A piece of legislation that may have the most impact on the fiscal solvency of cities like Davis is Governor Jerry Brown’s public pension reform plan. Earlier this week, analysis from the nonpartisan Legislative Analyst’s Office (LAO) showed a mixed review.
They write, “We view the Governor’s proposal as a bold starting point for legislative deliberations – a proposal that would implement substantial changes to retirement benefits, particularly for future public workers.”
“His proposals would shift more of the financial risk for public pensions – now borne largely by public employers – to employees and retirees,” they add. “In so doing, these proposals would substantially ameliorate this key area of long-term financial risk for California’s governments.”
“At the same time, the Governor’s proposals aim for a future in which career public workers receive a package of retirement benefits that would be (1) sufficient to sustain employees’ standards of living during their retirement years and (2) more closely aligned with benefit packages offered to private-sector workers.”
That is the good news, however, they believe that many details were left unaddressed in the plan unveiled by the Governor in late October.
“Despite the strengths of the Governor’s pension and retiree health proposal, it leaves many questions unanswered. In particular, we do not understand key details of how his hybrid benefit and retirement age proposals would work,” they write.
Moreover, while the plan appears to address CalPERS, it leaves “unaddressed many important pension and retiree health issues, including how to address the huge funding problems facing the state’s teachers’ retirement fund, the University of California’s (UC’s) significant pension funding problem, retiree health benefit liabilities, and other issues.”
Moreover, they believe that raising current worker contributions to be a legal and collective bargaining minefield.
“The Governor proposes that many current public employees be required to contribute more to their pension benefits,” they write. “Our reading of California’s pension case law is that it will be very difficult – perhaps impossible – for the Legislature, local governments, or voters to mandate such changes for many current public workers and retirees. Moreover, employer savings from these changes likely will be offset to some extent by higher salaries or other benefits for affected workers.”
The LAO notes that the current structure of public employee pension and retiree health benefits has serious and substantial problems, including the tendency to defer retirement benefit costs to future generations, leading to unfunded liabilities that have spiraled in recent years, creating huge cost pressures for state and local government.
Moreover, under the current law, governments have almost no flexibility to alter the current benefit and fund arrangements, even as cities and other local governments are pressed to the crisis point by dwindling revenues at the same time they face huge cost increases.
The Governor’s plan includes equal sharing of pension costs between employees and employers, the hybrid plan. This would include increasing the retirement age to 67 for non-safety and to a lesser number for safety employees, and requiring three-year final compensation to stop spiking for new employees, with benefits to be based on regular and recurring pay and limitation to post-retirement employment. Felons would forfeit pension benefits, there would be a prevention of retroactive pension increases and a prohibition on pension holidays for all employees. Also, this would prohibit purchases of service credit, increase pension board independence and have a reduction of health care retiree costs to state employees.
“It’s time to fix our pension systems so that they are fair and sustainable over a long time horizon,” said Governor Brown. “My plan raises the retirement age and bans abusive practices like ‘spiking’ and ‘air time’ while mandating that public employees pay an equal share of pension costs.”
The Governor’s office said, “When fully implemented, these reforms will cut roughly in half the cost to taxpayers for providing pension benefits for state employees. It will cut the risk to taxpayers for pension debt by more than half. Similar savings are expected across all systems.”
Pension reform advocate Steven Greenhunt has a mixed assessment of the Brown Plan.
“Despite some encouraging details in Gov. Jerry Brown’s recently announced pension-reform proposal, there’s virtually no chance the state will seriously reform — or even seriously attempt to reform — a system creaking under the weight of up to an estimated $500 billion in unfunded liabilities,” Mr. Greenhunt recently wrote.
“The proposal isn’t bad. It doesn’t go far enough to fix the problem even if implemented in its entirety, but it goes further than most pension reform advocates had expected from a Democratic governor who, to date, has governed as an extension of the public-employee unions that elected him to office,” he said. “But the plan probably is dead on arrival in the union-dominated Legislature.”
In our view, these reforms fix most of the problems – at least down the line. The unfortunate part is that we cannot implement those changes for current employees unless they agree to it. Governor Brown conceded as much.
The short-term benefits are limited. However, his administration said that over the next 30 years, the plan could save the state $4 billion to $11 billion.
The effect on existing public employees would be minimal. However, critically, public safety employees would have to pay 2% more towards their pensions.
“I try to protect working people whenever I can,” said Governor Brown, “but I’m also responsible to the taxpayer and making sure we have a solvent state government.”
And that is the dilemma that we face. The average state worker is not the problem here. In fact, neither is the average pension receiver, who receives 2% at 60 and makes an average of less than $40,000.
“We can’t forget that the vast majority of public-sector employees are middle-class workers, and their average pensions are far from exorbitant,” state Senate leader Darrell Steinberg said in a statement.
By our count, in the next three years, the City of Davis faces about $7 million in additional costs for pensions and retiree health. That is within a general fund that will likely be in the $35 to $40 million range, and that is during a time when the expected growth in revenue is supposed to be flat and will probably decline, barring unforeseen advances in the housing market.
To deal with those issues, the city will have to bargain with public employee groups that are, at best, distrustful of claims made by the city.
This situation was made all the worse when the city was flagged by the Public Employee Relations Board for unfair labor practices and jumping the proverbial gun in imposing impasse against Davis City Employee’s Association, the city’s largest bargaining group, comprised mainly of blue collar and other rank and file employees.
The Governor’s bill would fix some of the problems and give the city the leverage and leeway it needs to fix compensation and prevent massive layoffs and cuts to city services. But the biggest question is legality.
Since the Governor will put this to the voters anyway, perhaps a constitutional amendment would be the way to go, which would bypass issues of legality and allow state and local government to have the flexibility they need to survive the next five to ten years.
—David M. Greenwald reporting
[quote]That is the good news, however, they believe that many details were left unaddressed in the plan unveiled by the Governor in late October.[/quote]
Yes, usually the devil is in the details… and it is the details that are crucial. Reminds me of Obamacare, and the failure to pay attention to crucial details…
[i]”And that is the dilemma that we face. The average state worker is not the problem here. In fact, neither is the average pension receiver, who receives 2% at 60 and makes an average of less than $40,000.”[/i]
This is exactly the wrong mindset. Having worked in both the public and private sector, it is clear to me that private-sector employees are much more productive and efficient than their public-sector counterparts. It is not a slam against public employees, but the reality of their employers lacking competitive pressures and incentives for always striving to do more with less. This problem is compounded by the natural tendency for employees to consistently gravitate toward feeling overworked and underappreciated. You can tire out and depress a horse running him in circles.
There are studies that provide evidence that public sector employee pay, on average, is about equal to what private sector workers make. However, public-sector benefits are 50%-100% higher. This includes teachers.
It takes more public sector employees at higher total compensation to do the same job as the private sector. Unless you are looking at all of these public sector organizations as being and adult jobs program, it is the cost per unit of work that we should focus on. By that measure public-sector employees are significantly overpaid.
The solution is really quite simple in concept:
1. Reduce the size and scope of government by eliminating non-critical services and cutting entitlements.
2. For the services remaining, open it for outsourcing from private companies that can provide equal or better service at lower cost.
3. For those services remaining that are not outsourced, implement constant process-improvement and best practice pay-for-performance that drives the public-sector organization to do more with less. Consider that this will take some upfront investment in technology and employee retraining. Also, it will result in 30-50% of the workforce needing to be replaced because they will not be able to re-orient from a dysfunctional entitlement work culture to a performance-based model.
4. Reset the remaining public-sector employee compensation levels to be based on a total public-private mark-to-market comparison… not just a public-sector comparison.
For all of this to happen, we will need a constitutional amendment that outlaws public employee unions; because otherwise the unions will continue to spend their millions to prevent it.
I too have worked in both private sector (Biotech companies) and government (Jet Propulsion lab); and have found them to have comparable levels of efficiency and inefficiency.
One of the more striking distinctions was that in the private companies, people were running around faster (like Looney Toons cartoon characters), but many mistakes were made, and in the end no more was accomplished than the typically normal workpace at the government lab; where smooth and steady progress was generally made.
Also the scientists were no smarter at the Biotech companies than at JPL. I’d say there were a higher percentage of really brilliant people at JPL, though there were many at the Biotech companies as well. The people at JPL were more interested in their research; whereas at the private companies the researchers were typically more interested in career and pay.
jimt: I think Biotech and JPL are both likely significantly funded by government: either as a customer or a provider of research grants. In that case they would likely take on much of the management and work culture characteristics of government. Also, these types of companies focus much of their revenue producing activities on new products and services that often lack competitive pressures.
Regardless, any private-sector company is capable of failure. Lack of efficiency results in high costs. Competitors will eventually put them out of business. By the same measures, most government agencies should have been out of business long ago.
Your comment about “slow and steady” is interesting to me because it indicates a total lack of urgency for competing on time-to-market. That is a key problem with goverment business… no sense of urgency.
Yes, JPL has been pretty much entirely government funded, they have spearheaded worldwide advances in rocketry and satellite and spacecraft technology and design; with a stellar record in successful satellite and spacecraft deployments and innovative, powerful, robust communications, encryption, and remote sensing technology. Yes they had timelines; the planning was careful and far enough ahead of time to ensure success; once the satellite or spacecraft is rocketed up there is not the luxury of repair or adjustments.
My point is that the sense of urgency in the private biotech companies did NOT result in a higher rate of accomplishments or success, but perhaps gave that illusion because everyone was so busy spinning their wheels.
The Biotech companies had a very small fraction (
Comment continued–cut off in middle for some reason when I posted
The Biotech companies had a very small fraction (
Try posting again:
The Biotech companies had a very small fraction (under 5%) of their basic research budget thru government grants (need to keep key research proprietary); though the industry as a whole did receive some tax breaks; they were heavy lobbiers in DC (and still are, I presume).
In the Biotech industry of the 1990s (I haven’t kept up with it since), the main key to success was successful identification of a promising therapeutic agent, and getting hold of it first. Successful mid-size and larger Biotech companies had at least a few world-class scientists on staff who were also very well connected with the research community, and in a position to identify the best drug candidates and capitol to secure the rights quickly. Many successful Biotech companies did not have particularly efficient operations and management; identification and securing of the right drug candidates ensured success despite other inefficencies.
jimt: [i]”My point is that the sense of urgency in the private biotech companies did NOT result in a higher rate of accomplishments or success”[/i]
Those Biotech companies that failed to accomplish would cease to exist and hence the entire industry would be made more efficient only rewarding the winners with longevity. A sense of urgency that manifests as recklessness would generally not result in long-term accomplishments. Obviously there needs to be a market-based balance: scope, quality, time and budget are the four levers. A good marketing strategy can help overcome some weakness, but in general competition will ensure it results in lost market share.
I hired and managed many computer scientists during my early career. Most of them were wired for seeking perfection. They would routinely demand more time and resources to perfect their invention or contribution. They would complain about management and marketing for pushing them to a schedule and a budget. I was constantly mentoring them on the need to consider time-to-market and to help us make value decision to deliver a product that was “just good enough” based on the specification and project goals. I was also constantly mentoring the project teams to routinely deliver miracles… to perform with a high sense of urgency because the success of the company depended on it.
When all companies in a given industry are pushing the performance envelope this way, the result is every increasing customer value through greater efficiency.
Certainly JPL operates in a completely different and unique industry where scope and quality are the primary expectation, and schedule and budget are secondary. Now consider a situation where all four of these things are top priority, and if your organization does not deliver on all four it will lose to competition and eventually disappear.
Government, and government-sponsored business, generally does not have this sense of market urgency. For these organizations, change, if it can be motivated at all, takes agonizingly long. New inventions are painfully slow to get to market. Much greater customer value could be derived by infusing more government business with free-market competition. Or lacking that, some artificial models of performance management to simulate the same.