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At issue was Proposition B, approved by San Diego voters in 2012 by a nearly 2-to-1 margin. The measure required that all city employees who began their jobs on or after Jan. 1, 2013 – except for police officers – get 401(k)-style retirement benefits instead of the defined benefit pensions that left San Diego finances in near ruins more than a decade ago because of City Council decisions to underfund them.

But San Diego employee unions and the California Public Employees Relations Board (PERB) argued even before the measure reached the ballot that it violated state collective bargaining laws because the campaign for the pension changes was led in 2011 and 2012 by then-San Diego Mayor Jerry Sanders. He claimed that his role in the Prop. B campaign was as a private citizen – not as mayor – and thus he faced no obligation to collectively bargain with public employee unions before touting the direct-democracy initiative.

Before reaching the state high court, a trial judge first disagreed with Sanders and San Diego, then an appellate court sided with the city. But all seven state justices joined in a ruling that found that city leaders had not met their requirement to first seek changes at the bargaining table before seeking to impose them through direct democracy.

“Allowing public officials to purposefully evade the meet-and-confer requirements of [state collective bargaining rules] by officially sponsoring a citizens’ initiative would seriously undermine the policies served by the statute: fostering full communication between public employers and employees, as well as improving personnel management and employer-employee relations,” the court held. It ordered the case be sent back to the appellate court to determine how San Diego should untangle its mess.

Elected leaders may be less likely to lead ballot fights

The decision seems likely to change the nature of direct democracy going forward – at least at the local level of California government.

Direct democracy, brought forward in California by Gov. Hiram Johnson in 1911, has greatly benefited from the active participation of elected officials. They are often more able to win public approval of sweeping reforms through the ballot box than they can through the Legislature or city or county governing boards, which are often allied with deep-pockets special interests.

For example, Earl Warren – the former U.S. Supreme Court chief justice and California governor – repeatedly led ballot campaigns as Alameda County district attorney that directly affected many areas of California life.

But similar efforts by a politician in 2018 would face a different kind of vetting than Warren faced. Going forward, any ballot proposal that affects public employees in any way is subject to a potential court veto if it can be established that it were led by elected officials who didn’t live up to their collective bargaining obligations.

The California PERB Blog’s analysis noted that justices “did leave open the possibility that government officials can separate their official actions from their private activities. However, the court did not provide any guidance on what a government official would have to do to make such a distinction clear.”

SACRAMENTO – California’s Legislature is back from its recess and legislators kicked off the session by focusing on two highly partisan matters.

Assembly Republicans first voted to keep Chad Mayes as Republican leader, despite pressure from activists to oust him because of his vote to extend the governor’s cap-and-trade system. But Mayes said Thursday that he will step down and will be replaced by Brian Dahle, R-Bieber. Democrats pushed new legislation that would change state election rules to help Democratic Sen. Josh Newman of Fullerton thwart a high-profile recall effort.

As divisive political wrangling settles down, legislators do plan to address some substantive policy issues. At the top of the list is housing. Before the recess, Gov. Jerry Brown and the Democratic leadership promised to introduce a package of bills to help boost housing supply, given that escalating home prices have reached crisis levels.

Keep an eye on Senate Bill 35, which would create “a streamlined, ministerial approval process for development proponents of multi-family housing” in localities that have “not produced enough housing units to meet its regional housing needs assessment.” A ministerial approval would spare developers from a drawn-out process before planning commissions and city councils.

Local governments are opposed to the bill because it limits their authority, but backers say the measure is needed to jump-start some types of housing projects, given that local growth controls and environmental lawsuits have slowed housing construction.

The bill recently was amended to expand its application beyond big urban centers to include smaller cities and suburban locales. It’s a rare instance where Republicans and Democrats have some common ground, with the former wanting to encourage private companies to build more and the latter hoping to see the construction of high-density housing. The building industry opposes provisions that would require paying union wage scales.

There’s more controversy over two other housing-related measures. Senate Bill 2 would impose $75 to $225 fees on property transfers (excluding home sales) to fund government-subsidized affordable housing. Senate Bill 3 would put a $3 billion housing bond on the November 2018 ballot, which also would fund housing subsidies.

Another top Capitol priority is passage of Assembly Bill 1250, which essentially would ban 56 of California’s 58 counties from outsourcing certain services to private contractors. It is backed by a vast array of public-sector unions.

“While cheaper services and employee layoffs may appear to save dollars in the short term, the savings are often illusory with hidden costs that are not accounted for and diminished services or contractor failures that require cities and counties to ultimately re-hire and/or re-train staff to provide the outsourced service,” argues author Reginald Jones-Sawyer, D-Los Angeles.

But county governments, and companies that provide myriad services to them, argue that the bill will dramatically raise costs for taxpayers and will lead to diminished services. Given increasing costs of pensions, medical care and other employee benefits, these governments say they can’t afford to hire permanent employees. This is likely to be one of the most contentious bills to make its way through the Legislature during the final month of session.

On Wednesday, activists promoting bail reform held an event on the Capitol grounds, thus highlighting a growing reform movement. Senate Bill 10 — by Sen. Bob Hertzberg, D-Van Nuys — would replace the current system of money bail with a judicial-based pre-trial system, whereby defendants are released or kept in custody based on an assessment of their flight risk and the nature of their alleged crimes.

Opponents of the current bail system argue that it’s unfair to keep people in jail, as they await trial, based solely on their ability to post a bond. Studies show that low-income people are more likely to accept plea bargains – largely so they can get out of jail and get back to work and caring for their children. The bail-bonds industry sees the legislation as an existential threat, and Republicans fear that the new system could make it tough to keep dangerous people behind bars.

Senate Bill 54, which would turn California into a so-called sanctuary state by limiting “the involvement of state and local law enforcement agencies in federal immigration enforcement,” is another hot-button issue in the waning days of the session. As the Sacramento Bee reported, the measure “sailed through the Senate and appears likely to pass the Assembly with a majority vote,” but “it’s unclear where Brown stands on the issue.”

Its passage would put the state on a collision course with the Trump administration, which has threatened to halt crime-fighting funds to cities — and presumably, states — that refuse to cooperate with federal immigration officials.

Legislators and activists have talked about other, less-substantive but highly controversial issues, as well. Senate President Pro Tempore Kevin de Leon promised in a speech this week to hold hearings on white supremacists in California, which he called “a cancer on our nation.” Silicon Valley entrepreneur Tim Draper, who had failed to qualify for the November 2016 ballot a measure to break up California into six states, filed a new measure to split up California into three states.

There’s plenty to watch as the legislative session winds down – and as political battles heat up for the 2018 election.

Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.

The Public Divestiture of Thermal Coal Companies Act of 2015 required CalPERS to “identify, engage and potentially divest from companies meeting the definition of ‘thermal coal companies.’” The pension fund was directed to do so “consistent with its fiduciary responsibilities,” providing some wiggle room for the fund, whose primary duty is to maximize investment returns to make good on its public-employee pension obligations.

Nevertheless, CalPERS promptly identified two dozen publicly traded companies that generate at least 50 percent of their revenue from mining thermal coal, as required by the law. As the recent report explains, three companies adapted their business model and redirected their investments toward clean energy. As such, they were exempt from divestment. CalPERS had no holding in eight other companies identified under the act.

But 14 companies “failed to indicate applicable business plan adaptations, or failed to respond to CalPERS engagement efforts and were subject to divestment,” according to the report. As the Sacramento Bee explained, “stocks for 13 of the 14 companies are worth more than they were a year ago when the pension fund was divesting from the industry.” The shares of one of those firms were trading at 15 times their April 2016 levels.

There’s little question that the act was designed to achieve a social goal, rather than one related to increasing CalPERS’ investment returns. “Coal combustion for energy generation is the single leading cause of the pollution that causes global climate change,” said the bill’s author, Sen. Kevin de Leon, D-Los Angeles, as quoted in the Senate bill analysis. He added that coal is “a leading cause of smog, acid rain, and toxic air pollution” and that “most U.S. coal plants have not installed these technologies.”

CalPERS’ investment staff tends to oppose socially oriented investments, but the CalPERS board has the final say. The issue was debated at the CalPERS Board of Administration meeting in May. The Sacramento Bee reported on union officials who criticized the policy at the board meeting. “We cannot afford to lose funding for law enforcement officers in exchange for a socially responsible investment policy,” said Jim Auck, treasurer of the Corona Police Officers Association.

This isn’t the first time that there’s been tension between the fund’s politically oriented investment goals and its desire to increase investment returns. At a board meeting last year, CalPERS investment officials argued for an end to a 16-year ban on tobacco-related investments made by the system’s own investment officers. (Tobacco investments by outside firms were still allowed.) Because tobacco stocks had rebounded since 2000, news reports estimated that the pension fund had lost about $3 billion because of that decision. The fund’s total investments are valued at more than $300 billion.

Instead of following the investment team’s advice, the CalPERS board continued to ban tobacco investments and also decided to divest about $547 million in tobacco-related investments handled by outside firms. That decision also was based on social goals. Advocates for tobacco divestment argued that CalPERS ought not invest in firms that sell deadly products.

At the time, the tobacco-divestment decision was particularly controversial because CalPERS faced investment returns of a measly 0.61 percent. Now, with CalPERS’ latest returns showing a robust 11.2 percent gain, it makes continuing with the coal divestment plan – and other socially oriented investment strategies – an easier option to pursue.

Regarding coal, CalPERS isn’t the only state agency to pursue divestment. Last summer, California Insurance Commissioner Dave Jones launched his Climate Risk Carbon Initiative, which called for any insurance companies that do business in California to divest “voluntarily” from most of their thermal-coal investments. The state vowed to publicize the names of companies that didn’t comply and ramped up mandatory reporting requirements.

Insurance commissioners regulate insurers to assure they have the resources to pay any claims. Yet the department’s divestment request clearly had a social (and some say political) goal. Jones justified it by arguing that such investments put the companies at risk. “As utilities decrease their use of coal and other carbon fuel sources … investments in coal and the carbon economy run the risk of becoming a stranded asset of diminishing value,” he said in a statement.

But critics of the policy, including a 2016 study by this writer, note that insurers are invested in extremely conservative positions, mostly in fixed-income bonds, and that even the insurer with the largest percentage of coal-related investments (TIAA-CREF) had only 1.76 percent of its total assets in such holdings. Furthermore, the value of the stocks already reflects the well-known uncertainties that the insurance commissioner raised. Jones’ office argued, in response, that “since 2011, coal prices, cash flows, and company valuations have fallen sharply thus adversely affecting and bankrupting numerous coal companies.”

The broad question, especially for CalPERS, is the one raised by the union officials at the recent board meeting: Are the political and social gains of divesting from these industries worth the costs in investment returns?

Chief investment officers “invest for value and don’t appreciate being hamstrung by legislators who don’t know how to manage a diversified portfolio,” said Sen. John Moorlach, R-Costa Mesa, who voted against Sen. de Leon’s divestment act. “I think I’m the only legislator who managed a $7 billion portfolio. And the studies I’ve seen have shown that social investing has produced lower returns.”

Despite the recent good-news returns, CalPERS has an enormous amount of unfunded liabilities – the shortfall in assets to make good on all the long-term pension promises made to government employees. The system is only funded at around 68 percent. This should be of concern not only to the agency, the Legislature and public employees who depend on a CalPERS retirement, but to California taxpayers. Ultimately, they are the ones who will pay for any pension shortfalls.

Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.

The governor’s plan is similar to the idea of pension-obligation bonds. That’s when a government borrows money to pay down escalating pension debts, in the hopes “that the bond proceeds, when invested with pension assets in higher-yielding asset classes, will be able to achieve a rate of return that is greater than the interest rate owed over the term of the bonds,” according to an explanation from the Government Finance Officers Association.

The governor’s plan, by contrast, would borrow money from the Surplus Money Investment Fund, a low-interest (around 1 percent) account where the state holds money to pay for short-term expenses. It would then make a supplemental $6 billion payment to the California Public Employees’ Retirement System (CalPERS), which currently predicts a rate of return of 7 percent (even though last fiscal year it received only 0.61 percent). If the CalPERS fund performs as predicted, it will allow the state to save $11 billion in pension liabilities over two decades.

“Absent additional action to address these growing liabilities, paying off retirement liabilities will require an increasing percentage of the state budget. For example, the state’s contributions to CalPERS are on track to nearly double from $5.8 billion ($3.4 billion General Fund) in 2017‑18 to $9.2 billion ($5.3 billion General Fund) in 2023‑24,” according to the May budget revision’s summary. This is purportedly a painless way to pay down growing pension debts.

The idea got a boost from one of California’s best-known pension reformers, Sen. John Moorlach, an Orange County Republican who recently introduced a package of pension reform bills in the Senate. They were all killed by majority Democrats. Nevertheless, Moorlach wrote, in a column for Fox & Hounds that he wishes the governor’s prepayment plan had “a little more sizzle to make it an even more interesting opportunity.”

“Governor Brown should ask the board of CalPERS what type of incentive they will give the state for the prepayment,” he wrote. “CalPERS will benefit from the large influx and should provide at least a 3.75 percent reduction on the actuarially calculated required contribution.” That’s unlikely to happen, of course, but Moorlach wrote that he likes the Brown proposal and thinks the governor should move forward with it.

The idea follows the lead of the Orange County city of Newport Beach, explained Ed Mendel, in his May 29 Calpensions article. The city is paying down its pension debt to CalPERS as quickly as possible, helping it avoid the possible fate of other cities. Mendel quotes Modesto’s acting city manager, who told the Modesto Bee “he is hearing that many cities are facing bankruptcy over rising pension costs.” In the case of looming fiscal trouble, most say slashing at debt is a good idea.

But not everyone is so favorably disposed toward the governor’s plan. David Crane, a Stanford University lecturer and president of Govern for California, argues in a column that the plan is terrible precedent that transfers more pension costs from the beneficiaries of the pension system to the state’s taxpayers. When the state makes pension promises to employees, he wrote, both the state and the employees make contributions into the system, which he refers to as “normal costs.”

By contrast, when agencies increase benefit levels or stock-market earnings go down, the pension funds face those “unfunded liabilities,” which are the unfunded promises they’ve already made to current retirees and employees. CalPERS currently is 74 percent funded, which means that 26 percent of those promises are unfunded. “In contrast to joint sharing of normal cost, employees don’t share in the cost of unfunded liabilities,” he wrote. “One hundred percent of that cost falls on citizens, whose services get crowded out and taxes get raised to pay off the liabilities.”

Borrowing these taxpayer funds to pay off the pension debt, he explains, would just let CalPERS continue to set these shared “normal costs” at an unfairly low rate. Furthermore, Crane notes that this special fund is funded entirely by taxpayers, so he fears the state will borrow from other special funds. The state could claim that these monies are going to pay for public services, when in reality they are being siphoned off for pensions.

As Gov. Arnold Schwarzenegger’s pension adviser, Crane wrote that he helped the former governor “engineer ‘Deficit Reduction Bonds’ as a way to address the deficit he acquired upon taking office.” But he now regrets the move: “Those borrowings didn’t solve anything. They just covered up the problem, with interest to boost.”

State and local governments are understandably in a bind. They have “few ways to slow the rapidly climbing cost, among them: cut staff and services, lower pensions for new hires, get unionized employees to pay more for their pensions or cut salaries …,” explained Mendel. He noted the key obstacle limiting the ability of governments to cut pension accruals in the future is something called the “California Rule,” which is making its way to the state Supreme Court.

For some, then, shuffling funds around to prepay a little pension debt seems like a cost-free no-brainer to likely limit the growth of the debts. But to others, it’s just a shell game that evades the more politically dangerous course of tackling the size of those benefits head on – and running into powerful resistance from the state’s public-employee unions.

Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.

In a shock critics had warned against, Golden State schools discovered that their nation’s largest pension system, CalPERS, was on track to force substantial budgetary cutbacks on core education spending. 

“Public schools around California are bracing for a crisis driven by skyrocketing worker pension costs that are expected to force districts to divert billions of dollars from classrooms into retirement accounts, education officials said,” the San Francisco Chronicle reported. “The depth of the funding gap became clear to district leaders when they returned from the holiday break: What they contribute to the California Public Employees’ Retirement System, known as CalPERS, will likely double within six years, according to state estimates.”

Bad grades

The controversy hit as a fresh study brought unwelcome news about California’s nationwide education standing. The report, by Education Week, “looked at multiple ways that states are educating and preparing children for school,” the San Jose Mercury News reported. “For pupil achievement, for instance, the magazine considered 18 measures such as graduation rates, reading and math tests, Advanced Placement exam results, equity and achievement gaps.”

“In academic performance — as measured by the 2015 National Assessment of Educational Progress test and by poverty figures — California earned a D-plus. But in improvement over time, the state posted a C. In equity, California scored a relatively high B-minus — but that was still 41st in the nation, and below the national average of a B.”

A spokesman for California Superintendent of Public Instruction Tom Torlakson called the data behind the survey “outdated,” the Mercury News added, although it was no older in California’s case than any other state. “California is moving in a positive direction,” the spokesman insisted. “We’ve dramatically increased our investment in education.”

Underperformance

But that investment, according to new estimates, has been placed at risk of being consumed by pension costs. “There is a predicted shortfall among all state retirement accounts of at least $230 billion based on what’s owed to current and future retirees. The pension funds, including CalPERS, haven’t made as much money from the stock market and other investments as they had hoped,” the Chronicle noted. “CalPERS officials had hoped to gain a 7.5 percent annual return on investments, but they didn’t come close in either of the last two years.”

Despite optimistic predictions, underperformance has been a constant for the fund: “Over the last 20 years investment returns averaged only 6.9 percent, with the current annual return bringing in only 2.3 percent,” Pepperdine professor Joel Fox observed in the Orange County Register. “Facing market realities, the board lowered the estimate to 7 percent, a mark that still may be unattainable.”

“For taxpayers, the number change likely means more dollars from state and local government budgets will be directed to cover pension liabilities and less will be available to meet services supplied by government. The city of Los Angeles already dedicates 20 percent of its budget for pension obligations, Anaheim 13 percent, Long Beach 11 percent and San Jose as high as 27 percent.”

Double burden

At the same time, school districts have howled over the additional adverse impact of the state’s other pension liabilities. “In 2014, the Legislature adopted Assembly Bill 1469, which seeks to pay down CalSTRS underfunding over about 30 years by relatively small increases in contributions from teachers and the state, and by increasing school districts’ contributions over seven years by 10.85 percent,” former Piedmont USD Board of Education member Richard Raushenbush wrote in the East Bay Times. “In 2020, school districts’ CalSTRS contributions will be 19.1 percent of teacher payroll!”

“This is not sustainable. School districts are funded by the public to provide free public education; they do not make profits that can be devoted to paying off the Legislature’s CalSTRS debt. The Legislature did not provide any new funds to pay the significant CalSTRS’ increases.”

The law has several provisions protecting the state (and employers, which are required to enroll employees into Secure Choice) against liability, including this one: 

“The state shall not have any liability for the payment of the retirement savings benefit earned by program participants pursuant to this title. The state, and any of the funds of the state, shall have no obligation for payment of the benefits arising from this title.”

To protect against losses, the state plans to invest in low-risk securities, like treasury bonds or the federal MyRA program, while another section in the law allows for the state to adopt recommendations that address “risk-sharing and smoothing of market losses and gains.”

“Investment option recommendations may include, but are not limited to, the creation of a reserve fund or the establishment of customized investment products. Implementation of an investment option recommendation pursuant to this subparagraph shall be contingent upon subsequent approval by the Legislature.”

What does that mean?

If enacted, a reserve fund could protect investments during years of low returns, according to a Secure Choice official. In years the market performs well, the board could pay out less than the actual realized return. The remainder would be used to fill a reserve fund, which in turn could increase payouts in years the market performs poorly.

“Any reserve fund would have to be funded by participants themselves and not by the state,” according to Grant Boyken, deputy treasurer for retirement security and health care with the state Treasurer’s office. “The state can have no liability.”

Boyken reiterated that the Secure Choice Board has not made any decisions yet and is still considering many options. But it’s the ambiguity that leaves some observers concerned. 

Devil in the details

“Enabling more people to engage in retirement planning benefits them, society and government budgets,” said Carson Bruno, a research fellow with the Hoover Institution at Stanford University. “The devil, however, is in the details and how it is implemented.”

Bruno referenced the state’s pension crisis, where taxpayers are on the hook for $5.4 billion this year alone. Over the years, one big tweak, SB400, plus many minor tweaks, exacerbated the funding gap, despite claims that taxpayers would be protected.

“Secure Choice today isn’t a financial threat to taxpayers, but that doesn’t necessarily mean that future (lawmakers) won’t make it one tomorrow,” Bruno said. “Sacramento should work to ensure Secure Choice has strong protections built in – that can’t be tampered with by future lawmakers – to prevent it from becoming the next CalPERS or CalSTRS.”  

Heard this before

Those concerns have been most consistently echoed by Sen. John Moorlach, R-Costa Mesa, who notably predicted Orange County’s 1994 bankruptcy, which was largely prompted by risky investments made by the then-treasurer-tax collector.

Moorlach, a trained certified public account and certified financial planner, has repeatedly argued that it’s not a core mission of government to encourage savings by requiring employers to automatically enroll employees and set aside their wages.

Moorlach told CalWatchdog in a recent interview that whenever future economic downturns hit, producing low returns or worse, lawmakers may not be able to resist the temptation to try to fix the problem.

“They have this funny sense of guilt that if they don’t make up losses they’re somehow responsible for this,” Moorlach said.

Union battles Caltrans over costly move

Good morning! But alas, it’s only Tuesday.

CalPERS and the rising public debt continues to be scrutinized. But first, Caltrans is under fire from an employee union. 

A public employees’ union is questioning Caltrans’ pricey decision to move one of its district offices from one side of Orange County to the other, noting the high cost of new cubicle partitions and the lack of space to accommodate new staff required by two transportation proposals. 

Caltrans’ District 12 management terminated its lease two years early to move from a building it owns in Irvine to a space it’s renting in Santa Ana, to move from a space the union argues would accommodate space needs to a space that’s inadequate.

The new space saves about $1.2 million in rent annually, but it also reduces space by 50,000 sq. ft., which does not allow for the additional staff required for the traffic-relief construction called for in transportation proposals offered by both Gov. Jerry Brown and legislators.

“For state highways, this would require engineering design and construction inspection, but Caltrans is moving to a new location which would not have the space to house the staff needed to accomplish the program,” said Beth Katz, spokeswoman for Professional Engineers in California Government.

CalWatchdog has more.

In other news:

• “California’s foster-care system has long been plagued with unaddressed problems, but a recent exposé about the system’s alleged over-prescription of psychotropic drugs has propelled the Legislature into action. Gov. Jerry Brown currently has on his desk three bills that deal with some of the issues raised in a California state auditor’s report last month,” reports CalWatchdog.

• “Lawmakers agreed last month to extend a vital subsidy for [Bloom Energy], one that makes its pricey power generators more attractive to buyers such as hospitals, data centers and mega-retailers. For Bloom  and its industry cohorts, the win marked the end of a hard-fought slog against powerful adversaries including utilities and labor groups. But rival companies and some lawmakers had a different perspective… .” The Los Angeles Times has more. 

• “CalPERS pension fund defended by its most ferocious critic,” writes CalWatchdog.

• “Why the dot-com bubble is key to understanding California’s growing public employee pension debt,” reports Capital Public Radio.

Legislature:

• Gone ’til December.

Gov. Brown:

• No public events announced.

Tips: matt@calwatchdog.com

Follow us: @calwatchdog @mfleming

New follower: @cebryant

Pensions cost taxpayers billions, but weren’t supposed to 

Good morning. Hope y’all had a good weekend. There’s a really interesting story in the Los Angeles Times today about a pension-improvement bill signed by then-Governor Gray Davis and how much the measure is costing taxpayers, despite the sales pitch almost two decades ago that it would pay for itself.

“Proponents sold the measure in 1999 with the promise that it would impose no new costs on California taxpayers. The state employees’ pension fund, they said, would grow fast enough to pay the bill in full.

“They were off — by billions of dollars — and taxpayers will bear the consequences for decades to come.

“This year, state employee pensions will cost taxpayers $5.4 billion, according to the Department of Finance. That’s more than the state will spend on environmental protection, fighting wildfires and the emergency response to the drought combined. …

“Today, the difference between what all California government agencies have set aside for pensions and what they will eventually owe amounts to $241 billion, according to the state controller.

“Davis, who was elected in 1998 with more than $5 million in campaign contributions from public employee unions, says that if he had it to do over, he would not support the pension improvements.

“’If you’re asking me, with everything I’ve learned in the last 17 years, would I have signed SB400 … no, I would not have signed it,” Davis, now 73, said in a recent interview at his Century City law office.'”

The Los Angeles Times has more. 

In other news:

• “A lawsuit served this month against five California Coastal Commissioners could cost them millions of dollars in civil fines if the courts confirm hundreds of alleged transparency rule violations,” reports The San Jose Mercury News.
• “Sneakiness abounded on the last, hectic night of California legislature’s session,” reports The Sacramento Bee. 

• “As cities around the country attempt to regulate the growing home-sharing industry, Airbnb is going on the offensive with a barrage of lawsuits intended to kill local rules it doesn’t like. Airbnb has sued San Francisco, Santa Monica and Anaheim over ordinances that force the company to remove or refuse bookings that violate city laws, and it has threatened to sue the state of New York if a similar bill there is approved.” The San Jose Mercury News has more. 

• “The oddest of Senate odd couples — California Democrat Barbara Boxer and Oklahoma Republican Jim Inhofe — have accomplished something highly unusual in this bitter election year: significant, bipartisan legislation on the environment that has become law,” reports AP/SF Gate.

Legislature:

• Gone ’til December.

Gov. Brown:

• Continuing his statewide signing tour, Brown will be in Long Beach at 10:30 a.m. to sign a measure fighting “super pollutants.”

Tips: matt@calwatchdog.com

Follow us: @calwatchdog @mflemingterp

New followers: @samchung47

That decision was good news not just for pension-reform activists, but for the Jerry Brown administration and legislators from both parties who had supported a 2012 reform law meant to shave the state’s pension obligations. As Justice James Richman noted in his ruling, spiking “has long drawn public ire and legislative chagrin.”

But pension reformers got even better news, given the nature of the judge’s reasoning. The court ruled that employees have a right to a “reasonable pension – not an immutable entitlement to the most optimal formula of calculating the pension.” That simple logic undermines the core obstacle to far-reaching pension reform in California, and which has been adopted in several other states. It involves something known as the “California Rule.”

It’s not actually a rule, but a precedent derived from a variety of rulings that date back to 1955. Ultimately, it says that once a legislative body (city council, board of supervisors, the state Legislature) grants a pension-benefit increase, that increase is indeed immutable; it can never be rolled back. Employees can never be forced to contribute more to their pension plan unless they get something of equal or greater value in return.

By contrast, the courts allow private-sector employers to roll back pension benefits on a forward-going basis. In other words, an employer can’t reduce pension benefits that have already vested, but it can cut back future benefits that have yet to be earned.

Four years ago, California politicians from both parties acknowledged the depth of the state’s public-employee pension crisis. Unfunded liabilities – i.e., the taxpayer-backed debt to pay for the state’s pension promises – were rising. Localities were struggling to make ends meet as their pension obligations rose, with a handful heading into bankruptcy and others struggling with service cutbacks to afford their pension bills.

The resulting pension-reform law, called the Public Employees’ Pension Reform Act (PEPRA) of 2013, has been criticized for not going far enough in its reforms. Some Republicans even alleged it was more about public relations than reform. Its passage in 2012, for instance, was used by supporters of the Proposition 30 tax increase measure to convince voters the state was serious enough about governmental reform that they should vote yes. But the Brown administration and legislators argue it was a serious step toward reining in pension problems.

Whatever their motives, legislators and the governor have dealt with the same problem faced by other local governments that have tried to reform pensions: the courts use the California Rule to stop most proposals that reduce benefits for current employees. PEPRA mostly made changes for future employees. The pension-spiking restrictions at issue in this ruling, Marin Association of Public Employees v. Marin County Employees’ Retirement Association and the State of California, were found in a trailer bill that was passed after it became clear that PEPRA actually would “increase pension-spiking opportunities,” as the East Bay Times’ Dan Borenstein reported.

Despite the reform, however, massive pension problems remain. The Stanford Institute for Economic Policy Research produces a pension tracker that calculates the size of the pension debt for all of the state’s employee-retirement systems. Depending on assumptions about rates of return, the debt ranges from $281 billion to $946 billion, or a range from $22,000 per California household to $75,000. In the ensuing four years, the debt problems have intensified, especially following the California Public Employees’ Retirement System’s recent returns, which were below 1 percent for the past year.

Unlike a 401(k) system, where the ups and downs of the market raise or lower the returns that an employee will receive, these governmental defined-benefit systems guarantee a payout to employees based on a formula. If the market goes down, then the taxpayer-backed unfunded liability, or debt, goes up. There’s variation in the size of the debt based on how well the pension funds do. The main pension fund assumes their investments will earn an aggressive 7.5 percent. If it’s wrong, agencies will need either to come up with more money or cut back public services.

Hence, the significance of the California Rule. The state and local agencies have cut back pension benefits for new and future employees. That’s allowed. But most of those employees won’t start retiring for 30 years. Many analysts believe the only way to get these debt numbers under control is to reduce benefits of current employees going forward. The courts have so far stopped that approach. A federal court in the Stockton bankruptcy case ruled that benefits can be cut for current employees, but cities have to go belly-up to take advantage of that process.

The latest ruling offers a possible way out of this conundrum. “(T)he Legislature may, prior to the employee’s retirement, alter the formula, thereby reducing the anticipated pension,” the judge ruled. “So long as the Legislature’s modifications do not deprive the employee of a ‘reasonable’ pension, there is no constitutional violation. Here the Legislature did not forbid the employer from providing the specified items to an employee as compensation, only the purely prospective inclusion of those items in the computation of the employee’s pension.”

The judge pointed to a report from California’s watchdog agency, the Little Hoover Commission, noting the size of the pension problem: “The money coming in is nowhere near enough to keep up with the money that will need to go out. The state must exercise its authority – and establish the legal authority – to reset overly generous and unsustainable pension formulas for both current and future workers.” In other words, the promised benefits cannot be considered outside of the overall health of these public retirement systems.

The ruling will almost certainly be reviewed by the state Supreme Court. Pension-reform advocates have made progress in the past in addressing this rule (e.g., the 2012 passage of a San Jose reform that rolls back benefits for current employees) only to be rebuked in court. And even if it stands, the decision will leave no clear roadmap. How much can future pension benefits be cut or how much more can employees be expected to contribute before it becomes “unreasonable”?

It’s unclear, but as a Santa Rosa Press-Democrat editorial from last week opined, the “court ruling opens a path for pension reform.” That’s not a freeway, but it’s a way forward that reformers didn’t have before the 1st District Court of Appeal’s decision.

Steven Greenhut is Western region director for the R Street Institute. He is based in Sacramento. Write to him at sgreenhut@rstreet.org.

Recreational pot in trouble?

Good morning and happy Tuesday. Today we have lots of interesting bits of news, including about how there are signs suggesting the effort to legalize recreational marijuana may not be the slam dunk that it appears to be. 

On social media, the assumption is that come November, California is going to be the latest and the biggest state to allow recreational adult marijuana use. Advocates of Proposition 64, the California Marijuana Legalization Initiative, certainly appear optimistic.

However, this optimism may be premature. Polls show younger voters, including Republicans, are strongly predisposed to support proposals such as the Nov. 8 ballot measure. But voters who haven’t made up their minds may be dismayed upon learning what’s happened in Colorado since voters there approved pot legalization in 2012.

CalWatchdog has more. 

In other news:

• “A decade after California voters were promised $400 million worth of parks in some of the state’s poorest neighborhoods, an Associated Press review finds fewer than half of the 126 projects that received the money have been built, as Democratic lawmakers push to add another $1 billion to the program,” writes the AP.
• “Relocation of Highway 99 in Fresno, a key part of the bullet train project, is over budget, behind schedule and will cost millions of dollars more to complete,” reports the Los Angeles Times.
• “Back in 2005, just 1,841 retirees pulled down more than $100,000 a year in pension checks from the California Public Employees’ Retirement System. A decade later, membership in the so-called $100K Club had swelled by nearly 20,000 souls,” reports The Orange County Register.
• “Major labor, environmental and tenants groups have walked away from negotiations over Gov. Jerry Brown’s plan to streamline approval for housing developments that include setting aside a percentage of units for low-income Californians, further imperiling the plan’s chances of passing this year,” reports the Los Angeles Times.

Assembly:

• A few hearings.

Senate:

• Hearing on deal casino compacts negotiated by the Brown administration, reports The Sacramento Bee. 

Gov. Brown:

• No public events announced. 

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