This op-ed column by reader Kathy Ryan is the latest in a series of articles that will be featured under the new People Post column. The space is dedicated for Long Beach citizens to comment on local ideas and issues currently facing the city. Send your op-ed or proposal to [email protected] to be featured in the People Post.
9:00am | Over the years the pension issue has turned often honorable politicians into fearful accomplices of bad policy. This is what has happened to pension reform with the endless delays and excuses by politicians, bringing reforms to a standstill and causing a financial nightmare for municipalities. The control over municipalities by the unions has single handedly impeded necessary reforms. Politicians are paralyzed to act in fear of ramifications they would incur from the unions.
SB 400, signed in 1999 by Governor Davis, gave cities the authority to give public safety employees 3% of salary for each year of service with retirement at age 50. Then miscellaneous employees started lobbying for their increase in pension benefits. It was not until two years later that Governor Davis caved to the union demands even though he felt miscellaneous employees did not merit the increase. CalPERS said it would reward higher benefits by inflating the value of the local government’s pension investment fund, making it easier to pay for more generous pensions.
Booming pension fund earnings in previous years were cited in a in a self-congratulatory board resolution approving the incentive in 2001. But the stock market boom had cooled by then.
A 2009 article in the Capitol Weekly sums the situation up nicely:
The CalPERS chief actuary, Rod Seeling, advised against the plan to inflate the market value of the assets wrote Tom Branan in the May/June 2001 issue of The Public Retirement Journal. The California Public Employees Retirement System could not say how many of the 1,800 local government retirement plans had their assets inflated in exchange for increasing pension benefits.
CalPERS offered multiple formulas with different retirement ages. The Long Beach City Council chose the most expensive package, which allowed miscellaneous employees to retroactively receive 2.75% of salary for each year worked with a retirement age of 55.
In a hurry to pass the pension enhancement, whether carelessly or deliberately, the City Council in 2002 violated the City Charter! The Charter states it takes a vote of the people to change the retirement ages and this was not done. Even though CalPERS offered several formulas with different retirement ages, none of them included a retirement age of 65 for miscellaneous employees and a 55 retirement age for public safety as stated in the City Charter. Since Long Beach is a Charter City, it has precedence over state law, because there were no public safety issues involved. Many will say choosing a formula which did not contain the ages included in the Charter was okay, because they were not given an appropriate choice. The City Council did have a suitable choice. That choice was to do nothing, which in hindsight would have been the best choice.
The City Attorney agreed with what the City Council had approved, but there are other notables, Howard Jarvis Association, The Pacific Legal Foundation and recent candidate for Attorney General, John Eastman, who acknowledges the people had a right to vote on retirement ages in 2002.
Since it took a vote of the City Council to implement the increase for miscellaneous employees; a final reading and vote was taken during the changeover from the old City Council to the new 2002 council, approving the retroactive pension changes. When policy is made or legislation passed by circumventing public input, it calls into question the ethics of those who tried to keep the vote from becoming public.
We not only had inexperienced members of the City Council voting on a serious issue, I believe these members were not well informed on what they were actually voting for. The City Council should have insisted that the vote be taken at a later date, after the members had time to do their own research, because that is what we expect our City Officials to do when overseeing taxpayer funds. The void in the chain of responsibility within City Hall became evident soon after the increases were passed. We have a problem when our City Manager answers to the City Council and the City Council has unabashed loyalty to the unions, making it difficult to make sound non-partisan decisions.
Shortly after the Council’s actions in 2002, Mayor O’Neill informed the citizens of Long Beach that the City was over $100 million in debt. Immediately following her disclosure, the Mayor convened a Budget and Advisory Committee to bring an independent perspective to the City’s financial crisis. One of the suggestions was to have the ‘Employees’ contribution that was paid for by the City/Taxpayers be transferred to the Employee over the next three years. This recommendation was summarized in a preliminary draft to Mayor O’Neill in January, 2003. An independent committee saw the pension problem early on, but no changes followed their recommendation, and to this day there has been no action by anyone to make those changes.
There is still a lack of will to correct what was a calculated miscarriage of justice in 2002. The City Council still refuses to act on serious pension reform even with the mounds of evidence provided by the City’s pension consultant, a credible former CFO and many other knowledgeable people
Since no reforms have been made in Long Beach regarding pensions, it will now be harder to have the employees pay anything but the 2% of salary they now pay. If the City Council had followed the recommendations of Mayor O’Neill’s Advisory Committee, the employees would have become accustomed to paying their fair share of the costs. By 2014, those costs will reach 45% of salary for safety employees and 30% for miscellaneous.
The City will be in a quandary, because starting in 2008, the City changed from 3 to 5-year contracts, making it difficult to make changes until the contracts start expiring in 2013. The recent contract for the POA will not expire until 2015. These new 5-year contracts were not for the benefit of the citizens, they were to secure existing benefits for the employees for as long as possible, knowing they cannot be reopened unless the unions okay it. Signal Hill’s Mayor saw the economic meltdown, which started in 2007 and cautiously limited labor contracts to one year. It allowed the City flexibility to make numerous changes as the economy worsened over the years.
Long Beach has been financing their pension debt as far back as 1995. Almost $200 million in Pension Obligation Bonds have been taken out since 1995. The bonds will be paid off in 2020, but in the meantime, the City has incurred more pension debt. We will now have overlapping finance plans to pay off the debt; POB’s and ‘smoothing’. Financing pension debt is an indication that we haven’t been able to afford these expensive pensions for quite some time.
To help cities work through the new debt, CalPERS has come up with some creative financing called ‘smoothing.’ The losses CalPERS has taken since the downturn in the economy has drastically increased Long Beach’s pension debt. It will become impossible for the City to pay 90% of the pension costs based on the new rates starting in 2014. It is time to end the bailout programs… pay pensions according to what we can afford without incurring debt.
It is hard to imagine how the City will bring the employees to the table to renegotiate fairly for the taxpayers, when union members have had a free ride since 1983. At that time, the City indiscriminately started paying the employee portion of their pension costs in lieu of a raise. This agreement stayed intact throughout the years and remains today.
Up until 6 years ago, the taxpayers picked up 100% of pension costs… it is currently 90%. In addition, employees are allowed to apply the in lieu portion (in lieu of a raise) paid by the taxpayers to their salaries when calculating their retirement benefits. These facts and figures have been known by the City Council before the renewal of the each new labor contract. What started as a trade-off has become part of every labor contract since 1983, costing the citizens hundreds of millions in revenue that should have gone for services. Employees still enjoy negotiated raises and 90% paid pension benefits.
To quote John Bartel, the City’s pension consultant: “Actuary science is not rocket science.” If Mr. Bartel provides actuaries before each labor negotiation, then we either have City officials who are not listening, or a consultant who should be replaced. After reading the actuaries Mr. Bartel provided the City, I would say our City officials have some explaining to do.
Since the blame game will not solve the problem, the City needs to end their association with CalPERS and stop playing with public money. CalPERS averaged only a 2% return over the past 10 years. They are stubbornly adhering to an anticipated 7.45% return on investments. Their previous assumption was 7.75% and most economists feel CalPERS should have set a more conservative rate of 4-5%.
Long Beach has seen its cost for pensions increase 600% from $8 Million to $48 Million in the past ten years, while revenue to the General Fund has increased 17%. After 2014, the new rates for CalPERS will be established and the $48 Million will dramatically increase. The new figures established by CalPERS will remain a debt for the next 30 years. CalPERS new creative financing, helps retain a pension plan that is obsolete and unfair.
In 2002, the City Council used CalPERS as the scapegoat for passing the 2002 pension enhancement; however, each new City Council following didn’t seem to have a problem with an organization that gave misleading information, or one that has been exposed for their corruptive business practices.
CalPERS executives and fund managers have had to resign over fraudulent practices and investigations. A former board member and the Chief Executive have been sued by the State of California for receiving more than $50 Million in fees for hel ping private equity firms obtain CalPERS investments. Their ethics are in question when their own Director of External Affairs defends CalPERS luxury travel with financial firms with whom they were doing business with, and refuses to release that data, because CalPERS’ contracts with investment firms contain trade secrets. This is a company who acts as a Mini-Wall Street, who did not oversee problems within its own house. CalPERS ignored problems that helped create an environment that allowed the fraudulent behavior of City officials in Bell, California, and has pushed many municipalities towards bankruptcy. I believe the Bell scandal pales in comparison to what has been going on in Long Beach since 1983.
When CalPERS increased their pension formulas in 1999 and 2001, they based their assumptions on the Dow reaching 25,000 by 2009. This is an issue that needs investigating, and former Dean of Chapman Law School, John Eastman, agrees. According to Mr. John Eastman, ‘What CalPERS failed to disclose was that: (1) the state was on the hook for shortfalls should actual investment returns fall short of assumed investment returns; (2) those investment returns implicitly projected the Dow Jones would reach roughly 25,000 by 2009 were unrealistic to say the least; (3) shortfalls could turn out to be hundreds of billions of dollars; (4) CalPERS own employees would benefit from pension increases, and (5) members of CalPERS board had received contributions from public employee unions who would benefit from the legislation.
At the time, the Wall Street Journal said:
Had such a flagrant case of non-disclosure occurred in the private sector, even a sleepy SEC and US Attorney would have noticed.
The pension problem started in Sacramento in 1978 when then-Governor Jerry Brown signed the Dills Act which gave way for collective bargaining by public employees. During his run in the current election, Jerry Brown said, “I’m very proud to have created this system that gave workers a choice.” We will find out if this was political rhetoric to win an election, or if the Governor is now willing to solve the enormous problem of a $500 million unfunded pension liability.
Over the years, there were changes made to CalPERS through the initiative or legislative process. The voters, by passing Proposition 21 in 1984, opened the floodgates to corruption by allowing CalPERS to invest more than the previous limit of 25% of their funds in stocks. That led CalPERS to start moving towards riskier investments using taxpayer money. Assemblyman Larry Stirling admitted that what he did not foresee was that that Prop 21 would be used to approve unsustainable increases in pension benefits, and there was no one to enforce the ‘prudent man rule.’
To quote the chief actuary at CalPERS in 2009: “I don’t want to sugarcoat anything,” Ron Seeling said. “We are facing decades without significant turnarounds in assets, decades of what I, my personal words, nobody else’s – unsustainable pension costs of between 25-30% percent of pay for miscellaneous plan and 40-50% percent of pay for a safety plan.”
Even though former Mayor and Assemblyman Willie Brown, former L.A. Mayor Riordan, current L.A. Mayor Villaragosa, and former Governor Davis were all supporters of public employee pensions, they are all now calling for pension reform.
One of the many influential people who had consistently called for pension reform is recently deceased, Assemblyman Keith Richman.
His work has been carried on through the California Foundation for Fiscal Responsibility now led by Marcia Fritz. John Moorlach has also been leading a fight against the Orange County Sheriff’s Department in the courts to repeal the retroactive portion of the pension enhancements. The original case was thrown out a couple of years ago. To the disappointment of the O.C. Board of Supervisors and the taxpayers of Orange County, the 2nd District Court of Appeals rejected the appeals. When talking about the costs, the court stated:
“Imprudence, however, is not unconstitutional.”
It is time to stop burdening the taxpayers and set a sound course for running our local government. We should be out of the pension business and start a changeover to a 401K and social security for new employees; have the present employees pay their share of the pension costs, plus any increases the City incurs from 2012 – 2014 and beyond; adjust the retirement ages to those set by social security (partial benefits at 62 and full benefits at 66). All labor negotiations should be opened up to the public and all benefits on the table for change or elimination.
One program, outside of pensions, that needs scrutiny is ‘banked sick leave and retirement health care costs.’ This program has an unfunded liability of $182 million. This is an example of another program for the employees that the City cannot afford. Together with the $1.2 billion unfunded liability for pension costs, the City has an obligation to reign in employee benefits.
The City Council needs to understand they made a commitment to the citizens of Long Beach, not the unions, so they need to take the time to examine every agenda item that comes before them, do their own research and not rely solely on staff recommendations. Ignorance will not be a legitimate excuse the next time around for inaction or improper action. That is what happened in 2002 and it will continue if we don’t demand better of our City Council.
On Tuesday night the City Council will take the 1st step towards pension reform. Four groups – City Management, Confidential Employees, Attorneys and Prosecutors – have agreed to changes in their labor agreements. For new hires in these four groups, employees will be required to retire at 60, instead of 55. They will earn a pension benefit of 2.0%, instead of 2.5% for every year worked, and their final retirement benefits will be calculated on a 3-year average, instead of the current final year salary. New hires will also start to pay the full 8% employee contribution towards their retirement, instead of the 2% existing employees pay.
City Hall feels good about making such small progress with a problem the unions have long resisted. There will be real pension reform when the City requires all employees to pay their full contribution out of their earnings. As it is now, current employees will still be allowed to apply the employer contribution to their salaries when calculating their retirement benefits. Out of a total 20% contribution for each of the four groups, the current employees will contribute 2% from their salary, while the taxpayers pick up 18%. Since the changes will only apply to new hires, the City Council should delay the vote on the new contracts and make sure this new two-tier system will not inhibit future, meaningful reforms for current employees.
This article in the Franklin Center WQ in January said:
When talking about pension debt, to quote the new Chief Actuary of the GAO, The Great Recession did not cause this fiscal catastrophe but merely revealed it. As the task force clearly says: “Our findings regarding public pension systems; however, are independent of the financial crisis and encompass risks unlikely to go away with economic recovery. One of those risks is what actuaries refer to as “moral hazard.” That’s when those who benefit immediately from making promises know they won’t have to honor them and can hide the true cost until it is too late. State and local leaders have done just that for more than a decade on everything from public works projects and self-insurance premiums to social programs, education and, the biggest of all, false retirement promises”.
Kathy Ryan is a part-time activist, full-time business person; wife; mother and grandmother who advocates for a better future for her grandchildren through a more open and honest government. She co-founded Long Beach Taxpayers Association in order to give power to the people through information.