-labor base, who is primarily responsible for funding all California Democrat campaigns.

But the truth is that California Democrat politicians and the California Democratic Party is the “party of organized labor” not of “working families.”  This distinction may not be all together clear, or even relevant, at first glance to someone not familiar with the inner workings of California politics and campaigns.

Senate Pro Tem Kevin De Leon (D) and Governor Jerry Brown (D) are two of the state’s top Democratic leaders who push “pro-labor” agenda items including raising the state’s minimum wage and expanded paid family leave.

There is a big difference between a “pro-labor agenda,” and a “truly progressive” agenda that seeks to bolster the middle-class and truly lift up “working families,” not just those on welfare.  If you look at everything California Democrats politicians are advocating for, and what they consider to be major policy successes, it becomes painfully clear that California Democrat politicians are primarily out to benefit “organized labor,” which comes at the expense of almost everyone else.  Of course there are some exceptions with the moderate and pro-business Democrats, but here we are primarily talking about the California Democratic leadership and solidly “pro-labor” state Democrat politicians.

By and large, California Democrat state politicians are preoccupied with pursuing a narrow, pro-labor agenda that is focused on providing the greatest amount of public subsidies, wage and benefit enhancements, and welfare benefits to a very narrow class of people–the poor, organized labor, and public employees–which represents their “core constituencies.”  Everyone else suffers as a result, including “working families” who are not on welfare, lower and middle-class families above the poverty line, small business, and big business.  California’s biggest policy problems such as pensions, housing costs, taxes, and lack of infrastructure spending do not even appear to be on Sacramento’s radar.

In other words, the California Democrat “pro-labor agenda” is neglecting the state’s middle-class and the state’s business climate, and making it much harder for the “true working families” who do not collect state welfare checks to prosper.  Moreover, this “pro-labor agenda” conflicts with a “truly progressive agenda,” but most Democrats and progressives have no idea exactly how.  Robert Reich, the state’s most prominent left-leaning economist is right–the system and its policies are “rigged” in California–but not in the way that most people think.

 

CA Democrat Agenda Primarily Involves Spending as Much Taxpayer Dollars as Possible, Not Spending Reform

If you look at the priorities of the California Democratic leadership they talk about being proud to stand up for “working families” and a desire to “alleviate poverty,” and improve education.  Many of their stated goals are noble, but their means of achieving them and the policies they utilize to advance these goals only serve to benefit their “core constituencies” listed above, not the rest of us and California as a whole.

Their primary policy instrument is spending as much taxpayer dollars as possible on government programs, primarily welfare, health care, and education.  But the problem is that they do so almost indiscriminately and do not try to spending taxpayer dollars wiser or more effectively.  California Democrat politicians have all but given up on asking California state agencies to spend tax dollars more effectively, and rarely consider any program changes that would upset the state’s hugely inefficient and unwieldy bureaucracy.

Spending taxpayer dollars on welfare programs helps the poor but not anyone else, and does little to actually lift the poor out of poverty over the long-term–welfare spending begets more welfare spending.  Spending more money on education in itself, does not improve education.  As a Dan Walters Sacramento Bee column reported earlier this year, the state is spending billions of dollars more on education now compared to a few years ago, with little or no noticeable improvement in the actual quality of education.

In short, most California Democrat policy priorities boil down to one simple end–indiscriminately increasing the size, cost and scope of California government as much as possible–to the primary benefit of the poor and state’s public sector unions. Their policy toward government spending and public employee compensation is essentially giving them as much money as is available in the government budget, no questions asked.

What is most telling about the “pro-labor agenda” and perhaps its greatest departure from the public interest and a “truly progressive agenda” is what California Democrat politicians are not doing.  California Democrats and the Democratic leadership have all but given up on trying to solve the biggest problems that ail California, particularly working families, the middle-class and California businesses.  But before we get to that, let’s take a quick look at the recent “crowning achievements” of California Democrat politicians.

 

A Brief Look at the “Crowning Achievements” of CA Democrats

The centerpiece of the “pro-labor” agenda is environmental regulation, and the “crown jewel” is AB 32.  California Democrats love to tout their desire to enact never ending layers of increased “environmental protections” and “environmental regulations.”  Environmental policy is extremely important to California voters and does represent a “truly progressive” policy stance–perhaps the last remaining shred of integrity the California Democratic Party and its candidates have left in support of a “truly progressive” policy agenda.  But even here they are taking environmental regulation too far, to the primary detriment of “working families” and the middle classes, who will bear the brunt of the excessive regulatory burden in increased costs of goods and services that are regulated, particularly energy costs.

AB 32 was a legitimate policy victory for the state and should be celebrated as such.  But how much further should the state take environmental regulation before the rest of the state and the world show at least some willingness to follow.  California is responsible for emitting less than 0.5% of the world’s total carbon emissions, yes less than half of a single a percentage point. So even if California totally eliminated its consumption and production of CO2 emissions, that would represent but a blip in the grand scheme of things worldwide.

We do get benefits from improved air quality and health considerations, particularly around stationary pollution sources.  But California alone cannot save the world from “climate change” even if we totally eliminated CO2 emissions within our borders.  So why are California Democrats in a race to enact the strongest and most costly environmental regulations when there is little indication that the rest of the world and nation will follow anytime soon?  My view is that it is because this represents action on their strongest policy position, however, beyond a certain point, further regulation will only serve to undercut our global competitiveness, while providing marginal benefits to California residents.  “Working families” will be hit the hardest because they pay the greatest portion of their discretionary income in energy costs.

The biggest recent success that California Democratic leaders are pointing to this campaign season is their “victory” in increasing the statewide minimum wage in California from $10 to $15 dollars per hour–a 50% increase.  Economists say that increases in the minimum wage do modestly raise the take home pay of low-wage workers, but in return lead to about a 10% reduction in employment, according recent discussions with economists.  So is this really the great policy victory that it is being billed as by Democratic politicians?  Effectively, trading a very modest increase in wages for those who keep their jobs, while putting other workers out of work.  Touting this increase as genuine social progress may work on the campaign trail, where few people question the results, but the reality is that this was not the great policy victory that it is being billed as.  After all, shouldn’t the end goal be to lift workers out of poverty entirely, not have them making more in their existing minimum wage jobs.

Another recent “success” touted by California Democrats as a victory for “working families” is the expansion of the state’s paid family leave program.  Prior to the expansion, California law already allowed workers to take up to six weeks off from work to bond with anew child or care for sick family members and receive 55% of their wages.  The new measure increases the pay to 60% of wages, starting in 2018, and creates a new classification for low-income workers who make about $20,000 or less annually to receive 70% of their regular pay, according to a Wall Street Journal Report.

The program is funded by worker contributions and estimated to cost about $350 million in 2018, and $587 million annually by 2021, according to a legislative analysis obtained by the Wall Street Journal.  This policy does represent an improvement for primarily low-wage workers but its paid for by higher wage workers.  It is a marginal improvement at best, and will surely be followed up with future legislation to increase length of time allowed and percentages claimed by workers.

As one can see, the recent list of true policy victories for “working families” is pretty short.  And as will be seen is clearly outweighed by all the negative aspects of the “pro-labor agenda,” which is perhaps better defined by the policy solutions that it does not include–namely the state’s most pressing policy problems.  Or put another way, the “pro-labor agenda” comes with a great cost to California, and that cost is a long list of policy problems that are off limits and not subject to negotiation, or even substantive discussion.

 

“Pro-Labor” Politicians Silent on Mounting Pension Problem

CalPERS Board President Rob Feckner has been “under fire” from critics whom believe he does not have the experience nor expertise neccessary to manage the country’s largest public pension fund.pension fund. Feckner is known to have close ties with the state’s labor unions, having held top positions with the California School Employees Association and California Federation of Labor.

The best example of one such issue is the refusal of the California Democratic Party and California Democrat politicians to even acknowledge the magnitude and implications of the state’s pension crisis.  The public position of almost every California Democrat lawmaker is to first not even discuss the “problem,” let alone any solutions.  Yet every financial expert I have talked to, including a consensus of top economists and government professors at Stanford University, say this is the biggest public policy problem in the state.

The pension problem is eating state, and particularly local balance sheets alive, and leaving no additional money to pay for other pressing spending priorities such as infrastructure, roads and education.  Total statewide pension and retiree health care debt is estimated to top $1.3 trillion, according to the Stanford Institute for Economic Policy Research (SIEPR).  Would a “truly progressive” politician allow all government revenues to go to pensions, as opposed to policy programs and priorities that truly benefit California and its citizens?

To further illustrate, the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) lost a combined $25 billion in 2015, the deficit between what they said they will earn and what they actually earned.  Both funds are on pace to lose another $25 billion in 2016, potentially more according to early return estimates analyzed by the Bond Buyer.  That’s roughly $50 billion of taxpayer dollars lost in just two years, or almost half of total annual California General Fund spending.  To be clear, this is $50 billion debt that will grow at 7.5% annually and need to be funded by future tax revenues.  This represents a growing expenditure of public dollars that is not available to be spent on truly progressive priorities at both the state and local levels of government.  Perhaps worse, California state and local taxpayers, including “working families,” are on the hook for all loses incurred by both funds.  Why even bother running a 6-month budget process at the Capitol if nobody will so much as lift a finger to stop the state’s pension funds from driving state and local governments off a fiscal cliff?

Of course, these same politicians have likely already come up with some internal justification for not doing anything about this issue, such as “o’well” that is what the unions want, their members apparently know more about what is good for the State of California than every other independent expert who has examined the issue.

 

Treasurer John Chiang has been remarkably silent on the state’s pension issues for the state’s top fiscal statewide elected official. In 2010, while serving as State Controller, Chiang’s CEO sent a letter to the Government Accounting Standards Board (GASB) opposing the recognition of net pension liabilities on public agency balance sheets. Despite Chiang’s opposition, the GASB accounting changes took effect in 2015, and continue to be applauded for providing much needed transparency of pension debt. Chiang has recently unveiled a “debt watch” database of local debt obligations that excludes pension related debt, despite it being the fastest growing local government debt category.

 

California Democrats Refuse to Address the True Causes of CA Housing Crisis

Another major departure from a “truly progressive” agenda, is the unwillingness of California Democrat politicians to address the California housing crisis.  This was clearly demonstrated last week when California Assembly leaders, including Assembly Speaker Anthony Rendon, touted a package of $1.3 billion in new government spending that was intended to address the housing crisis–but it all involved new government subsidies and spending on existing programs for California Democrat “core constituencies” that have clearly failed to address the problem to begin with.

Assembly Speaker Anthony Rendon has stated that his top priority as speaker is alleviating poverty in California. As one of his first acts as Speaker, Rendon proposed $1.3 billion in new state spending on low-income housing subsidies and government run housing programs that are intended to address the state's housing crisis.

Assembly Speaker Anthony Rendon has stated that his top priority as speaker is alleviating poverty in California. As one of his first acts as Speaker, Rendon proposed $1.3 billion in new state spending on low-income housing subsidies and government run housing programs that are intended to address the state’s housing crisis.

 

California’s housing crisis holds the greatest potential to further reduce the standard of living of the poor and middle-classes in California–perhaps more than any other policy area except the pension issue.  As has been discussed in a previous column, the state’s housing crisis is market-driven.  It was created over a number of years, decades even, where the state’s heavily regulated and fee-burdened housing market has failed to build new housing units to meet surging demand, particularly in coastal areas, the Bay Area and Los Angeles.

California Democrats are silent on the causes of what is driving the crisis, appear to have no intention of investigating the true causes of the state’s housing problem, and have given no indication that they are willing to consider any policy changes that would actually address the root causes of state’s housing crisis–beyond providing more taxpayer dollars to the poor to pay for “unsustainable” increases in market-based rents.

Government has essentially created the problem, and the private sector is the only force that can generate the 100,000 units that need to be built on an annual basis to build our way out of the problem.  But no California Democrat, or very few, are talking about the need to address onerous government regulation, crushing development fees, and generally about what the building industry needs to “jump start” the California housing market.

 

CA Democrats Don’t Support Enough Infrastructure Spending

Perhaps the only kind of spending a California Democrat politician does not like is infrastructure spending.  This is largely because the state’s public employee unions shun infrastructure spending because the vast majority of these dollars do not end up in their pockets.

Yet infrastructure spending is critical to building and sustaining a thriving economy and business climate.  All business leaders will tell you that infrastructure spending is needed to improve the state’s business climate.  This is why Silicon Valley leaders are backing transportation sales taxes to pay for roads, which business needs to transport goods.  But infrastructure does not stop there, we need state highways, water storage, state parks, schools, universities, waste water plants, and maintenance of existing facilities that state and local governments all but neglect every year.

What most people don’t realize, and even fewer will admit, is that the state’s infrastructure problem is closely related to the state’s pension problem and public employee compensation issues.  Public employee compensation costs  are consuming all new tax dollars and preventing state and local governments from funding infrastructure projects.  And local sales tax measures to increase infrastructure funding hurt “working families,” assuming they can pass with the “albatross” of the pension issue hanging over them.

Governor Jerry Brown’s January budget proposal only allocated $500 million for the most critical infrastructure maintenance costs (less than 0.5% of General Fund spending), noting that the state needs to start funding massive mounting public employee compensation debts.  Sonoma, Marin, and Mendocino counties have some of the worst road conditions in the state, but are all hamstrung by unsustainable increases in public employee compensation costs and mounting debt from these same issues.

Infrastructure benefits all Californians.  It truly is a public good.  Apart from support for some school bonds, why doesn’t increased infrastructure spending fit into the “pro-labor” agenda?  Simple, it does not benefit the state’s public employee unions, as much as salary and benefits which consume 80% of state and local government spending.  And these same governments can’t afford to pay for it, given unsustainable spending in these same budget categories.

 

CA Democrats Fail to Address Tax Reform

Tax reform is perhaps the toughest issue of all, but holds the greatest potential to lift up the California working families and the middle-classes.  California Forward released a series of reports on the issue and Controller Betty Yee’s Council is scheduled to release a report on tax reform soon.  But you don’t see many California Democrats, or the Democratic leadership out there discussing the need to tackle tax reform.  One exception is Sen. Hertzberg, who has introduced a major tax reform bill to expand the state’s sales tax to services, but again this expands the state’s most regressive tax and would be passed onto consumers.

California Democrats are just as guilty as Republicans in proposing a series of new tax expenditures and exemptions every year that help a select special interest (i.e. the movie industry), but are paid for by everyone else.

The state’s tax system holds the greatest potential to transfer wealth from the rich to the lower classes–which is perhaps the single greatest defining policy of what I thought it meant to be a “progressive.”  But nearly all Democrats shy away from this issue because it upsets business, and is not seen as fitting into their long-term career path of climbing up the ladder in state and/or local politics.  It’s too tough of an issue to attract the Democratic mainstream, and holds little potential for a short-term political payoff, beyond very narrow proposals that benefit special interests.

What needs to be done on tax reform?  Simple, you broaden the base and lower the rates, as any expert on tax policy will tell you. California has the highest tax rates in the county on the sales tax and the income tax, up to 9.5% for the sales tax and 13.3% for the income tax.  The sales tax is regressive and hits the poor the hardest, particularly working families who don’t collect any state welfare payments.  The income tax also hits the lower and middle-classes the hardest, as well as small business, in terms of proportion of income and they don’t have the same exemptions and deductions afforded to the rich.

By failing to address the state’s unsustainable spending issues, California Democrats are essentially advocating for future tax increases, that will hit working families and the middle-classes the hardest.  They should be working to ease the tax burden on “working families,” not increase it–that would be “truly progressive.”  Local governments are constantly enacting a series of local fees, mitigations and exactions that negatively impact “working families” and the business community.

To be fair, most California Democrats are hoping for the Prop. 30 extensions to pass which raise $7.5 billion annually, primarily from the wealthy and small business (about $5.5 bil.), but this also includes a 1/4 sales tax increase that will hit the poor and working families (about $1.7 bil.).

This is not tax reform, it’s a general tax increase that lets big business off the hook and hits the average taxpayer and small business the hardest (Note: data from The Economist shows that U.S. corporations are generating the lion’s share of business profits, record profits in fact, higher than any other nation, but not necessarily passing them through to workers).  The reason is that many small businesses (S Corps and sole proprietors) pay taxes through the state’s income tax, while corporations pay through the state’s corporation tax which is so littered with special loopholes and exemptions that some experts say it is “voluntary.”

In short, California’s current tax system contains some progressive elements, namely the income tax, but as a whole the state’s tax system is is not “truly progressive.”  It is loophole-ridden and serves to primarily benefit the rich and big corporations who can take advantage of all its loopholes to the detriment of everyone else (i.e. working families, small business) who pays full boat.  It is largely in conformity with the federal tax code which is even worse as is being discussed at length on the national campaign trail.

 

Significant Policy Change is Difficult But Not Impossible

As one can see, the California Legislature has clearly been marginalized to proposing small, almost insignificant solutions, to address big problems.  And as for the biggest policy problem in California, the state’s unsustainable pension system, California politicians are remarkably silent because any discussion of this issue offends their “friends” in labor.  This is completely ridiculous, and unconscionable to any one who understands the facts of this policy issue, which almost certainly includes Gov. Jerry Brown.

A review of major policy changes enacted over the past 40 years beginning with Prop. 13, shows that significant policy change does happen but it requires bold leadership and a willingness to commit to taking on tough issues over the long-haul, according to a study published by the Kersten Institute.  Most major policy changes do not happen overnight, but the important thing is to at least try.

The critical ingredients of policy changes enacted in the California Legislature are strong leadership from both Legislative leaders and the Governor.  Unfortunately the California Democratic leadership is silent on many of the major policy issues facing California. Gov. Jerry Brown has perhaps the greatest capacity to take on the tough issues, but even he has recently shirked from his initial willingness to think and act big on the tough issues.  Gov. Brown has since decided to just follow the lead of the California Legislature on all but a few pet “legacy issues.”

Gov. Brown did make public employee compensation debt issues the major focus of his January State of the Union Address and is likely to drive a hard bargain in the budget process for increased state payments for retiree health care.  But that’s about it.  The Governor has tried to get CalPER’s to accept some reasonable reforms, but they have refused and he has not made a major issue out of it.

Gov. Brown has been mostly focused on his criminal justice initiative and his two “legacy infrastructure projects,” the delta tunnels and high-speed rail.  The sad reality is that the State of California cannot even pay for its most basic infrastructure needs, particularly in the absence of additional pension and retiree health care reform.  Who needs the delta tunnels and high-speed rail if the infrastructure we have is currently falling into disrepair?

The Governor made road spending a key issue last year, in response to requests by California business leaders and the counties, but has not chosen to connect this to the pension problem, which is the real cause of the “roads crisis.”  The Governor can, and should do more to address these major issues.

So what we really have in California politics is a leadership crisis.  A leadership crisis characterized by the unwillingness of California leaders to address the state’s most pressing policy problems in a substantive way.  Discussion of such issues, if even raised at all, is largely confined to a cursory review, and often followed by proposing a narrow or very piecemeal solution, which may not even represent a step in the right direction.  Other major problems such as pension reform, infrastructure, and tax reform are hardly discussed at all, it’s almost as if they are not even on the radar of Sacramento politicians, even though they loom large in almost every other venue in California, particularly with local governments, the business community and the average citizen.

Another problem is that California has become a “one party state” for all practical purposes which prevents many of their policy positions from being challenged in a competitive election.  The state would benefit by returning to a true two party state as reported by a recent Kersten Institute report.

 

It’s Fine to Be “Progressive,” But Please Be “Truly Progressive”

So the next time you hear a California Democrat politician say “I’m proud to stand with organized labor for working families.” Please question what that actually means, and clarify if that is for the “working families” that are paying California’s taxes, or just those who are partially or fully subsidized from state taxpayers because they are a “core Democrat constituency”?

California has a series of major public policy issues that are going unaddressed and undiscussed in the circles of power in California, all of which have huge implications for “working families” and California’s future as a state.

It is time for California Democrat politicians to start standing up for the “public’s interest,” which includes the lower and middle-classes and what is going to help the state as a whole, not just organized labor.  There is a big difference.  It’s fine to be “progressive,” but please be “truly progressive,” not just “pro-labor.”

And next time you hear a California Democrat politician say they are “fighting organized labor” in Sacramento, take my word for it, “organized labor” already has the keys to the kingdom–so there is really no need to fight for them in Sacramento–it’s really just an exercise of preaching to the choir.

About the Author: David Kersten is an expert in public policy research and analysis, particularly budget, tax, labor, and fiscal issues. He currently serves as the president of the Kersten Institute for Governance and Public Policy – a moderate non-partisan policy think tank and public policy consulting organization. The institute specializes in providing knowledge, evidence, and training to public agencies, elected officials, policy advocates, organization, and citizens who desire to enact public policy change

 

The Bell Syndrome Afflicts More Cities Than Just Bell

Remember Bell, California? Back in 2010 the Los Angeles Times reported that Bell city officials were receiving unusually large salaries, perhaps the highest in the United States. For example, Robert Rizzo, the City manager, had received $787,637. By September of that year, as reported on CNN, the California Attorney General filed charges against eight former and current city officials. The public was outraged.

Not generally known however was the process whereby the City of Bell employees managed to pay themselves so much money. Earlier that summer the Los Angeles Times covered this part of the story, reporting “The highly paid members of the Bell City Council were able to exempt themselves from state salary limits by placing a city charter on the ballot in a little-noticed special election that attracted fewer than 400 voters.”

This use of barely legal maneuvers to extract ridiculously generous salaries and benefits from taxpayers is not restricted to Bell, however. The Bell Syndrome existed before any of us had ever heard of Bell, and even now, in this sanitizing age of transparency, it lingers, continuing to infect our public institutions.

Two cases of the Bell Syndrome are featured in an investigative report just published on UnionWatch entitled “The Pension Scandals in Sonoma and Marin Counties,” written by John Moore, a retired attorney living in Pacific Grove.

Back in the period between 2002 and 2008, Sonoma and Marin counties were, just like virtually every other city and county in California, in the process of granting pension benefit enhancements to their employees. But did they follow due process? Moore writes:

This article deals with pension abuses by two separate CERL agencies, the counties of Sonoma and Marin. Each has its own retirement board. In each county, the civil grand jury found serious procedural violations that were preconditions to the adoption of retirement increases:

Grand Jury Report – Marin County
Grand Jury Report – Sonoma County

Each grand jury report documented the grant of pension increases from 2002 through 2008 without providing the board of supervisors and citizens mandated actuarial reports estimating the “annual” cost of each enhancement.

There are 21 counties in California with independent pension systems. In all, taking into account cities with their own pension systems, along with CalPERS and CalSTRS, there are 81 independent state and local government worker pension systems in California. And most if not all of them adopted pension enhancements between 1999 and 2008, awarding the benefit enhancements retroactively.

Anyone who thinks there aren’t legal grounds on which to question the retroactive pension benefit enhancements that have mired California’s public sector in a swamp of overwhelming debt should carefully read Moore’s article. Improper notice. Poor estimates of “annual costs.” Lack of independent financial review. But the consequences of these improprieties are plain to see.

In Marin County the most recent financial report shows their pension system, as of June 30, 2015, was funded at a ratio of 84.3%. If we were at the bottom of the market instead of on the plateau of a market that has roared for the past seven years, that would be reassuring. But we’re not. Since June 30, 2015, the S&P 500 has risen from 2076 to 2091. That’s less than one percent during a ten month period when – at 7.25% per year – this index should have gained 6.0%. The DJIA for the same period? Up 1.5%. The NASDAQ? Down 2.4%.

On page 27 of Marin County’s most recent pension fund financial report is a table entitled “Sensitivity of the net pension liability to changes in the discount rate.” That table shows the system, as noted, 84.3% funded when assuming – as they do – a “risk-free” rate of return, year after year, of 7.25%. On the same table, the lowest assumption they calculate is at a return of 6.25%, which lowers the funded ratio to 74.4%.

Abstruse Gobbledygook

It’s too bad this is all abstruse gobbledygook to most voters and most politicians, because this is real money. Also shown on page 27 of Marin County’s 6/30/2015 financial report is the amount of the unfunded liability for Marin County’s pension system. If those investments keep on earning 7.25% per year, that liability is $387 million. If those investments only earn 6.25% per year, the liability nearly doubles, to $717 million.

Along with asking questions as to the legality of shoving these pension benefit enhancements through county boards of supervisors and city councils with minimal due process or quality independent financial analysis, one may ask how these pension systems get away with claiming 7.25%, or 6.25% for that matter, is a “risk free” rate of return. When is the last time you went to a bank and bought a CD, or went to a brokerage and bought a treasury bill, and saw a return north of 3.0%? So how much would Marin County’s pension liability be if their investments only earned 3.0% per year?

Using formulas developed by Moody’s Investor Services for this purpose, as explained in the California Policy Center study “A Method to Estimate the Pension Contribution and Pension Liability for Your City or County,” if Marin County’s pension system were to earn a risk free 3.0% return per year, their unfunded pension liability – that’s “debt to taxpayers” in plain English – would be $2.1 billion.

Two-point-one-billion. Billion with a “B”.

When pension benefits were enhanced by one local government after another between 1999 and 2008, the means by which they were approved were barely legal, if they were legal at all. The chicanery and insider-dealings that constituted these decision making processes rival the scandal in the City of Bell. The syndrome is the same – financial corruption that enriches the government while disenfranchising and diminishing private citizens. But the sheer scale of the financial consequences of these retroactive pension enhancements, the literally hundreds of billions of debt that these shady machinations imposed on California’s taxpayers – that dwarfs the scandal in Bell like a whale dwarfs a minnow.

 *   *   *

Ed Ring is the president of the California Policy Center.

The Pension Scandals in Sonoma and Marin Counties

Two Case Studies on How Two Counties Purchased Outside Legal Opinions That Delivered Aggressively Self-Serving Interpretations of the Law in Response to Grand Jury Reports That Found That Substantial Pension Benefits had Been Granted Illegally.

Introduction

In California, public pensions are guided by different divisions of the government code. The largest administrator is CalPERS which administers pensions for most cities, some counties and most political districts pursuant to statutes known as The Public Employee’s Retirement Law (PERL).

The County Employee’s Retirement Law (CERL) governs counties, cities and districts that elected to be governed by CERL. These CERL agencies have an administrative agency for their plan that is local and not governed by CalPERS.

This article deals with pension abuses by two separate CERL agencies, the counties of Sonoma and Marin. Each has its own retirement board. In each county, the civil grand jury found serious procedural violations that were preconditions to the adoption of retirement increases:

Grand Jury Report – Marin County

Grand Jury Report – Sonoma County

Each grand jury report documented the grant of pension increases from 2002 through 2008 without providing the board of supervisors (BOS) and citizens mandated actuarial reports estimating the “annual” cost of each enhancement.

Each county obtained outside legal opinions, which committed direct violations of fiduciary duties owed the client (the County) and failed to provide “material matters” to the client as required by the “Rules of Professional Conduct” applicable to California lawyers.

This is the first expository article, specifying the unusual lengths gone to by law firms to aggressively interpret the law to help government agencies, like a county, to protect hundreds of millions of dollars of illegally adopted pension increases.

The Sonoma pension increases were documented by the civil grand jury in 2012. The Marin civil grand Jury report was issued in 2015. On March 9, 2016 a Marin citizen, David Brown, sued the Marin County board of supervisors for its failure to take action to remedy the illegalities found by the grand jury.

On March 23 and March 28 The Marin Independent Journal, the dominant paper in Marin County, printed an article and an editorial, respectively, on the topic.

Pension critic calls for court review of grand jury’s pension probe,” by Nels Johnson, Marin Independent Journal

Marin IJ Editorial: Pension critic doesn’t deserve county’s rebuke,” Editorial, Marin Independent Journal

This analysis specifies how these pension increases almost certainly violated the law, but more importantly, and for the first time, how outside law firms provided questionable legal opinions to protect the illegally granted benefits.

Legal Background

The California Rules for statutory construction clearly show that Government code 7507, herein “7507,” was and is mandatory. Compliance by the Agency legislative body prior to increasing pensions “shall” and “must” occur,  or the increase is void or voidable. Section 7507, as it read from 2000 to 2009 had three distinct mandates.

Mandate one:  The legislature and local legislative bodies (the board of supervisors for counties) shall secure the services of an enrolled actuary to provide a statement of the actuarial impact upon future annual costs before authorizing increases in public retirement plan benefits.

Comments on mandate one:

  • Per Government code section 14 “Shall” is mandatory and “May” is “permissive.” Permissive is another way to say “directory.” “Shall” is used three times in the statute, and without qualification or limitation of any kind.
  • It is the “legislative body” (board of supervisors, city council, district board) that must obtain the actuarial report, not the retirement administrator or board, or even the agency.
  • See also Govt. code 31516: “The board of supervisors shall comply with Govt. code 7507 before… etc.” Govt. Code 31516 was added in 1995 to make certain that CERL retirement administrators required board of supervisors’ compliance before agreeing to accept a new retirement increase.
  • According to Govt. code 14, if the legislature had intended permissive and not mandatory, it would have used “may,” but it clearly did not.

Mandate two: The ‘future annual costs’ shall include, but not be limited to, annual dollar increases or the total dollar increases involved when available.

Comments on mandate two:

  • Govt. code 7507 deals not with “costs,” but increased “annual costs.” If the cost of 2%@50 was $10M a year and it was increased to 3%@50, and the cost of that increase was $5M a year, then the total cost would be $15M a year. The annual cost estimate of the new benefit was $5M.
  • If the new benefit was retroactive for time served, another annual cost for that determination was required.
  • In order to determine the annual costs, the actuary needed the salary and actuarial data for members of each group receiving the increase. For example, if the increase related to both fire and sheriff, salary and actuarial data was required for both groups.
  • The annual cost increases must be stated in “dollar” sums for “any” pension increase.

Mandate three: The future annual costs as determined by the actuary shall be made public at a public meeting at least two weeks prior to the adoption of “any” increases in public retirement plan benefits.

Comments on mandate three:

  • “Any” is clear. Every separate increase for an affected group of members must comply with 7507.
  • The reason for 7507 is to inform the board of supervisors and the public of the budget dollar cost of a new pension benefit; a transparency issue. But also to assure that the constitutional debt limit is not violated by the increase; and, on a common sense level, to see if the new benefit is sustainable.
  • There are statutory requirements for describing agenda items. California Govt. Code Section 11125(b) requires, “The notice of a meeting of a body that is a state body shall include a specific agenda for the meeting, containing a brief description of the items of business to be transacted or discussed in either open or closed session. A brief general description of an item generally need not exceed 20 words.” See also California Govt. Code Section 54954.2(a)(1)(seventy two hour notice). It is insufficient to refer to an agenda or other report to meet the notice requirements. Whether in an open or closed session, a minimum agenda notice regarding pension enhancements would provide as follows: “Item provides annual dollar increase in costs, as determined by an actuary, for retirement increases for X employee categories.

In 2009, the legislature attempted to close loopholes that agency lawyers had devised to evade the “annual cost” revelations required by Govt. code 7507. It amended it to prohibit the use of consent agendas and henceforth required the chief administrative officer of the agency to certify compliance with Govt. code 7507. Like govt. code 41516 of CERL, CalPERS had always required such certification, but not necessarily by the chief administrative officer. The 2009 amendments are persuasive evidence of the mandatory nature of the statute; otherwise, why would the legislature bother to strengthen it?

In both Sonoma and Marin County’s Code of Ordinances there is a code provision mandating that “shall” means mandatory. Like Govt. code 14, the mandated rule of interpretation was not referenced in county obtained legal opinions. That was a travesty. Outside counsel had a duty to reveal that “shall” as used in interpreting the government code was mandatory

The Sonoma County Pension Scandal

In 2012, in response to citizen’s complaints, the Sonoma county grand jury, investigated massive pension increases initiated in 2002 (by 2013, the Stanford Pension Tracker reported that the Sonoma pension deficit has grown to $2.2 billion, including about $500M in pension bonds). At the conclusion of its investigation, the grand jury report concluded: “The CERL requirements for approving the county pension in 2002 do not appear to have been followed.”

Not very dramatic? Right? Well Sonoma County’s response to the grand jury report was spectacular – arguably it was a total confession: “Documents could not be located to demonstrate that the County made the actuarial cost impacts public at a public meeting at least two weeks prior to the adoption of the enhanced retirement benefits.”

But in spite of that admission, the county response, based on a shameless outside legal opinion stated that while the county did not notice and provide the annual cost in dollar terms at a public meeting two weeks prior to approving the retirement enhancements, it had “substantially complied with 7507. In effect, the lawyers said zero compliance equaled substantial compliance.

The outside legal opinion agreed that a 7507 actuarial report had not been made public, and had not even been obtained by the board of supervisors as required by 7507; it referred to two actuarial reports from the files of the Human Resources department (not the board of supervisors as required by 7507) and made the incredible conclusion that those internal records, never shown to the board of supervisors or the public, equaled “substantial compliance” with 7507.

The history of the Sonoma County 2002 pension increases is critically important to prove the concerted power of county staff, unions and board of supervisors to illegally enrich their group by non-adversarial, precise, agreed upon tactics. This is the usual method of so-called collective bargaining in California government.

At the turn of the century there was an open dispute about what determined “pensionable compensation” in CERL agencies like Sonoma County. The California Supreme court cleared up the issue in “The Ventura Decision.” But the Sonoma county lawyers saw a billion dollar opportunity. A “Ventura Decision” law suit was pending in Sonoma County, but of course all of the issues had been decided by the supreme court in the Ventura case.

Eventually, all of the members of the county pension plan (beneficiaries) were made parties to the suit. Plaintiffs and defendants made a detailed written lawsuit settlement that substantially increased pensions, both going forward and retroactively, for every plaintiff and defendant group, including the board of supervisors.

Here is a link to the Ventura Settlement agreement enacted by the Sonoma County Retirement Association’s Board of Directors who do not have the authority under the law to increase pension formulas. That can only be accomplished with a Board of Supervisors resolution adopting the new formulas. Item 8 in the agreement increased benefit formulas for Safety employees and Item 9 increased benefit formulas for General employees.

The board of supervisors did not obtain an actuarial report as required by 7507; therefore it was impossible to notice a public meeting to make the annual cost known to the public prior to adopting the increases, also as mandated by 7507. There is absolutely no case law suggesting even by hint, that 7507 could possibly be “permissive” (directory). As I will show, there was and is substantial case law confirming that 7507 was/is mandatory.

I have been actively observing governmental pension and compensation history since about 2008. The approach used to design the Sonoma county pension scandal is a precise representation of union bargaining in California governmental agencies. Everyone at the table benefited from unanimous compensation increases. In response to the grand jury finding, the successors of the same beneficiary groups that designed the scheme, stuck to the scheme by ignoring the facts and the law, and engaged law firms to provide them legal interpretations that defended their actions, as exemplified in the responses to grand jury findings of substantive compliance with 7507.

Hopefully, this analysis will spark an interest in pension reform in Sonoma county.

The Marin County Pension Scandal

In April 2015, the County of Marin civil grand jury issued a comprehensive report entitled: “Pension Enhancements: A Case of Government Code Violations and A Lack of Transparency.” The report was a precise factual demonstration of 23 violations of the requirements of 7507 by the county.

In particular, the grand jury report focused on the County’s failure to obtain actuarial reports and the failure to notice public meetings to reveal the annual costs of the increases to the public, as required by section 7507. In addition, I note that the facts indicate that not only the public, but the “legislative body” (board of supervisors) was not provided a 7507 estimate of the future costs of  “any” increase as required by 7507 and government code 31516.

The grand jury report indicated that as of its April 2015 publication the most recently available county unfunded pension deficit was $536.8M. The County also had over $100M in pension obligation bonds outstanding.

Citizens for Sustainable Pension Plans (CSPP), a Marin pension reform group, hired attorney Margaret Thum to provide a legal brief outlining the law related to the facts set forth in the grand jury report. The county hired the law firm of Meyers Nave to advise it about its required response to the grand jury report. The Thum opinion was totally honest and accurate, but the board of supervisors refused to read it or to even make it part of the public record. It is debatable, at best, to assert that the Meyers Nave opinion argued for the interests of the county of Marin, its client. An objective reading of the Meyers Nave opinion might instead find that it misrepresented the law and facts and omitted critical statutes and cases.

A review of the Meyers Nave legal opinion makes it clear that it agreed the county had failed to obtain an actuary report setting forth the “annual costs” of  “any” retirement increase discussed in the grand jury report. It admits that no public meeting was noticed or held, where the “dollar amount” of the annual cost for each new benefit was reported to the public, or even to the board of supervisors as required by 7507 and 31516.

But despite these acknowledgements, Meyers Nave argued that the County had “substantially complied” with the statutory requirement. Its contention on the facts was that in 1999 and 2001, the “Mercer” actuarial firm provided the county Human Resources Department (not the board of supervisors or the public as required per 7507) with actuary reports about the proposed increases. I note that the latter of the reports stated that it relied on calendar year 2000 data in making its estimates.

Here is why that is important. In the fiscal year 2001-2002 there was a tech stock market crash. Both PERL and CERL pension plans lost approximately 7% of the value of their assets and failed to earn their 8% assumed rate of return at the time. Generally CERL plans thereby fell short of their target return by 14%. So the use of 2000 data would have substantially understated the cost of any new benefit after 2001-2002. In addition the rate of retirement, salary increases etc. after 2000 would have increased the annual cost of the new benefit. That is why it was necessary to obtain a current actuary report – one that used the most recent data from the past year to provide a report that that produced an accurate “annual cost” dollar amount.

I am not an actuary, but I have reviewed dozens of 7507 actuarial reports. Every one of them provided that after June 30 of a designated year (e.g.2000) the report was no longer valid because the data from the last year was now finalized and available for a current and accurate analysis. That is what actuarial standards required.

Keep in mind that as the grand jury, as did the Sonoma grand jury, found there were no bona fide 7507 actuary reports; only the Mercer reports (which neither the public nor the board of supervisors saw). The board of supervisors did not obtain a valid actuary report setting forth the annual costs in dollar sums for “any” pension increase, and that information was not revealed to the public at a public meeting, so there was NO compliance with 7507. Yet, a law firm conjectured that there was “substantial compliance” when, arguably, there was NO compliance. Did that firm breach its duty to the client, if the client, ultimately, was the citizens of Marin County? It appears that the firm advocated for the staff, unions, and the board of supervisors, the continuing beneficiaries of the illegally adopted pensions, and contrary to the interests of the client.

Follow the Attorneys:

In pension enhancement cases, the process  to comply with 7507 is as follows:

  • The unions ostensibly negotiate with the county for a pension enhancement,
  • they agree on the increased pension and execute a contract (MOU) setting forth the terms,
  • the board of supervisors adopts the MOU,
  • the county informs the Retirement board of the new benefit,
  • the board of supervisors obtains a Govt. code 7507 report determining the annual dollar cost for each new benefit.
  • the county notices a public meeting by an agenda notice that describes that at the meeting the county will reveal the annual dollar cost of each (any, per 7507) pension increase set forth in the MOU’s,
  • that meeting is held at least two weeks prior to adoption of the new benefits,
  • if approved, the county enters into a new or amended agreement with the Retirement Board for the administration of the new pension enhancements.

In the case of “Voters for Responsible Retirement v. board of supervisors, (1994) 8 Cal. 4Th 765, the California supreme court clarified the moment at which the MOU’s that increased pensions were valid contracts. It said: “..section 7507 provides that the local legislative body, before adopting increases in public retirement benefits for its employees, must obtain actuarial evaluations of future annual costs of the plan, and make that cost information public “at a public meeting at least two weeks prior to the adoption of any increases in public retirement plan benefits.”

In the 1994 ruling, the court made it clear that the county, by its board of supervisors could refuse to pursue the new benefit if the 7507 report indicated that the cost was not acceptable to the board of supervisors. Additionally, the court noted that if the board of supervisors refused to adopt the benefit after receiving the 7507 report, the MOU’s were not final because the condition subsequent to validity had not occurred and it was back to the negotiating table to start anew.

The Alleged Violations of Fiduciary Duty in Both Sonoma and Marin Counties

  • The most outrageous fiduciary breach by lawyers for the county in the Sonoma and Marin pension scandals was the evident by-pass of Govt. code 7507. On a risk reward basis it was apparently decided that it was better to risk non-compliance when compared to the knowledge that a 7507 actuary report would reveal. That is, the enhanced plan would reveal a violation of the constitutional debt limit, which would then require a 2/3 vote of the people;
  • The failure of a single county lawyer to advise that in the Voters case the California supreme court had ruled that MOUs between unions and the county granting pension increases were dependent upon board of supervisors compliance with 7507; otherwise there was no binding contract;
  • The assertion that no case law has found that 7507 was mandatory. Clearly the Voters case proves that it was mandatory.
  • In addition to the omission of “Voters” case, note how outside counsel explained Howard Jarvis Taxpayers’ v. Bd. of Supervisors (1996) 41 Cal. App.4th The law provided that a board of supervisors could withhold the power of its retirement board to define retirement eligible compensation that included “flexible payments.” If a board had not denied a Retirement Board the power to set flexible payments as a part of final compensation, then the Retirement Board had that power. That is what it did in this case. This was permitted because 7507 only applies to the legislature and legislative bodies and not retirement boards.
  • The court held that because the consent of the board of supervisors was unnecessary for the retirement board to set flexible payments, there was not a violation of 7507. If board of supervisors’ approval had been required there would have been a violation of 7507 invalidating the increases that resulted. If 7507 was not mandatory, there was no issue for the court to decide. At page 15 of its legal opinion Meyers Nave cites cases unrelated to the Govt. code where the court in those cases discussed whether “shall” as used in the contracts was mandatory. It omitted reference to Govt. Code 14 of the Govt. Code Rules of interpretation that states clearly that “shall” is mandatory.
  • Here is what Meyers Nave told the board of supervisors and citizens about the Howard Jarvis case to imply that it did not support that 7507 was mandatory. It repeated the facts, as I have above, and then said: ”Under the facts of the case, section 7507 was found inapplicable.” What Meyers Nave failed to tell the board of supervisors was that 7507 was inapplicable because it did not involve the board of supervisors, but that if it had, compliance with 7507 was mandatory. Here, let that court explain it: “However, the record demonstrates the change in the retirement system of which plaintiffs complain was not an ‘increase in public retirement plan benefits’ which the board of supervisors may authorize, AND WHICH WOULD SUBJECT IT TO THE REQUIREMENTS OF SECTION 7507 (emphasis mine), but rather a change in LACERA’S method of calculating “compensation earnable”……” What can I say? The omission of the court’s clear statement that 7507 was mandatory for board of supervisors adopted pension increases had the effect of misleading the public as to whether 7507 was mandatory. That gimmick benefited not the client, but the beneficiaries of the illegal pension: the staff, the unions, the board of supervisors. It financially hung the client and citizens out to dry.
  • The legal opinion also does another magical application to the case of California Statewide Law Enforcement v. Department of Personnel Administration 192 Cal. App. 4Th1 (2011). Again, the issue is whether 7507 was mandatory. In the case, CSLEA, a govt. union that had been classified as “miscellaneous” was granted “safety status” with higher pensions by the 1992 legislature. After it became law, the union claimed it was entitled to the new “safety” status retroactively for time served as miscellaneous employees. Arbitration ensued under the “Dills Act” and a judge then ruled that CSLEA was entitled to retroactive safety benefits. DPA appealed. Keep in mind that 7507 applies to the state legislature. It did obtain a 7507 actuary of “annual costs” of the new benefit going forward, but it did not request and did not receive a 7507 report setting forth the “annual costs” of the new benefit for prior service of the employees. Again, let the court say it: “the materials provided to the legislature regarding the bill did not state that the reclassification would be applied retroactively and did not contain a fiscal analysis of the cost of the retroactive application of safety member status for all employees in the unit….” Earlier in regards to what constituted fiscal analysis, the court said: This requirement necessarily includes the obligation to present the Legislature with a fiscal analysis of the cost of the agreement. (See section 7507, sub.(b) (1) “ before authorizing changes in public retirement benefits.” The legislature shall have a “statement of [their] actuarial impact upon future annual costs,…” In its opinion letter, Meyers Nave said: “The case does not address whether section 7507 is mandatory or directory.” In those precise words, no; but it clearly showed that 7507 was the financial information necessary for such action to be valid. The court held that the prospective benefit was legal because of 7507 compliance. Again, the Meyers Nave opinion misrepresented the court’s opinion to support its claim that 7507 was not mandatory.
  • At page 16 of its opinion, Meyers Nave has the nerve to have a whole section entitled: “2. The Legislature Did Not Make The Sections at Issue Mandatory.” It then listed the four Govt. code sections referenced in the grand jury report. This must have been an oversight by Meyers Nave. Govt. code section 14 specifically provides that as used in the government codes: “Shall” is “Mandatory” and “May” is “permissive.” What makes this claim so galling is that Meyers Nave and all of the appellate courts are aware of the Voters case, the Howard Jarvis case, the CSLEA case and Govt. code section 14 and in each and every case assumed without discussion that 7507 was mandatory. There has never been an appellate case where a California attorney had the guts to argue that 7507 was directory. Why? Because such a baseless claim would properly make the firm liable for sanctions. But out of house lawyers hired by cities and counties routinely advise that 7507 is directive and therefore the staff, unions and board of supervisors can continue receiving pensions that were illegally adopted. Then, when a pension reform group like CSPP obtains an honest opinion, the board of supervisors will not even make it part of the record.

The Future for Reform in Sonoma and Marin Counties

I have not spent as much effort discussing the Sonoma Scandal. That is because the staff, unions and board of supervisors in Sonoma have very little opposition to their enjoyment of the Ventura pension gambit. The county has such great pension and other benefit debt, that another serious market downturn will likely force it into a chapter 9 bankruptcy. Then it may renegotiate its debts, reject its defined benefit plans and initiate a plan in bankruptcy that provides reasonable but affordable pensions. But there will be more suffering before that occurs.

In Marin, the situation is quite different. While it does have a pension and other benefit structure that is unsustainable, it has a vibrant pension group, the CSPP and a will to reform. But more importantly it has a gold plated grand jury report that clearly established that massive pensions were granted illegally.

Marin has a local press that has not sold out to the governing agency and is demanding that the grand jury report be given respect. A citizen has filed a civil complaint in Superior court in an attempt to keep the findings of the grand jury from being kicked down the road. He is in pro per and from that point of view is in over his head. But he does have a case. If a couple of local law firms would band together and represent him in the case I believe they would be richly rewarded under the private attorney general theory which provides for attorney fees for any success in the case.

Meanwhile citizens of Marin should hold accountable the present board of supervisors for its part in what I have argued was a bad faith effort to cheat Marin citizens out of the benefits of the grand jury report. They should be replaced by a new board of supervisors which should then terminate the present county administrator and county counsel and replace them with experts who will be contractually bound to truthfulness, transparency and undivided loyalty to the citizens of Marin by carrying out substantial reforms, such as a freeze on salaries until deficits are eliminated.

Conclusion

In my view, there is a serious flaw in the process by which a county hires outside counsel. The law is clear that the client is the county, not the county agent who interacts with the outside law firm. That means that the law firm has an exclusive duty to diligently apply the laws of the state and the county codes when advising the board of supervisors about legal matters. There is a fiduciary duty to do so. The California Rules of Professional Conduct require counsel to advise the client of all facts and law material to the legal matter. Instead, the out-of-house opinions invariably support the staff, unions and board of supervisors, all of whom, in this case, are beneficiaries of the illegally acquired pension enhancements.

Collective bargaining by public employees for salaries and benefits has ruined a once great way of life in California. For those who take up political space by fooling around with pension reform initiatives, it is time to face the substantive issue: A state wide initiative is necessary to remove so-called bargaining for compensation and benefits from the government arena. As the Sonoma, Marin and Pacific Grove examples show, there is no action that is off the table by the lawyers for the government to pursue, protect and enlarge illegally adopted pensions and other benefits. In the meantime the one clear tool of pension reformers is salary control, but it is rarely used.

The idea that some White Knight is going to come along and solve the pension scandal is preposterous, yet that seems to be what everyone is waiting on.

It is so disappointing that government lawyers and law firms that practice in the government area have been willing to aggressively defend what evidence strongly suggests were substantial violations of due process. It will be telling to watch the county staff and board of supervisors unleash their attorneys on Mr. Brown in his meritorious law suit. With hundreds of millions at stake, the ruling group will throw everything at him. Will the citizens come to his aid? The grand jury clearly documented the illegality of the pension increases.

 *   *   *

About the Author:  John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34749) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. John graduated from San Jose State College with majors in Political Science and Economics (summa cum laude). He then received a JD from The Stanford School of Law and practiced business and trial law for 40 years before retiring. In 1987, he was the founding partner of a Sacramento law firm that he formed in 1987 to take advantage of the increased bankruptcies brought about by the Tax Act of 1986. Although he did not file and manage bankruptcy cases, he represented clients in numerous litigation matters before the bankruptcy court, including several cases before judge Klein, the current judge of the Stockton bankruptcy case. He is an admirer of Judge Klein, for his ability and accuracy on the law. As managing partner, he understood the goals of bankruptcy filings and its benefits and limitations.

Other work by John Moore:

The Mechanics of Pension Reform – State Actions
– Part 1, December 22, 2015

The Mechanics of Pension Reform – Local Actions
– Part 2, January 11, 2016

During 2015 author John Moore published the “final” chapter of “The Fall of Pacific Grove” in an four part series published between October 20th and November 9th:

The Fall of Pacific Grove – A Primer on Vested Rights
 – The Final Chapter, Part 1, October 20, 2015

The Fall of Pacific Grove – The City’s Tepid Defense of the Vested Rights Lawsuit
– The Final Chapter, Part 2, October 27, 2015

The Fall of Pacific Grove – The Judge’s Ruling
– The Final Chapter, Part 3, November 2, 2015

The Fall of Pacific Grove – The Immediate Future
– The Final Chapter, Part 4, November 9, 2015

During 2014 author John Moore published the first chapter of “The Fall of Pacific Grove” in an eight part series published between January 7th and February 24th. For a more complete understanding of the history, read the entire earlier series:

The Fall of Pacific Grove – How it Began, and How City Officials Fought Reform
 – Part 1, January 7, 2014

The Fall of Pacific Grove – How City Thwarted Reform, and CalPERS Squandered Surpluses
 – Part 2, January 14, 2014

The Fall of Pacific Grove – CalPERS Begins Calling Deficits “Side Funds,” Raises Annual Contributions
 – Part 3, January 21, 2014

The Fall of Pacific Grove – Outsourcing of Safety Services Causes Increased Pension Deficits
 – Part 4, January 28, 2014

The Fall of Pacific Grove – Anti-Pension Reform Mayor Claims to Favor Reed Pension Reform
 – Part 5, February 3, 2014

The Fall of Pacific Grove – Privately Owned Real Property are the Only Assets to Pay for Pensions
 – Part 6, February 11, 2014

The Fall of Pacific Grove – The Cover-Up by the City After the Hidden Actuarial Report Surfaced in 2009
 – Part 7, February 18, 2014

The Fall of Pacific Grove – Conclusion: The “California Rule” Cannot Stand

Local Citizen Takes Marin County to Court Over Pensions

Marin County is not the only county in California where pension benefits were increased, retroactively, back when the increased cost was seemed to be easily covered by double-digit returns on pension fund investments. But Marin County is the only county, at least right now, where a private citizen is taking the county Board of Supervisors to court over alleged violations of due process. As reported in the Marin Independent Journal in their editorial of March 28, 2016:

Mill Valley resident David Brown is taking the county to court, asking a judge to decide whether the county Board of Supervisors and other public agencies broke state law in approving workers’ pension enhancements with little or no public involvement in their decision-making process.

The 2014-15 Marin County Civil Grand Jury raised that question in its report, but the most definitive legal finding it made was that the public agencies “appear to have” side-stepped state rules.

The grand jury is not a court of law. On this issue, it raised a valid question, one that deserves a clear ruling.

That’s what Brown is seeking. As a taxpayer, he’s entitled to that and, unfortunately, he has to file a lawsuit to get it. Unfortunately, he got a dose of blowback from the county.

Here is the actual writ that was filed on March 9th, 2016 by David Brown in the CA Superior Court for the County of Marin. Links to all of the exhibits are included at the conclusion of the petition.

SUPERIOR COURT OF THE STATE OF CALIFORNIA

FOR THE COUNTY OF MARIN

NAME OF PLAINTIFF(S)

DAVID C BROWN

vs

MARIN COUNTY BOARD OF SUPERVISORS AS A GROUP

INDIVIDUALLY:  STEVEN KINSEY, JUDY ARNOLD, KATIE RICE, DAMON CONNOLLY, MATTHEW HYMEL, STEVEN WOODSIDE.

DATED:  March 7, 2016

Table of Contents

  1. Why this writ?
  2. Why this court?
  3. List of interested parties.
  4. Body of petition.
  5. List of Exhibits. 
  1. Standing

My name is David C. Brown. I am not an attorney. I live in the County of Marin at 25 Country Club Drive, Mill Valley, California, 94941. I have lived at this address since 2001. During that time I have paid taxes that have been used for, among other things, public employee salaries, pensions and benefits.

As a result of the improperly/unlawfully granted benefit enhancements I have suffered the following harms: 1) Payment of taxes in excess of what I otherwise would have paid and 2) A reduction in the quality of services from the County as money that should have been used for public services was used instead to pay the unlawfully granted retirement benefits.

Further, where “the question is one of public right and the object of the mandamus is to procure the enforcement of a public duty…” the petitioner “need not show that he has any legal or special interest in the result, since it is sufficient that he is interested as a citizen in having the laws executed and the duty in question enforced …” Green v. Obledo, 29 Cal.3d 126, 144 (1981).

  1. Why This Writ?

I am petitioning for this writ under Section 1085 because there is no plain, speedy and adequate remedy at law. Whether it is categorized as an error of law, a denial of a fair trial, a decision not supported by the evidence, findings not supported by evidence or all of the above, the simple fact is that is that members of the Marin County Board of Supervisors 1) should have recused themselves, 2) were negligent in not considering all the evidence and 3) received biased legal analysis and advice prior to making a decision in the matter.

  1. Why This Court?

On first reading this petition may look like a conflict of interest case better suited to the Fair Political Practices Commission (FPPC) than to Superior Court. That is, in fact, where I began. Last year I submitted a short complaint to the FPPC about the failure to recuse by three members of the Marin County Board of Supervisors (BOS). That complaint was closed. It was lacking in facts and documentation. Since then I have become better informed about the law regarding conflicts and more aware of the broad ramifications of the actions taken (or not taken) by the BOS. The issues involved extend far beyond the failure to recuse and deep into the financial wellbeing of the County. The actions I am requesting from the Court are much broader than simply declaring that members of the BOS were subject to conflict. They are beyond the scope of the FPPC. 

  1. List of interested Parties

Board of Supervisors
Marin County
3501 Civic Center Drive, Suite 329
San Rafael, CA 94903
415-473-7331

Individually:

Marin County Supervisor Steven Kinsey
Marin County Supervisor Judy Arnold
Marin County Supervisor Katie Rice
Marin County Supervisor Kate Sears
Marin County Supervisor Damon Connolly
Steven Woodside, Marin County Counsel
Matthew Hymel, Marin County Administrative Officer

All at:

3501 Civic Center Drive
San Rafael, CA 94903
415-473-7331 

  1. Body of Petition

Background and Facts

In April 2015 the Marin County Civil Grand Jury issued a report (Exhibit 1) in which it found 23 violations of section 7507 (Exhibit 2) of the California Government Code by the County of Marin. (The Grand Jury took care to use the version of 7507 in effect at the time (Exhibit 2A). In its report the Grand Jury issued Findings and Recommendations as required by law.

On June 30, 2015 the Marin County Board of Supervisors addressed the Grand Jury Report. Item number seven on the agenda was:

Request from the County Administrator for Board concurrence and adoption of response to 2014-2015 Grand Jury Report: “Pension Enhancements:  A Case of Government Code Violations and A Lack of Transparency” (April 9, 2015).

Recommended actions: Concur in and thereby adopt response and direct the President to submit the response to the Presiding Judge.

This item was also accompanied by:

  1. Staff Report, (Exhibit 3)
  2. Response, (Exhibit 4)
  3. Attachment (a nineteen-page memorandum from outside counsel, Meyers/Nave.), (Exhibit 5)
  4. Grand Jury Report. (Ex. 1)

Before discussion of item seven began I approached the podium to address the BOS. I read CA Government Code section 87100 which says,

“No public official at any level of state or local government shall make, participate in making or in any way attempt to use his official position to influence a governmental decision in which he knows or has reason to know he has a financial interest.”

Also relevant is CA Government Code Section 1090(a):

“Members of the Legislature, state, county, district, judicial district, and city officers or employees shall not be financially interested in any contract made by them in their official capacity, or by any body or board of which they are members. Nor shall state, county, district, judicial district, and city officers or employees be purchasers at any sale or vendors at any purchase made by them in their official capacity.”

I did not read aloud the above section but I reminded the Board that it is the duty of the elected official, not the public, to determine if the official has a conflict.

I stated that Supervisor Kinsey had been a member of the BOS during the period when the benefit enhancements cited by the Grand Jury had occurred. He voted in favor of all of the enhancements.

I further stated that Supervisors Kinsey, Arnold and Rice and County Administrator Matthew Hymel all had a financial interest in the outcome of the Board’s deliberations regarding the Grand Jury report and that they should recuse themselves. I said it was possible that Supervisors Sears and Connolly had conflicts as well, although I was uncertain. I have since learned that Supervisor Connolly had a similar conflict.

Immediately after I spoke, County Counsel Steven Woodside, who had previously recused himself from matters related to the Grand Jury report, addressed the BOS and said,

“There is not a legal conflict that would preclude you, any of you, from participating in a discussion and decision on pension matters, compensation matters etc. even though you may have a personal stake in the matter in-so-far as you may be eligible for a pension, for example. The case that so decided this is a California Supreme Court case. The leading name is Lexin, L-e-x-i-n, makes it very clear that you have a duty to make these decisions. You have a duty to respond to the Grand Jury report. You have a duty to make decisions on compensation, etc. …”

The case to which Mr. Woodside was referring is CATHY LEXIN et al., Petitioners, v. THE SUPERIOR COURT OF SAN DIEGO COUNTY, Respondent; THE PEOPLE, Real Party in Interest. 47 Cal.4th 1050 (2010) 103 Cal.Rptr.3d 767 222 P.3d 214.

(My and Mr. Woodside’s comments can be found beginning at 21:28 of the video of the June 30, 2015 BOS meeting. The link to it can be found at Exhibit 6.)

I had never heard of the Lexin case so I took Mr. Woodside at his word and sat down. None of the supervisors recused themselves nor did Mr. Hymel. The meeting continued.

Legal Issues Presented

Summary of Legal Issues:

  1. Should supervisors Rice, Kinsey, Arnold and Connolly have recused themselves due to conflict of interest?
  2. Should County Administrator Hymel have recused himself due to conflict of interest?
  3. In light of his prior recusal, should County Counsel Woodside have participated in the Board of Supervisors’ discussion, even to the extent of offering an opinion on whether the members of the BOS and Mr. Hymel should have recused themselves?
  4. The memorandum written for the County by Meyers-Nave was to be an “objective legal review” of the Grand Jury report (statement by County Administrator Matthew Hymel at time 25:40 of the June 30 BOS meeting). If it wasn’t, should The County be directed to make available to plaintiff the same amount of funds used for payment to Meyers-Nave to retain an attorney with expertise in the area of statutory processes and procedures involving public sector pensions.
  5. Was the Board of Supervisors negligent in dismissing, and then proceeding to its conclusions, without reading the memorandum from M. Thum, Esq.?

Analysis of Legal Issues

Legal Issue 1: Should supervisors Rice, Kinsey, Arnold and Connolly have recused themselves due to conflict of interest?

As stated above, the controlling code sections in this matter are:

1) CA Government Code Section 87100 and 2) CA Government Code Section 1090.

In responding to the 2015 Grand Jury report, the four supervisors were asked to opine on the Grand Jury’s conclusion that benefit enhancements they themselves are to receive were originally granted unlawfully. The financial interest at stake for each of the four is not trivial. It is in the low hundreds of thousands of dollars.

The membership of the Marin County Employees’ Retirement Association (MCERA) does not consist of a uniform group, all of which does or will receive the same benefits as the supervisors. The membership of MCERA is divided into two mutually exclusive groups. One group (Group A) includes retirees and current employees who do or will benefit from any of the pension enhancements under discussion. Because of the pension tiers in which they participate Supervisors Kinsey, Rice and Arnold are all members of this group. Supervisor Connolly participates in MCERA through a pension tier granted by the City of San Rafael. That tier is also among those cited as questionable by the Grand Jury. An adverse finding in Marin County would have a precedential affect on the grants of pensions in San Rafael, likely affecting Supervisor Connolly’ pension.

The other group (Group Z) includes retirees and current employees who do not and will not benefit from any of the increases under discussion. This group comprises at least a substantial minority of the plan’s members.

Because the pool of funds available for retirement benefits is not infinite, the interests of the two groups are different. A decision to continue to pay unlawfully granted benefits provides advantages to members of Group A while simultaneously causing harm to members of Group Z. Paying out unlawfully granted benefits weakens the financial strength of the retirement plan. This has broad implications.

In his remarks at the BOS meeting County Counsel Woodside stated to the BOS, “You have a duty to make decisions on compensation, etc. …” He then cited the Lexin case, which revolves around Section 1090.

Section 1090 includes section 1091.5(a)(9), the so-called “compensation” exception. It states:

(a) An officer or employee shall not be deemed to be interested in a contract if his or her interest is any of the following:

(9) That of a person receiving salary, per diem, or reimbursement for expenses from a government entity, unless the contract directly involves the department of the government entity that employs the officer or employee, provided that the interest is disclosed to the body or board at the time of consideration of the contract, and provided further that the interest is noted in its official record. 

The decision facing the BOS in responding to the Grand Jury Report was 1) not a decision regarding the making of a contract and 2) not one of compensation. The grant of benefits (i.e., the contract regarding compensation) had been made long ago. Rather, the current BOS was asked to decide whether the BOS in place at the time of the making of the original had followed the required statutes.

The current BOS was responding to a Grand Jury report. The Grand Jury operates pursuant to the penal code. The BOS was asked to make a judicial or quasi-judicial decision about the legality of a previous grant of compensation. The current matter was not itself a compensation matter. County Counsel Woodside’s comment “…having a duty to make decisions about compensation…” was not relevant. The “compensation” exception under Section 1091.5(a)(9) does not apply.

In addition, the supervisors’ interest was not disclosed to the “body or board” at the time of consideration of the “contract” as required by 1091.5(a)(9). Nor was the interest noted in its official record.[1] Nor did the four supervisors disqualify themselves. Nor did the four supervisors refrain from influencing the other members of the Board.

Legal Issue 1 continued:

Had this been a compensation decision, as Mr. Woodside’s statement implied, he would have been correct that the controlling case would be Lexin v. Superior Court (47 Cal.4th 1050 (2010)103 Cal.Rptr.3d 767 222 P.3d 214). Even so, the Lexin case would not have provided an exemption for the officials involved.

Lexin hinges on the so-called “Public Services” exception, not the “compensation” exemption, to Section 1090 as stated in Section 1091.5(a)(3):

(a) An officer or employee shall not be deemed to be interested in a contract if his or her interest is any of the following: (3) That of a recipient of public services generally provided by the public body or board of which he or she is a member, on the same terms and conditions as if he or she were not a member of the body or board.

In its opinion the Supreme Court said,

“… contracts that actually involve unique personal financial interests not shared by the board’s constituency remain prohibited.” (Lexin v. Superior court) (Italics mine.)

In concluding its discussion of the “Public Services” Exception the court in Lexin went on to say:

“Having thus considered the text of the statute, judicial and Attorney General interpretations, and the surrounding statutory scheme, we conclude section 1091.5(a)(3) should be read as establishing the following rule: If the financial interest arises in the context of the affected official’s or employee’s role as a constituent of his or her public agency and recipient of its services, there is no conflict so long as the services are broadly available to all others similarly situated, rather than narrowly tailored to specially favor any official or group of officials, and are provided on substantially the same terms as for any other constituent.” (Italics and bold type mine.) (Lexin et al. page 1092)

In this case, “the service” is the enhanced pension and the conditions specified by the court are not present. The BOS was not making a contract. Even if it had been making a contract, the benefit is not broadly available to all others, or even to almost all others. Tthe constituency divided into “haves” and “have-nots”. Importantly, a benefit to the “haves” is not neutral to the “have-nots”. It causes them harm. The actions by the four Board members cause harm to members of their constituency while benefitting themselves. The public service exception, 1091(a)(3), does not apply in these circumstances.

The four supervisors should have recused themselves. Their failure to do so constitutes a violation of Section 87100 and is not covered by the relevant exemptions to Section 1090.

Legal Issue 1a: Supervisor Kinsey, a special case.

The case for recusal by Supervisor Kinsey is clear but not yet complete. Mr. Kinsey was a member of the BOS that granted every one of the pension enhancements cited by the Grand Jury. He voted for all of them. In addition to the financial conflict highlighted above, by not recusing himself, Mr. Kinsey was acting as judge and jury as to whether he himself had violated the law. This should never occur. Mr. Kinsey should have recused himself on these grounds alone. Petitioner cannot find a case or code section addressing this, perhaps because the idea is so preposterous.

Legal Issue 2: Should County Administrative Officer (CAO) Hymel have recused himself?

Mr. Hymel is a member of MCERA and will benefit directly from the questionable pension enhancements identified by the Grand Jury. Because Mr. Hymel’s compensation is greater than that of the supervisors he stands to receive a commensurately greater incremental benefit. Mr. Hymel, on information and belief, identified counsel to investigate the Grand Jury report and negotiated the terms and compensation for the agreement with counsel. The response to the Grand Jury report was prepared by Mr. Hymel or by an individual under his supervision and with his approval. Mr. Hymel recommended to the BOS the adoption of the draft response to the Grand Jury report. These actions constitute a violation of Section 87100.

Legal Issue 3: Should County Counsel Woodside have participated in the Board of Supervisors’ discussion, even to the extent of offering an opinion on whether the members of the BOS and Mr. Hymel recuse themselves?

Mr. Woodside had previously recused himself from matters related to the Grand Jury report. Mr. Woodside currently receives pensions from both Santa Clara and Sonoma Counties. His Sonoma County pension was found (broadly, as a member of a group; not individually) by the Sonoma County Grand Jury to have been enhanced under the same questionable circumstances as the pension enhancements here in Main County. An adverse finding in Marin County would have a precedential affect on the grants of pensions in Sonoma County, likely affecting Mr. Woodside personally. This is a violation of Section 87100.

Legal Issue 4: The Meyers-Nave (MN) memorandum.

Shortly after the Grand Jury report was released in April of 2015 Citizens for Sustainable Pension Plans (CSPP), a group of which the petitioner is a member, asked the Board of Supervisors to hire outside counsel to review the Grand Jury report. The Board agreed.

Mr. Hymel asked CSPP to provide a list of questions to assist him in selecting counsel. CSPP provided such a list. Some of the questions were answered. Some were not. The single most important question on the list was not answered. The question was this: Who would outside counsel consider as its client? CSPP was trying to determine whether the BOS would be the client or whether the citizens of Marin County would be the client. The two answers had different implications.

The County entered a contract (Exhibit 7) with the firm of Meyers-Nave for up to $40,000. The full amount was spent.

In his comments at the June 30, 2015 BOS meeting Mr. Hymel said, “We used outside counsel because we wanted to have an objective legal review of the Grand Jury report.” (Beginning at 25:40 of exhibit 6). (Italics mine.)

For $40,000 of taxpayer money spent on an objective legal review one would expect to get just that, unbiased work product. One would expect a comparison of both sides of each legal issue followed by a thoughtful analysis of which side had the stronger case. After all, it was taxpayer money that was being spent and it was tens if not hundreds of millions of dollars of taxpayer money that were at stake in the outcome of the analysis.

The MN memo provided nothing of the sort. What the taxpayers got for their money was a one-sided analysis of the issues that in every instance came down on the side of inaction by the BOS and maintenance of the status quo with regard to the unlawfully granted benefits. IN fact, the MN memo never mentioned that there might be another side to any issue. It was, in effect, a brief arguing against the report by the Grand Jury. To highlight just one example, MN’s discussion of whether 7507[2] is mandatory, and its conclusion that it is not, filled almost three single spaced pages. Yet Meyers-Nave did not cite even one of the many cases that could be used to argue that section 7507 is mandatory or that the word “shall” in the statute might actually have its plain English meaning.

If this were an adversarial proceeding, this would have been acceptable. There would have been a comparable brief from the other side. There was not. This was a case of the County using its resources to take one side of an argument when there was no one to take the other side.

The situation was analogous to that of a (conflicted) judge hearing a case but only permitting a brief from one side, the side on which the judge’s interest lies, while at the same time claiming the brief was neutral.

The conflicted position of Mr. Hymel when he hired MN, and the biased nature of the MN memorandum combine to make the MN memo tainted. However, just as a bell cannot be unrung, the memo cannot be unread. A remedy must occur.

Legal Issue 5: Refusal by the Board of Supervisors  to read the memorandum from M. Thum before making its decision.

An attempt was made to present a brief from the other side. The Grand Jury report was released April 16, 2015. The contract with MN is dated June 1, 2015. The MN memo is dated June 24, 2015. As required, it was made available to the public along with the BOS draft response to the Grand Jury report on June 25, 2015, three business days before the June 30, 2015 BOS meeting at which it was discussed. The result was that MN had 23 days to research and draft its memorandum to the BOS.

In anticipation of the MN memo and the BOS draft response to the Grand Jury report, CSPP hired Margaret Thum, Esq. to analyze the two documents and to write a response (Exhibit 8).

The first paragraph of the Thum memo asked the BOS to delay its response to the Grand Jury so that it and interested citizens could “thoughtfully consider and comment upon the current draft of your response to the Grand Jury report.” Extensions to response deadlines are routinely granted by Grand Juries provided there is good cause.

Ms. Jody Morales of CSPP, speaking in open time at the June 30, 2015 BOS meeting, informed the Board of the existence of the Thum memo. She informed the BOS she had a copy of the memo for each of them. She asked the Board to extend her time so she could read the memo to the Board. The Board sat stone-faced. She suggested the BOS take a short break in order to read the memo. The Board again sat stone-faced. In the end, all CSPP could do was submit the memo for the record. This was done. Later in the meeting (1:19:47 of Exhibit 6), during public comment on the item, I said to the Board of Supervisors:

“I want to be very, very clear that if you proceed and make a decision on this report today without reading the seven-page letter that Ms. Morales submitted from our attorney you are choosing, repeat choosing, to ignore a very material piece of evidence.”

The Board proceeded with its public hearing and voted to approve the response to the Grand Jury report as written WITHOUT HAVING READ THE THUM MEMO. Conflicted members of the Board, acting as judge and jury, elected to read only documents arguing for “their” side of the issue. This constitutes negligence on the part of the Board because it ignored evidence it knew was available.

Relief Sought

  1. Order that Supervisors Kinsey, Rice, Arnold and Connolly, County Administrator Hymel and County Counsel Woodside were subject to conflicts of interest and should have recused themselves from participating in the discussion and approval of the response to the Grand Jury report in question.
  2. Order that there was not a quorum for Item 7 at the June 30, 2015 Marin County Board of Supervisors’ meeting.
  3. Order that the Marin County Board of Supervisors’ response to the Grand Jury report is void.
  4. Because of the conflicts demonstrated, the disregard of those conflicts by those involved, the future likely unavailability of a quorum and the willful blindness demonstrated by all five members of the Board of Supervisors in dismissing the Thum memo, order that the Board of Supervisors has forfeited its right to address this matter.
  5. Because the MN memo cannot be unread, order the Board of Supervisors to make available a sum of $40,000, equivalent to that spent on the Meyers-Nave memo (one ten-thousandth of the County’s annual budget), to provide a brief arguing the other side of all relevant issues, along with sufficient time to construct such a brief.
  6. Order that this court will step into the shoes of the BOS and undertake a fare and unbiased analysis of the Grand Jury report. It should rule on all relevant points of law raised by the Grand Jury, Meyers-Nave, M. Thum and other briefs that may be submitted.
  7. If this court concludes that any of the individuals involved were conflicted and should have recused themselves, order that they publicly and individually apologize at a Board of Supervisors meeting as a listed item on the agenda, not as an item on the consent agenda.

Verification:

I, David C Brown, certify that everything I have written in this document is true to the best of my knowledge.

David C. Brown

List of Exhibits

  1.  Grand Jury Report
  2.  Section 7507. 2A Section 7507 then in effect
  3.  Marin County Board of Supervisors Staff Report
  4.  Marin County Board of Supervisors Response to Grand Jury Report
  5.  Meyers Nave memorandum
  6.  Marin County Board of Supervisors meeting June 30, 2015
  7.  Contract with Meyers Nave
  8.  Memo written on behalf of CSPP by Margaret Thum, esq.
  9.  Office of the CA Attorney General, 2010, “Conflict of Interest”

[1] See Exhibit 9, page 67: “An official whose interest falls into one of the “remote interest” categories must do the following: (1) disclose the official’s interest to his agency, board or body, and (2) have the interest noted in the official records of that body. (Section 1091, subd. (a).) Further, the interested official must completely disqualify himself or herself, and must not influence or attempt to influence the other board members. (Section 1091, subd. (c)”

[2] Section 7507: “The Legislature and local legislative bodies shall secure the services of an enrolled actuary to provide a statement of the actuarial impact upon future annual costs before authorizing increases in public retirement plan benefits. … The future annual costs as determined by the actuary shall be made public at a public meeting at least two weeks prior to the adoption of any increases in public retirement plan benefits. (Italics mine.)