My Open Trench column began two years ago in the January 2011 issue of NorthBay biz. I’d noticed the absurdity of roadwork signs reading “Open Trench.” Of course the trench is open. There’s no need to say so. Thus, “Open Trench” is a metaphor for government waste, overspending, redundancy and excessive regulation. That’s what this column is about, and this is a look back at certain issues I’ve covered during the last two years.
Davis-Bacon/Prevailing Wage (D-B/PW) laws: These laws basically protect unions by making non-union contractors pay artificially high wages on projects involving government land and/or government funding. I tried to determine the effect of D-B/PW rules on the massive $145 million cost of the Green Music Center at Sonoma State University but got no return calls from the general contractor. Recently, I called the architect who oversaw the retrofit/renovation of UC Berkeley’s Memorial Stadium to ask the same question about how D-B/PW rules affected the project. Again, no return call. But here are some interesting facts: Stanford University built a new football stadium in 1921, while Cal built a new football stadium in 1923. In the late 1990s, both universities saw the need for new facilities. Stanford, building on private land, completed a brand-new stadium in 10 months at a cost of $100 million. The stadium opened in 2006.
It took years and years for Cal to get started on its project. Readers will remember obstacles involving lawsuits and tree-sitters. Cal, building on public land, took 21 months and $321 million to get the project done for opening in 2012. Yes, the stadium is somewhat larger than Stanford’s. And yes, the project was funded privately. But it took twice as long and cost three times as much. I’m fairly confident that D-B/PW rules had a lot to do with it.
The SMART train: Sonoma and Marin counties have been collecting an extra one-quarter of 1 percent sales tax for almost four years to fund commuter rail service. Is service about to begin? No. 2013? No. 2014? No. 2015? Maybe. Will people who voted for the tax get the 70-mile system that was promised when the election was held in 2008? No, at least not for an unpredictably much longer period of time. The current work is on a segment about one-half the length of the original proposal. Will SMART have any significant impact on Highway 101 traffic? No. Worst of all, look at SMART’s own projections of ridership, generously given as 5,000 riders per weekday using a paltry six two-car “trains.” CalTrain, operating on the San Francisco peninsula, carries an average of 41,000 passengers daily using 90 train cars.
Permits and regulations: I’ve also written numerous times about the challenges faced by anyone who wants to build or remodel a home in Marin, Sonoma and Napa counties, and about the challenges faced by anyone who wants to build or renovate commercial buildings, especially in Santa Rosa. To the property owners and professionals working in construction and development, the obstacles seem endless, time-consuming and expensive.
Pensions: Of all the Open Trench topics, what’s the most crucial in the North Bay? By a wide margin, it’s public employee pay and benefits—most specifically, the costs of public employee pension obligations—and the way in which those costs undermine other government services.
Public employee pensions have become a fortress jealously guarded by public employee unions and CalPERS, the largest statewide pension fund. In the simplest terms, they assert that, once an employee meets the five-year “vesting” period, his or her pension benefits are inviolate and cannot be reduced or taken away, even on a prospective basis. They assert that pension enhancements after hire are also protected, even if sponsoring government entities can no longer afford those enhancements and even if the enhancements weren’t properly approved. CalPERS went so far as to send a letter saying that bankrupt cities such as Vallejo, Stockton and San Bernadino shouldn’t seek to abrogate their pension obligations as part of the bankruptcy filing, and that any such attempt would be challenged in court. Translation: “Don’t even think about it.”
Voters/taxpayers need to understand that this situation with California public employee defined benefit pension plans does not agree with the federal law governing private sector defined benefit plans. Federal law recognizes that financial conditions can change for companies that sponsor defined benefit plans. For this key reason, companies can change the benefit formula on a prospective basis or even terminate the plan. In either case, the benefits previously accrued are preserved. This is an essential flexibility. Without it, virtually no private sector company would sponsor a defined benefit plan. As it is, defined benefit plans are already few and far between in the private sector due to the uncertainty of funding costs. What is the biggest uncertainty? The answer is investment performance. If the plan assumes investments will earn 6 percent per year and the actual earnings are 2 percent or, worse yet, -20 percent, the plan sponsor must make up the difference.
Public employee pension plans mostly assume investment returns from 7.5 percent to 8 percent. Who makes up the difference if, as happened last fiscal year, CalPERS makes less than 1.5 percent on its investments? Taxpayers do. Since CalPERS attempts to “smooth” funding costs by amortizing gains and losses, cities are still paying off the massive pension losses that occurred in 2008.
Next month, I’ll take a look at two dangerous misconceptions among the public-at-large about the pension obligation crisis. First, many people believe this is just a matter of math interpretation. In other words, there isn’t really a problem at all. Just get a different actuary to give you different numbers. Second, many people believe our elected officials have actually done something significant to address the pension problem. To coin a phrase pertaining to both misconceptions: It ain’t so.
