It appears that Governor Jerry Brown’s recently unveiled 12-Point Public Employee Pension Reform Plan is gaining traction over a wide swath of California voters and not just fiscal conservatives. Periodically the Sacramento Bee publishes an interesting debate between two writers titled “Head to Head.” Head to Head pits conservative Ben Boychuk and liberal Pia Lopez on a wide range of political issues. The November 2, 2011-piece caught my eye. The question debated between Mr. Boychuk and Ms. Lopez was: “Does Brown’s pension reform plan go far enough in curbing costs?” Not surprisingly, Mr. Boychuk says it does not but give Governor Brown credit for a good start. I was most surprised, in fact shocked, that Ms. Lopez supported Governor Brown’s pension reform plan. Ms. Lopez sets forth a thoughtful analysis of the Brown Plan and concludes that while it does go far enough it is in fact a good idea.
Ms. Lopez’s opinions are consistent with a recent LA Times poll which found that over 75% of State Democrats supported significant public employee pension reform. California’s Public Sector employee unions should note the direction of public opinion and plan accordingly. While there seems to be wide public support for the Brown Plan, it still has to pass the Democrat-controlled Legislature before it ever reaches voters as a ballot initiative–a total longshot. Notwithstanding, the Brown Plan is tame compared to other pension reform plans that may show up on next year’s ballot such as a 100% defined contribution plan and mandatory freezes on all pay levels tackling the problem of the massive underfunding of existing pension obligations. Recently, a Little Hoover Commission report found that the ten largest pension plans in California had a collective 240 billion shortfall over the next 30 years. Critics argue that the Brown Plan does not come remotely close to meeting this shortfall.
For today’s California public sector employee union it is imperative that they keep their enemies close and their friends closer.
The biggest pension fund for California teachers, CalSTRS, is experiencing a massive funding gap and the California Governmental Accounting Standards Board (GASB) is proposing new accounting rules for calculating the fund’s liabilities that will make those numbers even worse. CalSTRS currently has a funding gap of 56 billion dollars–the difference between money it expects to have compared with what it expects to have to pay out in benefits. If the new GASB accounting rules take effect that funding gap will be almost tripled to over 150 billion dollars.
Either way CalSTRS needs more money from taxpayers, teachers or both to avoid running out of money that pays out these benefits over the next 30 years. This issue, and many like it have created a hot button political debate pitting conservatives and conservative groups, who say the current public pension systems in California are unsustainable, against unions, that, while making some concessions, have resisted major structural changes. Unlike CalPERS, who can simply demand more money from their participants (cites, counties, and special districts) CalSTRS needs a legislative solution. In other words, CalStRS needs lawmakers to find a way to balance the books.
In many ways, CalSTRS’ current problem comes down to an accounting question: How should pension funds measure their long-term liabilities? Right now, pension funds base their calculation on a forecast that their investments will earn 7.75% a year. However, because public pensions are guaranteed by the taxpayer, many argue including GASB, that the assumed investment return should be much lower comparable to safe investments like U.S. Treasury Bills. If the investment earning assumption decreases the pension fund simply needs more cash, a lot more. It is fair to assume the pension fund investments will earn at least 7.75% per year? Maybe, maybe not. Look at your own personal investments over the years for guidance. Certainly there have been years when average investment earnings have exceeded 7.75% (dot com boom, real estate boom, etc.) Of course there have been years when investment earnings have been far less than 7.75% or even in the negative. What the question really is: How much tolerance for risk does or should the California taxpayer have.
CalPERS CEO Issues Statement on Governor’s Pension Reform Proposal
SACRAMENTO, CA – Anne Stausboll, Chief Executive Officer of the California Public Employees’ Retirement System (CalPERS), today issued the following statement in response to Governor Edmund G. Brown, Jr.’s 12-point pension plan:
“CalPERS is closely involved in the pension policy dialogue that will affect our employers and members in the State, schools and local government. We encourage discussion between all parties to ensure that public employee retirement plans are sustainable, secure and cost-effective.
CalPERS pensions have provided retirement security for California’s hard-working State and local public employees for nearly 80 years. Retirees with a dependable income contribute to stimulating our economy. In 2010, CalPERS $12 billion in monthly pension checks resulted in more than $26 billion in economic activity throughout the State, including $14 billion in business revenue and more than 93,000 jobs.
In today’s fragile economy, many employers are facing budgetary challenges and have already made changes to their pension systems. We have observed more than 175 cities, counties and local governments negotiate changes to lower near-term and future costs by increasing employee contributions, modifying benefits for new hires, or both. Changes in the State plan that have already occurred will result in significant savings of about $13 billion over the next 30 years. Some of the Governor’s proposals may require constitutional changes, while others may require collective bargaining.
At CalPERS, we believe that defined benefit plans are an important cornerstone to adequate and secure retirement. Pension change dialogue should focus on the critical policy issue of how to provide adequate and secure retirement income for public workers in a cost-effective way, while honoring vested rights for existing employees. We are committed to serving as an honest broker of information and an expert in pension administration as all parties work together on pension solutions. As the pension policy discussion progresses through the Legislative process, CalPERS can assist with information on costs and potential savings over time to facilitate lawmakers in a fully informed discussion.
CalPERS provides retirement benefits to 1.6 million State, public school, and local public agency employees, retirees, and their families, and health benefits to more than 1.3 million members.
CalPERS Pension Quick Facts (as of June 30, 2011)
Average monthly service retirement allowance for all retirees: $2,331
Average monthly service retirement allowance Fiscal year 2010-11 retirees: $3,065
Average years of service for all retirees: 20.3
Average years of service for Fiscal Year 2010-11 retirees: 21.2
Average monthly service retirement for school miscellaneous members: $1,250
Average years of service for school retirees: 16.9
Average monthly service retirement for State members: $2,597
Average years of service for State retirees: 23.2
74 percent of all service retirees receive $3,000 a month or less.
86 percent of CalPERS retirees, survivors, and beneficiaries live in California.
$12 billion in pension payments in 2010 resulted in $26 billion of economic activity in California and 93,651 jobs.
$22 billion of CalPERS assets are invested in California.
CalSTRS Response: http://www.calstrs.com/Newsroom/whats_new/pension_reform_response.aspx CalSTRS appreciates that Governor Brown has taken a very important step in addressing the critical and complex issues facing the state’s public pension systems. We look forward to receiving more detail on the proposal and having the opportunity to review it in depth. The most important reform CalSTRS needs is a plan of action to address its long-term funding shortfall, which only the Legislature and Governor have the authority to implement. We will continue to work with the Governor, Legislature and our stakeholders to develop a plan that includes contribution increases that are gradual, predictable and fair to all parties. It’s important to note that some provisions of the Governor’s proposal, such as board governance and health care costs, do not apply to CalSTRS. Moreover, since CalSTRS contribution rates are set in statute by the Legislature, our contribution structure is extremely predictable and has not experienced pension “holidays.” CalSTRS members contribute 8 percent of salary to fund their pension, while their employers contribute 8.25 percent. These rates haven’t changed since 1972 and 1990, respectively. The State’s contribution of 2.541 percent was reduced from 4.607 in 1998. CalSTRS administers a hybrid pension system consisting of a mandatory traditional defined benefit pension and a cash balance plan which is similar to a 401(k). CalSTRS also offers its members a voluntary defined contribution supplemental savings program such as 457(b) and 403(b) plans. A look at the average CalSTRS member who retired in 2009-10 further illustrates the unique aspects of CalSTRS: • Retired at age 62 • Performed 27 years of service • Earned a pension that replaces nearly 60 percent of salary • Receives approximately $49,000 in earned benefits annually • Does not earn Social Security benefits for their service • Does not receive employer-paid health care benefits after age 65
Governor Brown’s 12 point pension reform plan that was released today outlines big changes to current and future public employees, including California state employees as well as employees of local governments, schools and special districts. The Governor’s plan, while probably outraging institutional Unions, probably does not go far enough for conservatives and conservative activist groups. The Governor’s pension reform plan cannot be implemented, in most cases, without bargaining with the employees and employee organizations it affects. One thing is for sure though, the employee associations better bring it’s “A” game to the bargaining table to discuss the Governor’s plan. With the right approach, many of the employer needs outlined in the pension reform plan can be accommodated while preserving the fundamental elements of California public employee pensions. The California public employee pension system has been the cornerstone of public service for over 2 generations. That system, which has supported probably the finest public sector workforce in the country, needs to be preserved the common sense way.
Main Points of Governor Brown’s Pension Reform Plan
1. Equal Sharing of Pension Costs: All Employees and Employers
2. “Hybrid” Risk-Sharing Pension Plan: New Employees
3. Increase Retirement Ages: New Employees
4. Require Three-Year Final Compensation to Stop Spiking: New Employees
5. Calculate Benefits Based on Regular, Recurring Pay to Stop Spiking: New Employees
6. Limit Post-Retirement Employment: All Employees
7. Felons Forfeit Pension Benefits: All Employees
8. Prohibit Retroactive Pension Increases: All Employees
9. Prohibit Pension Holidays: All Employees and Employers
10. Prohibit Purchases of Service Credit: All Employees
11. Increase Pension Board Independence and Expertise
12. Reduce Retiree Health Care Costs:
State Employees Savings will be in the neighborhood of $900 million per year to the State.
How Do the Big Teacher’s Unions Get Away With Such High Dues?
As a California public school student through high school, son of a public school employee, and a long time coach at a public school for fifteen years, I have seen how hard the majority of teachers work, despite the obstacles they are forced to deal with on a daily basis. As a labor attorney, I am shocked at that these same dedicated and intelligent teachers have tolerated and continue to tolerate being represented by a union that takes from them much more than what it gives them.
Over the past couple of years, and especially since last March when I have taken a more active role in helping to represent the Horizon Certificated Employees Association (HCEA), a public charter school teachers association, I have started looking into what the traditional, “big” teachers unions offer their members, and at what price.
The standard union dues for a full time teacher in California is about $650/year for the state association and another $175 for the national association. The local association keeps another $100-$300. The part-time dues are lower proportionally. That comes out to over $100 per month since most teachers are paid on a ten month contract.
What do these teachers get for these high dues? Surely they must get an attorney to represent them if they are being investigated for discipline or have a professional labor negotiator working for them to negotiate their contract or handle workplace grievances and problems? No. For the most part, teachers use a system of stewards (fellow teachers) to “represent” other teachers as they go through the disciplinary process. When it comes to bargaining, teachers typically have a negotiations team that spends hours undergoing training from the state association to negotiate for themselves. To be fair, the state associations do provide some level of professional support, but far less than the huge dues would suggest.
For comparison, Goyette & Associates represents a large number of police, fire and general employee public employee associations. Each of these associations’ members gets professional representation at the earliest stages of discipline and we are actively working with each group on their contract issues and negotiations. Even the public safety unit with the highest rate of usage pays only 60-70% of what teachers pay in union dues.
Surely, the political arm of the state and national teacher associations must justify the huge dues? Die-hard members may make this argument, but the reality is that only a small portion of union dues actually get to political campaigns. Most dues goes to the huge administrative overhead of these massive organizations. Certainly, California teachers’ unions have a big voice in state politics, but that does not clinch the argument that teachers ought to pay such high fees for that voice. In the alternative framework below, a local teachers association can use the money currently earmarked for the state and national groups and use most of it for local politics, or send it to the big unions for politics – but by choice.
There is another way of doing this.
A local California teachers association with 800 members currently brings in about $800,000 in dues. Of that, almost $700,000 goes to their state and national associations. The other $100,000 is used by the local association to cover meeting expense, a small local office and maybe staff, and other costs. Usually, one of the biggest “discretional” expenses is travel and registration fee expenses to attend conferences and trainings put on by the state and federal associations.
What’s the alternative? Decertification…”fire” the big union.
What if instead of the budget picture painted above, the local association could keep that $700,000 in dues each year? The local association would still keep its rights to collectively bargain a contract with the school district, but it would have the freedom to decide how much and to whom ALL of its membership dues were spent.
An “independent” teachers association with these 800 teachers could take the $700,000 and do a lot of things…this is just one possibility: 1) Use $240,000 and hire a law firm to provide the teacher members with professional representation at every step of the disciplinary process and to hire a professional labor negotiator; 2) Return $200,000 to the members ($200/year); 3) Set aside the other $260,000 for a combination of public relations, local politics and state/national politics. For the politics/PR piece, think about the impact this teachers association would have in a local school board election (the group that approves their contract) if they spent even a portion of that $260,000 on a local election. Also, if the membership felt strongly about the political actions of the state and/or national associations that they formerly belonged to, they could simply send them a check for whatever amount they wanted to support their activities – I doubt that the money would not be accepted.
But Decertification has to be nearly impossible to accomplish? Not true. The process is actually simple and straightforward, though there are some critical timelines that must be met and each step has to be properly taken. The reality is that there are decertifications taking place throughout California of big unions in all layers of public services. The biggest obstacle to teacher taking charge of their labor organizations and dues is their ignorance of the alternatives to the status quo.
The CalPERS, Terminated Agency Pool lacks the ability to get more money from employers and taxpayers if investments expected to fund roughly 67% of pension costs fall short.
That coupled with the increased number of agencies exploring the idea of terminating their participation in CalPERS lead the Board of Directors to approve a sharp increase in the cost of terminating pension plans.
Currently the Terminated Agency Pool is responsible for the pensions of 4700 members of 118 terminated plans. Two years ago the terminated pool had assets of $144m, liabilities of $60m and annual pension payments of $54m.
A 3.8 percent bond-based earning rate will be assumed when calculating the money an employer must set aside to offset future obligations, down from the 7.75 percent used when forecasting earnings, drastically increasing the cost of termination.
The new 3.8 percent earning rate will increase the terminated pool’s liabilities from $60m to $92m.
The Sacramento Bee recently reported that a group, looking to abolish collective bargaining rights for all of California’s public sector employees, filed three ballot initiatives this week. The group is called the California Center for Public Policy and arrears to be led by a UC Santa Barbara economic lecturer named Lanny Ebenstein. Mr. Ebenstein’s group has started fundraising to begin a signature campaign to get the initiatives before the voters.
The three initiatives are focused on both public sector employees and retirees. The first measure would ban recognition of all public sector labor unions to prevent government from collectively bargaining with them. The second measure would impose a higher tax burden on pensions paid through CalPERS or CalSTERS for retirees who earn an annual pension of over $100,000.00 per year. The Third measure would raise the retirement age of state employees to 65 and, and public safety workers to age 58.
The most troubling aspect of the news was the initial reaction from representatives of public employee groups. Steve Maviglio, of a group called Californian’s for Retirement Security, responded by saying “these will end up in the same trash bin as the proposal to require Christmas music in public schools. These proposals are wildly out of synch with California; fortunately there is a $15 million dollar gap between dumb ideas and the ballot box.”
Let’s hope Mr. Maviglio’s comments are not shared by a majority of public sector employee organizations throughout the State. Californians and members of public sector employee organizations should take these measures very seriously. Many voters, especially those who work in the private sector would view positively some, if not all of the element s of the measures. Union recalcitrants, inflexibility and lack of creativity is exactly the posture that lead to the abolition of collective bargaining in other states, including Wisconsin. The public sector employee union can no longer used tried and true methods like strikes, picketing, or PR smear campaigns to meet their objectives. The world out there is much more complicated now and requires an entirely different and smarter approach. The public sector employee unions need to position themselves as partners with a solution and regain the trust and respect of the citizens of California. Mr. Ebenstein is quoted in the Sac BEE article by saying, “[g]overnment does not exist to provide compensation and pensions for government workers. Government exists to provide good public services at a reasonable cost.” A vast, vast majority of California voters would agree with this statement. Unions need to incorporate this message in their strategy and convince the public that the good public service Ebenstein references depends upon hiring and keeping skilled and motivated government workers. Remember, the California private sector employees out number public employees over 25 to 1 at the ballot box. California’s public sector employee organizations would be wise to take seriously the three initiatives filed by Mr. Ebenstien and similar ones that have already been filed or will be filed in the coming months.
If you would like more information from us, regarding how you can craft a message of cooperation and partnership, please contact Jennifer at the Firm.