The Vanguard sees the pension reform legislation as one of the most significant pieces of state legislation impacting the finances of the city of Davis.
Ed Mendel of CalPension argues, “Pension reform approved by the Legislature last week gives many cities new cost-cutting power that some have been unable to win from public employee unions at the bargaining table.”
One of the issues of contention in the city of Davis appeared to be the pension splitting formula, but under this new law, that is a non-issue – at least in the longer term. Writes Mr. Mendel, “The legislation calls for a 50-50 split of ‘normal’ pension costs between employers and employees. As current contracts expire, if unions do not agree to equal cost sharing in bargaining by 2018, cities can impose an employee contribution increase.”
That is the biggest criticism of the new law, that it does not give cities immediate tools to impact their current budget.
The League of California Cities agrees with eight of the ten points in the legislation, with two of the original 12 points tabled for action at a later date: retiree health care and pension bonds.
In a release last week from the League: “While not perfect, the League views this legislation as a substantial step forward in implementing pension reform largely in keeping with the League’s own comprehensive pension reform principles.”
Where the League differs with the plan is that the cities dislike the cap on high-end pensions for new hires – preferring the hybrid plan. And the cities oppose the absolute forfeiture of pension benefits upon felony conviction, arguing that it should be limited to felonies for pension fraud.
The Vanguard differs with the League, supporting the cap on pensions and opposing the hybrid plan, but agrees on the issue of felonies and actually believes that someone could probably challenge that provision in court. After all, why should someone forfeit their pension because they get caught with a usable amount of meth? We believe a court would strike down such a challenge.
The key point, though, for the city of Davis – the legislature not only eliminates the need for bargaining but gives the city renewed leverage to make those needed changes in the current round of MOUs for contracts that expired more than sixty days ago.
Mr. Mendel argues that this is a far more fundamental change than one might initially think.
“The legislation limiting bargaining for pensions moves California closer to the mainstream,” he argues, noting that while about 30 states allow collective bargaining by public employees, only a few states, California, Vermont and New Jersey, allow it for retirement benefits.
“Critics say bargaining resulted in ‘bidding wars’ that drove local government pensions to unaffordable levels,” Mr. Mendel argues.
The history of this inflation began with SB 400 in 1999 which gave state workers a major pension increase. This was about the same time that the city of Davis, for instance, moved to 3% at 50 for safety employees.
Ed Mendel writes, “Three formulas for pensions, a ladder for step-by-step increases, were added for local governments by AB 616 in 2001. Although not a sponsor of the bill, CalPERS offered local governments an incentive for boosting pensions with the new formulas.”
The result was rewarding higher benefits “by inflating the value of the local government’s pension investment fund, making it easier for the employer to pay for the more generous pensions.”
The employee contribution was between 5 and 8 percent of pay, but could be changed through bargaining with the employer contribution twice that of employees and adjusted annually as pension levels rose and fell.
The problem was this: “During bargaining, many employers agree to pay part or all of the employee contribution, sometimes in lieu of a pay increase. The practice is common enough to have its own bureaucratic term, EPMC or ’employer paid member contribution.’ “
Mr. Mendel reports, “The president of a pension reform group said AB 340, though an ‘important step to reform,’ should have had a ‘hybrid’ plan making employees share the risk of investment losses and a constitutional safeguard against a rollback by future Legislatures.”
“The provision requiring that almost all public sector employees pay half the cost of their pensions is the most significant of the reforms and will provide both immediate and long-term savings,” Marcia Fritz of the California Foundation for Fiscal Responsibility said in a news release.
If employees increase their pension contribution, employers can reduce their contributions by a similar amount and AB 340 reduces the ratio from 2:1 down to 1:1.
The critical part of this reform is that it does it automatically. Without this legislation, cities like Davis would have had to bargain for an arrangement like that, and probably would have had to have given up one of their planks – whether it be salary freezes or cuts – in order to get it. Now the issue is essentially off the table.
This is not a small deal. Ed Mendel, in fact, notes that Sacramento was forced to lay off 16 municipal police officers this July because the union failed to agree to pay the employee share.
Unfortunately, while the legislation calls for an equal split for normal costs, most systems have unfunded liabilities created due to shortfalls in previous years for a variety of reasons.
Mr. Mendel notes, “Last year state miscellaneous workers contributed 8 percent of pay, more than half the 14.4 percent normal cost. But state employers contributed 18.2 percent, an amount that includes a payment for a large unfunded liability.”
The LAO (Legislative Analyst’s Office) last year, in evaluating the governor’s plan, argued, “Employees should share in the cost of the unfunded liability,” but doubted that “higher employee contributions can be legally imposed on many workers.”
“Since increasing current employees’ contributions is one of the only ways to substantially decrease employer pension costs in the short run, the legal and practical challenges that we describe mean that the governor’s plan may fail in its goal to deliver noticeable short-term cost savings for many employers,” the LAO wrote.
Mr. Mendel argues, “The legislation apparently is designed to clear legal hurdles by changing bargaining law to give employers more flexibility to increase employee contributions.”
Another part that helps Davis is changes in impasse procedures, that could be used to impose contribution increases.
Writes Mr. Mendel: “A legislative analysis of AB 340 said impasse cannot be used for contribution increases that exceed statutorily required contributions for current employees or half the normal cost for employees hired on or after Jan. 31, 2013.”
He adds, “Local governments have until 2018 to bargain employee contributions that share half of the normal cost. Then imposed increases are limited: 8 percent of pay for miscellaneous workers, 12 percent of pay for police and firefighters.”
Moreover he adds, “Importantly, the self-described guardian of pension ‘vested’ rights under contract law, CalPERS, is not warning that requiring employees to pay half the normal cost is likely to be challenged in court.”
Instead, CalPERS believes only two portions of the plan raise vested rights issues. Those “barring current employees from purchasing ‘air time’ service credits to boost their pensions, and requiring some members convicted of felonies to forfeit their pensions.”
We agree on the felony issue. We just do not see how some felonies could legally lead to a loss of pensions.
The Vanguard will talk to local officials this week to gauge their assessment of the impact on Davis’ fiscal situation.
—David M. Greenwald reporting
[quote]Ed Mendel, in fact, notes that Sacramento was forced to lay off 16 municipal police officers this July because the union failed to agree to pay the employee share.[/quote]
And this is one of the problems w unions – they would rather have a few workers laid off than take concessions, thereby continuing the downward spiral of layoffs…
ERM has an interesting perspective… let’s say that the choice is between 30% layoffs or 30% reduction in compensation… why would 70% “fall on their swords” and default on their mortgages, etc, to ‘protect the 30% who will not qualify for unemployment, and have similar drastic results? Just asking…
But the statelaw now means they don’t have to fall on their swords, the reductions are automatic.
Come again? Where in the law does it decree that employees make concessions, other than eventually sharing the ‘normal cost’ of PERS, to allow the employer to dictate that the employee compensation base remain the same, and everyone take an arbitrary cut to all compensation?
If that was the case, public agencies should double the staff, and cut all staff compensation by 50%.
Am I missing something?