Ruling on pension bonuses shows obstacles to CA reform

????????????????????????????????Providing bonus checks to government retirees when pension funds have good years has long been common and controversial around California. Now an appellate court has ruled this policy is a vested benefit that can’t be ended by formal action of government officials or as part of a voter-approved pension reform measure.

It’s another sign of how daunting pension reform is in California. Ed Mendel of Calpensions.com has the details:

A retiree group won a big victory last month. Reversing a superior court ruling, an appeals court overturned part of a voter-approved San Francisco pension reform in 2011 that ended higher payments to retirees when investments have “excess earnings.” …

Retirees, scattered and no longer union members, might seem unlikely to be formidable, particularly when battling a cost-cutting pension reform backed by all 11 county supervisors, business and labor groups, and 69 percent of San Francisco voters in 2011.

The reform, Proposition C, was the milder establishment alternative to deeper pension cuts in Proposition D by Jeff Adachi, one of the 16 candidates for mayor on the San Francisco ballot that year, including the incumbent and winner, Mayor Ed Lee.

“The epitome of greed,” Gary Delagnes, president of the San Francisco Police Officers Association, told SF Weekly in 2012 when the retiree group began its legal challenge.

“Vested benefits” theory protects flawed concept

The court decision shows that judges take the concept of “vested benefits” very seriously. Unlike in the private sector, once a government union is promised benefits, those benefits can’t later be reduced. When this legal axiom is combined with the state Public Employment Relations Board’s hostility to ballot measures on pension issues, the difficulty that taxpayers face in trying to scale back government pensions looks extraordinary.

But the San Francisco case is particularly noteworthy because it involves the single category of pension benefit that actuaries, accountants and good-government advocates find most indefensible. Giving government pensioners extra money when pension funds have strong years only makes mathematical sense if the pensioners get less when pension funds have bad years. No local government in California has such a policy.

“Excess earnings” benefits are never seen at big pension agencies with strong staffs like CalSTRS or CalPERS; it’s understood that they’re just not sustainable in the long run.

But in cities like San Francisco, San Diego and Fresno, and counties like Alameda and Mendocino, the actuarial, common-sense arguments were overwhelmed by political clout and expedience.

Here’s a link to a study commissioned by the Schwarzenegger administration that outlined the many costly quirks in local governments’ pension policies. It was highly critical of “excess earnings” bonuses.

18 comments

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  1. Ronald Stein
    Ronald Stein 2 May, 2015, 06:05

    It’s like walking across the street within the guidelines of the crosswalk and getting hit by a truck, you’re RIGHT but DEAD RIGHT.

    Legally, we may be obligated to pay those DEFINED benefit pension plans, but their unsustainability is killing the budget and discouraging new job creation as the entrepreneurs’’ taxes and fees are contributing to paying for those defined entitlements that are not available in the private sector.

    “Defined benefit” programs are lucrative to the recipients, but unsustainable as they are funded by investments that do not get defined rates of returns. Currently there are more than 12,000 people receiving pensions over $100,000 from CALPERS. When the CALPERS investments perform poorly, the consumer picks up the tab for those defined guaranteed pensions.

    With the economy and jobs in the doldrums, entrepreneurs should be incentivized to get the job market moving, not dis-incentivized to pay more taxes to fund more government and more defined compensation and benefits to retiring government workers.

    The uneven playing field continues to prosper while new job creation suffers. Everyone needs to be on the same playing field with defined CONTRIBUTIONS only, which places the entire risk of loss on investments on employees and delivers no guaranteed benefit.

    Reply this comment
    • SeeSaw
      SeeSaw 3 May, 2015, 22:20

      You are in dreamland if you think that DC plans are the way to go. San Francisco and LA are both on their own DB plans and they might pay out big bonuses but CalPERS which is the largest pension plan in the U.S. does not give bonuses to recipients. There are 500,000 people receiving benefits from CalPERS and 98% of them get less than $100,000. The average benefit is about $2500/mo. The DB pensions keep the country going–just try putting everybody on DC plans–one must save one to two million dollars during a working career in order to sustain life until the end. Every worker in the country, public and private both, should have a DB pension plan!

      Reply this comment
      • Tough Love
        Tough Love 4 May, 2015, 08:24

        SeeSaw, the typical CalPERS pension IN AND OF ITSELF is so grossly excessive, unnecessary, unfair to Taxpayers, and unaffordable ….. that rightfully, 50% should be considered an unjust “bonus”.

        Reply this comment
        • SeeSaw
          SeeSaw 4 May, 2015, 10:42

          Oh, I know, TL. Its always best to have someone who resides in NJ decide what is best for us down here in CA. I do have bills to pay and my out-of-pocket share of the medical insurance premiums for me and my spouse requires 41% of my take-home pension–that is really unfair!

          Reply this comment
          • S and P 500
            S and P 500 4 May, 2015, 13:50

            Why is that unfair? If Gilead wants to charge $1100 for one of its pills for hepatitis C or if Allergan wants to charge $500 for Restasis then there’s no law that says they can’t. That’s no different than our public safety workers demanding exorbitant pensions and arguing that they deserve them because of the services they provide to the public.

  2. Richard Rider
    Richard Rider 2 May, 2015, 07:34

    Contracting out is where the BIG savings are, and the IMMEDIATE relief — with less concern about endless (and flawed) court battles. Grandfathering existing workers with their opulent pay and benefits leaves us with the existing problem for the next 20+ years.

    Let’s turn as many government functions as possible over to the private sector via competitive bidding, with companies held fully accountable for performance (something seldom done with government departments and workers). And BTW, the savings are FAR bigger than the immediate budget comparisons, as government systematically understates and under-accounts for unfunded pension AND retiree MEDICAL CARE liabilities.

    A side benefit (some might argue the BIGGEST benefit) is dramatically shrinking the public employee labor unions — the biggest single problem in California. If we can’t ban such public employee labor unions (a recent addition to California), gut them by putting their members back in the private sector.

    Reply this comment
    • SkippingDog
      SkippingDog 2 May, 2015, 12:36

      Interesting that it was that conservative icon, Ronald Reagan, who supported and signed the Myers, Milias, Brown Act into law, which extended collective bargaining rights to local public employees in California.

      Reply this comment
    • SeeSaw
      SeeSaw 3 May, 2015, 22:26

      I worked in the public sector. There are some projects that are better completed with private help and others that work better with in-house workers. Sorry, sir, you are stuck with the public sector. If you hate unions so much–something that allows people to have middle class existences, go live in a right-to-work state where wages are low and so is the buying power of the people.. Having large work forces unionized is just efficient!

      Reply this comment
      • S and P 500
        S and P 500 4 May, 2015, 13:31

        I assume you are okay with the probable 25% tuition hike at the University of Calif. to pay for pensions. If your kid wants to go to UCLA you will be paying for those big UC pensions but I’m sure you understand. Or maybe your kid wants to go to USC, where the tuition is $50K a year and pensions are just as generous. Student loan debt is now at $1.3 trillion. Didn’t it pass $1T just a short while ago? Colleges are better at stealing money than public unions.

        Reply this comment
        • Tough Love
          Tough Love 4 May, 2015, 15:24

          There is nothing more universally GREEDY than a Public Sector Union/worker.

          Reply this comment
          • NTHEOC
            NTHEOC 4 May, 2015, 15:51

            Total CalPERS Fund
            Market Value
            Reflects market value, as of market close on 5/1/2015.
            $305.3 Billion
            ———————-
            Im proud to say I have ownership in my pension system!!

        • SeeSaw
          SeeSaw 4 May, 2015, 16:26

          There are lots of figures that go into the cost of things. That is the life we have and I am as free to grouch about my medical insurance as you are free to gripe about your issues. Pensions are a line-item on the total budget. I have three grandchildren being put through college by their own parents, UCLA and USC both in that mix, so you aren’t telling me anything I don’t know about the cost of college. I did hear a tidbit from the UC President when I was watching her interview: A student who is accepted to the UC system goes tuition-free if the parents earn less than $80,000.

          Reply this comment
  3. JPR11
    JPR11 2 May, 2015, 17:12

    Did you notice we need more taxation to fix the roads, for schools but can pay a pension bonuses. CA is now on an annual rotating tax increase. The same need now come up every 5 years. It does seem the Progressive socialist CA model will eventually go the way of Greece. People and business expansion have the bottom-line. Time to move out.

    Reply this comment
  4. john m. moore
    john m. moore 3 May, 2015, 09:04

    It is important to understand that the decision applies only to vested rights that were granted by a statute that was interpreted by the court to grant a vested right. Approval of an MOU promising a benefit for a limited number of years does not grant a vested right unless, as in the instant case, there was/is a statute granting the benefit(in this case a charter amendment)

    Reply this comment
  5. Equal Time
    Equal Time 3 May, 2015, 09:19

    My research on California pension systems finds that the provision of bonus checks as described in this post is not common around California as claimed – in fact the vast majority of pension systems, including CalPERS, do not engage in this practice. Thus the magnitude of this problem is inflated by this statement in this article. The author should know this having served on a retirement system board in a California county.

    Reply this comment
  6. S Moderation Douglas
    S Moderation Douglas 3 May, 2015, 10:19

    On the horns of a dilemma. I almost agree with Chris Reed here:

    “Giving government pensioners extra money when pension funds have strong years only makes mathematical sense if the pensioners get less when pension funds have bad years.”

    At least, giving pensioners extra money when pension funds have strong years logically, if done at all, should NOT be done unless the fund is fully funded at the time. (in my opinion)

    However……good for these guys for fighting (and winning) to……..comply with the law…….
    ……………………..

    “It’s another sign of how daunting pension reform is in California.”

    It SHOULD be daunting.

    Democracy: three wolves (11 supervisors, 69% of voters, and……labor groups?) and a sheep (Retirees, scattered and no longer union members) voting on what to have for dinner.

    “First they came for the Socialists, and I did not speak out—”

    If this tactic had worked, what would the supervisors go for next?

    Reply this comment
  7. S and P 500
    S and P 500 4 May, 2015, 13:37

    This is a great short video by Prof. Joshua Rauh summarizing the pension crisis. He mentions that the main source of funding for private equity has been pension funds, which is a fact that I wasn’t aware of.

    Reply this comment

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Chris Reed

Chris Reed

Chris Reed is a regular contributor to Cal Watchdog. Reed is an editorial writer for U-T San Diego. Before joining the U-T in July 2005, he was the opinion-page columns editor and wrote the featured weekly Unspin column for The Orange County Register. Reed was on the national board of the Association of Opinion Page Editors from 2003-2005. From 2000 to 2005, Reed made more than 100 appearances as a featured news analyst on Los Angeles-area National Public Radio affiliate KPCC-FM. From 1990 to 1998, Reed was an editor, metro columnist and film critic at the Inland Valley Daily Bulletin in Ontario. Reed has a political science degree from the University of Hawaii (Hilo campus), where he edited the student newspaper, the Vulcan News, his senior year. He is on Twitter: @chrisreed99.

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