One has a shot at passing. The other doesn’t.

Senate Bill 400 would require the California High-Speed Rail Authority to use at least 25 percent of its cap-and-trade funds for projects to reduce or offset construction emissions. The bill comes as two groups have brought legal challenges to the state’s cap-and-trade program and the state’s plan for measuring emissions from the high-speed rail project. The bill traces its origins to the powerful Hispanic caucus and is expected to pass in the largely pro-rail legislature.

SB400, introduced by Sen. Ricardo Lara, D-Bell Gardens, has been approved in the Senate and is moving through committees in the Assembly.

Last year the Legislature appropriated 25 percent of the state’s revenues from cap-and-trade auctions to the high-speed rail project. SB400 would reduce construction funds to 18.75 percent of the revenues, with the remainder going to “reduce or offset greenhouse gas (GHG) emissions directly associated with the construction of the high-speed rail project and provide a co-benefit of improving air quality,” according to a Senate analysis of the bill.

The analysis suggests that this bill might save the cap-and-trade program, which is being challenged by two lawsuits.

Lawsuits against AB32 and HSR

A suit brought by the Pacific Legal Foundation, which favors limited government and “sensible environmental policies,” claims that the very existence of the cap-and-trade program is an illegal tax. The case is on appeal and expected to be heard in the fall.

A second suit asserts that a state plan to reduce emissions improperly calculated the impact of the high-speed rail project — which the plaintiffs allege will actually contribute to greenhouse gases instead of reduce them.

The plaintiffs in their complaint say that the state’s estimates “were neither real, permanent, quantifiable or verifiable but were instead illusory because in reality the construction of the (rail) project would result in a significant increase in (greenhouse gas) emissions prior to 2030 or beyond.”

The suit is being brought by the Transportation Solutions Defense and Education Fund, a nonprofit environmental group.

Cap and trade bailing out high-speed rail project

The rail project is not slated to be operational by 2020, which is the deadline in state law to reduce the state’s greenhouse gas emissions to 1990 levels.

The Senate analysis points out that state law restricts the use of cap-and-trade funds.

“The Constitution requires that a clear nexus exist between an activity for which a mitigation fee is used and the adverse effects related to the activity on which that fee is levied. …

 

“It is important that legislation allocating cap-and-trade revenues ensure that the funds are being used to reduce (greenhouse gas) emissions. If opponents of the program can convince the courts that the revenues are not being used appropriately, the entire cap-and-trade program could be jeopardized.”

The analysis hints that the rail program’s use of cap-and-trade funds, as currently outlined, doesn’t meet legal standards, and that passage of the bill would shore up the legal standing of the program and help the state win the pending court cases.

“If opponents of the program can convince the courts that the revenues are not being used appropriately, the entire cap-and-trade program could be jeopardized,” the analysis reads.

The cap-and-trade program is estimated to bring in as much as $2 billion a year in fees.

Further analysis on SB400

An analysis in the Assembly shows that some lawmakers remain sympathetic to the aims of the bill but not as positive on its potential effects.

The bill would significantly drive up the cost of the rail project by reducing its only stable revenue stream, according to a summary of transportation committee members’ concerns. This could threaten completion and jeopardize any future environmental benefits.

“The project is already sorely underfunded,” the analysis states.

The analysis also points out that SB400 is intended to offset environmental impacts from construction but does not impose any requirement that the redirected money, approximately $125 million, be spent in communities near the construction zones. The bill could result in “millions of dollars being spent in Southern California, hundreds of miles from the high-speed rail construction sites.”

In other words, it could result in a money grab for other transit projects in Southern California, not the “disadvantaged communities” proposed in the bill.

Republicans in the Legislature have been unsuccessful for the past three years with more than a dozen bills that attempted to manage, change or end the high-speed rail program. All failed on party-line votes to get out of committee. In fact, Rep. Jim Patterson, R-Fresno, has a graveyard with little tomb stone markers set up in his backyard for failed bills he’s introduced on various subjects including high-speed rail.

Despite the fact that Senate Bill 3 has bipartisan sponsorship, from Sens. Andy Vidak, R-Hanford, and Rudy Salas, D-Bakersfield, it’s expected to suffer a similar fate.

The bill would direct the Legislature to approve putting high-speed rail back on the ballot. It would redirect high-speed rail funds to retiring the debt incurred from the issuance and sale of bonds. It would also require that unsold bonds use half the net proceeds for funding repair and new construction projects on state highways and freeways. The other half would be used to fund projects on local streets and roads.

Ed Mendel of calpensions.com explained how one key reform was gutted.

 A bill that started out as Gov. Brown’s proposal to restructure the CalPERS board emerged from the Legislature last week as a more modest change: a requirement that CalPERS board members receive 24 hours of education in pension fund operations.

A 12-point pension reform proposed by Brown in October 2011 called for more “independence and expertise” on the CalPERS board. The governor’s appointees would have doubled to six, matching the number of labor representatives.

“In the past, the lack of independence and financial sophistication on public retirement boards has contributed to unaffordable pension benefit increases,” said No. 11 of the governor’s 12-point plan.

Pension-spiking was target of move

Brown’s goal was plain: to bring more honesty to board decisions about pensions.

The “unaffordable” pension increases were not identified. But the reference may have been to two bills backed by the powerful CalPERS board, which sets annual rates that must be paid by government employers in the giant retirement system.

When a booming stock market gave pension funds a surplus, a CalPERS sponsored bill, SB 400 in 1999, sharply boosted Highway Patrol pensions and authorized the same pension formula for local police, which many obtained through bargaining.

For state workers, SB 400 rolled back a pension cut given new hires earlier in the decade. Low pensions earned under the old plan could be boosted through a “buy back” with increased contributions. Retirees received a 1 to 6 percent pension increase.

A second bill, AB 616 in 2001, authorized three escalating pension formulas for local governments in CalPERS and 20 county systems operating under a 1937 act. The top formula, “3 at 60,” provides 120 percent of pay after 40 years of service at age 60. (See table at bottom)

The CalPERS board, rejecting the advice of its chief actuary, encouraged local governments to boost pensions authorized under AB 616 by offering in 2001 to inflate the value of their pension fund investments to help cover the increased cost.

Revising a bill from changing the board’s makeup to requiring education is pretty drastic.

CalSTRS exempted from key pension reform

But it’s still not as much of a symbol of failure as Brown’s other retreat. His 2011 pension manifesto’s key provision was that the state move toward a retirement-benefit funding structure in which public employees and taxpayers roughly shared costs.

The theory was that if employees had to share equally in the huge cost of their pensions, they’d be more amenable to plans to reduce them going forward so as to increase their take-home pay.

But when it came to enforcing this provision — and triggering a fight with the CTA and the CFT — Brown sized up the Sacramento landscape and doesn’t appear to have even tried. The provision in his 2014-15 budget shoring up funding for the California State Teachers’ Retirement System requires that taxpayers foot 90 percent of the bill and teachers just 10 percent.

It’s an “Animal Farm” thing, you see. Some public employees are more equal than others.

Brown’s failure on these fronts is one more reminder that even a popular governor can’t shake up a system in which unions wield such entrenched power. A ballot initiative is the only way to force the sort of changes the governor sought — and that would face monkey-wrenching from the Attorney General’s Office.

This sad state of affairs doesn’t feel like union power-flexing. It feels more like union occupation.

By Dave Roberts

SB 400, by Sen. Hannah-Beth Jackson, D-Santa Barbara, is designed to help the victims of domestic violence. But it’s really a “jobs killer,” according to the California Chamber of Commerce, because it “increases the burden on California employers to conduct business and exposes them to a higher risk of litigation.” The bill was approved by the Assembly Labor and Employment Committee last week and it’s now being considered by the full Assembly.

Jackson sees it as a victim saver rather than a jobs killer. She told the committee on June 12:

“SB 400 would prohibit discrimination or retaliation against an employee because of that employee’s known status as a victim of domestic violence, sexual assault or stalking. It would also require simple reasonable accommodations for the workplace safety of a victim of these three potential acts of violence against them. Such as changing the employee’s telephone extension or moving them to a different work station in the office or implementing a workplace safety plan in response to domestic violence, sexual assault or stalking. A study by the Legal Aid Society-Employment Law Center, one of our co-sponsors of this measure, held that nearly 40 percent of survivors of these crimes in California reported that they had either been fired or feared termination due to this violence that had been posed against them.”

There is no link to the study, or even a mention of it, on the LAS-ELC website.

Example

Julia Parish, an attorney for LAS-ELC, described to the committee one example of a fired domestic violence victim:

“One of our clients was fired from a job that she had had for 14 years — she was a model employee — after she disclosed that she was a victim of domestic violence. She was afraid for her safety, and she bravely decided to tell her employer this information. She worked with them in order to obtain a workplace restraining order that protected everyone in the workplace as well as herself. And testified in court to assist her employer with this process. But instead of allowing her ever to return to work, they terminated her. She explained, ‘I cooperated with the police investigation, talked to victims’ advocates and testified in court to obtain a workplace restraining order to protect the clients, staff and myself from harm. At the same time I wanted to return to work, doing something that I loved.’ She went on to express how it felt when she was terminated by her employer simply for having disclosed that she was a victim of domestic violence. ’I was treated like a criminal. Never allowed to return to my office or have contact with my dear friends and colleagues, and never allowed to say goodbye to the clients that I worked with. My whole world turned upside down. I felt betrayed by my employer when I needed support at the most vulnerable time of my life. I’m asking the representatives and lawmakers to help women victims in domestic violence situations to feel safe, supported and not made a victim all over again at work. I don’t want another woman to have to go through what I went through….’

“Survivors of domestic violence, sexual assault or stalking deserve fair and equal treatment in the workplace. This is a challenging situation for so many of them. Refusing to provide a reasonable safety accommodation upon an employees’ request, often forces a victim to choose between their own safety and, frankly, sometimes the safety of the workplace at large and financial security: losing that job or quitting that job because there’s no assurance that efforts have been made to try to secure their safety.”

‘Victims’ could be lying

While no one takes lightly the reality of domestic violence, there is also the possibility that an employee claiming to be a victim of domestic violence could be making it up. If requested, the employee would only have to provide a note from a “domestic violence advocate” or “counselor” attesting to his or her victimhood status. But the employee would not have to provide an arrest report, a restraining order, doctor’s note, judicial ruling or any court documents affirming that the employee was actually being abused or stalked.

That concerns Assemblyman Luis Alejo, D-Watsonville, who has worked as an attorney representing litigants seeking workplace violence restraining orders:

“These are very tough, emotional issues. How do you create a bright line for employers? So they are not having to make judgments, figuring out how long is an accommodation going to last. They are very difficult issues. In these cases, many of them occur in the middle of very troubling relationships full of conflict, and there’s allegations on both sides. Just because somebody makes an allegation doesn’t necessarily mean that there is domestic violence going on. That’s why a judge hears both sides, looks at the evidence and makes a determination whether there’s actually domestic violence and whether it merits a restraining order. When these cases do happen, what’s the bright line for employers? These accommodations could take place when an employee comes with a restraining order and provides a copy to the employer. A determination has already been made by a judge that there is actually domestic violence or a threat, or stalking, whatever it may be. But then it tells the employer exactly when is the restraining order in place, who is it against. It’s a very clear rule. For an employer not to have to make any determinations, knowing that there is an order in place and that this order is going to go on for a year, or three years or five years, it gives them a very reasonable time frame. And it gives employers notice that a judge made a determination that there was in fact domestic violence going on.”

Jackson dismissed his concerns:

“As a recovering lawyer myself, I can understand that if we were asking for some really significant acts by the employer. Here we are just asking for an accommodation at a workplace. Not who’s right, who’s wrong. They don’t even have to actually necessarily know who is the person that is doing the stalking or whatever. It’s just simply you have someone who says, ‘Look, I’ve been the victim of a sexual assault.’ Sometimes the victim doesn’t necessarily want to share a whole lot more information. But just simply says to the employer, ‘I’ve been through this situation, and I would really appreciate a reasonable accommodation like moving to a back office or having a phone extension line changed.’ Just something like, ‘Could you walk me out at night, I’m a little afraid to go out in the dark.’ We don’t want to create a burden on the employer. If there were going to be a burden on the employer, then I could understand having people come in with a restraining order and so forth. My sense is that, in some of these situations, there may not necessarily have been an order obtained. We just want people to be comfortable and not afraid when they’re in the workplace. So that they can also work as well as make a living, rather than being re-victimized by becoming unemployed again.”

That did not satisfy Alejo, who replied:

“But then your bill would have an employer make an accommodation just based on an allegation. Anybody could say there were threats without there being any evidence. And it would automatically initiate the accommodation to take place without any determination made by anybody. You’re asking that, solely on the allegation, that there’s domestic violence or a threat or stalking without any other evidence whatsoever, you have to try accommodation. What I’m saying is, as a legal standard, it’s much clearer when there’s actually a judge who reviewed the facts and takes that away from the employer having to make that determination. Because the judge would have seen that there’s enough facts behind this case that they do issue a restraining order. And all the employee has to do is come back, give a copy to the employer and say, ‘I need accommodation because a judge, after reviewing the facts of my case, made a determination that there’s enough there that merits a restraining order.’ And that’s the kind of bright line that I think I could be comfortable with supporting this bill.”

False claims of domestic violence

Alejo’s concerns may be well founded. Fraudulent accusations of domestic violence are common, according to some family law attorneys. Of course, hard data is difficult if not impossible to come by, given the punitive consequences for faux-victims admitting perjury.

“We see false claims of domestic violence in family courts every day,” writes attorney Robert Franklin on his website. “Courts have been telling us that claims of domestic violence are routinely made to gain an advantage in custody cases. That’s another way of saying that many of those claims are made up. But, of course, those claims will continue to be made for the good and sufficient reason that they work. They achieve the desired result — separate the other parent (almost invariably the father) from the child. Once that’s accomplished with a temporary order, it becomes much easier to make sole maternal custody permanent.”

Pasadena attorney Mark Baer asserts on his blog that false allegations of domestic violence are epidemic:

“An allegation of domestic violence is made in approximately 25 percent of divorces. Moreover, such allegations are more common in relationships involving children. It is estimated that as high as 80 percent of allegations of domestic violence and child abuse are completely false. What would cause someone to make a false allegation of domestic violence? It is widely recognized that false claims of domestic violence are often made in divorce and paternity actions in order to gain a legal advantage. It can be of no surprise that child custody tends to be awarded to the accusing parent. Why would someone make such false allegations against the person they once loved, considering that the claim stigmatizes and humiliates the person and may require the expenditure of substantial sums to defend against? When a relationship ends, the emotions involved are anger, hurt, frustration, rage and bitterness. In fact, when a couple with children together are breaking up, they almost cannot help themselves from somehow using the children as weapons or pawns.”

SB 400 drags employers into these messy, ugly divorce and custody battles in which allegations of domestic abuse, sexual assault or stalking are made, even when those allegations may be false.

Coworkers could be endangered

And, while SB 400 provides protections for true domestic violence victims, it does nothing for the coworkers of those victims. It could actually place them in danger if their coworker’s attacker attempts to assault or shoot the victim in the workplace. Moving a victim’s desk to the back of the office, which Jackson said would be a reasonable safety accommodation, could actually place coworkers in greater danger as it would force the attacker, who could be wielding a knife or gun, to move through more of the office in pursuit of the victim. It in effect turns the entire staff into potential victims of violence.

SB 400 would allow professed domestic violence victims to sue if they don’t feel their employer has reasonably accommodated them. That, of course, would increase the potential for more litigation in this litigious state’s underfunded, overburdened judicial system.

Those concerns were cited by then Gov. Arnold Schwarzenegger in his veto message for a similar bill, SB 1745, in 2006:

“California employers are currently required to take reasonable steps to provide a safe and secure workplace for all employees, including a duty to adequately address the potential for workplace violence.  Because the precise employee rights and employer obligations under this bill are not defined, the combination of existing law and this bill would place employers in an untenable position. For instance, if an employer determines that removing an employee from the workplace is necessary to provide a safe workplace and keep other employees safe, the employer may very well be sued for violation of the public policy established by this bill. On the other hand, if the employer determines an employee must be allowed to continue performing duties in the workplace in order to comply with this bill, the employer may face litigation arising from injuries sustained by other employees if workplace violence occurs…. However well-intentioned or worthy of consideration, this bill would create conditions that can only be resolved through the courts at great expense to employers and employees alike.”

On June 12, the committee voted 4-1 (Alejo and one other committee member abstained) to send SB 400 to the Assembly Judiciary Committee. It earlier had been approved by the state Senate, 21-12.

By Chris Reed

On Monday, the day that finally saw criminal charges filed over CalPERS’ brazen pay-to-play bribery scheme, there were signs that some Democratic state lawmakers finally are figuring out that believing California’s pension status quo is ridiculous isn’t just partisan right-wing posturing.

Ed Mendel, one of a handful of elite reporters on pension machinations, has the scoop at Capitol Weekly:

“Assemblyman Marc Levine, D-San Rafael, an upset victor last fall in a new election process, has introduced a bill containing Gov. Brown’s stalled proposal to restructure the CalPERS board, adding financial expertise and loosening labor control.

“The proposal to change the board, which needs voter approval because of a labor-backed initiative in 1992, would double the number of gubernatorial appointees to six, matching the number of labor representatives.

“’In the past, the lack of independence and financial sophistication on public retirement boards has contributed to unaffordable pension benefit increases,’ said the 12-point pension reform proposed by Brown in October 2011.

“The proposal said pension boards need members with ‘independence and sophistication’ to ensure that retirees receive promised benefits ‘without exposing taxpayers to large unfunded liabilities.’”

‘Unsophisticated’? Or union double agents?

Journalistic decorum requires Mendel to pretend the problem is a lack of sophistication on board members’ part, not the fact that they are union tools. Why is this problematic? More from Ed:

“CalPERS sponsored legislation, SB 400 in 1999, that gave state workers a major retroactive pension increase. A deep pension cut in 1991 was rolled back. Retirees received a 1 to 6 percent increase in their pensions.

“Highway Patrol pensions increased 50 percent, setting a costly bargaining benchmark for local police and firefighters that critics say is unsustainable. All of this, CalPERS erroneously said, would be paid for by investment earnings, not costing taxpayers ‘a dime.’”

Here’s a factoid that goes a long way to explain why California is so screwed up. Who is the president of the CalPERS’ Board of Administration?

Is it a UC Berkeley economist? A CEO of a thriving Califoria firm? A respected former statewide official considered an independent straight-shooter?

Nah.

It’s this guy.

“Mr. Feckner is the Past President of the California School Employees Association. He also serves as an Executive Vice President of the California Labor Federation.”

How insane that a guy with such preposterous and extreme conflicts of interest is CalPERS’ board chairman.

How … California.

By Chris Reed

So CalPERS is found to allow ridiculous, outrageous double-dipping by salaried employees that boosts their pay (and probably their pensions), and faces sharp criticism. So when the giant pension fund responds, does it do so with an apology? Of course not, according to the Sacramento Bee:

“CalPERS has decided to immediately suspend a program that allowed some salaried managers to moonlight in-house and take hourly pay, saying that the controversy surrounding the practice has become a ‘significant distraction’ to its work.”

If CalPERS wouldn’t apologize for the propaganda it put out to get SB 400 passed in 1999, starting the retroactive pension spiking that is now destroying local governments, why would it apologize for shady behavior now?

If CalPERS’ upper ranks for years engaged in gross corruption even as CalPERS offered itself up as a moral force for socially conscious investing, why would it notice the dissonance between the high opinion the agency has of itself and the way it looks to the rest of the world now?

If CalPERS thought it was an appropriate use of public funds to build itself a 560,000-square-foot, $153 million tribute to its glory and importance, why would it be expected to behave prudently with taxpayer money now?

If CalPERS reacted to a factual analysis questioning its investment history by having its high-paid lead flack engage in a juvenile tirade against the Bloomberg reporter who wrote the analysis, why would it be classy now?

If CalPERS spent years denying the pension crisis was real, why would it show any common sense now?

CalPERS’ massive headquarters is probably visible from outer space. But so is its bizarre combination of self-congratulation, incompetence and obliviousness.

The California Public Employees’ Retirement System: Always assume the worst. Don’t let any “significant distraction” prevent you from understanding that it’s the CalPERS way.

By Chris Reed

The city of San Bernardino’s defiance of CalPERS’ demands for payment will be remembered as the first in a very long line of defiant acts from local governments in California as budgets that don’t add up force local officials to make tough and often unprecedented decisions. For local officials, telling Sacramento to take a hike is a much easier call than taking on those who benefit from city compensation policies or who benefit from city services.

Given CalPERS’ central role in so many local governments’ pension nightmares, there is a perverse sense of karma at play in San Berdo’s using bankruptcy protection to avoid its overdue pension payment. The decision of a judge to side with the city in its maneuvering will absolutely prompt other cities to copy it.

But a new act of defiance is more complicated. The city of Santa Ana’s decision on Friday to stiff the state on the $56 million it owes for redevelopment funds that state grabbed in 2011 has no legal cover such as a bankruptcy filing.

Redevelopment is a farce that deserved killing. The city of Santa Ana is poorly run. So was its redevelopment agency. So it’s tough to side with Santa Ana Mayor Miguel Pulido, a very interesting fellow.

But the state government has been preying on local governments for so long when times are tough that it’s impossible to root for Jerry, Darrell, John A. and Monsieur Maviglio. And given that a redevelopment refund may help the state to keep the bullet-train fiasco alive, I’ve decided to root for Santa Ana.

There is also this: An era of local governments refusing to honor contracts will underscore what a disaster California has become since union power metastasized after Gov. Pete Wilson left Sacramento in January 1999.

Meanwhile, no one tell Politico’s crack staffers. They’ve bought Jerry Brown’s spin that his tax triumph means he’s a genius. Groan. Par for the course for East Coast saps.

By Chris Reed

The California Public Employees’ Retirement System is a piece of work. For years, it has downplayed the pension crisis, ignored its central role in the crisis by encouraging a 50 percent retroactive giveaway to all state employees in 1999, and depicted its critics as hateful ideologues, not people who understand basic math.

So the governor got through a fairly sweeping pension reform, which is the best proof possible in Democrat-dominated Sacramento that the problems are huge and unavoidable — and CalPERS is still pretending it is one of the good guys in the pension fight. The method: depicting attacks on CalPERS for its many mistakes and for its horrible counsel to local governments as an attack on innocent, aged retirees:

CalPERS officials say retirees are being scapegoated for problems caused by foolhardy local officials who overspent their budgets and Wall Street bondholders who should have understood that lending money to municipalities carries the risk of not getting repaid. … 

In 1999, CalPERS persuaded the Legislature to substantially increase state worker pensions, saying the costs could be borne by booming investment returns. CalPERS predicted the state’s annual pension contributions would remain at $766 million or less for at least a decade. Many local governments responded by boosting their own workers’ pensions.

When the investment markets sagged and the state’s annual contribution to CalPERS zoomed past $3 billion, Republican lawmakers and others began attacking benefit levels as too generous.

CalPERS was quick to defend itself, noting that the average pensioner receives under $30,000 a year and shouldn’t get blamed for weak investment results.

Third in a series on public pensions. The first is here and the second here.

Oct. 5, 2012

By Mark Cabaniss

On Wednesday, the city of Atwater declared a fiscal emergency, putting it on the path to become the fourth California city to declare bankruptcy this year, joining San Bernardino, Mammoth Lakes and Stockton.  Unfortunately, these four cities seem to be just the tip of the iceberg.  Many other California cities are rumored to be heading for bankruptcy as well, including, at least according to former mayor Richard Riordan, Los Angeles.

The common thread to these bankruptcies is  current retiree pension obligations, which were granted during the go-go years of the stock market and property bubbles, but which have proven dramatically, unbelievably unsustainable during periods of economic contraction, such as the one we are caught in now. For example, Gov. Gray Davis’ infamous SB 400, which in 1999 retroactively boosted state worker pensions, implicitly assumed that the Dow Jones Industrial Average would be at 25,000 by 2009.  (As of 9 am Friday, it is at 13,637.)

One reason that cities have chosen bankruptcy as a means of restructuring pensions, rather than choosing the more direct route of simply attempting to alter current pensions, is the widespread assumption that current public employee pensions are legally untouchable.  However, even though widespread and oft-repeated, this assumption may be wrong.  The only way to find out is to test it in court.  Such a court battle would, I believe, make plain the reality of the situation, which is that what seems to be a “complex legal issue” is in reality a political issue — nothing more, and, unfortunately, nothing less.

The naked political issue can be stated different ways.  In the “social justice” formulation, pension proponents state their argument as, “Is it right for government to just tear up its debts to retirees that have worked their whole careers for that money?”

“Social justice”

In their own version of the “social justice” formulation, pension opponents frame their argument as, “How much money must one group of people give to another group of people, when times are unexpectedly tough, as now?” Or, “Is it right for some politician to sell my children into slavery just to get himself elected?”

Since the “social justice” formulations are so fraught with emotion, simple numerical tautology may be the best and most honest way to frame the argument:  “If the government does not have the money to pay all pension obligations, must the government still pay all pension obligations?”

Obviously, this is a very contentious political issue. But if we frame it as a political issue, the solution presents itself, because it can then definitionally only be solved by doing what is politically possible in the first place, which means that any solution will have to get a majority of people to back it.  Therefore, one possible way to approach the pension crisis is to cut only the very highest pensions, those more than $100,000 per year which, according to CalPERS, only 2 percent of current retirees receive.

Currently, Social Security benefits, to which you have no contractual rights, are capped at a maximum of $30,156 per year. Implementing a pension cap of $100,000 per year would put the 2 percent in the position of arguing that they just can’t live on over three times as much money as everyone else, an argument to which the voters, the 98 percent, might not be sympathetic.

Pension abusers

To their credit, CalPERS has been taking the politically admirable step of going after some of the very worst pension abusers, such as former Bell City Administrator Robert Rizzo (former pension $650,000 per year; new pension $50,000 per year); former City Manager of Vernon Bruce Malkenhorst (former pension $540,000 per year; new pension $115,848 per year) and Scott Plotkin, former Executive Director of the California School Boards Association (former pension $205,000 per year; new pension $72,288 per year).

Nonetheless, such symbolic sacrifices will not be enough to make a dent in the problem. To have an effect, governments will have to make an across-the-board cut in current pension payments, by, for example, simply stopping the payment of benefits in excess of $100,000 per year. If they do that, they will soon find themselves in court, where the legality of the proposition “pensions are contracts and contracts are sacred” will be put to the test.

In evaluating this claim, courts will look to prior cases, in which governments have altered or torn up other contracts. They won’t have to look far; recent governmental actions in California show the government’s ongoing belief that it absolutely has the power to alter or amend or tear up contracts as it sees fit, to promote the governmental objective of ensuring the health, safety, and well being of the citizens.

Ironically, one of the warriors currently working hard to establish the legal precedent that, yes indeed, governments can tear up contracts, is none other than Lt. Gov. Gavin Newsom. He Newsome recently wrote a strongly worded letter supporting the idea of local governments using eminent domain to seize underwater mortgages at below-contract prices, and then resell them to the homeowners at the lower prices.  The idea is that government has an interest in stabilizing the housing market, and thereby stabilizing tax revenues.

Who would lose under the plan to use eminent domain to seize mortgages?  Obviously, the current owners of the mortgages, such as banks and funds owning mortgage-backed securities, would lose. But aren’t these mortgages contracts, and aren’t contracts sacred?  Yes, but some contracts are more sacred than others.

So how do you tell which contracts are sacred?  If the highest pensions were to be cut, how would the defenders of the 2 percent top pensioners explain the contradictory proposition that government can tear up some contracts when it feels like it and yet is absolutely forbidden to tear up other contracts, such as current pension benefits?

Although many lawyers will construct various arguments differentiating the tearing up of private mortgages from the tearing up of public pensions, perhaps the argument is best collapsed down to its most basic: the distinction between public contracts and private contracts. Stated simply, the defenders of the 2 percent believe that it is okay for the government to tear up contracts if doing so negatively affects the rights of private citizens; but it is not okay for the government to tear up public contracts if doing so negatively affects the rights of public employees.

In other words, they believe in an explicitly two-tiered society: government employees have inalienable rights, non-government employees have alienable rights. To put it even more simply, what they really believe is this: contracts which protect my money are sacred; contracts which protect your money are toilet paper.

Will this argument be a winner?  For myself, I wouldn’t want to make it.

First on a series on public pensions.

Sept. 20, 2012

By Mark Cabaniss

The politicians in charge of “doing something” about the ongoing California pension debacle like to play a little game. It goes like this:  They decry the high costs of pensions that have already been granted, pretend to want to do something to rein in future pension obligations, and then turn their hands up and shrug that there is really nothing they can do about current pensions (including, cough cough, their own) — since, after all, pensions are contracts, and therefore they are protected by the Constitution.

But there is a problem with this self-serving assertion:  Even if politicians’ pensions are contracts protected by the Constitution, they are still breakable.  In pretending otherwise, the politicians are lying.  In other words, merely noting that pensions are contracts protected by the Constitution is not the end of analysis, but only the beginning, for all contracts are breakable, and all constitutional rights are subject to limits.

When, not if, state and local governments begin dishonoring the highest public pensions, there will be, obviously, a huge blizzard of litigation.  And when those cases are heard, some of the following basic concepts of contract law may be applicable.  (Note: My purpose here is not to write a treatise on contract law, nor to predict the course and outcome of future litigation.  My purpose is simply to show the lay person that there are several possible theories under contract law under which governments might be able to reduce the highest existing pensions rather than go bankrupt.).

All contracts are breakable, if you have a legally valid reason for breaking them.  For example, if a used-car salesman sells a car to a 10-year-old, the contract can be broken on the basis that the 10-year-old didn’t have the legal capacity (age) to sign a binding contract in the first place.  And all constitutionally protected rights, including contract rights, are nonetheless limited by finite resources. For example, your right to a fair trial does not mean that the government has to hire the entire Harvard Law School faculty to defend you in your shoplifting case. Society can’t afford it.

Regarding public pensions, the best and most obvious legal ground under contract law to get out of onerous pension obligation may be mistake of fact.  The legal rule goes like this: If you make a contract while holding a belief that isn’t true, you can get out of the contract.  For example, you make a deal to buy a Picasso for a million dollars, but it turns out that the painting is not a Picasso.  You can get out of the deal.  (Under the mistake doctrine, both sides have to be making the same mistake.  If only one side is mistaken and the other side knows the truth, you may still be able to get out of the contract under a different theory, such as fraud; more below.)

Pension spiking

Regarding high public pensions, the mistake that was made was simple, fundamental, and huge:  the supersize pensions that began to appear in the 1990s were justified on the grounds that pension funds “would” generate average annual returns of 7.5 to 8 percent or more into the future, forever.  This has turned out to be, ahem, not true.

The infamous SB 400, that then-Gov. Gray Davis signed into law in 1999, and which gave retroactive pension raises to state employees, including already-retired state employees, was sold by the California Public Employee Retirement System to the Legislature with lie after lie after lie — or “mistake” after “mistake” after “mistake,” if you prefer.  The CalPERS “analysis” that was “presented to” (perpetrated on?) the Legislature implicitly assumed that the Dow Jones Industrial Average would be at 25,000 by 2009, and 28,000,000 by 2099.  On the morning of Sept. 20, it is at 13,556.

Proving the existence of and reliance on the mistake(s) ought to be a lark. After all, a great deal of time, money, and work went into creating the rosy projections that were used to bamboozle government into granting the unsustainable pensions.  Were the mistakes made regarding future stock market returns mutual?  Well, the government certainly made a mistake on behalf of the taxpayers.  How about the public employees?  Who knows?  However, as a practical matter it is very hard to see how they would go in to court and say, “We were not mistaken as to future stock market returns.  We knew full well that the projections were a joke and that CalPERS was lying.”

Performance

The second big legal ground to get out of pensions is impossibility of performance.  If events make it impossible for you to perform the contract, then you can get out of it.  For example, you contract to sell your car, but before you deliver, it is destroyed by lightning.  Regarding pensions, the argument would be simply that the state and local governments have gone bankrupt since the pensions were granted.  In that event, the pensions could be modified to match the ability of government to pay them.

The third possibly applicable doctrine is known in contract law as consideration:  for a contract to be legally binding, there has to be something of value promised, on both sides.  For example, if I promise to give you a million dollars, and you promise to take three breaths between the hours of 1:00 p.m. and 2:00 p.m. next Tuesday, there is no mutuality of consideration, since I am giving something up and you are not.  The contract is voidable.

In the public pension realm, one obvious place where the consideration doctrine would come into play would be SB 400, the 1999 retroactive pension increase.  Since some of the workers who received retroactive pension increases were already retired, they obviously could not promise or give anything at all in exchange for the money, and indeed they did not.  Therefore, at least in regard to these already retired workers, there was a complete absence of consideration.  (A similar argument can be made not on contract law, but on Article 16 Section 6 of the California Constitution, prohibiting the giving away of public funds.)

A fourth possible ground for breaking managements’ pensions is fraud: If CalPERS or any of the other groups pushing big pensions knew that the pensions would not be self-funding and would require massive infusions of taxpayer cash, and they did not divulge that information, then any such pensions obtained on the basis of such fraudulent disinformation would be voidable.  Moreover, widespread and undisclosed self-dealing might qualify as fraud. For example, CalPERS officials, as public employees, themselves benefitted from the huge pension increases granted in 1999, and they did not disclose to the legislature that they would benefit.

Unconscionability

Another contract doctrine which might be used to break onerous pensions is “unconscionability,” which means simply that a contract is so one-sided that it is just unfair to enforce it against the disadvantaged party.  While normally this doctrine is applied to consumer contracts, some of the factors courts look to in weighing claims of unconscionability — such as whether the parties had equal bargaining power, whether the contract makes a one-sided allocation of risk (for example, where the taxpayers have to pick up the tab, all the tab, in the event that the Dow does not hit 25,000 by 2009, ha-ha) — are applicable to public employee pensions, as well.

Finally, one more area of contract law might be used to break the pensions: lack of capacity to contract.  If you are drunk or insane, for example, you cannot sign a contract to buy a house.  In the public pension context, the lack of capacity would be a little more subtle (maybe; hopefully).  For example, if you are under duress, being threatened to get you to sign a contract, that could qualify as a lack of capacity, since you lack free will.

Steven Greenhut and others have written recently about bullying tactics, including the attempt to frame a city councilman for DUI, being used in Costa Mesa to get local officials to see things the public employees’ way.  Testimony about such incidents could nullify the contracts obtained thereby.

Similarly, if you were being bribed to sign a contract, that too would qualify as a lack of capacity, since you would not be acting in your capacity as a fiduciary to the public, but rather in your private capacity as a criminal.  Another way to look at it is that if you are a manager sitting at a table “negotiating” a pension increase that will benefit not just the parties across the table but yourself as well, you may not be acting within the scope of your employment as a public official, but instead acting on your own behalf.  Therefore, you do not have the legal capacity to act to bind the public to pay for your self-dealing little scheme, since you are not at that moment acting as a public official.   Needless to say, were the courts to start taking bribery and self-dealing seriously, they could nullify a lot of contracts.

To sum up: There are a great many helpful doctrines under contract law that could be used to break onerous public pensions.  These legal arguments are strongest against the very top pensions, because they are the most unconscionable, they are the least possible to continue to pay, and they are the most likely to have been the result of self-dealing or bribery.

Therefore, the legal grounds for attacking the biggest pensions, managements’ pensions, coincide nicely with the public policy grounds of wanting to go after only the largest, most abusive pensions, and not the pensions of the retired school teacher or janitor.

Next article in this series: Breaking public employee pensions: The political path.

Mark Cabaniss is an attorney from Kelseyville. He has worked as a prosecutor and public defender.

By John Seiler

As the smoke and the rhetoric have settled, you know pension reform is weak when: a) It’s criticized by an analysis in the Los Angeles Times. c) Ridiculed by the paper’s liberal columnist George Skelton. And c) praised by the California Public Employees Pension System.

The plan was crafted by Gov. Jerry Brown and Democratic lawmakers in the state Legislature and announced Tuesday. The main aspect of it is that there’s no move — at all — toward 401(k)-style pensions for public employees. Brown’s original 12-point proposal, from October 2011, called for a “hybrid” plan for non-safety employees that would be half continuing the current system, called “defined benefit,” in which benefits are guaranteed by taxpayers; and half a 401(k)-style plan called “defined contribution,” because it would guarantee a certain payment into the plan, but payouts would depend on market performance.

Without such a reform — or, better yet, a 100 percent “defined contribution” plan — any reform is a Band-Aid on a knife wound through the heart.

The Brown-Legislature “reform” does contain some minor good elements, reported the Bee, including “higher contributions from existing employees and imposes pension caps and raises the retirement age for new workers.”

The main problem is that it would save, at most, $60 billion. Yet the state’s unfunded pension liability is $500 billion, according to a Stanford University study headed by Joe Nation, the former liberal Democratic assemblyman but an honest man good with numbers. So the “reform” would fill just 12 percent of the pension black hole, leaving 88 percent unfilled.

Reform 2043

“This should more accurately be called the ‘Public Employees Pension Reform Act of 2043,’ since it will be at least three decades before it even begins to have any effect on state or local finances,” Jack Dean told me; he publishes PensionTsunami.com, which reports on national public pension news.

“I printed out a hard copy of the first summary I received by email and then circled every instance of phrases like ‘for new employees’ and ‘going forward’ — because all of those items fail to address the huge unfunded liability that has already started to drown local governments. Unfortunately, one of those phrases appeared in just about every item on the list.

“Banning retroactive pension increases is a sound move but doesn’t help, either, since most unions have already gotten the maximum increases they sought — all of them retroactive.

“And finally, the University of California system with its huge unfunded liability isn’t even included in the legislation.

“If I were to grade this legislation I’d give it an A for creativity and a D for lack of substantive content.”

Times analysis

The Los Angeles Times’ sober analysis of the “reform” found:

“SACRAMENTO — Even by the most ambitious forecasts, the plan Gov. Jerry Brown and fellow Democrats are championing to contain government worker pensions in California could leave state taxpayers awash in debt to public employees.

“The governor’s plan, announced Tuesday, is unlikely to save cities on the brink of bankruptcy. The relief his proposal would provide to the strained state budget is modest.

“Analysts who study the issue say far more aggressive action — including reduction of benefits for hundreds of thousands of current employees left untouched by Brown’s proposal — will be needed to get runaway retirement costs under control.

“Taxpayers still face the prospect of major bailouts to cover retirement promises made to public employees whether lawmakers pass the plan as expected Friday or not.”