Public Employee Pension Roundup - Illinois, Detroit Update

Here is a summary of key areas in the fight to prevent state and local public employee pensions from bankrupting governments.

Detroit. Judge Stephen Rhodes will rule today at 10:00 a.m. (EST) on whether the city is eligible to enter bankruptcy.  From the LATimes. Most legal experts expect Rhodes to declare that Detroit is eligible for bankruptcy protection.  A ruling to enter bankruptcy would give emergency city manager Kevyn Orr leverage to bargain with unions over pension reductions or to make unilateral changes.  Whether such changes would be constitutional would be decided later.
UPDATE:  The NYTimes is reporting that Detroit is insolvent and eligible for bankruptcy:

Judge Steven W. Rhodes of the United States Bankruptcy Court, found that Detroit was insolvent and that the pension checks of retirees could be cut during a bankruptcy proceeding, a crucial part of his decision

I had not expected that a ruling on pensions to be part of the judge's ruling.  USAToday has some amazing facts about Detroit's situation including the fact that it has three times as many retirees as workers.

Illinois. As I discussed earlier, the state is poised to vote on huge pension reform and the outcome is in doubt.  A vote is expected in both the state House and Senate, also today.  The outcome is clouded because Republicans who normally would vote for such a measure will be helping the state's Democratic governor.  My answer, be known as the party of principle, it works better for you in the long run.  Meanwhile, some Democrats will have to vote against the unions for this to pass.    More detail on the plan:

About $90 billion to $100 billion of that savings is expected to come out of the wallets of state workers, teachers outside Chicago and public university employees. The other $60 billion to $70 billion in savings is expected to come from the state owing less as it seeks to pay down the pension debt sooner — a move akin to a homeowner saving money by paying down the principal on a mortgage more quickly.

UPDATE:  The WSJ is reporting that pension reform has passed the Illinois state legislature.  The Chicago Tribune reported that the House voted 62-53 in favor and the state Senate passed with a 30-24 vote.  In reviewing the details in the Tribune article, I am inclined to agree with Brian Brady, frequent SD Rostra commenter and blogger, that the reform doesn't go far enough.


San Diego. Proposition B remains held up in administrative limbo by the California Public Employment Relations Board (PERB), no relation to Bob Filner.  Craig Gustafson reports in the U-T that the key cost saving measure of Proposition B has been implemented.

. . . the city and its unions reached a deal earlier this year on a five-year freeze on the pensionable pay of current city workers, a provision in the ballot measure that is projected to save the city nearly $1 billion over the next three decades. By agreeing to terms, the city has locked in those savings even if Proposition B is later found to be illegal.

Unfortunately, the city may have to wait until April 2015 to get a ruling.  Implementing remaining pieces of the proposition may become an issue in the mayoral campaign. Meanwhile, the city of San Diego chose to settle a lawsuit where the city tried to get the city employees to be responsible for half of any shortfall in the pension funds investment rate.  I am concerned, as is the U-T editorial board, that this signals a lack of willingness on the city council to tackle tough pension issue.

California. The mayor of San Jose, Chuck Reed, is attempting to put pension reform on the state ballot in 2014.  Reed is a Democrat, like Governor Pat Quinn of Illinois.  The Pension Reform Act of 2014 would give cities more flexibility in changing pension retiree health care rules for future retirees.  The public employee unions are actively opposing the plan of course.

“What they’re trying to do is overturn decades of case law, Supreme Court decisions and change the California constitution to allow public employers to either change, cut or eliminate public employees’ pensions in the middle of their career,” said Dave Low, executive director of the California School Employees Association and chairman of Californians for Retirement Security, a coalition of public employees and retirees.

Exactly.  Of course we need to change decades of case law because these retirement benefits are unsustainable if we are to have government perform any function at all.

Rhode Island. In the mostly Democratic state of Rhode Island, the legislature passed pension reform in 2011 that included a temporary halt in cost of living increases and moving part of the retirement to a 401(k) style plan.  From the state's web site:

The Rhode Island Retirement Security Act of 2011 as Amended includes language that: 

• Suspends  new  cost‐of‐living  adjustments  (COLAs)  to  retirees’  benefits  until  the system is better funded but provides for an intermittent COLA every five years until 80% funded.
• Moves all but public safety employees to hybrid pension plans.  
• Increases minimum retirement age for most employees not already eligible to retire.
• Preserves accrued benefits earned through June 30, 2012. 
• Begins to address independent local plan solvency issues.

Recent complaints about the investment strategy pursued by the state's treasurer do nothing to change the basic impetus for pension reform.  There are allegations by a long time financial industry critic, "Ted" Siedel on inappropriate investing in hedge funds that result in hefty Wall Street fees. (Hedge funds received over half of the fees paid out by the pension fund last year.) However, 401(k) style pensions could reduce the opportunity for abuse, if employees are given the opportunity to choose their own fund in which to invest.  More important to note for supporters of pension reform, the legal struggle over pension reform in Rhode Island continue two years later, with no end in sight.

Lesson learned: You have to be in this fight for the long haul.

What You Should Be Reading

• San Diego blogger W.C. Varones asks if media bias has any impact on economic performance? Fascinating answer.  Maybe it can benefit your market timing.
• The VOSD takes a look at a San Diego couple's questions about the ACA.  It quickly gets complicated.  Note how the question of subsidy isn't fully resolved. 

County Pension System Risks vs 401

The U-T has a great article on changes in the portfolio mix of the San Diego County employee pension fund.  In 2009, the county fired the fund manager after losses totaling $2 billion in 2008.  Assuming that the fund had about $9 billion at the time, that is a loss of 22%, compared withan an S&P loss of 37% for the same year.  Taken in context that doesn't seem that bad.  The new fund managers have shifted the mix to include emerging market debt (Russia, Brazil and Mexico) as well as in hedge funds.  I find the 2 basis point (2%) management fee in the new contract to be too high.  Fees are a drag on performance, and frankly, the county should be shooting for something closer to 1%.   Correction: A commenter on sdrostra pointed out that two basis points is .02%, not 2%. I should have checked the math. The fees compare favorably with the Federal Government's Thrift Savings Plan.   I wouldn't mind hearing from any professional financial planners on this subject.  I am not qualified to say whether the investment strategy is good or not, I just know that above average returns generally do not prevail.

Which brings me to my main arguments for 401 style pensions. Inevitably, these fund managers are going to have a bad year, no matter how well they are doing now, and taxpayers will foot the bill.  The entire system is rigged so that the taxpayer shoulders all the risk, but the fund manager and employee beneficiaries are guaranteed their pay days.  Further, as we have seen with CalPERS pensions, which invested $500 million in green energy in 2010, investments can be influenced by political considerations, again to the detriment of the taxpayers, who are on the hook for losses.

However, under a 401style plan, employees shoulder the risk, but they can adjust their individual pension risk to their personal situation, shifting more to bonds as they approach retirement, for example.  Further, they can protect themselves by managing their own investments and avoiding high fee management firms.  This way taxpayers are protected and employees can be as well.  The counter-argument is that individual employees may not invest wisely, but I think that is changing as financial literacy is more common in the general population.  Should taxpayers take all the risk just because some employees will be foolish?  Further, the union could do an actual service to the employees by providing them with sources of financial advice.

Vocabulary clarification, I use the term 401 style, because government employee defined contribution plans are considered 401(a) plans, not 401(k) which are private sector plans.

Bad Day to Miss the News

I missed the news yesterday and missed some good news stories, which are infrequent enough. (Work and class pressures were too much.)

Pension Reform Measure Stays on on the Ballot, Survives Two Lawsuits

In the first lawsuit, the California Public Employment Relations Board tried to take the almost unprecedented step of preventing a citizen initiative on pension reform to reach the ballot on the thin legal argument that it was actually a city government sponsored initiative, which violates good faith bargaining principles.

In his ruling, Judge William Dato said case law is clear that the court should block a measure only when it is clear beyond a doubt that it is invalid. He said he found no compelling reason to keep the initiative from the ballot when its legality can be still be challenged later.

Exactly. Further, even if city officials were involved in the initiative process, which is what the PERB alleges, they are citizens, too, and have the right to launch an initiative process.

The second lawsuit

. . . filed by mayoral candidate and attorney Hud Collins, claims the measure is a major revision to the City Charter, and can't be put on the June ballot by way of petition signatures.

But Judge Steven Denton ruled that the initiative won't affect the "structure" of city government, so it's a valid amendment to the charter.

So much for pre-election legal challenges. This initiative will clearly pass in June. I think the unions know it, hence the legal wrangling. Get ready for post-election lawsuits to prevent the law from taking effect. If any city employee is reading this blog, could you please explain how this hurts you; I understand how the union bosses get hurt, but how does the union member get hurt.

Comprehensive Smackdown of Warmist Scaremongering

The WSJ published a second smackdown of the theory that man made CO2 is causing catastrophic global warming. Of course increased CO2 has some impact, the questions about how much and whether this is even a problem are not clear. Further, the supposed climate experts have no clue as to whether the vast economic tradeoffs necessary to shift from a carbon based energy economy are worth it. They rail against supposed non-experts who question their findings, and yet launch themselves into economic discussions in which they are clearly uneducated and untrained. The pseudo-scientific cult of warmism has all the hallmarks of religion. A few choice quotes from the scientists who have gone public with debunking the theory that we are all doomed.

When predictions fail, we say the theory is "falsified" and we should look for the reasons for the failure.
. . .
From the graph it appears that the projections exaggerate, substantially, the response of the earth's temperature to CO2 which increased by about 11% from 1989 through 2011. Furthermore, when one examines the historical temperature record throughout the 20th century and into the 21st, the data strongly suggest a much lower CO2 effect than almost all models calculate.
. . .
Given this dubious track record of prediction, it is entirely reasonable to ask for a second opinion.
. . .
The Trenberth letter tells us that decarbonization of the world's economy would "drive decades of economic growth." This is not a scientific statement nor is there evidence it is true. A premature global-scale transition from hydrocarbon fuels would require massive government intervention to support the deployment of more expensive energy technology. If there were economic advantages to investing in technology that depends on taxpayer support, companies like Beacon Power, Evergreen Solar, Solar Millenium, SpectraWatt, Solyndra, Ener1 and the Renewable Energy Development Corporation would be prospering instead of filing for bankruptcy in only the past few months.

Thanks for that.

As I continue to point out, if the warmists were serious they would have called for a carbon tax with an income tax offset as the economically most efficient means of delivering CO2 reduction. That they do not is proof of their statist aims.

Santorum's Odds on In-Trade Drop

Ok, I admit this is today's news, but Santorum has too much big government baggage and emphasis on social issues when the nation has to face down the debt-star. I would hope that social conservatives see that government that is limited in all areas is to their advantage. Notice how every expansion of government eventually intrudes on religious beliefs, usually in a negative way, e.g. Obamacare vs the Catholic Church. Santorum can make a big show of defending Catholicism against Obamacare, but he has some history in causing the problem in the first place.

Thinking About Pension Reform

I fully support the pension reform initiative that will be on the ballot this June here in San Diego, but I think there are some clarifications needed about the facts surrounding the measure. Some key facts.

1. Short term savings do not result from a shift to a 401(k) plan. The initiative will save the taxpayers money in both the short and long term. However, closing the defined benefits plan will require a plus up of those accounts as there will be no new entrants into those plans. This is made up for by other means, the most significant being fairer sharing of costs for current employees, a cap on the "pensionable" portion of employee pay and an anti-spiking provision. Further, the plan is not technically a 401(k), but a 401(a) which has less flexibility. A 401(k) is not currently legal for municipal employees by federal law. Call your Congressperson.
2. The plan does nothing about current retiree health care costs. These costs seem likely to increase as retirees live longer.
   
3. The costs of running a 401 style plan are likely to be greater than a defined benefits plan due to the need to manage individual accounts.
4. The city's contribution rate of 9.2% seems high, but must account for the fact that employees are not part of the social security system a 6.2% contribution. That's a huge benefit to the employees which is often overlooked. Over very long time horizons, employees can expect a return of at least 8% per year as opposed to the paltry 2.6% for a medium income two income couple born in 1985. (Source is social security admin.)
   

So, am I against the 401(a)? No, I believe that it is better to offload future risk from the taxpaying public to the employee. City employees enjoy very high levels of job security, so the tradeoff should be that the taxpayer is no longer on the hook for supporting them after they retire. I honestly don't know why employees wouldn't prefer this deal.

For a full discussion of public employee pensions in general, and a debunking of many myths, see Governing magazine's article on Pension Puffery by Girard Miller.

Pension Reform Qualifies for San Diego Ballot

This is no longer news, but nevertheless important. Carl DeMaio announced that the pension reform initiative had over 145,000 signatures, with 93,346 needed to qualify. It appears likely that the initiative will qualify for the ballot. The furious counterattack by labor on even allowing a vote on the measure has been curious. Clearly they see a huge threat in this initiative. The left of center OBRAG had this to say:

The proposed initiative would eliminate pensions for all new city hires except police officers and replace them with a 401(k)-type plan. It also includes a five-year salary freeze on the pensionable pay of current workers and a cap on future police pensions, among other things. City workers would not be eligible for Social Security under the plan.

The proposal is strongly opposed by organized labor, who characterize the plan as a punitive measure that places the solution to the city’s fiscal crisis unfairly on workers. Labor groups went so far as to send volunteers to popular canvassing locations to argue their point of view after receiving reports of petition gatherers making significant misrepresentations about the petition that they were asking people to sign.

A fair characterization, no doubt. OBRAG also asked a question that perplexed me.

Even though supporters of the ballot measure have known for several weeks that they’d passed the threshold for needed signatures, the campaign has continued using a “we’re desperate” meme. Why? It turns out that signers information was being shared with the DeMaio Mayoral campaign. It’s probably illegal, but unlikely that the consequences will outweigh the benefits.

I'm not sure I believe that, but I'd like to hear from DeMaio and the organizers as to why the tone of desperation. I went so far as to predict rough sailing, based on my reading of DeMaio's Facebook posts.

Meanwhile, the arguments against placing the initiative on the ballot by San Diego City Beat were that it would pass if it got on the ballot. From the comments.

Bob, I think you missed a key part of the article. See the end of the first paragraph. If the measure makes the ballot, it'll pass, because it's a complex issue for the average voter to process. There are a number of misleading statements being made by the pro CPR folks. We think the debate needs to happen now.

Bradley Fikes responded on sdrostra.

The CityBeat interpretation is that that the pension reform measure will pass if it qualifies for the ballot because it’s too complicated for voters to understand. (A nice way of saying the voters are stupid and gullible).

Comments and articles from both sides of the issue make me believe that even if the initiative qualifies, there will be millions more spent by both sides. There will also be some carping about how expensive and unseemly all the spending is. Too quote Dean, "Democracy is, like, hard."

Ultimately, the question is whether 401(k) pensions are fair. The left's argument is that just because you as a private sector worker have a pension subject to the vagaries of the stock market, it doesn't mean you should make government employees suffer that injustice. Some flaws in this thinking:

• 401(k) plans don't have to invest in the stock market. My own plan is only in the market 65%.
• The new generation entering the work force will learn out how to handle this, in fact they already are. My 22 year old son has a 401(k) as well. We have discussed dollar cost averaging and sector averaging and balancing a portfolio. I have faith in their ability and intelligence. I wish I had thought to start investing at that age.
• Workers will own their own pensions, and won't be dependent on politicians and union bosses to ensure that they receive pensions promised.
• Over the course of twenty years, investing in a broad basket of stocks will produce safety and high yield. The market performance of the last few years is part of the normal up and downs.

Look at this graph from visualizingeconomics.com


Most 401(k) plans have the investor re-invest dividends. There isn't a 20 year period when you would lose money when re-investing dividends.

So why do the unions and left oppose? They fear the loss of power, because the average employee won't need them anymore.

San Diego Taxpayers vs Leftists and Unions - UPDATE

Lots of local political news in San Diego today, revolving around the struggle to reign in the cost of local government, much of it involving Carl DeMaio. First, DeMaio announced that the "fair and open competition" measure had qualified for the ballot in an article on sdrostra.com (Full disclosure: I sometimes cross-post there, also, I signed that petition.) This measure would enjoin the city of San Diego from entering into Project Labor Agreements (PLAs) as a condition to allow bidding on a contract. PLAs generally require agreed upon rules about union participation, prevailing wage rates and other working conditions for each city construction project. See my earlier description.

Later in DeMaio's rostra article, he mentioned that of course, the unions are counterattacking at the state level. "An important note: Union-backed members of the State Legislature have introduced legislation which would overturn local bans on PLAs."

Second, I learned via a tweet from councilmember Lorie Zapf, that the city council had voted to move forward on managed competition. I learned from other sources that the Miramar landfill will go through the process. As Zapf points out, the city employees may win the competition, so I don't know why there is such hubbub from labor and environmentalist groups. OK, I do know, but the taxpayers should win. If this works like the federal government's process, the city department affected may be allowed to present a plan for reorganization that would result in lower costs to the city by shedding excess jobs. If the city employees win the competition with a "most efficient organization" concept, then we still win through reduced costs. From Craig Gustafson in the U-T:

The landfill operation is the latest — and most controversial — service to be placed under managed competition, a process that has generated passionate debate at City Hall since voters approved it in 2006. It allows private firms to compete against city workers to provide certain services, with the goal of reducing costs for taxpayers no matter who wins the competition.

Of course the labor unions and enviros are opposed. Their argument that the city will be liable for the inevitable unsafe practices of the private operator are of course crap. The contracting process can require that the winning bidder carry liability insurance that would survive a bankruptcy.

The debate was apparently not without acrimony, even among those voting in favor. A tweet from Craig Gustafson (which didn't make it into his U-T article) said that Tony Young gave Carl DeMaio a scolding over his handling of the debate. Waiting to see hard news on what that was about.

On the pension reform front, I am concerned that the required signatures won't get gathered prior to the mid-October deadline. No new news, is probably not good news. The last I checked, the initiative was 30,000 signatures short. This morning on the radio, I heard the local firefighters union advertising against the initiative. Their basic argument is that no young person will want to become a firefighter because the pension will be so bad, so we will have all these really old firefighters trying to put out fires, but they'll be too old to lift the hoses. Really? I think in this economy, which looks to continue its present pathetic course for some time, plenty of applications will be received for firefighting positions. Besides 401(k) can be better for employees anyway. (I know the city workers don't get social security, but that's going to become a straight up welfare program anyway.)

Finally, the student journalists (or should I say pseudo-journalists) at the Mesa College newspaper printed these lies about the pension reform measure, as if this were straight reportage:

Yet the changes DeMaio is proposing will completely wipe out pensions for people who are already receiving it and for the city workers who are due a pension once they retire, it will also make them ineligible to collect social security. Instead a forced 401K will replace the pension, which will likely leave them with less than they are currently getting.

Read the measure here, and show me where people who are already receiving a pension will be wiped out. If this is the standard for journalism in our colleges, then the MSM is clearly on a clear path to oblivion. I submitted the following comment to the Mesa Press, which is awaiting moderation:

The statement that the pension reform will wipe out pensions for people already receiving them is flat out incorrect. Nothing in the measure changes existing pensions, read it for yourself: http://www.realpensionreform.com/home/index.php?option=com_content&view=article&id=78&Itemid=93.

Further, Section 10 of the U.S. Constitution prohibits such changes to contractual pension obligations. "No State shall . . .pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility." This applies to cities as well, as creations of the states. Please perform basic research.

I'll let you know if I get published.

UPDATE

My comment is still awaiting "moderation." You have to wonder about the teaching for journalism these days.

Local Roundup

I thought the grocery unions might be on strike at the time of this writing, and they still might by the time you read this. However, a 7:10 p.m. deadline came and went today without a strike. This is great news, and perhaps a strike can be averted. Despite my antipathy for the union position and belief that they will do immense harm to themselves by striking, a strike will be bad for the region given all of our other economic stress. From today's U-T:

"Our workers will stay on the job until at least midnight, and possibly longer if negotiations are moving ahead," Mike Shimpock, spokesman for United Food and Commercial Workers Local 770, told The Associated Press.

This sounds like we might catch a break with some good news.

Carl DeMaio has come up with the single most brilliant fund raising idea I have ever seen for San Diego. He is hosting a fundraiser at Phil's BBQ, with the tagline (from his Facebook page):

Skip the line at Phil's BBQ -- and support our campaign for Mayor! Hope to see you Tuesday!

I have to give DeMaio kudos for making good use of Facebook and Twitter in his campaign. I follow him on both forms of social media. He has been effective. Also, skipping the line at Phil's is pretty close to going to heaven. I love Phil's but seldom like to brave the line, often opting for take out instead.

Carl DeMaio's other big effort, besides running for mayor, is getting the pension reform measure on the ballot. The unions have tried to undermine the effort with radio ads falsely implying that a petition signer might be the victim of identity theft. The U-T Watchdog (one of my favorite local sources) checked out the ad campaigns.

The Watchdog set out to determine who was behind the ad.

The domain for the group’s website is registered to the same address and phone number as the State Building & Construction Trades Council of California, a labor union coalition. The council’s president, Bob Balgenorth, said the identity theft group is separate but he financially supports the effort, helped to organize it, and believes the concern is real.

. . .

Beth Givens, director of San Diego-based consumer advocacy organization Privacy Rights Clearinghouse, said, “The ad is a clear case of dirty tricks. Signing your name and address to a ballot petition does not put you at risk for identity theft. They are using fear mongering to attempt to suppress people who do sign ballot petitions.”.

Meanwhile, the fact that DeMaio continually pitches the effort leads me to believe that the effort may be in trouble. Right on cue, I found the following U-T article headline:

Pension petition drive faces challenges

The article discusses the difficulties facing the drive.

It’s widely viewed as a slam dunk for passage should it appear on the June 2012 ballot, but that may not happen because of the high degree of difficulty in collecting the required 94,000-plus signatures from registered city voters in the six-month window provided under election law. Adding to that burden is the strong opposition from local labor unions that are admittedly putting up as many roadblocks as possible to thwart the effort.

I agree with the assessment that the proposition will pass if it gets on the ballot. If you want to contribute money, you can visit the pension reform web site.

Meanwhile, DeMaio and Dumanis, the two leading Republican candidates, skipped the mayoral debate Saturday at Liberty Station. As expected, Filner came out against pension reform, with Fletcher supporting. I hope DeMaio doesn't skip such events indefinitely, because the public needs to see the candidates airing out the issues. I found it interesting that medical marijuana has surfaced as somewhat of a hot topic, because it is not high on my list of priorities, although I support decriminalization in general. Good to hear that there was no appetite for taxpayer funding of a new stadium.

That's all for the weekend political news. One last recommendation, if you go to Phil's for take out, get their early and have a beer at their bar, they have a pretty decent lineup, including some good local selections.

Applause for Mayor Sanders

I have been a harsh critic of Mayor Sanders at times. But I need to give credit where it is due, he worked with purveyors of competing reform plans to come up with a single ballot measure. This increases the odds that a measure will pass, because there will be a unified reform effort. Today's U-T has the news.

The new measure, to be announced Tuesday, combines elements from a proposal two weeks ago by Mayor Jerry Sanders and Councilman Kevin Faulconer with ideas from Councilman Carl DeMaio and business leaders.

Under the measure, if approved by voters, new police hires would be the only ones to receive the guaranteed payouts of a traditional pension while other new hires would contribute to a 401(k)-style plan and take on the risk of money invested.

Pensions for current workers would remain unchanged, although the measure proposes limits on pay that prevent future benefits from growing as quickly as they do now.

Predictably, the forces of leftism are gathering together to defeat any meaningful reform. The Voice of San Diego ran an article implying that a pay freeze in the plan is illegal. (My response? See you in court.) They also claim that there will be no short term savings. (I agree, but that's not the point, you have to get started.)

The city's public employee unions commented negatively as well.

Frank De Clercq, head of the city firefighters union, said the change would have long-term consequences for public safety as the city would struggle in future years to recruit and retain firefighters. He also questioned the wisdom of devaluing any worker who puts his or her life on the line.

“I don’t know how anyone, morally and ethically, would not consider the risk that firefighters take being absolutely similar to what police officers and lifeguards take,” De Clercq said. “We risk our lives on a daily basis. I’m disappointed to say the very least that they’ve chosen to go down this path.”

Actually, I read an article in Reason that being a police officer has been getting safer for 35 years, so I don't know why they aren't also included in the reform.

I believe this has a great chance of passing, but expect every dirty trick and court fights to keep it off the ballot. This effort is worthy of the support of the San Diego Tea Party.