Costa Mesa Stands Up To Public Unions

MARCH 7, 2011


The chambers were packed at Costa Mesa’s City Council meeting last Tuesday night, and understandably so.  After all, the council was considering sending pink slips to 203 city employees – 43 percent of the Orange County city’s workforce – warning them they could be laid off in six months. Just before midnight, the council voted 4-1 to send out the pink slips, even though they were staring down a roomful of angry city workers who had argued loudly against the action.

Driving the move were three factors, from least to most important:  A July 1 deadline for the city’s 2011-2012 budget, a silly requirement to give a six-month notice before layoffs (talk about the profound difference between the public and private sectors!), and increasingly overbearing pension and benefit expenses.

Not just in California, but everywhere cities are looking at pension contribution costs with a critical eye.  Costa Mesa, like many California cities, only had to casually toss a few dollars in the general direction of CalPERS during the flush years, but that time has gone, and now it is forced to cover a share of the liabilities created by years of CalPERS losses on disastrous investments and years of enhancements to union employee benefits. Few, if any, have done what Costa Mesa did on Tuesday, but all cities certainly will be watching to see if Costa Mesa carries out its threat. Then they’ll assess the city’s ability to win the legal challenges that almost certainly will follow, and ultimately, they’ll be counting how much the city’s CalPERS contribution drops if all 203 pink slips really do turn into actual workforce cuts.

As a private business owner, I look at Costa Mesa and, gratified as I am by its action, my main thought is, “Why did it take them so long?”  The private sector certainly doesn’t reward such delays.  During the recession, my company laid off an employee for the sole reason of reducing the overhead – benefits, federal and state withholding tax liabilities – associated with having employees.  We looked at the numbers and saw we had no choice, even if it was terribly unpleasant to act responsibly, for us and for the great employee who had to let go.  Local government, long able to spend other people’s money without consequence, is suddenly in a position where they too have to act responsibly.

The state and federal gravy trains are now empty, even as local leaders are stuck with expensive commitments they made when times were good, when they should have built up reserves and paid down liabilities instead of sweetening benefits and growing staffs.

What’s most interesting about Costa Mesa’s action is that four members of the council were able to look a couple hundred angry people in the eye and still cast the right vote.  (The dissenting vote was cast by Councilwoman Wendy Leece, who angered the county’s Republican leadership after she won an endorsement on a promise of supporting only defined contribution plans for city employees, then voted to grant [email protected] defined benefit pensions to four unions.)  It wasn’t too long ago that the four-man majority would have thought casting such their votes would be political suicide in the face of public employee union power, but no more.  The politicians on the council now sense that there are more voters who are sick to death of government over-generosity with taxpayer money than there are voters who want them to keep the generosity spigot open wide.

In the end, the decision was pretty straightforward.  “We’re going to run out of money sometime this year if nothing changes,” Councilman Eric Bever told the crowd, which largely seemed to prefer declaring municipal bankruptcy over taking serious efforts to avoid it.

The city intends to keep services going by outsourcing the work to private sector employees who don’t come with pension strings attached.  Should the City Council ultimately fire 43 percent of city staff, and should city services be delivered just as well or better without union-represented workers, other cities in the state will really begin to take notice.  And if that happens, the power public employee unions’ hold over cities, counties and the state will be significantly diminished.

# # #

Laer Pearce, a veteran of three decades of California public affairs, is currently working on a book that shows how everything wrong with America comes from California.

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  1. Dean Smith
    Dean Smith 7 March, 2011, 15:20

    WOO-HOO!!! It’s about time.

    Reply this comment
  2. rick
    rick 7 March, 2011, 17:27

    the scary part of the story is “..Bever told the crowd, which largely seemed to prefer declaring municipal bankruptcy over taking serious efforts to avoid it.”

    vallejo declard bankruptcy couple years ago too. seems nobody has any responsibility anymore.

    which also brings up issue of states’ ability to declare bankruptcy and congress lifting the debt ceiling.

    we’re a runaway train with drunk politicians in the rear observation car and we’re locked in the Democratic baggage car known as California. we’re gonna crash.

    Reply this comment
  3. FedUp
    FedUp 8 March, 2011, 09:10

    Hooray, never thought I’d see this in CA. (I’ve been living vicariously through Wisconsin.) With regards to our state budget, people keep complaining that state workers and teachers will lose their jobs. Well, you know what, we in the private sector did our layoffs three years ago! In the first round, we laid off people who were not top performers and our company actually got stronger with less people. The second round was much harder because we had to lay off people we really would rather have kept. But because we did this, our company is surviving this recession. Our state needs to do the same thing. If you don’t have the revenue, the expense is no longer viable. It’s time to trim. Good article and way to go Costa Mesa! You are like an oasis in this desert of a state. Don’t back down!

    Reply this comment
  4. rick
    rick 8 March, 2011, 13:24

    you’re right on.
    my private sector employer and manufacturer laid off the slow performers first.
    then we had to choose to cut people or reduce hours. we reduced hours. we’re still cutting on expenses and had to cut more people this year.
    my wife lost her job last year too.

    state govt over spending, unemployment and unions…..

    “eventually, you run out of other people’s money”

    AB 32, another iceberg right ahead!

    Reply this comment
  5. stevefromsacto
    stevefromsacto 10 March, 2011, 17:25

    Read and learn:

    Why employee pensions aren’t bankrupting states

    By Kevin G. Hall | McClatchy Newspapers

    WASHINGTON — From state legislatures to Congress to tea party rallies, a vocal backlash is rising against what are perceived as too-generous retirement benefits for state and local government workers. However, that widespread perception doesn’t match reality.

    A close look at state and local pension plans across the nation, and a comparison of them to those in the private sector, reveals a more complicated story. However, the short answer is that there’s simply no evidence that state pensions are the current burden to public finances that their critics claim.

    Pension contributions from state and local employers aren’t blowing up budgets. They amount to just 2.9 percent of state spending, on average, according to the National Association of State Retirement Administrators. The Center for Retirement Research at Boston College puts the figure a bit higher at 3.8 percent.

    Though there’s no direct comparison, state and local pension contributions approximate the burden shouldered by private companies. The nonpartisan Employee Benefit Research Institute estimates that retirement funding for private employers amounts to about 3.5 percent of employee compensation.

    Nor are state and local government pension funds broke. They’re underfunded, in large measure because — like the investments held in 401(k) plans by American private-sector employees — they sunk along with the entire stock market during the Great Recession of 2007-2009. And like 401(k) plans, the investments made by public-sector pension plans are increasingly on firmer footing as the rising tide on Wall Street lifts all boats.

    Boston College researchers project that if the assets in state and local pension plans were frozen tomorrow and there was no more growth in investment returns, there’d still be enough money in most state plans to pay benefits for years to come.

    “On average, with the assets on hand today, plans are able to pay annual benefits at their current level for another 13 years. This assumes, pessimistically, that plans make no future pension contributions and there is no growth in assets,” said Jean-Pierre Aubry, a researcher specializing in state and local pensions for the nonpartisan Center for Retirement Research at Boston College.

    In 2006, when the economy was humming before the financial crisis began, the value of assets in state and local pension funds covered promised benefits for a period of just over 19 years.

    At the bottom of Aubry’s list is Kentucky, which would have enough assets to cover 4.7 years. Other states do much better: North Carolina local government pensions are funded to cover 19 years of promised benefits; Florida’s state plan could cover 17 years; and California’s plans about 15 years.

    “On the whole, the pension system isn’t bankrupting every state in the country,” Aubry said.

    States having the biggest problems with pension obligations tend to be struggling with overall fiscal woes — New Jersey and Illinois in particular. Many states are now wrestling with underfunding because they didn’t contribute enough during boom years.

    Most state and local employees government across the nation have defined-benefit plans that promise employees either a percentage of their final salary during retirement or some fixed amount. The Bureau of Labor Statistics estimates that 91 percent of full-time state and local government workers have access to defined-benefit plans.

    Several states_ including Florida, Georgia, Ohio, Colorado and Washington_ have adopted competing defined-contribution plans, or a hybrid plan that provides government employees both a partial defined benefit in retirement and a supplementary defined-contribution plan.

    Defined-contribution 401(k) plans divert on a tax-deferred basis a portion of pay, generally partially matched by the employer, into an account that invests in stocks and bonds. In 1980, 84 percent of workers at medium and large companies in the U.S. had a defined-benefit plan like those still predominate in the public sector. By last year, just 30 percent of workers in these larger companies were covered under such plans.

    Defenders of the public pension system say anti-government, anti-union elected officials and interest groups have exaggerated the problem to score political points, and that as the economy heals, public pension plans will gain value and prove critics wrong.

    “There’s a window that’s closing as market conditions improve and interest rates rise, the funding of these plans is going to look better than depicted by some,” insisted Keith Brainard, the director of research for the National Association of State Retirement Administrators in Georgetown, Texas.

    Critics of public sector pensions paint the problem with a broad brush.

    “Unionized government workers have tremendous leverage to negotiate their own wages and benefits. They funnel tens of millions of dollars to elect candidates who will sit across from them at the negotiating table,” said Thomas Donohue, the chief executive of the U.S. Chamber of Commerce, in a Feb. 24 blog post. “This self-dealing has resulted in ever-increasing wage and benefit packages for unionized government workers that often far outstrip those for comparable private-sector workers.”

    In a Feb. 23 radio interview, Rep. Devin Nunes, R-Calif., called federal stimulus efforts to rescue the economy “essentially a federal bailout of public employee unions.” Nunes described money owed to state pensioners as a crisis “about ready to happen.”

    Except that two out of every three public-sector workers aren’t union members.

    The Bureau of Labor Statistics reported in January that 31.1 percent of state public-sector workers were unionized in 2010, compared with 26.8 percent of federal government employees. The highest percentage of unionization, 43.3 percent, was found in local government, where police officers and firefighters work. Teachers can fall into either state systems or local government.

    Ironically, in Wisconsin, where Republican Gov. Scott Walker is trying to weaken public-sector unions and reduce pension benefits, he’s exempted police and firefighters, who are among the most unionized public employees. And Wisconsin’s public-sector pension plan still has enough assets today to cover more than 18 years of benefits.

    The most recent Public Fund Survey by the National Association of State Retirement Administrators showed that, on average, state and local pensions were 78.9 percent funded, with about $688 billion in unfunded promises to pensioners. Critics suggest that the real number is at least $1 trillion or higher, using less-optimistic market assumptions.

    The unfunded liabilities would be a problem if all state and local retirees went into retirement at once, but they won’t. Nor will state governments go out of business and hand underfunded pension plans over to a federal regulator, as happens in the private sector. State and local governments are ongoing enterprises.

    The flow of employees into retirement matches up with population trends in states, with Northeastern states with declining populations, particularly Rhode Island, seeing more stress on their pension systems than Southern and Western states, where there’s been vibrant population growth.

    Another misperception tied to the pension debate is that while the private sector has shed jobs during the economic crisis, state and local government employment has grown — and pensions along with it.

    Since September 2008_ when state and local government employees numbered 19,385,000 and the economic crisis turned severe — the governments’ payrolls shrunk by 407,000, to 18,978,000 this January, according to Bureau of Labor Statistics data.

    When calculating from December 2007 _ the month that the National Bureau of Economic Research determined was the start of the Great Recession _ state and local government employment has fallen by 703,000 jobs amid a downturn that cost the nation more than 8 million jobs overall.

    “The down economy has had an effect, and the loss of employment outside the public sector has created a contrast” said Brainard, of the National Association of State Retirement Administrators.

    Also fueling backlash is the perception that state and local workers don’t contribute to their own retirement funds the way private sector workers do.

    Three states have non-contribution public pension plans _ Florida, Utah and Oregon. About a third of Connecticut state workers don’t contribute to their pensions, while most new employees do. Missouri until recently had a non-contribution policy for state workers, as did Michigan until 1997. Michigan workers hired before 1997 still don’t pay toward their pensions, and some teachers in Arkansas don’t have to contribute toward theirs. Tennessee doesn’t require contributions from most workers and employees in the state higher education system.

    Those notable exceptions aside, most states require employee contributions. The midpoint for these contributions for all states and the District of Columbia is 5 percent of pay, according to academic and state-level research. That contribution rate climbs to 8 percent for the handful of states whose workers or teachers are prohibited from paying into the federal Social Security program.

    By comparison, private-sector workers shoulder a bit more of the burden.

    In its data for 2010, Fidelity Investments, the largest administrator of private-sector 401(k) retirement plans, showed employee contribution rates in its plans averaged 8.2 percent of pre-tax pay.

    Separately, the Employee Benefits Research Institution estimates that most private-sector employers match up to 50 percent of employee contributions up to the first 6 percent of salary.

    The utility or burden of either type of retirement plan depends on whether the plan is measured by what it delivers to an individual, or by how much it delivers to all workers receiving retirement benefits from their employer.

    “It really comes down to what you are attempting to do,” said Dallas Salisbury, the president of the nonpartisan Employee Benefit Research Institute.

    Viewed through the lens of an employee, defined-benefit plans are more cost-effective at providing a pre-determined level of benefits to an employee. But the shortcoming of these plans is that they reward seniority. For workers with a shorter tenure, they’re far less generous in retirement.

    This fairness issue is one reason why 401(k) plans have grown steadily in prominence since the mid-1980s. From the payroll perspective of an employer, these defined-contribution plans produce at least some retirement income for the greatest number of employees, and the plans can move with employees who change jobs.

    Read more:

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