What follows is an attempt to provide a general overview of the public pension controversy that seems to be in our media and various blogs continuously. If you are sick and tired of that topic, skip this post. If, however, you are interested in a readable summary of my take on what is going on, keep reading.
Anti-public pension advocates have for several years pushed municipal bankruptcy as a way to force the overhaul or abandonment of what they view as over-generous public sector pensions. They rejoiced a few years ago when Vallejo, California filed for bankruptcy, and then whined when the city did not include its projected pension liability as part of the debt from which it sought relief in Federal Bankruptcy Court.
Next came Stockton, a bankruptcy in process, and now they are whining because Stockton too has not included its projected pension liability as a debt to be reduced or wiped clean. (Though Stockton did cut retiree health care benefits in this process.) Hopes rose when Mammoth Lakes filed for bankruptcy, but alas – the Bankruptcy Court forced the town and its major creditor – a lawsuit-winning developer – to negotiate a settlement that resulted in the town not being declared bankrupt after all. The latest California bankrupcty hope is the City of San Bernardino, which has listed its forecast pension liability as part of the debt it seeks to escape in Federal Bankruptcy Court. The nation’s largest pension system, CalPERS, which handles San Bernardino’s pension plan promises to its employees, has announced it is going to appeal an initial Bankruptcy Court ruling that found San Bernardino is indeed insolvent. That one will apparently drag on for a while.
If one drills down on the cause(s) of fiscal distress in these cities one finds that the root cause was a lengthy period of bad decisions by the cities’ elected officials. These bad decisions include employee pay and benefits, but also many other things including going into debt to finance marinas, sports stadiums, city halls, other nice to have civic improvements and subsidizing private sector developments. In some cases the string of bad decisions continued while the electeds ignored warnings from city staff that they were making commitment the city may not be able to fulfill.
Mix in the economic collapse that appeared in 2008 and hit some cities harder than others, such as Stockton and San Bernardino who had bet big time on a continued housing and economic boom to keep filling city coffers, and you find the elected officials in these cities turning to the Federal Bankruptcy Court for a solution. In the case of San Bernardino, forecast pension costs are but one expense the city says it cannot afford.
Not to be overlooked is the City of Detroit, Michigan where demographic shifts, municipal corruption, auto industry retrenchment, white flight and other factors have combined in a “perfect storm” 50years in the making that prompted that city to also seek relief in Federal Bankruptcy Court. It is seeking relief from forecast pension obligations as well as other obligations in its bankruptcy plan. As testimony to the legacy of elected officials it was reported in the press just last week that the former Mayor of Detroit, Kwane Kilpatrick, was sentenced to 28 years in prison for corruption.
There still remains a belief by some pension reform advocates that Federal Bankruptcy Court is the answer, even though the results so far have been less than stellar. In fact, the push for bankruptcy seems to be getting stronger. Here in Orange County the Board of Supervisors has used its 4 appointments to the 9 voting-member Board of Directors of the Orange County Retirement System (OCERS) to appoint 4 people (including the President of the Orange County Lincoln Club, a conservative Republican group active in handing out political endorsements and campaign contributions) who seem to be on a path of changing the system’s actuarial assumptions in ways that some believe exaggerate the system’s unfunded liability in order to make the system’s finances sound worse and to then demand more funds from employers and employees in hopes that it will lead to a bankruptcy filing by the County and/or one or more of the cities or special districts in the system. A showdown on some of these assumption changes is scheduled for an OCERS Board meeting in November and will most likely be a headline-grabber.
Concurrently wealthy far-right backers, such as the Laura and John Arnold Foundation (John Arnold became a billionaire by being an energy trader, first at Enron and later his own firm) and the notorious Koch Brothers (2 of 3 billionaire brothers who are self-made industrialists), are reportedly funding an effort to place yet another pension reform initiative on the California ballot, in hopes that this time around the voters are so up to here with the pension issue that keeps appearing in the media as though every day is Groundhog Day. A small group of city Mayors, including two from Orange County – Miguel Pulido of Santa Ana and Tom Tait of Anaheim – has endorsed the proposed initiative. Never one to miss a chance for publicity, Supervisor Todd Spitzer and his colleague Janet Nguyen are, according to press reports, going to propose an Orange County ballot initiative to require that county elected officials pay half of their retirement cost. (One must wonder if this is really a stealth plan to guaranty those officials a 50% county funded retirement).
There are other pension issues out there. Municipalities in other states have sought bankruptcy protection resulting from everything from bad decisions on sewer system expenditures to – you guessed it – more corruption. Harrisburg, the state capital of Pennsylvania and the small city of Central Falls, Rhode Island have pursued bankruptcy, and in the case of Central Falls pension benefits were cut in a creditor negotiation process. And, there are those who are making money off this pension chaos and work to keep it alive, such as the authors of books and newspaper columns that seem to go on ad infinitum. In a follow-the-money vein, one recent published thrust argues that there is a conspiracy against pensions being undertaken by a combination of far right interests and brokers and other Wall Street interests anxious to get their hands on the billions in public sector pension funds in order to rake in billions in fees and commissions.
On top of all this there is at least one court decision in California that found that the forecast unfunded liability of public pensions is not a debt at all. If that logic is presented in the San Bernardino bankruptcy case or elsewhere in a bankruptcy filing in California the waters may become even murkier.
Missing from this post is any discussion about public sector unions and their power, as well as collective bargaining rights granted to public sector employees and the real or perceived power these unions seem to have over some elected representatives. The argument about whether these unions are the root cause of the problem or are just a symptom can go on forever. Another day…
“Missing from this post is any discussion about public sector unions and their power…..”
Does smoking cause Cancer?
Nicely done, OBNO!
Que es OBNO?
The author.
The bare fact that public pensions are so susceptible to political gamesmanship indicates that something is wrong. And what is wrong is mentioned as an issue for another day. But why put it off?
The levels of taxpayer contributions and the early retirement age were onerous enough; but worst of all was granting of retroactive benefits, which always struck me as a “gift” – something not earned and not included in prior negotiations.
In 2010 my barber raised his price from $10 to $15. But he never had the effrontery to ask me for a retroactive payment of $5 for each of my earlier haircuts.
I’m not sure why retroactive rewards, at least, shouldn’t be on the table when it comes to dealing with municipal bankruptcies.
Who gets retroactive rewards? Managers or rank-and-file?
The retroactive benefits, where they were given, started out with “public safety” unions; later the deal went to everybody. At the County this caused a massive fiscal and management problem. Younger workers were forced to pay for the benefits conferred on middle-aged workers – not surprisingly, those who had a lot more clout in the union and who were basically negotiating their own sweet deals. Of course the public had to assume more of the cost as well as the hidden costs of the unfunded liability.
Some, like Chris Norby, actually recognized the management problem: there would be very little financial incentive for senior County workers to stick around past age 55, and they have been leaving in droves – some to go get jobs in other places or come back as contract help at the County.
A final observation about California’s pension system: pensions are based on the highest salaries attained. And of course this leads to the problem of pension spiking, particularly in upper management ranks.
I’m within you on the problem of pension-spiking in upper management — and generally regarding pension abuse by those who can negotiate or personally arrange the inflation of their own pensions.
For the rank-and-file, I think that retroactive increases may or may not be a problem. Where a public entity has refused to negotiate and an existing contract has been extended, I think that there’s no problem with it — the negotiation has essentially been in stasis from the end of the previous contract until the successful completion of negotiations, with workers continuing to work because the public’s business still needs to be done. They could strike as soon as the old contract expires — but that’s in no one’s interest and policy shouldn’t encourage it. So the solution is allow for a belated agreement that will necessarily apply in part retroactively.
If you’re talking about situations where politicians essentially arrive bearing gifts for politically influential public safety unions, in exchange for their political support, then you have a cogent point. It may be justified in some cases, but it certainly deserves a hard look — and as individual pension amounts are higher, the harder that look should be.
“If you’re talking about situations where politicians essentially arrive bearing gifts for politically influential public safety unions…”
That’s exactly what happened, enabled by the legislature and put into effect by local agencies.
Once that camel’s nose was in the tent the rest was sure to follow.
At the County it was Campbell, Wilson and Silva who gave away the store, with Norby and Chuck Smith, objecting.
Managers and rank and file workers who had already been around for a long time and were already set to retire got a gargantuan windfall – for doing absolutely nothing except bamboozling “conservative” stalwarts like Bill Campbell.
Mr.Zenger, I think you have some very good points. Once upon a time it was the position of the Orange County Counsel that granting retroactive raises was an illegal gift of public funds, so it was not done. However, in the pension feeding frenzy at the county in the early 2000’s that kind of legal analysis seems to have been set aside and retroactive pension increases were approved for almost all rank and file, public safety and management.
The OCEA group is paying for their retirement benefit increase, but over a 30 year period which means placing part of the fiscal burden on younger employees, and some think they will eventually rebel. I suspect that much of todays’ pension fund unfunded liability could be traced back to that retroactivity – though I have not seen any kind of analysis.
I also suspect the county’s political leaders are afraid to have such an analysis done, as it would find that much of the unfunded liability due to the granting of retroactive pension increases relates to the safety members and none of the Supervisors is yet willing to take that group on. Some view the retroactive nature of the pension increases granted by the Supervisors as the decision that turned a sound county retirement system into a fiscal black hole. The question that now exists is whether the county and its retirement system can climb out of that hole or not.
Few people on either side of this debate (which should not be a debate, but a problem that needs to be solved) understand one of the core causes of this problem:
Many elected representatives at the local level (and the state level) lacked the intelligence and aptitude to properly evaluate these deals. It has been compared to fielding a team of professional coaches (Public Employee Unions) vs. volunteer Dad’s (Councilmembers/mayors/legislators). The former were PRO’S trained and practiced in the art of negotiation, while the later were largely local “yokles”. completely unprepared and eaten alive by the more experienced union lawyers.
This is at the core of why elections are important. We must as a community and a society look beyond party and ideology and pick those best suited for the job. I think to a small degree this is being played out in Anaheim with Tait.
And while district elections will bring in fresh faces, one needs to look at Santa Ana or Stockton to see what “blind” allegiance to canidates gets you. in the case of public pensions, a high school graduate council member spells B-A-N-K-R-U-P-T-C-Y.
I think every candidate for office should be required to take the high school exit exam with results published. that will root out some of this.
Good observations. The unions were being represented by trained, tough lawyers. The taxpayers were being represented by city managers and HR directors – public employees. In essence the executives were getting the same deals the negotiated with their own managers and line workers.
I doubt that such results were due to some “mismatch” in the quality of negotiators. I’ve negotiated with City Managers and HR Directors; they are generally well-armed with relevant knowledge and plenty tough. The second part of your statement — that there was personal gain for negotiators whose own benefits might be calibrated to those of the employees whose compensation they were negotiating, seems more likely.
Well there sure was a mismatch at the County. The HR personnel were both incompetent and unmotivated. One of the first recommendations in the HR Performance Audit was to get outside negotiators, pronto.
You are trained lawyer.
A law professor, how couldyou compare the average municipal employee/elected official to you?
I wish I YOU defending the city!
You nailed it! Another example of the pitfalls of ‘citizen’ (only, not educated citizen) government is the “Capital Improvement Bonds” scam, which, thanks (only too late!) to the LA times spreadsheet popping out of Google, I found out my local (Magnolia) School District fell for! (Check it for YOURS!) Terrible mistakes made by the well-intentioned, but not well-educated / informed!
Unmotivated, I suspect so. Incompetent? How much competence does it take to say “no, we’re not gonna do that”?
More than they had.
Not much when they don’t understand the language as it is presented (legalese).
OBNO very well put.
Your article is thought provoking and as far as the two that you mentioned Mr. Spitzer and Ms. Nguyen, I could not agree with you more.
One question that pops into mind is why the discrepancy between what elected officials pay (or don’t pay) into pension funds while general employees pay their full share. A number of complicated reasons are to blame but one that jumps out is that in the past, the county agreed to cover full pension costs for various officials, in that magical time long, long ago when the economy looked robust and the future bright. However, your point should be considered, I actually did not think this through.
“One must wonder if this is really a stealth plan to guaranty those officials a 50% county funded retirement”. Very interesting!
I believed the proposal if passed and elected officials begin paying their full shares, it would be just a tiny drop in the bucket toward lessening that $5.7 billion County pension liability but at least it’ll be a step in the right direction, a sign that our representatives are taking some fiscal responsibility, with more hopefully more such signs to come in the future
Currently, the Orange County Employees Retirement System has an unfunded pension liability that amounts to a rather unwieldy $5.7 billion, give or take a few bucks. A myriad of prospective solutions have been offered from many parties to decrease this huge difference but nothing of significance has yet taken place.
(One must wonder if this is really a stealth plan to guaranty those officials a 50% county funded retirement).
Possibly. They were put in an awkward position by County Prop B in 2012 that required any future Supervisor to take the lower pension formula. It was actually designed for the two of them: if they wanted to get more years on the higher formula they would be likely able to, but they would have to fight for it legally – a political suicide mission.
I know because I wrote the language for Prop B.
Irene – good thoughts and insight. A disccussion on yoru points would be too long and involved for my response, but let me give you an explanation of one item. The issue being how much an employee contributes to the pension fund. It is less costly for the employer to pay some or all of the employee share into the pension fund than it would be to grant that employee a raise. For instance, if I am at the 25% income tax bracket, I would have to recieve a 4% raise to get a 3% increase in my take home pay. But, if the employer takes an amount equal to only 3% and applies it to my share of retirement contribution, I see the same 3% jump in my take home pay as my retirement deduction decreases but it cost the county less!. It is all pretty mouch a moot point now though, as the issue of “fairness” has entered the scene (a very difficult term to define to anyone’s satisfaction), and hte State pension reform legislation enacted last year requires that within 5 years virtually all public sector employees pay their own share. BTW- I have wondered if the proposal (according to media reports) by Supervisor Spitzer to put a mandatory 50% retirement contribution cost share for the Supervisors on the ballot is not really a stealth effor tto guaranty them a 50% county funded retirement contribution – seens to me such a scheme to extract a 50% contribuotin from them could also be a guaranty that the county (taxpayers) will put up its 50%. We need to think about that one.. Maybe Mr. Zenger has a pespective on this.