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Out of Control Policy Blog Archives: 10.13.13–10.19.13

BART Unions Choose Striking Over Paying Their Fair Share

The Service Employees International Union (SEIU) and Amalgamated Transit Union (ATU), representing employees of the Bay Area Rapid Transit (BART) system, have gone on strike, disrupting service to the 400,000 Bay area residents who rely on the system on a daily basis. The unions previously disrupted service in July, when they went on strike for four and a half days. Unlike other public employees, unionized BART workers do not have a "No Strike" clause in their contracts, allowing them to continue holding the region hostage whenever they want. At the heart of the months-long conflict are proposals by BART officials asking BART employees to contribute to their pensions and more towards their health care benefits.

The situation is hardly a pitched battle between low-wage public servants challenging an unfair system. The average BART employee earns $76,000 in base salary and overtime; by comparison, the median household income in San Francisco is only $71,000. BART employees make far more than transit workers in other systems, including $30,000 more per year than their counterparts in Los Angeles.

In addition, BART employees receive tens of thousands of dollars in benefits towards which they contribute very little. For health insurance, BART employees have only had to pay $92 a month, and are apparently furious at a BART proposal that would gradually raise their monthly contribution to $144 by 2017. Even more absurdly, BART employees have never contributed towards their own pension plans, in an arrangement known as a "pension pickup." In addition to paying for the "employer contributions" towards CalPERS, which BART employees are enrolled in, taxpayers last year doled out $17 million making pension contributions on behalf of the now striking BART employees.

The most recent proposal put out by BART seems far more generous than it should be:

  • A four year contract
  • 3% salary increases every year for four years
  • An offer to pay BART employees $500 a year in bonuses if ridership increases 1% above forecasted levels (capped at $1000)
  • Annual phasing in of pension contributions by 1% a year
  • Phasing in increased contributions to health benefits by 2017

The unions themselves haven't made public their most recent proposals, though a look at their prior proposals show how ridiculous their demands are:

  • A three year contract
  • 4.5% salary increase per year
  • Pension contributions of 1.4% the first year, 2.8% the second, and 4.9% the third
  • Increasing the health insurance premium by no more than 15% (raising it to about $106)

The above is actually more modest than earlier proposals, which included a demand for a 23% salary increase. For the overwhelming majority of people in the public and private sector, the demands and actions of the BART unions are slap in the face to decency and common sense.

Length of contract: 3 years

In countering this, the two public employee unions are counter offering:

  • Length of contract: 3 years
  • Pay: 4.5 percent raise each year
  • Pension: 1.4 percent first year, 2.8 percent second year, 4.9 percent third year
  • Health insurance: Increasing average premium contribution by 15 percent

- See more at: http://reason.org/blog/show/bart-negotiations-border-on-a#sthash.lxr8c0dS.dpuf

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Jerry Brown Vetoes Modest Drug Policy Reform

On Saturday, Governor Jerry Brown vetoed Senate Bill 649, which would have given prosecutors discretion in charging suspects arrested of drug possession with a misdemeanor rather than a felony. In vetoing the modest reform, Governor Brown rejected an opportunity to alleviate overcrowded prisons and jails, and save taxpayer money in the process.

The bill would have provided prosecutors discretion in charging suspects arrested for drug possession with either a misdemeanor or a felony upon considering the particular circumstances of each case. Presently, prosecutors must charge individuals arrested for possession of certain drugs, such as heroin or cocaine, with felonies. Under current  California law, possession of less than an ounce of marijuana is an infraction and possession of methamphetamine is currently eligible for a misdemeanor charge. Senate Bill 649, then, would have merely extended the option to possession of other substances, such as heroin and cocaine, and would not have gone so far as California has with marijuana.

According to the Senate Public Safety Committee analysis of the bill, the change would "give prosecutors and courts wide discretion and flexibility in charging and sentencing  a defendant. The prosecutor and the court can consider the facts of the charged crime, the defendant’s record and the defendant’s attitude as these matters are developed through the  process. The prosecutor can offer the defendant a plea bargain...such as probation...or the case can proceed to trial."

The veto comes as California scrambles to figure out how to meet a January 2014 deadline to reduce overcrowding in the state prison system. As an indication of the sorry state of corrections in California, the most significant and successful reforms in recent years have been forced on California politicians. In 2010, California was ordered by the United States Supreme Court to reduce the prison population from a 150,000 to about 110,000.

In 2012, California voters approved Proposition 36, which amended the "Three Strikes" law that established mandatory life sentences for third-time felony offenders, regardless of what the felony was. Proposition 36 requires that the "third strike" must be for violent or serious offenses, or offenses committed with a firearm. Proposition 36 also allowed for "third strikers" convicted of non-violent, non-serious offenses to petition for resentencing. Of the three thousand lifers who qualify for resentencing, 1,000 have already been released upon review of their convictions.

A recent study by the NAACP and Stanford University Law School has found a remarkably low 4.4 month recidivism rate of 2% among those released so far, compared to 90-day recidivism rates of 16% among other California offenders. In 2011, there were 1,350 individuals sentenced to life terms for non-violent drug offenses, including 682 for simple drug possession. As of June 2013, there are still 1,027 non-violent drug offenders (500 for possession) in California prisons serving life terms under "three strikes."

But more to the point. California politicians, for whatever series of reasons, have decided to continue the policy of arresting and incarcerating people for involving themselves with forbidden substances. Further, California politicians have decided that the resources of the criminal justice system and the institutions of jails and prisons ought to be devoted, in part, to punish people for merely possessing "bad" chemicals. While SB 649 was certainly underwhelming legislation, in that it upholds the idea that the criminal justice system needs to be involved in combating voluntary, victimless activity, it also could have given some relief to county jails, courts, and individuals caught up in the execution of flawed drug policy.

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San Jose Mayor Chuck Reed Files California Pension Reform Initiative

San Jose Mayor and pension reformer Chuck Reed, who spearheaded the successful passage of the city’s Measure B pension reforms with 69 percent of the vote in favor, is launching a statewide pension reform initiative along with four other California mayors. Reed, along with San Bernardino Mayor Pat Morris, Pacific Grove Mayor Bill Kampe, Anaheim Mayor Tom Tait, and Santa Ana Mayor Miguel Pulido—all of whom are Democrats except for Tait, who is a Republican—filed the measure, known as “The Pension Reform Act of 2014,” with the California Attorney General’s Office yesterday. The constitutional amendment would allow the state and local governments within California to reduce public employee’s pension benefits on a go-forward basis. Under the measure, all benefits earned by existing employees up until the enactment of the measure, if passed, would be protected, but future, unearned benefits could be reduced.

The measure asserts that such a reform is necessary because the California legislature has not adequately addressed the issue, and that public-sector pensions should operate under the same rules as private-sector pensions:

This voter-sponsored measure is necessary because attempts to reform the system through legislation and other initiatives have been inadequate. Even though the Little Hoover Commission has confirmed that California cannot solve its pension problems without making prospective changes going forward for current employees, the pension reforms passed by the Legislature in 2012 did not include such necessary changes. In addition, more substantial pension reforms adopted by local governments are at-risk of being overturned by the courts due to a lack of clarity in the law. While private sector pension plans are governed by federal laws that allow the plan sponsors to prospectively change employee benefits and provide for specific remedies when the plans become financially distressed, some argue that the language in some California judicial decisions hold that the same standard does not apply to public pensions. Finally, the citizens of California strongly support pension reform and believe the 2012 state legislation did not fix the problem.

Among the measure’s provisions are the following:

SEC. 12(a)(l) From the effective date of this Section, to the extent any government employer confers its current employees with vested contractual rights to pension or retiree healthcare benefits of any kind, such rights shall be earned and vested incrementally, only as the recipient employee actually performs work, and only in proportion to the work performed, subject to the vesting periods established by the applicable plan.

(2) Nothing in this subsection shall affect pension or retiree healthcare benefits earned and accrued for work already performed by emplo1ees or retirees.

 (b) For any government employee hired after the effective date of this Section, to the extent any government employer confers these employees with vested contractual rights to pension or retiree healthcare benefits of any kind, such rights shall be earned and vested incrementally, only as the employee actually performs work, and only in proportion to the work performed, subject to the vesting periods established by the applicable plan.

 [. . .]

(e) The terms of a pension or retiree healthcare benefit plan for work not yet performed may be amended through a labor agreement, an action by a legislative body, or an initiative, referendum or other ballot measure initiated by the voters or by a legislative body. Any such amendments to pension or retiree healthcare benefits made by a legislative body, whether by legislation or by placing a measure on the ballot, shall comply with applicable collective bargaining laws.

[. . .]

(h) The amount employees are required to pay for pension or retiree healthcare benefits is a component of an employee's compensation package, and may be amended through a labor agreement, an action by a legislative body, or an initiative, referendum or other ballot measure initiated by the voters or by a legislative body.

(i)(1) If a government employer finds its pension or retiree healthcare plan is substantially underfunded and is at risk of not having sufficient funds to pay benefits to retirees or future retirees, or declares a fiscal emergency because the financial condition of the government employer impairs its ability to provide essential government services or to protect the vital interests of the community, the government employer, in addition to its current powers and the powers set out in this Section, shall have the authority to implement one or more of the following actions for all employees, within the limits of the United States Constitution:

(i) Reduce the rate of accrual for pension or retiree healthcare benefits to be earned in the future.

(ii) Reduce the rate of cost of living adjustments for pension or retiree healthcare benefits to be made in the future.

(iii) Increase the retirement age for payment of pension or retiree healthcare benefits to be earned in the future.

(iv) Require employees to pay a larger share of the cost of pension or retiree healthcare benefits.

(v) Other reductions or modifications of pension or retiree healthcare benefits agreed upon during collective bargaining.

[. . .]

(j)(1) For any pension or retiree healthcare plan with assets equaling less than 80 percent of the plan's liabilities, as calculated by the plan's actuary using generally accepted accounting principles, the government employer shall prepare a pension or retiree healthcare stabilization plan.

Speaking about the growing problem of public pension liabilities at the Hoover Institution’s California Pension Solutions Conference last week, Reed asserted, “The government can't afford these benefits, and the employees can't afford these benefits.”

A similar effort to curtail future, unearned pension benefits for current government employees was included in Reed’s Measure B reforms for San Jose, which are currently being tested in the courts. While many have argued that benefits for current government employees in California cannot be rolled back—even future benefits that have not yet been earned—San Jose contends that since it is a charter city, and thus has greater flexibility in determining its employee compensation levels, the changes made by the new pension law are perfectly legal.

» Read the full text of The Pension Reform Act of 2014 here.

» See this San Jose Mercury News article for more details on Mayor Chuck Reed’s statewide pension proposal.

» See here for more information on San Jose’s Measure B pension reforms.

Note: This article was updated to include the proper titles for mayors Morris, Kampe, Tait, and Pulido, and to make minor corrections to their names.

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New Report Finds Improving City Fiscal Outlook, But Pension & Healthcare Costs Loom

After six straight years of declining general fund revenues, a new report from the National League of Cities finds that American cities are projecting a slight increase in general fund revenues in 2013. While property tax revenues are expected to continue their multi-year slide this year, sales and local income taxes are up. Further, two in five (39%) cities raised fee levels for various services, while 22% of cities increased the number of fees applied to city services, and 19% of cities increased local property taxes in 2013.

Still, there are significant fiscal headwinds. The NLC report notes, "While conditions are no longer deteriorating, the capacity of city budgets remains weakened coming out of the Great Recession." According to the report, factors putting pressure on city budgets include infrastructure costs; public safety costs; employee-related costs for health care, pensions, and wages; and cuts in state and federal aid.

Some other interesting findings of the report include:

  • "Leading the list of factors that finance officers say have increased over the previous year are health benefit costs (84%) and pension costs (80%)." (p. 5)
  • "When asked about the positive or negative impact of each factor on city finances in 2013, at least seven in ten city finance officers cited health benefit costs (80%), pension costs (75%), and infrastructure demands (73%) as negatively effecting city budgets." (p. 5)
  • "Two of the factors that city finance officers report as having the largest negative impact on their ability to meet needs are employee- and retiree-related costs for health care coverage and pensions. Pension and health care costs will persist as a challenge to city budgets for years to come[.]" (p. 9)
  • "Confronting a gradual economic recovery following a deep recession, cities are likely to continue to operate with reduced workforces and service levels, and city leaders will likely continue to be cautious about making significant infrastructure investments[.]" (p. 9)

The full report is available here.

Given the current and future pension funding cost challenges cited in the report, city leaders interested in reforming their pension systems in the interest of fiscal sustainability should consider signing up for Reason's two remaining (and free) Pension Reform Webinars this Wednesday and next Tuesday. More details and registration info are available here

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Audit: California Teachers Pension System Remains “High-Risk”

For all of Governor Jerry Brown’s self-congratulatory claims of engineering a balanced budget, the reality is that and claims of “balance” are wholly predicated on ignoring over $100 billion of debts and unfunded liabilities. From understating the “wall of debt” to completely skipping out on addressing unfunded public employee pension and health care obligations, California is digging itself into a deeper hole that threatens long-term systemic stability.

As one example, the California State Teachers' Retirement System (CalSTRS), which provides retirement benefits to California K-12 and community college educators and administrators, has long been underfunded. With 862,000 members, it is the second largest pension system in California. CalSTRS allows members to collect a generous defined benefit plan that includes several benefit enhancements (e.g. longevity benefits) to boost retirement benefits. As a consequence, over 6,000 retired teachers and school administrators currently receive pensions in excess of $100,000 per year.

Presently, the CalSTRS Defined Benefit Program, which provides for pensions, only has 67 cents for every dollar it promises in benefits. The decline in the system hasn’t been a sudden development, but a gradual process that the Legislative Analysts Office (LAO) has been sounding the alarm on for years.

Ahead of the finalizing of the California budget, the LAO reported to the Senate Public Employment and Retirement Committee that CalSTRS is currently short $73 billion. As a result, the LAO reported that CalSTRS assets would be fully depleted by 2044 if corrective action weren’t taken. For recently hired teachers and administrators, this directly imperils their future. For taxpayers, this means finding a resolution to this funding shortfall.

According to the LAO, CalSTRS received $5.7 billion in contributions in 2012-2013, with $2.1 billion in contributions from employees themselves, and an additional $3.6 billion in contributions from state and local school and community college districts. In order to keep the system solvent, the LAO reported that an additional $4.5 billion in contributions is necessary, per year, for 30 years. This could hypothetically be achieved by higher contributions from teachers, school districts, and state government. In plain speak, this could mean smaller take-home pay for teachers, fewer services from school districts, and diverted tax dollars from state functions to cover the shortfall. 

To make matters worse, these numbers all assume that CalSTRS’ assumption of receiving a 7.5% investment return on pension investments are reasonable over 30-years. Using accounting standards by the Governmental Accounting Standards Board (GASB), CalSTRS’ unfunded liability balloons to a “Net Pension Liability” of $166.9 billion due to the incorporation of lower investment return assumptions.

How CalSTRS will adjust to this figure is unclear. Unlike the California Public Employee Retirement System (CalPERS), the contribution rates needed to address liabilities are set by the state legislature rather than the system itself. That is, whereas CalPERS has the authority to make the necessary adjustments of contribution rates, CalSTRS is at the mercy of an (up until know) unresponsive and irresponsible state legislature.

This has all been underscored by a recent California State Auditor report characterizing the underfunding of CalSTRS as a “high risk issue” for California. Unless California “takes steps to ensure that funding for the CalSTRS program is increased, it may have to make up for the deficit using revenue from taxes.” This is concerning, as California taxpayers are routinely baited into voting for higher taxes in order to “invest in education.” In 2012, California voters approved Proposition 30 (“Temporary Taxes to Fund Education”), which raised income and sales taxes to the tune of $7 billion in additional revenue. One fear, raised by my colleague Emma Collins in a blog post, is that such revenue siphoned from taxpayers on the pretense of funding education may end up financing the currently unsustainable CalSTRS system.

Presently, there appears to be no discussion in the state legislature or from the Governor about seriously addressing this problem. It is possible that making reforms such as allowing CalSTRS to make the necessary adjustments to contribution rates may assist in at least maintaining a facade of sustainability.  It may also just make viable more sensible and sustainable alternatives. Giving employees the option of switching to a defined contribution plan may ease some of the burden going forward. Either way, any resolution to this long-developing problem is likely to be a significant burden on teachers and taxpayers.  

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