In my last three columns, I’ve explored the public employee pension crisis and the lack of effective action to deal with the disaster. I worried that some people still think there isn’t a crisis. Sure enough, The Press Democrat ran a letter to the editor on January 5 in which the writer stated that a Sonoma County pension crisis “is truly one of the biggest fallacies” and that “the county pension system has been viable for more than 50 years.”
Viable? Let’s review the well-known facts: Retroactive 50 percent pension enhancements, $600 million of Pension Obligations Bonds, unfunded liabilities in excess of $340 million, annual pension and bond payments up 400 percent to about $100 million, county employees retiring in record numbers and more retirees than active employees. Supervisors describe the current pension situation as “unsustainable.”
Another danger is a mistaken belief that our elected officials have taken any effective action to deal with the crisis. Look at the state situation. Governor Brown proposed some pension changes. The legislature, beholden to union supporters, took no action until the very last day of its two-year legislative session in August 2012, when it passed a very watered-down version of Brown’s proposals. Almost all of the changes apply only to new hires.
And there’s subterfuge in reporting one part of the state law change that seems to affect participants in all government pension plans in California (including the plan for Sonoma County employees), namely that employees will be required to pay “half the cost” of their pensions. A closer reading of the law shows that the 50/50 split only applies to the so-called “normal cost” of pensions, not including costs to pay down unfunded liabilities or to make principal and interest payments on Pension Obligation Bonds. These costs for Sonoma County are greater than the “normal cost.” Taxpayers are still completely at risk with respect to investment earnings (or lack thereof) and bond payments. The change in state law will provide minimal help for Sonoma County.
Our county supervisors finally put together an ad hoc committee on pension reform in 2011. In a lengthy report, issued in November 2011, the committee noted pension contributions and bond payments were $97 million in the 2010/2011 fiscal year and were projected to increase to $209 million in the 2020/2021 fiscal year unless substantial changes in pay and benefits occur.
So, have there been substantial changes that supervisors can say were effective action? I think not. A tentative agreement with SEIU, which represents half of the county’s 3,400 workers, was rejected by a vote of 87 percent in December. And even the proposed agreement was mild—no cost-of-living raises for three years, slightly larger employee contributions, no use of accrued-leave payments to spike the pension amount, and a second-tier benefit formula for new employees. To repeat: These modest changes were rejected by SEIU. As of press time this January, there isn’t an approved labor agreement.
What we do have is a lower, second-tier pension formula imposed by the state law change, effective for most employees hired after 2012. There will also be some small changes in the definition of pensionable pay, and whether the county will make deferred-compensation plan contributions on top of pension and Social Security contributions—nothing earthshaking and nothing that will substantially lower unfunded liabilities or the soaring rate of increase of total annual costs.
A fair question is: What should the supervisors do? There are several answers, all of which require courageous action by Supervisors. Here goes:
Let the voters decide. Put substantial pension reforms on the ballot. Supervisors should have negotiated hard for these changes. Stop providing high-risk defined benefit plan participation for new employees. Give new employees a 401k plan with a fixed county contribution but no further financial risk. Freeze all pay and benefits for five years. Require existing employees to choose either a lower pension formula going forward or a true 50/50 split of all costs, including bond payments and pay-down of unfunded liabilities. Eliminate post-retirement, cost-of-living pension adjustments. Eliminate all methods of spiking pensions.
Acknowledge that pension enhancements were not legally adopted in 2002 and take appropriate action to roll back the benefits. This issue isn’t going away. The Grand Jury, with input from local businessman Ken Churchill, noted supervisors didn’t meet legal requirements for adoption of pension increases. Specifically, California Government Code Section 7507 states that the supervisors shall secure the services of an actuary to determine total future costs of changes and shall make those future costs public at a meeting at least two weeks before adoption of changes. Our supervisors admit that these requirements weren’t met but claim the enhancements were legal, based partly on a legal opinion that the word “shall” is “directory” rather than mandatory. I disagree. These safeguards are in the law to protect us, the public.
A full exploration of future costs—just look what actually happened—wasn’t done, and the public wasn’t informed. Litigation may be necessary to show that the word “shall” means “mandatory” and the benefit increases weren’t legally adopted, and there’s no statute of limitations on voiding the enhancements ab initio, a fancy phrase meaning “from the beginning.” Further, all documents pertaining to the enhancement for non-public-safety employees stated the full cost of their enhancement would be paid by employees, theoretically with an increase in contributions equal to 3 percent of pay. This hasn’t been the case. Think about it: Will a future 3 percent cost increase cover a 50 percent retroactive pension benefit increase? No, and especially not if better benefits lead to a sharp increase in retirements and a smaller workforce paying the extra 3 percent.
Supervisors need to admit failure to meet mandatory procedures and to collect the full cost of pension enhancements. Then, they need to spend whatever money is necessary to roll back benefits for current employees and retirees. The alternative is an ugly fiscal cliff in Sonoma County.
