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Out of Control Policy Blog Archives: 8.18.13–8.24.13

In California, Getting Public Employees To Pay Their Fair Share Is Harder Than It Should Be

Over the last decade, Californians have had increasing amounts of their hard-earned money taxed to be spent on unsustainable public employee pension schemes. The average California Public Employees' Retirement System (CalPERS) pensioner retires by age 60 and receives monthly checks of $2420 (or, about $29,000 per year). According to figures from CalPERS, 78% of pensioners receive $36,000 or less per year, 21% receive $36,000-100,000 per year, and "only" 1% (or, about 15,000 retirees) receive $100,000 or more per year.  CalPERS and the state, county, and city governments and agencies that pay into it are far short of fully funding the program. As the front page of the CalPERS website features, the pension program is, using the best case investment scenarios, only 73% funded as of 2011. Translated into dollar figures, this amounts to  least a $30 billion shortfall, according to the latest state budget.

The high unfunded liability has put significant pressure on governments and agencies to devise ways of making the program solvent for the over 1.6 million retired and active public employees who are depending on the checks continuing to arrive and the fund continuing to exist there when they retire. Meanwhile, rising pension costs have grown to be an  financial burden on state and local governments, which must divert money that could be used for providing services towards paying for increasingly costly pension obligations.

One obvious way of easing this burden is to end the practice of pension pickups for all employees as quickly as possible.

CalPERS sets contribution rates for both the "employer" (governments, also known as, "taxpayers") and the employees who will be benefiting from the program upon retirement. Therefore, public employees are supposed to be contributing a certain percentage of their paychecks to go towards their generous pension plan (which often comes with annual cost-of-living increases and health care assistance as part of negotiated retirement benefits). The average contribution rate for employees is 8%, to be taken out of their paychecks.

However, in defiance of common sense, governments and agencies across the state (and, the nation) have long engaged in a practice called the "pickup," or, making the retirement contributions that employees are supposed to make, for them. Even the Public Employees' Pension Reform Act of 2013 retained the practice for employees hired before January 1, 2013; those hired after then are not eligible for this perk, though they may continue to receive the same pickups as older employees until the bargaining agreement they were hired under expires, is amended, or is renewed.

CalPERS hasn't tracked the extent of these pickups and in their books, a 7-9% contribution made by employees has been indistinguishable from a 7-9% contribution made by taxpayers on behalf of the employees. This therefore makes determing the cost to taxpayers difficult to determine and it is generally necessary to track down and read through bargaining agreements to see if pickups are being made.

According to a recent investigative report, at least 51 Bay Area governments engage in pickups for public employees, most of whom pay into CalPERS. Last year, Bay Area taxpayers paid at least $221 million to cover contributions that public employees were supposed to make. For example, transit workers for the Bay Area Rapit Transit (BART) system haven't had to pay a cent towards their pension plan, at a cost of $17 million a year for taxpayers. The BART employees even went on a four and half day strike last month after being asked to start paying their fair share and are threatening to do so again, unless they receive a 15% pay increase and an additional 6.5% pay increase to offset any contributions to their own pensions.

Fortunately, at least some governments are making the common sense policy change, to an extent, if only because of a mutual understanding between unions and government that both groups will suffer widespread financial losses if the pension system collapses. The cities of Santa Barbara, Thousand Oaks, and Chico are three of them.

Santa Barbara in 2010 negotiated with its police force to pay 2.266% of their paychecks for their pensions. Police officers did so on the condition they receive a pay increase, which they did. Negotiations are presently underway for police to begin paying their full 9% commitment. Not surprisingly, the officers, who benefit from an average of $98,000 a year in pensions upon retiring in their early 50s, have stalled negotiations and are demanding further pay increases to "offset" their contributions.

As part of two-year agreements with the three unions, the Thousand Oaks City Employee Association, the Thousand Oaks Management Association, and the Senior Management Association, employees agreed to contribute towards their pensions. Taxpayers will continue to pay for the "employer" contributions to CalPERS, of over $3 million a year, naturally, but the agreement with the labor unions will take off most the other $2 million in annual contributions taxpayers had to make on behalf of public employees.

"Most" because while the state contribution rate is 7-8%, depending on the Unit the employee is in, the unions agreed to contribute 3.5% of their salaries beginning in July 2013 through July 2014, at which point they agreed to contribute 7% of contributions. It is unknown how many employees will still be receiving a 1% pickup. In exchange for this deal, city officials in Thousand Oaks offered to reinstate merit-based pay as part of the two-year contract. Draft copies of the three agreements, which were ultimately adopted, can be read here.

At the very least, beginning July 6, city employees in Thousand Oaks  began contributing towards their own pensions, which average approximately $25,000 a year for public employees in Thousand Oaks, who earn average salary of $79,000 according to a CalPERS actuarial report. The system is currently short at least $30 million in funding, and while the agreement doesn't necessarily make a dent in that unfunded liability, it at least gives taxpayers some breathing room and makes possible more serious discussions in the future. In California, this is progress.

The city of Chico also took a stab at asking city employees to contribute towards their pensions, considering that it has an unfunded pension liability of over $60 million. Last year, Chico taxpayers paid $1.8 million to cover the pension contributions of city employees. According to the Chico Enterprise Record, between 2012-2013, "only one of nine city unions paid their full employee share. Two paid nothing and the remaining six paid a range in between." As part of 2012-2013 contract negotiations, two of the nine city unions agreed to pay their full contribution rate, and the other seven will contribute partially or not at all towards their share of paying for their pensions. The city reportedly rejected offers by city unions to increase salaries in exchange for having employees contribute more towards their pensions.

Combined, the pickups for BART, Santa Barbara, Thousand Oaks, and Chico public employees cost taxpayers over $20 million last year. This is money that taxpayers shouldn't have had to pay at all, and it doesn't include the cost to taxpayers that was attached to salary increases for public employees who, on average, probably make more than they do. Even worse, these piecemeal pension adjustments don't address the high unfunded liabilities of these systems. Using the best case investment scenarios:

  • BART has an unfunded liability of $187 million
  • Santa Barbara has an unfunded police pension liability of $57 million ($220 million in total)
  • Thousand Oaks has an unfunded liability of over $30 million
  • Chico has an unfunded liability of over $60 million

Combined, just these four agencies and local governments have unfunded liabilities of over $300 million. This is just the pension side of things. California is also short tens of billions of dollars in funding public employee health care as well, not to mention the other pension systems, state and county administered, that are in trouble across the state. California governments and agencies apparently have hard enough of a time getting employees to pay their fair share, making the prospect of California politicians seriously addressing such massive shortfalls any time soon difficult to imagine. That it is even considered a success to have all public employees pay their own contributions in full is a clear indication of how fractured the notion of good governance is in California.

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BART, Pensions, and Pick-Ups

The Bay Area Rapid Transit (BART) system is one of the largest transportation systems in the state of California, servicing about 400,000 Bay Area residents daily. With over 3,000 employees, last year BART had an operating budget of $722.6 million. While BART employees are among the highest paid public employees in the state, for four and a half days in July, BART employees engaged in a work stoppage as contract negotiations between BART and the two large unions representing BART employees--Service Employees International Union Local 1021 and Amalgamated Transit Union Local 1555--fell apart. At issue are employee compensation, pension benefits, and retiree health care.

Last year, BART spent 57.9% of it's operating budget on compensation, pension and retiree health benefits. Rising costs have led them to propose modest reforms, such as having BART employees contribute 5% of their salaries to go towards their pension plans and have employees contribute more than the current $92 a month for health benefits. In response, the unions proposed a 20.1% pay (down from an initial "offer" of 23%) increase over three years and balked at the pension contribution proposal. As negotiations are currently ongoing amidst a 60-day "cooling-off" period, the issues at stake have state- and nation-wide implications.

The most recent proposals have been summarized by the San Francisco Chronicle:

BART's four-year offer

- A 9 percent raise over four years.

- Employees contribute 2 percent to their pension the first year, and 3, 4 and 5 percent in subsequent years. They now make no pension payments.

- BART will cap its health insurance payment at the lowest cost of either a Kaiser or Blue Shield Access + family plan. Any employee wishing to pick a more expensive plan must pay the difference.

The unions' three-year offer

- A 15 percent raise over three years.

- Employees would contribute 7 percent of their pension costs each year. In exchange, BART would offer a 6.5 percent raise the first year, on top of the 15 percent raise over three years.

- Union employees' $92 monthly health insurance premium could increase by no more than 5 percent a year.

The increasing rate of pay for public employees, coupled with the rising costs of unaffordable retirement benefits, have contributed to these perks consuming larger portions of budgets. Consequently, taxpayers are paying more for less.

Taxpayers are footing the bill for some of the most lavish compensation and retirement programs in the state. Last year, the average BART employee made $76,551. When executives are included, the average salary rises to $83,000. According to the Mercury News, the average BART employee (executives included)† is "nearly $30,000 more than employees at Los Angeles' transit line, and nearly $10,000 more than those at San Francisco Muni." For comparison, in 2010, the median household income in San Francisco was $71,745; all told, the median household income in Bay Area counties ranged from $67,169-83,867. While the unions are currently "offering" to agree to an 8% pay increase over four years (increasing union member pay to over $80,000), the reality is that taxpayers are currently in a situation where they are paying for public employees who often make far more than they do.

Unlike most people, BART employees haven't had to contribute to their pension plans. One of the more perverse benefits has been the "pick-up" of employee pension contributions. According to a recent investigative report, 51 Bay Area governments engage in the practice of not only contributing to the public pension system but also covering the contributions that employees should be making. In 2012, taxpayers paid "$17 million covering what employees were supposed to be contributing to their pensions," for the BART system. Governments across California are recognizing the unsustainability of this practice, such as Ventura County,† recently struck a deal with SEIU to end the practice of "pick-ups" in 2014. The most recent line of proposals put forward by the BART-employee unions suggest they have at least been paying more attention to the realities that the system currently faces.

According to a California Common Sense report, "overall annual retirement costs nearly quadrupled from 2000 to present day, growing from $13.1 million to $58.0 million. Retirement benefits grew from 3% of BARTís operating budget in 2000 to 8% of its operating budget last year." Presently, BART's pension fund is only 90% funded using the best-case estimates. Under the assumption that the rate of return on pension investments is 7.5% annually for thirty years, BART currently reports a shortfall of $187 million for the pension fund. However, if you assume rates of return more in line with those used by the private sector, such as a 5.5% rate of return over thirty years,† then the unfunded liability rises to $797 million. That is $797 million that the status quo BART pension system does not have; hence, the need for reforms.

It is unclear how the BART-employee conflict will resolve itself.† That the unions have at least recognized that employees should be contributing some amount is at the very least a step in the right direction. Even if whatever comes from the strike is only a short-term solution to a long-term problem, the situation signals that government agencies are at least finally getting around to addressing fiscal realities.

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The City Of Santa Barbara Takes On Police Pensions

Like many governments, the city of Santa Barbara has not only promised lavish retirement benefits to government employees at the taxpayers expense, but is also falling short in paying for those promises. The city of Santa Barbara currently faces an unfunded pension obligation of $226,284,296. "For the first time, the City will begin making progress toward addressing the unfunded liabilities associated with post employment benefits," reads a fiscal year 2014-2015 budget proposal. As part of the effort to address this shortfall, the city has asked members of the police union, representing 115 police officers and 20 sergeants, to contribute more to their pensions.

In 2012, Santa Barbara media reported on the story of a police captain who, upon retirement, "cashed in 2,240 hours of unused sick leave for $115,000." This was only a lump sum payment in addition to his ~$100,000 pension. Between 2010-2012, the average police retiree earned $116,931 (not including overtime), retired at age 53, and received an annual pension of $98,848. For the pensions of 11 police officers who retired in that time, taxpayers can expect to pay over $1 million a year, probably for decades. For decades, police officers in Santa Barbara never had to contribute to their pensions. Taken together, generous pensions and decades of not having police officers pay into their pension plans mean the city is currently short $57 million in funding the pension plan for police officers.

Beginning with the three-year contract in 2010, police officers in Santa Barbara agreed to pay 2.266% into their pensions, under the condition that they receive pay increases that other city employees didn't get. As important a step as this is, this still isn't enough to adequately fund the pension program, and the city has asked police officers to contribute 9 percent of their salary towards their pensions.

According to a press release by the city, "Police pension benefits are generous with a police officer able to retire at age 50 with up to 98% of salary. With pension costs increasing steadily, the City will need to pay police retirement costs amounting to 50 cents for every dollar paid in salary by 2015 and an estimated 62 cents for every dollar paid in salary by 2020. The City is requesting the Police Union to pay 9 cents of this amount."

As part of the pending contract, the city has proposed a 5% salary increase as well as asking police officers to contribute an additional $80 a month towards health benefits. The police union has countered with a proposal to agree to the pension increase on the condition that they receive a 6% general pay increase and an additional 6.734% pay increase to offset the increased pension contributions. In other words, the police union is proposing that taxpayers continue to bear the burden of an unsustainable and ultimately unfair system.

These contribution rates are all predicated on the assumption that promising police officers "up to 98%" of their final ($100k+) salaries after retiring, years before the rest of us, is a sustainable and sensible practice in the first place. Thankfully, it appears that some localities, including Santa Barbara are taking seriously the threat of further debt. It is unclear, however, what the police union will ultimately agree to and the extent to which taxpayers can have some breathing room before it becomes clear that there is still a mountain of debt to climb out of.

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