Counterfeit COIN - Just the Facts

by Mayor Pro Tem Greg Sebourn, PLS & Council Member Bruce Whitaker

The issue of open negotiations in government finances is nothing new.  In fact, Fullerton considered this at its November 5, 2013 City Council meeting in which the matter was tabled for nearly seven months.

Elected officials have a fiduciary duty to manage your tax dollars and the public has the absolute right to know how and why their tax dollars are being spent.  This right to know is underscored since unionized labor is the single largest budgetary line item for the City and the fact that the City is still operating with a City Council approved (3-2) structural deficit of at least $1.6-million! 

Fullerton taxpayers have a long history of being shortchanged by City Hall.  From illegal taxes to redevelopment waste, Fullerton taxpayers have every reason to question who is proposing to spend how much and on what.  Civic Openness in Negotiations, or COIN, offered a glimmer of hope to Fullerton taxpayers before being surreptitiously replaced with a Counterfeit COIN. 

On June 17 the Fullerton City Council voted 2-3 (Ayes: Whitaker & Sebourn; Noes: Chaffee, Flory, & Fitzgerald) to approve COIN based on the original model approved in other jurisdictions including Costa Mesa.  COIN would have provided a new level of openness and transparency into labor negotiations.  Unfortunately, after that motion failed, three Council Members (Chaffee, Flory, & Fitzgerald) voted to approve an ordinance that gives the illusion of transparency and rigor to a backroom process that has to this day remained secret.

Fullerton’s Counterfeit COIN ordinance lacks the two most critical components that make COIN an effective process for taxpayers and city workers - transparency and accountability.  Supporters of Counterfeit COIN point to the model guidelines “LABOR NEGOTIATION STRATEGIES AND PRINCIPLES” by the Association of California Cities of Orange County (ACCOC).  The guidelines offer up sample language and suggestions for COIN-like ordinances but Counterfeit COIN ignores the first rule of the guideline, Use of Outside Negotiators, as well as the second which calls for use of an independent auditor for financial analysis.

COIN and Counterfeit COIN both have a process for disclosure to the public regarding what the Council and public employee unions have negotiated behind closed doors.  Fullerton’s Counterfeit COIN, however, only applies to written offers.  Further, it does not specify when the details of the proposed agreements, offers, or counteroffers must be made public.  This means there may be countless secret “trial balloons” offered by both sides before settling on written terms.  This is where Counterfeit COIN fails the transparency test.

Accountability is completely absent from Fullerton’s Counterfeit COIN as well.  COIN required that all negotiations and economic analysis were to be conducted by professionals that were not subject to a public pension system and far removed from City Hall.  They are to be independent from the negotiating parties in every way.  Counterfeit COIN offers certain criteria that must be met in order bring in any outside parties. Even if the criteria is met, Counterfeit COIN requires the Council appoint a representative as a representative to the outside Negotiating Team, and further requires that representative be a public employee who stands to benefit by the outcome of the negotiation process.

COIN is really quite simple despite attempts to create the illusion of complexity or difficulty.  There are just three key components of COIN:  Independent Negotiator, Independent Economic Analysis, and Timely Public Disclosure. 

The lack of labor union opposition to Fullerton’s Counterfeit COIN sends the message to taxpayers that this new ordinance brings no substantive changes to the backroom labor negotiations. 

Until a clear majority of the Fullerton City Council is willing to recognize that feathering the beds public employee unions is contrary to their fiduciary duty, Fullerton’s legacy of backroom negotiations lead by city staff to benefit city staff will continue. 

More of the same, same as before.  

CalSTRS Fails

Press Release from State Controller John Chiang

SACRAMENTO – State Controller John Chiang today released his review of the California State Teachers' Retirement System's (CalSTRS) ability to detect and prevent pension spiking. The review found CalSTRS does not adequately audit more than 1,900 reporting entities (including school districts), has missed opportunities to reduce instances of suspicious or unjustified salary increases and also failed to adequately use existing electronic systems designed to identify cases of pension spiking. It also includes recommendations to address each of those shortcomings.

"Starting with more rigorous auditing and better use of existing technology, CalSTRS must fortify its ability and resolve to crack down on those seeking unjust enrichment at the expense of their fellow educators and taxpayers," said Chiang. "These recommendations aimed at strengthening CalSTRS' anti-spiking efforts will complement the recently-enacted pension reform package and shut down this form of public theft." 

The review specifically examined the electronic methods that CalSTRS uses to detect and prevent pension payments based on unusually large or excessive final compensation amounts, the auditing processes the system uses to oversee the state's school districts, and the efforts conducted by its newly-formed Comprehensive Review Unit during the review period of July 1, 2009, through June 30, 2011. The scope of the review was expanded to include records from three school districts, one community college district and one county office of education.

The review found that the CalSTRS audit program did not adequately detect or deter pension spiking. Although more than 1,900 agencies are a part of CalSTRS, the pension plan averages only 40 audits a year. During the review, CalSTRS was implementing a new stand-alone Compensation Review Unit charged with specifically detecting pension-spiking activity, which should result in more audits. However, the Controller said more auditors are needed to provide adequate oversight of the reporting by districts to CalSTRS.

The review evaluated pay increases granted prior to retirement to determine whether they were adequately approved, justified and documented. A geographically diverse sample of five local education reporting agencies was chosen: Pajaro Valley Unified School District in Santa Cruz County, the San Francisco and San Diego unified school districts, Foothill-De Anza Community College District in Santa Clara County, and the Los Angeles County Office of Education. Two of the five, or 40 percent, lacked documentation to justify pay increases granted to their employees immediately prior to retirement, such as board or executive approval or written performance evaluations. 

For example, at the San Francisco Unified School District, one executive received a 26% pay increase six months prior to retirement, and another executive received a 20% increase one year prior to retirement. The district was unable to provide any documentation supporting those raises.

After similar and repeated requests were made to the San Diego Unified School District, officials ultimately responded that documentation supporting raises was missing from their files.

CalSTRS uses a system that electronically identifies instances in which an employee's monthly pay increase exceeds a certain percentage, or in which an employee's "special compensation" exceeds a specific dollar amount in one year. However, the review found that during the period evaluated, CalSTRS did not review, verify or follow up on pay increases that were flagged by the system. The Controller urges CalSTRS to review all of the cases that were flagged by the system, require the agencies to provide adequate documentation supporting those increases and better determine if the pay increase thresholds are appropriate to detect pension spiking. 

The findings and recommendations from this review will be presented at the September meeting of the CalSTRS Audit and Risk Management Committee. The Controller also plans to perform a similar review of pension-spiking prevention measures at the state's largest pension system, the California Public Employees' Retirement System (CalPERS).

Can Pensions Be Altered?

Today's OC Watchdog (OC Register) provides some framework for discussion and a little food for thought.

The article concludes with this:

Current pension reform efforts only tackle newly hired workers — and do nothing about what’s owed to current workers. If governments could reduce pension benefits of current workers going forward — not for the past time they’ve already worked, but for the future still to come — they might wrestle those multi-billion-dollar unfunded liabilities down to a more manageable size.

Fast Facts About Fullerton

Here are a few fast facts about Fullerton:

400 - the number of years it will take to replace that water line in the street (current replacement cycle should be 6 miles per year on 50-year cycle)
547.6 - millions of dollars of pension liability (CAFR 2011, page 69)
657.9 - millions of dollars of Redevelopment Agency liability (March 20, 2011 agenda item 6: "PROPOSED THIRD AMENDMENT TO ENFORCEABLE OBLIGATION PAYMENT")
91 - the percentage of increase in water rates proposed by City of Fullerton May 23, 2011
2,000 - approximate dollars paid per month in daily stipends to Councilman Bankhead as a Director on the Orange County Water District Board (City Council Agenda Item 12, April 3, 2012)
27 - millions of dollars skimmed since 1997 from the Water Fund to pay for salaries and benefits of employees not associated with the water department  (Public Records Request data from Julia James, Administrative Services Director, City of Fullerton)
2.7 - millions of dollars the City plans to skim June 2012 (Based on Adopted Budget FY2011-2012)
64 - days left for you to decide if you want to change any of these numbers (Recall Election June 5, 2012)

$62.1 BILLION - CalPERS Unfunded Liability

SACRAMENTO – State Controller John Chiang today released a new actuarial report showing the 30-year cost of providing health and dental benefits for state retirees is $62.1 billion.

"Even as California continues its struggle to get back on firm fiscal footing, we must begin to address our obligation to pay health and dental benefits for current and retired state employees," Chiang said.  "Even slight amounts set aside will help lessen the impact on future generations, and ensure that we fulfill our responsibilities to the state workforce and our taxpayers."

The unfunded obligation as of June 30, 2011, grew $2.2 billion from the $59.9 billion obligation identified as of June 30 2010.  The accrued liability grew less than expected due to favorable healthcare claim experiences linked to a combination of fewer claims, less expensive claims, less utilization of services, and the implementation of new California Public Employees' Retirement System’s (CalPERS) health programs designed to reduce costs.  

While state pensions are pre-funded, allowing investment returns to reduce liabilities, California pays for retiree health benefits on a "pay-as-you-go" basis, or the minimum amount needed to fund the costs as they are due.  The latest actuarial report estimates California’s obligation for retiree health and dental benefits, also referred to as Other Postemployment Benefits (OPEB), based on two different funding scenarios:

• The current pay-as-you-go policy results in an actuarial unfunded obligation of $62.1 billion, which represents the total the State would need to pay for future retiree health benefits earned as of June 30, 2011, by current and future state retirees.  Based on this unfunded obligation, California should pay $4.7 billion in 2011-12 to pay for present and future retiree health benefits. In the 2011-12 Budget Act, the State provided $1.71 billion to only cover current retirees' health and dental benefits.

• If the State shifted to fully pre-funding the costs of future benefits, the actuarial unfunded obligation would be cut by more than $21 billion to $40.7 billion.  Under a full pre-funding approach, the State would set aside money in a separate trust solely for future retirement health care benefits.  The investment income generated by the trust would be used to reduce the costs to the State and its employees of paying for future benefits. To take advantage of the tremendous cost savings resulting from fully-prefunding, the State would need to contribute $3.3 billion in 2011-12, or $1.6 billion more than the State currently pays.

Recognizing that fully funding the health and dental benefits obligation is unlikely given the State's tight budget, Controller Chiang noted that even incremental steps toward pre-funding the obligation would significantly reduce the State’s liability (see chart ).  For example, if the State pre-funded just 10 percent of its obligation, it would only need to pay $160 million more than its current pay-as-you-go contribution.  However, that additional payment would shave $2.7 billion off of the State's unfunded liability.

Pre-funding 25% of its obligations would cost the State $400 million more than the pay-as-you-go contribution, but would reduce the total unfunded liability by $6.54 billion.

In 2004, the Governmental Accounting Standards Board Statement 45 (GASB 45) required states and local governments to publicly disclose the future costs of paying for post-employment benefits other than pensions for current state retirees and employees.  Chiang commissioned California’s first report shortly after taking office in 2007.  This report is the fifth to be issued under his administration.

While GASB 45 does not require states to fully fund its obligations, all three credit rating agencies have urged states to at least have a funding plan in place to avoid any future downgrades.

The actuarial report  and a chart  showing how much pre-funding would cut future costs can be found on the Controller's website at www.sco.ca.gov.

State Controller Releases Updated Public Employee Salary Data

SACRAMENTO – State Controller John Chiang has updated his website showing the salary, pension benefits and other compensation for police, fire, transit operators, transportation planning, and waste districts in calendar year 2010.
The new posting includes 57,000 positions across 788 districts, with wages totaling $2.95 billion.
Read more here...

Mileage Tax Coming Soon?

As a licensed professional land surveyor, I have an acute awareness of our infrastructure.  Our roads and utilities are aging and no one wants to deal with it. 

President Obama thinks infrastructure maintenance and construction jobs are the answer to our economy even though they are all temporary employment.

Some of my engineering counterparts like the idea of big federal expenditures on our infrastructure and the lucrative contract to be gained.  Indeed, I too could benefit from a Big Dig. 

One of the ideas being promoted by my engineering colleagues is the Vehicle-Miles-Traveled Fee or mileage tax as I prefer to call it. 

There is a notion in the engineering community that the current gas tax just isn't sufficient for keeping up with the wear and tear on our roads because of mileage efficient vehicles and that a usage-based tax is more appropriate.

How quickly we have forgotten one of the principle reasons for implementing the gas tax: to encourage use of public transportation systems. 

Additionally, we have forgotten what we used to do before the gas tax.  Not that long ago, we relied on the general fund to pay for roads. 

President Obama’s National Commission on Fiscal Responsibility and Reform recommended a gas tax increase at the federal level last December when it issued its report to America.  The financial "experts" who came up with this recommendation made this argument: The current transportation trust fund is falling behind the government’s outlays, once again requiring transfers from the general fund to cover transportation costs. The commission called for additional gas tax revenues to be dedicated to fully funding the transportation trust funds and therefore eliminating the need for dipping in further to general fund.  The gas tax has freed up funds making it possible for the President and Congress to funding pet projects like wars. 

It could be argued that the best way to prevent unnecessary military conflicts might be to end all of the various special taxes and fees so that Congress must fund domestic  programs ahead of foreign military campaigns with obscure objectives.

A quick internet search of "gas tax" brings up numerous blogs, PR pieces, and reports about why we need a higher gas tax. 

According to http://www.gaspricewatch.com/usgastaxes.asp California's gas tax is $0.18 per gallon.  Other California gas taxes include a 6% state sales tax and 1.25% county, plus additional local sales taxes and 1.2 cents per gallon state under-ground storage tank (UST) fee.

So, as the gas tax is not quite keeping up with the needed infrastructure repairs, many are looking for the quick fix solution in rate hikes for everything from water, gas, roads, and even emergency services in some jurisdictions.  I don't think raising the gas tax will change anything.  Our same lack of fiscal discipline will soon find us looking to raise taxes elsewhere.

The elephant in the room being ignored are the various allocations from General Funds to cover salaries and benefits.  Locally, in Fullerton California, 80.2% of the General Fund is spent on Public Safety and 69.8% of the City's General Fund is spent paying the Public Safety salaries and benefits (City of Fullerton FY2011-2012 Adopted Budget). 

The question shouldn't be which tax or fee to raise but rather where to cut spending.

Deferred Compensation, the Preferred Compensation

In its simplest form, deferred compensation is a benefit paid after services are rendered. 

It’s an interesting concept; paying someone today for services performed and then paying them again at some later date for those same services already rendered.

With that in mind, let’s look at what we might pay one of our public safety employees who retires at age 50 with 30 years of service and the “3%@50” defined benefit.  We’ll call her “Sara”.

For the sake of discussion, Sara will die of old age on her 85^th birthday which means she will receive her pension for 35 years. 

If Sara was paid $124,730 for her last year’s employment, she will receive $112,500 for those 35 retired years. 

Her pension check alone will cost taxpayers $3,937,500 after she has stopped rendering services to the City assuming she does not get cost of living adjustments which our current public safety retirees enjoy.  We have also excluded the lifetime medical benefit as well.

When she dies at 85 she will have received $6,695,940 for her 30 years of service (not including medical or pension COLA).

That would be the same as if taxpayers had paid her $223,198 for each of her 30 years of service.  Of course she started at $65,000 per year and never received a stepped increase in pay, only cost of living adjustments valued at 6% her first year and 2% for most years after and still was able to earn $124,730.  Not bad for no promotions.

The entire notion of deferred compensation has me convinced we are handling pensions completely wrong.

I see two possible ways to deal with this.  We could pay higher salaries now and let the employees figure out the best investment plan for their future (think 401-K) or workers will need to be productive for 40-50 years instead of 30 years.

Controller Urges Support for CalPERS, CalSTRS Reform

PR11:07
2/9/2011

Contact: Hallye Jordan

916-445-2636

SACRAMENTO – State Controller John Chiang today announced he is sponsoring two bills to improve the performance of and the public’s confidence in the nation’s two largest public pension funds – the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS). The bills would cap the amount of gifts members and staff may receive each year, and require a pension fund board member or employee to wait two years after leaving before working with a firm that has business with the funds.

“The appearance of impropriety by some former board members and investment staff of CalPERS raises concerns that members and staff may be using their past relationships and positions of power to influence decisions regarding the investment of public pension funds,” Chiang said. “I believe these bills are a critical step toward restoring the public’s confidence in the professionalism of all of our activities on behalf of the retired public employees and teachers, and the taxpayers of California.”

Authored by Senator Gloria Negrete McLeod, chair of the Senate Public Employment and Retirement Committee, one bill will lower the amount of gifts CalPERS’ and CalSTRS’ members and staff are allowed to receive under the Political Reform Act. By reducing the amount from the current $420 a year to $50 a year, the bill will address the influence-peddling practices revealed when the placement agent scandal broke in the spring of 2009.

“California’s public pension systems are the largest in the country and should be held to a higher standard,” said Negrete McLeod. “Limiting gifts from individuals and organizations trying to influence the decisions of pension boards and government employees is the right thing to do.”

The second measure, by Assembly Member Furutani, chair of the Assembly Public Employees, Retirement and Social Security Committee, would prohibit, for two years, CalPERS’ and CalSTRS’ board members and employees from accepting a job with any employer who had substantial contracts or investments in the five years the employee or board member worked at the fund. Employees or board members who had worked with placement agents during the 10 years prior to leaving CalPERS or CalSTRS would be prohibited from going to work for the agent or the agent’s firm for two years after leaving the public pension system.

“Public trust and government accountability within the nation’s largest pension systems are critical to any of the reform proposals that are on the table,” Furutani said. “Implementing a ‘cooling-off period’ would ensure that decisions being made by board members and staff are being made for the right reasons and not to encourage future employment opportunities.”

In letters to CalPERS’ and CalSTRS’ officials sent late last week, Chiang noted that the placement agent scandal has eroded the public’s confidence in the handling of public funds. “These measures were developed with the principal goal of protecting (CalPERS and CalSTRS) investments from unsound influence and restoring the system’s credibility in the public eye,” Chiang wrote.

The legislation may be discussed at the CalSTRS meetings this week and at the next CalPERS meetings that start February 14. The bills are expected to be in print within the next two weeks.

###

Late word out of Sacramento: Pension Reform + Higher Taxes On Way

***UPDATE***
Sacramento insiders are telling me that GOP State Senators are working on a compromise that would place taxes on the ballot in exchange for pension reform.  No word yet on who will flip.  More updates to come.

***ORIGINAL POST***
An anonymous source out of Sacramento is reporting a backroom deal is in the works with party leaders which will give us pension reform AND higher taxes. 

I am in the process of confirming this information from someone who I consider to be a reliable source.  As soon as I have a confirmation and more details, I will share it here.

Pension Spiking and Fraud 101

I was watching a short interview with Steven Greenhut on Reason.TV and heard Steven mention "Chief's Disease".  After a few quick google entries, I tripped over this 2005 exerpt from Reason.org.  Click HERE to read and download the entire PDF.

THE GATHERING PENSION STORM: HOW GOVERNMENT PENSION PLANS ARE BREAKING THE BANK AND STRATEGIES FOR REFORM
By George Passantino and Adam B. Summers
June 2005

The Orange County Register Continues to Pound the Pension Tsunami Drum

In yesterday's online Op Ed, the OC Register once again bangs the drum for fiscal responsibility by our elected representatives. With many seats opening up on city councils throughout California, thanks in part to term limits (more on that later), we have an opportunity to fix a broken system.

The OC Register points out Orange County's estimated unfunded pension gap of $3,700,000,000, which has enough zeros to strain my eyes on any computer monitor and should make you mad!

But how do we fix the mess? Some say the quickest fix is for municipalities to file for bankruptcy. That is an unethical response that will cause more harm than good. Orange County hit the financial reset button on December 6, 1994 when we filed for bankruptcy. It was a hard recovery which has been made worse by errant spending and overly generous pensions. Did we not learn anything? Of course not.

If not bankruptcy, what can we do? The other day I heard someone suggest a bond measure to bail out the pension systems of California (including cities and counties). It is a known liability versus an unknown liability.  The socialistic idea that the wealthier, more conservative agencies would help pay for the liberally generous agencies reeks of a Bush/Obama bailout on the backs of tax payers. No, a bond is not the solution.

Sue the bastards! Sue the employee associations for being smart enough to pull the wool over the eyes of our elected representatives. Yeah, that’ll teach them! Meanwhile, we will spend millions on attorneys and court fees, etc. etc. Throwing good money after bad money is not a practical solution for many municipalities who are already cash-strapped and making deep cuts. However, should the County Board of Supervisor’s suit against the Orange County Employees Retirement System win, I could see many more agencies heading to court with high hopes of victory.

The first step in fixing the pension mess is recognizing opportunities. One opportunity will arrive on November 2 when you can cast your vote and choose pension-minded candidates for your local offices.

Another opportunity exists due to this economic depression. With some of the highest unemployment numbers since 1939, we have a deep labor pool. As the OC Register reports, we need to engage the employee associations in negotiations and help them come to terms with the inevitable: the pension ship is sinking and the deals on the table will continue to shrink the longer they wait.

The next step is realizing that the switch from the current defined-benefit plan to the defined-contribution plan cannot be optional. Defined-contribution plans must be standard fair for all new hires.

The final step is accountability. We hold our elected representatives accountable by voting for new candidates who haven’t succumbed to the will of the workers. Public employee association leaders must be held responsible for their complicity in the entitlement foray.

Somewhere in this fix we must include education for the tax payer and education for the employees. When I was a young green Orange County worker, there was no one to help explain retirement benefits. There was one option and it was mandatory. Employees need to know how to invest in their future which includes short-term investment in their employer and long-term investment in their retirement. If public employees hurt their employers today, there may be nothing left for tomorrow.

The Orange County Pension Law Suit Is "Radical", Says Att. Gen. Brown

In yesterday's Op-Ed, The OC Register's editorial staff said, "... his brief in opposition to the board lawsuit called it 'radical.'"  Yes, our own Attorney General will not defend tax payers.  As the OCR points out:

"What is really radical is the $3.7 billion unfunded pension gap the county faces, of which the retroactive pension spike accounts for about $100 million. Mr. Brown, supported for governor by a number of public worker unions, discounted the lavish benefits given to county workers. We'd like to hear what he would do about the runaway pension situation."

Indeed, we would all like to know his plan.  Unfortunately, his plan will surely include higher taxes.

 

OC Watchdog Has Inside Scoop On Orange County Employee Pensions

The OC Watchdog is barking up the OC pension tree and have discovered a few interesting facts.  Before we get into what they found, though, we have to put it all in the right context.  The OC Register "told the court, we will use the information for research and analysis and not just post the raw data."  Why would they tell the court that?  Why not publish the raw data?  Anyway, you might remember  a few of these folk's names, like Bob Citron and Mike Carona:

"Robert Citron, the disgraced treasurer whose risky investments led Orange County into the largest municipal bankruptcy of its time, is collecting around $148, 327 a year. That’s an increase of more than 50 percent above the $92,904 a year pension that he made when he retired in 1994 – thanks to cost of living raises."

And then there is retired OC sheriff Mike Carona who is receiving $217,457 per year while out on bail appealing his federal witness tampering conviction.

Another top OC pension earner is Blake Anderson, who came in fourth on the County's pension list:

"... former Orange County Sanitation District general manager Blake Anderson, who was forced to resign in 2005 after hiring a leadership guru at $180,000 to help the sewer agency find its corporate soul. Dharma Consulting was hired by Anderson on a no-bid contract at $15,000 a month. Anderson, who was criticized in a later audit for exceeding his authority, now lives on about $228,025 a year."

I hope the list is released in its entirety and without redacting.  I think tax payers deserve to know how much is spent on county employee pensions.  Something that we always need to keep in mind is that the people we elect today will be the bloodsucking pensioners of tomorrow.  Stop defined-contribution pension plans for ALL elected officials!