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Shades of Brown: Cities and the Governor's Pension Reforms (Part 1)

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You've gotta hand it to our governor: there's nothing black and white about him. Less than three weeks after signing into law the anti-city, pro-union bill AB 646 which would make collective bargaining more cumbersome and force cities to spend large sums of money on "fact-finding," Governor Brown made his 12-point pension proposal over the sometimes loud objections of the same labor groups that pushed through AB 646.

"Pension reform" isn't exactly the subject that engenders excitement and ignites fantasies, but over the past two years I've become a bit of a "pension reform" wonk, having served on the League of California Cities Employee Relations Policy Committee (or the LOCCERPC, pronounced "lock-SERP-see"). Over these past two years, LOCCERPC has worked on solutions to the pension crises facing most cities in the state, as well as the State itself.

Don't believe anyone who tells you it's not a looming crisis, unless, like so many of our politicians, you subscribe to the Louis XV philosophy of governing (and perhaps life, as well). Unless you want massive raises in taxes accompanied by massive cuts in government services, the current levels of salaries and benefits offered to government employees are simply unsustainable. And even in the event of tax increases and service cuts, we'd just be postponing the inevitable: the day when more taxpayer dollars would be spent paying people to stay home (or to double-dip) than to work.

Even though there are those who would make it political, the subject of pension reform for government employees in California is not really a political issue: it's a mathematical issue.

Cities and Pension Reform

The League's policy committee has discussed a number of possible solutions over the past couple of years, many of which have been incorporated into suggestions and a White Paper, which was adopted by the League Board earlier this year. In trying to create and maintain a focus on the source and solution of the problem, the policy committee came up with a kind of watch-cry and mantra: public employee salaries and benefits should be "fair and sustainable" for both the employees and the taxpayers.

"Fair and sustainable."

"Sustainable and fair."

Read it. Learn it. Know it. And, if I may add to Cameron Crowe's trifecta: Live it.

While this mantra may seem to be an oversimplification of a multi-pronged, complicated issue, it really serves to keep the focus on the two most important aspects of the public salary/benefits discussion, which are easy to lose sight of in the morass of our statewide political dysfunction.

At last week's, public hearing of the legislature's Conference Committee on Public Employee Pensions (or LCCOPEP, probably pronounced "el-see-COP-ep"), which preceded Governor Brown's 12-point plan announcement by a day, I gave comments intending to represent the local perspective. As it turns out, I was the only elected official from local government to speak at the hearing, which was mostly dominated by speakers and panelists from the various unions.

Not only did I urge the LCCOPEP to make the "fair and sustainable" mantra their own, I also briefly ran through various points which had been the subject of discussions at the LOCCERPC. Those points included:

• Second-tier pensions for new employees, which could include increased retirement ages.
• Anti-pension spiking provisions.
• Elimination of pension holidays for employers and employees.
• More equitable representation for cities on the PERS board, including the addition of independent members.
• Introduction of hybrid plans.
• Dealing with OPEB ("other post-employment benefits"), which have much greater levels of unfunded liabilities than the pensions themselves.

Furthermore, I made the point that various levels of pensions and benefits offered to various groups of public employees should not be lumped together. While some might already meet the "fair and sustainable" criteria, others might meet one or the other -- or none -- of them. With most coming to the realization that there is not an unlimited pot of money from which to pay public employees, this potential imbalance within the public employee sector could mean a reduced ability to correct inequitable pension levels and this, by definition, simply isn't fair. If one group is getting benefits and salaries which are neither fair nor sustainable, some other group is probably taking a hit. Despite what some may think, there is no bottomless pit of government funding, and, no, it does not grow on trees.

I also urged the committee to work with the League and to use the aforementioned White Paper as a valuable guide.

Local Control

During the panel portion of the LCCOPEP's hearing, State Senator Joe Simitian asked a number of incisive questions, among them a query he posed to Rod Gould, city manager of Santa Monica, who was the sole panelist representing cities. Gould, who helped write the League's White Paper, suggested that certain legal limits should be placed on collective bargaining. Simitian seized upon this. As a city manager, Gould naturally supports more local control. Why, all of a sudden, did Gould want the state to step in with parameters which could have the effect of limiting what could be done in collective bargaining and therefore theoretically weakening local control? Was this, asked Simitian, a case of cities asking the state to help protect cities from themselves?

Gould's answer was essentially "yes," but, of course, it's not that simple.

The governor's proposals themselves did, in fact, include parameters which would be superimposed over collective bargaining, such as requiring current and future employees to pay at least half of the costs of their own pensions. Sounds reasonable, right? And while a number of public employees already make significant contributions to their own pensions, there are jurisdictions -- such as my own city -- where the employees don't contribute a dime to their own pensions. We're now negotiating at the bargaining table to try to correct the mistakes of the past, but a general expectation that employees need to pay part of their own pensions would certainly contribute to cities' abilities to negotiate fair and sustainable pensions and benefits.

Not surprisingly, the unions have cried "foul" at Brown's suggestion, with the argument that everything needs to be collectively bargained for at the local level. The chairman of the group Californians for Retirement Security, David Low's response to Brown's plan was: "We simply cannot stand for imposing additional retirement rollbacks on millions of workers without bargaining."

Oh, how the times change. Now the unions are guardians of local control and protectors of collective bargaining. Evidently, this wasn't always the case. As state political veteran and Sacramento Bee columnist Dan Walters wrote:

The 1999 bill that hugely increased state pensions was rushed through the Legislature without even the veneer of collective bargaining.

In fact, the state's largest union, the California State Employees Association, declared in a 1999 memorandum that "retirement benefits are not part of the Dills Act (and) CSEA should not be required to bargain for retirement benefits when the money for these benefits is coming from the Public Employees' Retirement Fund and not state coffers."

Even if the union stance is -- to put it mildly -- wildly disingenuous, how can those of us who support the principles of local control approve of statewide collective bargaining parameters? This goes to the crux of Senator Simitian's question.

As highly as some of us value the principles of local control -- and particularly in this state, we need a lot more of it, not less of it -- some of us can also be pragmatists at times. If local jurisdictions were going to get a sweeping amount of local control -- and I would extend this to finances, land use, and the elimination of any number of burdensome and politically-motivated "one-size-fits-all" restrictions from Sacramento -- and maybe even go so far as to bring about a retrenchment of the state and local government relationship, personally, I would be fine with allowing cities to implement pension reform on a local basis. But the reality is that cities' hands are already tied in so many ways, the latest being AB 646, mentioned at the beginning of the article, for which Senator Simitian was one of the "aye" votes. There are more, plenty more examples of anti-city legislation, which, unfortunately, seems to have become our state legislature's current specialty.

Currently, the pension formulas are limited by PERS. Only enhancements can be made to pension formulas for current employees, but not downward adjustments for future service (to be clear, retroactive pension reductions are not legal, nor would they be fair). And this doesn't even take into account the effect of all the Louis XV politicians at work within our state. With all of these constraints and with so many politicians scrambling for their next gigs, as a matter of practicality certain parameters might just not be a bad thing in the real world of California state politics in ensuring the financial viability of cities going forward. In my best Don LaFontaine voice, I'll say: "In a world of increasing benefits, longer life expectancies, shrinking revenue and growing unfunded liabilities, requiring employees to pay at least 50% of the cost of their pensions would be a useful parameter."

Trickle Down

In fact, it was SB 400, that 1999 bill brought to us by our friends in Sacramento and rushed through by the unions without the hint of collective bargaining which indirectly unleashed the time-delayed pension crisis. And it's another reason, as I mentioned at the LCCOPEP hearing, why what the state does with state employees is important. There is an unavoidable "trickle-down" effect which we saw in the aftermath of SB 400, where, enhanced pension benefits such as the 3/50 formula (whereby some employees could retire at 50 with 90% of their salaries after 30 years of service) became so prevalent in local jurisdictions after Gray Davis had first offered it to the highway patrol.

Of course, those were the go-go days of market invincibility with funds raking in double-digit annual returns-on-investment. Public employees on defined benefit pension plans looked with "pension envy" at the stock market's returns, which did nothing to directly benefit themselves (aside from actually funding their DB plans) and looked to get in on the act. Pensions which had previously maxed out at 75% suddenly became 90% -- in many cases retroactively and magically overnight, as it were. And all the while, politicians in local jurisdictions acted like Ado Annie in Oklahoma! egged on by PERS actuaries who assured them that PERS was superfunded and the enhanced benefits "wouldn't cost a thing."

Should these benefit enhancements have been offered in the first place? Weren't the pensions being offered in the pre-SB 400 days sufficient to attract and retain first-rate public employees? Of course, that was never the issue, because public employee unions wanted it both ways. They wanted the upside of the go-go Wall Street market of the day, but they didn't want to assume any of the market risk, as would be the case with a 401k-style pension plan. So they used the market-run-wild to get enhanced benefit levels which were above and beyond what was fair and which later turned out to be above and beyond what was sustainable. In actuality, the unions did get it both ways. They were lucky enough to be able achieve enhanced defined benefit pensions which effectively locked in the market gains without any assumption of risk. Yet it was essentially unfair to offer public employees the rewards of an up-market with no risk. If you want the upside, then go for a 401k equivalent. The benefit bonanza which occurred as an aftermath of SB 400 was purely political, and we're paying the price today for this short-sighted lack of leadership.