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Out of Control Policy Blog Archives: 10.27.13–11.2.13

Innovators in Action (October 2013 edition): Advancing Pension Reform in San Josť

The latest interview in Reason Foundation's Innovators in Action 2013 series focuses on recent pension reforms enacted in San José, California. Like many cities, San José has been reckoning with a looming crisis related to unfunded government employee pension liabilities. The city is facing a $2.3 billion unfunded liability in its pension system, and the city’s annual pension contributions have risen from $73 million in 2001 to $245 million in 2012. That annual payment now accounts for over 25 percent of the city’s general fund expenditures, putting a strain on its ability to fund essential services.

This situation came to a head in June 2012, when 70 percent of San José voters passed a ballot measure (Measure B) to reform the city’s pension systems and put them back on a path toward financial sustainability. One of the leaders of the pension reform movement in San José was City Councilman Pete Constant, a retired police officer and former board member of the San José Police Officers’ Association, the union representing the city’s law enforcement officers. Constant worked with Mayor Chuck Reed to design the language in Measure B and was a leading advocate of the measure prior to voter approval. Constant was also the sponsor of a separate policy initiative that ultimately ended the provision of lifelong pension benefits for San José elected officials.

I recently interviewed Constant on what prompted him to take on pension reform in San José, how he made the case to policymakers and citizens, the specifics of the reforms enacted, and more. Here's an excerpt:

Gilroy: San José had experienced a dramatic ratcheting up of retirement benefits in the years, and really decades, before Measure B passed. Can you speak to that? What impact did this have on current city services?

Constant: The City of San José had a number of factors that collided to significantly contribute to this financial crisis and the pension crisis. First, there was a series of escalation of pension benefits provided to not only our current, working employees but also to people who had already been retired. Mayors and councils made promises that really didn’t take into consideration the future cost implications.

For example, people who had been hired on by the city with pensions that were a maximum of 75% of final salary saw some of those pensions escalate to 90% of salary. People who had retired in a pension plan where their annual cost of living increases were tied to the consumer price index found that the city had increased that benefit to the point where it was a 3% guaranteed annual increase. We also saw an increase in our retiree health benefits when our city council provided 100% paid healthcare—not only for the member, but for their entire family—upon retirement.

All of these individually might have seemed like minor adjustments—like taking a pension from 75% to 80%, or subsequently from 80% to 85%, and ultimately from 85% to 90%. But what we found was that these increased benefits were given at a time when salaries increased a very significant amount at the same time. For example, if you were a police officer working in this city in the year 2000—without supervisory rank, just an officer on the street patrol—the money you would make would have been $72,000 per year. And in 2000, that came with an 80% retirement. So someone who had served for 30 years would retire and get approximately a $58,000 per year pension for the rest of their life.

Fast-forward just a decade later to the year 2010, at a time when the pension benefit was only increased from 80% to 90%. At the same time, wages were increased by over 50%. So that same officer who had worked for the city for 30 years was making a salary of approximately $118,000 per year at a 90% pension. As you can see the simple math shows that that’s now a $106,000 pension a year for the rest of your life, plus the 3% guaranteed cost of living adjustments compounded every single year.

So for that period of 10 years the actual cash retirement benefit nearly doubled from $58,000 per year to $106,000 per year. It’s that exponential factor that we found—that by increasing salaries and benefits along the same track—that resulted in these huge unfunded liabilities that we now see top $3 billion in San José.

Check out the full interview here. Other articles featured in the Innovators in Action 2013 series are available here.

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Sasha Volokh on Privatization and the Constitutional Delegation of Coercive Power in Germany

Sasha Volokh has a new article on Reason.org discussing a 2012 decision by the Federal Constitutional Court of Germany that upheld a delegation of coercive power to a privately-operated psychiatric hospital. This makes for an interesting case, because while many constitutions—including the U.S. Constitution—do not explicitly address the issue of the delegation of state power to private actors, Germany's actually does. As Volokh explains in the intro:

The U.S. Constitution is silent on whether any sort of power can be delegated to private actors. The due process clause protects people from the bias of state actors, whether these state actors are public or private. Financial motives may of course stand in the way of a private party’s faithfully executing its disinterested public duties, but of course public officials can also be subject to bias, and the same constitutional doctrine applies to both. The Nondelegation Doctrine prevents Congress from giving up legislative power—whether the recipient of such power is public or private doesn’t matter. [...]

The situation is the same in most state constitutions, so any doctrinal distinction they make between public and private delegates is purely judge-made. In Israel, the Basic Law (the closest Israel has to a constitution) provides for the rights to liberty and dignity—“A person’s liberty shall not be denied or restricted by imprisonment, arrest, extradition, or in any other way,” and “One may not harm the life, body or dignity of a person.” Based on these extremely general phrases that make no reference to public or private, the Israeli Supreme Court struck down a statute allowing for private prisons—based on a high-level philosophical view that private-sector incarceration was illegitimate, regardless whether abuses were any more or less prevalent in private prisons.

Against this background, it’s interesting to see what happens when a country has constitutional text that actually addresses the issue of privatization. The German Basic Law (as in Israel, Germany’s equivalent of a constitution) has some general text, like the so-called “Democracy Principle” of Article 20(2): “All state authority is derived from the people. It shall be exercised by the people through elections and other votes and through specific legislative, executive and judicial bodies.” But it also has specific text related to the public-private distinction. In 1993, the Basic Law was amended to provide for the privatization of railways, and in 1994, it was again amended to provide for the privatization of postal and telecommunications services. A more longstanding provision—dating to the very beginning, in 1949—is Article 33(4), which provides that: “The exercise of sovereign authority on a regular basis shall, as a rule, be entrusted to members of the public service who stand in a relationship of service and loyalty defined by public law.”

On January 18, 2012, the Federal Constitutional Court of Germany upheld a delegation of coercive power to a private mental hospital against a challenge under Articles 33(4) and 20(2). The Court’s reasoning is interesting as an example of how other countries, under their own constitutional text, approach issues of privatization and the delegation of coercive power.

Read the rest of the article here. And for more, all of Volokh's recent legal analyses written for Reason Foundation on an array of privatization-related topics are archived here.

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Latest Articles on Reason Foundation

How Government Wastes Our Time in Travel

Time is the ultimate scarce resource. Unfortunately, Americans waste a huge amount of time every year as they commute to and from work, and also when they travel by air.

The Texas A&M Transportation Institute estimates the direct cost of urban traffic congestion at $121 billion per year (and that is just an estimate of people’s time and excess fuel burned in stop-and-go congestion). The full economic costs of traffic congestion are about twice that much, including lower urban area productivity and higher freight costs.

Air travel delays, both at airports and in the sky, are in the vicinity of $29 billion per year, according to an academic study funded by the Federal Aviation Administration. Air travelers also spend an estimated 138 million hours a year waiting in Transportation Security Administration airport security screening lines.

A common factor in these cases is that the infrastructure involved is owned and operated by government agencies. For various reasons, they don’t seem to take seriously the enormous burden that their delays and congestion impose on us as individual travelers (and on the U.S. economy). Relief from congestion and delays can only come about via changes in government policy, such as implementing market pricing and in some cases privatizing the transportation infrastructure. The good news is that steps in these directions are occurring. But the bad news is that so far they have only scratched the surface.

For urban congestion, the big change in recent years has been the introduction of express toll lanes in 14 of the 20 most-congested metro areas. Most of the initial projects have involved converting carpool lanes to toll lanes, with variable pricing keeping demand (vehicles per lane per hour) within the capacity of the priced lane, so that you can drive at the speed limit even during rush hours.

The next step, under way in Atlanta, Dallas/Ft. Worth, Houston, Miami, San Diego, San Francisco, and Seattle, is to create entire networks of express toll lanes. A network lets people make faster and more-reliable trips from anywhere to anywhere in the metro area—and that also makes possible region-wide express bus service.

Building such networks involves adding new lanes and connectors, which will cost tens of billions of dollars, and require financing via toll revenue bonds. That has opened the door to investors and global toll road companies, under long-term public-private partnerships. Global infrastructure funds are ready and willing to invest in such projects, but we are at least a decade away from the first urban express toll networks being in place and operational.

Relief is also in prospect for many air travelers, now that the TSA has finally (after 10 years) accepted the principle of ‘trusted travelers.’ As put forth shortly after the 9/11 terrorist attacks, but rejected by the first several TSA administrators, the idea is that people who are pre-vetted (e.g., passing a background check) are very low-risk and should not have to go through all the post-9/11 security hassles. Last year the current TSA Administrator endorsed the concept and the result was PreCheck, implemented at 40 airports so far. It was initially offered only to high-end members of airline frequent flyer programs, on whom extensive travel histories exist. Members use special checkpoint lanes with basically pre-9/11 screening. TSA is now expanding the program to another 40 airports and will sell memberships to other air travelers who agree to a background check. TSA’s parent agency had previously pioneered a trusted traveler program called Global Entry, which lets air travelers returning from overseas bypass long lines at Immigration if they have passed a background check and obtained a biometric ID card.

But there has been little progress so far in reducing delays to airliners. The greatest delays occur at a handful of airports, especially the three that serve the New York metro area. For various reasons, it has been politically impossible to add runway capacity at Kennedy, LaGuardia, and Newark airports (unlike Chicago, where a major expansion of runways has greatly reduced congestion). Because air travel is so interconnected, long delays at the New York airports ripple through the system, delaying a great many other flights.

When runways cannot be expanded, the best way to reduce congestion is market pricing for runway access. With much higher prices during congested peak periods, airlines will have incentives to save money by some combination of (a) shifting some flights to off-peak times, and (b) using larger planes during peak periods. Incumbent airlines at congested airports have so far fought hard against runway pricing, but former Transportation Secretary Mary Peters changed federal policy to allow airports to do this, so it may be a matter of time until some congested airport bites the bullet and does so.

Air travel delays could also be reduced by modernizing the air traffic control system. Our system still uses largely 1960s concepts and technology, which is so inaccurate that it must provide huge buffer zones around each plane in flight, for safety reasons. GPS-based technology and other enhancements will make it possible to reduce those buffer zones, thereby adding capacity to the airways. Such technology can also be used to increase the hourly capacity of many airport runways. But the Federal Aviation Administration is risk-averse and status-quo oriented. A serious revamp of the air traffic control system will probably require “corporatizing” the system, turning it into a user-supported utility, as has been done in Australia, New Zealand, Canada, Germany, and the U.K. with excellent results.

The bottom line is that major transportation infrastructure owned and operated by governments has given short shrift to the huge burdens of wasted time imposed on all of us. The best hope for relief is to convert that infrastructure into customer-friendly utilities that use market pricing to balance demand with capacity.

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