In the past several weeks I have posted about what I have called the three myths of Fire Service in Contra Costa County. Now, I will look at Myth Four, possibly the most important fable in the pantheon of how to find real solutions to the financial crises of Fire Services countywide.
Myth Four: There is a WILL, a true resolve, to solve the financial crises in Fire Service delivery (and other government programs) in Contra Costa County as well as in California.
But is there really resolve? Where is it? Show us.
I have divided this posting into two parts; 1.) The “Players” in the game and, 2.) The actions that can and must be done to archive financial solvency for our fire district, as well as s other government agencies in the county and throughout California.
Part I: Players in the game
To understand this crises, one must first identify the players, i.e. those groups, organizations, and individuals with a “vested interest” in the the outcome of the solutions that should be implemented or avoided. By my way of thinking there are five on one side of the equation, and one on the other:
- Pension Plans such as CalPERS, CalSTRS, and CCERA
- Elected Officials at the city, county and State level
- Unions and their membership working as employees in local and state government and agencies
- Unions and their membership working as management employees in local and state government and agencies
- Management employees
And then there are
- Citizens/Residents/Businesses, all Taxpayers
The interesting initial question is how do these players fit into our financial crises puzzle?
Well, think of a tug of war. On one end of the rope are the pension plans, elected officials, appointed government management and worker personnel and the unions that represent them.
On the other end are taxpayers, who pay the lion’s share for the status quo and will bankroll future decisions whether or not they are true solutions.
Who do you think is going to “win” this tug of war? Would you be surprised that new or more taxes are always the answer to such financial crises?
Do you think the first group of unions, politicians, and County administration would naturally create the WILL to solve a financial crises?
Pension Plans (CalPERS, CalSTRS, CCERA and others)
There are eighty-five public sector pension plans in California. CalPERS—or State and some local government employees—has assets of $277 billion, and is the largest pension fund in the country. CalPERs has an unfunded liability of $80 Billion.
CalSTRS—the pension system for teachers—is the second largest pension fund in the country, with assets of $181 billion. CalSTRs has unfunded liabilities of at least $71 billion, a deficit that is growing by $22 million per day every day of the year. CalSTRS has requested/demanded that employer (State and school districts) contributions be increased by $4.5 to $5.7 billion annually to eliminate its shortfall.
CCERA is the retirement system for Contra Costa County and various agencies (including Fire districts). CCERA has assets of approximately $6.5 billion; its unfunded liability including other pension benefits, such as health care costs is $3.12 billion.
Each of the eighty-five pension systems in California is run by a Board of Directors or Administration. Board members of each retirement system are generally made up of “employee representatives,” meaning labor unions, and “appointed members,” appointed by elected officials of the government entity. In California this means a coalition of the Democratic Party and big labor control over the funds and actions of the plans. In recent years this has meant pension growth, “spiking,” the issuance of Pension Obligation Bonds, and protection for employees and their pensions.
To see examples of a pension plan reaction to “pension reform” one just needs to review the actions of CalPERS in relation to failing cities. Vallejo, Stockton, and San Bernardino have all filed for bankruptcy; have all been attacked, threatened, cajoled at the first hint of possible pension rollbacks during those bankruptcies by pro-union stakeholders.
Vallejo and Stockton caved in to the threats; Vallejo came out of bankruptcy less than five years ago without changing its pension plans and is, reportedly, ready to file bankruptcy again due to escalating pension costs. Stockton, capitulated to CalPERs’ threats and passed a new sales tax rather than reducing pensions. Predictions are Stockton may make it for four years without re-filing for bankruptcy. San Bernardino is in a battle now; it has replaced its entire city council and is fighting CalPERs’ demands. It is expected to give up the fight soon.
These pension plans have demonstrated by their actions, words, and their make-up that they have no intention to modify their respective positions on pension reform in California. They are, in fact, the main beneficiaries of pensions in the State and are frequently coupled with Wall Street firms to protect the billions in investments, commissions, and fees they make annually. For example, in the 2012-13 year CalPERs had 2,696 employees and administrative expenses of $590,229,000. Its position is not going to change when it comes to “reform”.
Unions and Elected officials: the Bribe/Extortion Cycle
The critical driving factor of the ongoing crisis is the interactions between the unions and their collective political clout with California elected officials from Governor down to city councils, school boards, and special districts.
What makes the world of the public employee pension crises in California go ‘round is what I call “the bribe-extortion merry-go-round.”
It works like this: “Unions give candidates—usually Democratic incumbents—campaign money,and in return those office holders turn around and return the favor with exorbitant pay increases, luxurious health care coverage, and pensions, Project Labor Agreements, and favorable work rules unheard of in the private industry. “Thank you,” say the unions “here’s more campaign money as a new contract negotiation period is coming up.” and the merry-go-round continues spinning.
If you doubt this analysis, just look at campaign contributions to the governor, Lt. Governor, State Senate, and Assembly candidates. Or acquire the financial disclosure statements from your local city council members.
In 2012, California Watch, a Contra Costa Times journalism partner, reported a study on the top 100 contributors to California politics from 2001 to 2011. Public Sector unions were the top givers, contributing $285 million. Indian casinos were the second largest industry on the list, contributing $233 million, with the Energy industry contributing $200 million to place third The California Teachers Association (CTA) topped the public sector list, contributing $118 million.
After CTA, other top public sector union contributors were:
- California State Council of Service employees ($49 million)
- AFSCME ($15 million), California Correctional Peace Officers, ($14 million)
- California Federation of Teachers ($13 million)
- California School Employees Association ($12 million)
- SEIU ($10 million) California Professional Fire Fighters ($8.6 million)
- California Nurses Association ($8 million)
- California State Council of Laborers ($8 million)
- Professional Engineers in California Government ($7 million)
- State Building and Construction trades Council ($6.9 million)
- California Faculty Association ($6 million), and the
- National Education Association, one of two major national teacher unions, ($6 million).
This past week I looked up political contributions by Fire Fighter unions at follow the money (FTM), a website that tracks money in politics; note that the California Professional Fire Fighters are on the above list. The results are not surprising; remember FTM does not capture all contributions, but it is a good representation of patterns/trends in political contributions by organizations.
Between 2003 and 2012, the United Professional Fire Fighters, Local 1230, the union that represents employees in most local fire districts in the county, made political contributions totaling $63,150.
According to FTM, the contributions went to candidates (80%) and ballot measures (17%). The candidates (largest receipts to smallest) were to Democrats: Mark Desaulnier, Susan Bonilla, Phil Angelides, Jerry Brown, Joan Buchanan, Nancy Skinner, Tom Torlakson, Jim Frazier, Loni Hancock, Alberto Torrico, Joe Canciamilla, Mark Leno, and Elaine Shaw.
Spot a trend?
Contributions to ballot measures went to: Californians against the costly recall of then Governor Gray Davis, Workers Rights Protection Fund of the California Labor Federation, AFL-CIO No on 75, Yes on 1A, Californians to protect Local taxpayers and public safety. (sic)
The parent Fire Fighters Association of Local 1230, the International Association of Fire Fighters, made $4,057,479 in contributions in California between 2000 and 2012, that were tracked by FTM. (Subsidiaries of the Association made $44,112,428 in contributions throughout the country that were not included in the report. Of the $4 million tracked in California, 57.5% went to Democratic campaigns, 1.4% to Republicans, and 41% to ballot measures advocated for by the Democratic party and major public employee unions. The top recipient on the list of candidates was Gray Davis with $100,000; Jerry Brown was fifth with $51,800 in the 2010 election.
The top ballot measure funded by the union was the Alliance for a better California in 2012; it received $700,000 of a total contributions of $1.6 million.
Finally, FTM also shows campaign contributions to political parties (“All Party Committees”) totaled $1,349,417 with 100% going to Democratic Party organizations throughout the country.
One other note on the political influence of public sector union. California Public Policy Institute’s “Project Union” reports that public sector unions collect between $1.1 billion and $2 billion per year in union dues, ALL of which is used to influence government decisions. Funds collected as dues are given directly as contributions, used to hire lobbyists, fund independent expenditure campaigns and/or are used to pursue a union agenda through negotiation, litigation, education or other means. The money has no other purpose.
At the local level the same pattern of contributions continues, with one additional dynamic: members of city councils, fire boards, and other elected officials meet frequently, if not daily, with employees of the government entity they manage. They become colleagues, many times friends. They “understand” the issues and problems they see with the employees; many elected officials are retired employees of the same “industry.” They may be, for example, retired firefighters on the fire board, policemen on the city council, or teachers or principals on the school board, or city councils. They are members of the same “fraternity” of workers. It is a small world, after all.
On the other hand, these folks rarely interact officially with those they are actually working for, the residents and taxpayers they represent.
Few citizens show up at city council or town hall meetings. At recent ECCFPD town hall meetings on a proposed parcel tax only a handful of people showed up at each session (145 people at seven town halls). I attended one Fitch Associates town hall meeting on ConFire and the majority of attendees were fire fighters, not citizens. It is a human condition to favor those you come into contact and identify with most frequently. We should expect no less from our elected officials, but we should demand a more rigorous accountability.
Government management employees are in roughly the same position as elected officials. They also occupy a different place in government than managers in the private sector. In the private sector, management employees represent the owners of the company, they sit on the “other side” of the bargaining table from the workers.
In the Public Sector management employees are frequently union members as well. For example, in home town, the City of Brentwood, the Police Department has an Officer Union, a Sergeants Union, and a Lieutenants Union. The Police Chief is the lone non-union employee in the entire department.
In this environment they know that whatever they give up in negotiation will “trickle up” their way shortly. Being stingy with the compensation dollar will only reduce their pay or benefits a short time later. They too, side with the employees, not the citizens when it comes to compensation.
The will to solve government financial issues is afraid to even whisper its name in these peer groups.
We should expect even more lawsuits and strikes as more budgets tighten, more bankruptcy filings take place, as money for more wage and pension benefits disappears below the redline.
Citizen, Resident, Business, Taxpayer
This takes us to the citizen, resident , business, or taxpayer, the group that funds everything. Sadly, this is the only group NOT at the negotiation table.
But even we are often players in our own tax demise.
At various town hall meetings I attended on how to solve the Fire Districts financial crises there was always the person or people who got up to address the Board of Supervisors, Fire Board, or Fitchand demanded that costs be cut, pensions reduced AND a fire station be built or saved in her/his neighborhood. At one meeting in Brentwood, several residents demanded the Fire District drop services for the cities of Byron, Knightsen, and any other city that took away from “their” services.
Yes, this is California, the State where residents always want more government services and fewer taxes; and, of course, our normal solution is to “tax someone else, not me.”
Now that we know the players at the table involved in our shared, growing financial crises, the next step in discovering if there is actual WILL to resolve to solve the financial mess, is to consider what actions can be taken to finally and seriously address the structural financial deficits created by out of control public employee pension costs.
Part II: Actions to Take
Find “Other Revenue Sources”
The first, and current, consideration to act on is to find “other revenue sources.” Several fire districts, for example, are now on this quest. It is as if taking money out of our left pocket, in addition to our right pocket, is not really taking more money from us; or, at least,it is going to make it easier for us to accept. The one “advantage” this has is that it will generally spread the costs to more than just property tax payers.
The one advantage this has is that it will generally spread the costs to more than just property tax payers.
We will all just be nickeled and dimed to death.
ConFire has added to this concept by proposing that a person’s insurance company be charged for emergency services such as EMT services at the scene, and rushing you to a hospital by ambulance. This way, you pay an indirect tax by having your health insurance costs rise. This is government funding at its finest.
This however achieves the wrong goal. The tactic of finding more money only enables the traditional attitude of higher tax and fees.
Reorganize, Restructure, or Consolidate
Another option that has been advanced is to re-organize, restructure, and/or consolidate fire services within the county.
LAFCO, in its Municipal Services Review of 2009, made multiple recommendations to consolidate areas into existing fire districts and, at least one recommendation that ECCFPD be consolidated into ConFire and/or ALL districts in the County be consolidated into one district.
Recently, the Board of Supervisors retained Fitch and Associates to review ConFire’s operations and make recommendations. Fitch listed three options for organizing the District, recommending their option two as a solution. Option two is “Optimized Three/Two Response Staffing” which means:
“Convert a select number of three person companies, to two person quick response vehicle companies, thereby providing additional response units, expanded coverage, and improved response times to emergency events. Modify deployment plans with an eye toward staffing stations that are now closed. The option utilizes the existing personnel roster and requires capital costs of approximately $100,000 to $200,000 for each fully equipped vehicle.”
This option recognizes that fire districts have changed; seventy-eight per cent of all fire calls (fifty-six per cent of all fire fighter time) is responding to basic or emergency medical assistance calls, not fires.
Consolidation or reorganization is being considered throughout California Counties as you read this. Be it Santa Clara County, or Orange County, or other counties in California. In each case it dawns on decision makers that having one Fire Chief and command structure, instead of five, or six, or nine, will save money. Locally, the city of Lafayette is reviewing ways to improve fire and emergency services, not by re-opening a closed fire station, but repurposing the facility and services bro focus on medical response capabilities.
Fire merger expert Chief Stewart Gary of Citygate Associations, a fire service consulting group, has recently warned cities and counties that there are potential significant costs savings through reductions in “services redundancies.” Yet after years of recession-driven cost reductions, huge savings may not be possible. In other words, we must, therefore, be aware that reorganizing or consolidating services within the County will save money, but that options such as Fitch has forwarded will not result in financial savings large enough to resolve the county’s funding issues. It could, however, result in better service delivery throughout the county with some reduced costs to taxpayers.
So we ask again. It there truly enough political WILL in Contra Costa County in this alternative to make organizational changes that result in substantial financial savings?
Sadly, No, not from what I have seen.
Each city guards its fire services resources closely and few are ready to consolidate to a larger, more efficient, though remote authority they cannot more directly control. In addition, the fire services unions are opposed to significant changes in the current operation. I personally do not see the resolve to make changes within the county.
Now we come to the solution with the most “bang for the buck,” the one “must achieve” for solving the financial crises in fire districts and most other government services…Pension reform.
Although pension reform is the area where most savings can be realized, it is the solution with the most serious impediments to implementing reforms. Those impediments lie within the court system and, to a lesser degree, the IRS.
This section relies heavily on the work of Steve Malanga, editor and reporter for City Journal, and Amy B. Monahan, University of Minnesota Law Professor in her research entitled “Statutes as Contracts? The California Rule and its impact on Public Pension Reform,” and various other reports from the Bay Area News Group, the L.A. Times, and the San Diego Union Tribune.
Early California Public Pension Systems
Early California Public Sector pensions were held by the California Legislature and Supreme Court to be a “gratuity” provided by the State or other government entity. As a gratuity, the State was allowed to make changes to pensions, even of current employees, but not to end a pension.
California courts’ view of pensions evolved throughout the early 1900s. Understandings of pensions changed from a gratuity to that of a “property interest” protected by the Fifth Amendment. As such, recipients must be given due process rights and protections against arbitrary government action, but allow earned and future benefits to be reduced or revoked if such changes had a “rational basis.”
This is the legal status of the Social Security system today.
This legal status has also changed , with the Courts viewing pensions in the 1930’s and 1940’s as “deferred compensation,” that allowed the State to make “reasonable modifications” to pensions, but required that “disadvantageous modifications” had to be offset by “comparable new advantages.”
The current standard for allowing modifications was established in 1955, in Allen v. City of Long Beach. The California Supreme Court ruled that an employee’s vested contractual pension rights may be “modified prior to retirement to keep a pension system flexible to permit adjustments in accord with changing conditions at the time and to maintain the integrity of the system…such changes, however, must be reasonable and bear some material relationship to the theory of the pension system and its successful operation and changes in the pension plan which result in disadvantages to employees should be accompanied by comparable new advantages.”
In decisions since Allen, California courts have found that “increases in the rate of employee contributions were held to be unreasonable where they were not accompanied by any new advantage.” Courts have also ruled that poor funding status is not enough to satisfy changes in employee contributions and that the system must show extreme hardship by the government entity that would result in the collapsing of the system without employee financing of past unfunded liabilities.
The “California Rule” and “Comparable New Advantages”
Current California pension law is known nationally as “The California Rule.” The California Rule grew out of California Supreme Court rulings and holds that the statutes establishing the state’s retirement system created a contract between the State and employees on the employees’ first day of employment and prohibits the State from making any “detrimental” changes to the benefits provided to current employees within the system. The ruling also holds that benefits not yet earned are also contractually protected.
Since this ruling California courts have ruled that the State can terminate a worker, lower their salaries, and/or change their fringe benefits, but cannot decrease a worker’s rate of accrual of benefits as long as the worker is employed.
Ms. Monahan believes the California Supreme Court erred in its original decision (and several subsequent decision. She contends that the court failed to prove the legislature intended to create a contract when passing pension legislation. She adds that the decision , in her opinion, is contrary to federal law.
This interpretation is highlighted in legal battles in Detroit, and Michigan—whose pension laws mirror the California Rule—hence making it difficult for bankrupt Detroit from modifying its pensions to current workers and retirees.
The case, however, has now reached the Federal Courts, and the judge in the case has ruled that pensions, as well as other contracts, may be modified (suggesting at one point that pensions should be reduced by 84% for both current workers and retirees) under Federal law.
The Detroit case has not reached a conclusion, but may be the single best solution to solving the pension crises for California cities.
Significant Opportunities to Challenge Current Pension Law
The trend in California is that the multiple attempts by cities and other government entities to modify existing benefits are always challenged in Court, with unions winning those challenges. However, there are two recent major challenges that, perhaps, offer a path to reform: the cities of San Diego and San Jose in 2012.
The City of San Diego’s pension reform initiative, Proposition B, passed with 66% of the vote in 2012. The proposition was immediately challenged by unions, and the union friendly State Public Employment Relations Board. The measure, a less sweeping than San Jose’s, instituted a 401 (k) plan for new city employees, capped city pension payments for five years and ended a variety of pension spiking abuses. The plan continues to be implemented today while the court challenge continues, with unions adding a new defense: the law is illegal because it improperly denied them their right to negotiate. It hasn’t yet been determined by the court if that right surpasses the constitutional right of citizens to vote.
Another bellwether case in the evolving pension fight is Ventura County. The County is currently attempting to pass a pension reform measure that is significantly like San Diego and may work for other “37 Act” pensions such as Contra Costa County.
In San Jose, the city’s pension costs had risen from $76 million a decade ago to $245 million in 2012, despite the city having laid off several thousand workers. Major Chuck Reed decided the city needed to act on pension reform; he recruited other city council members and the city placed Proposition B on the ballot in 2012; it gathered 70% of the vote in that year’s election.
The city reasoned that they are a Charter City with a charter that allows the city to amend or repeal their two city run retirement plans at any time. In March, 2013 a Superior Court judge ruled against the city, citing several California Supreme Court rulings.
The Proposition gave current workers the option of 1.) Increased pension contributions up to 16% of pay, but no more than half the cost of paying for the unfunded liability debt or 2) a lower pension for future service. It also would have allowed the city to cut cost of living increases for up to five years if the city council declared a fiscal emergency and it tightened eligibility rules for disability retirements .
The judge ruled against the city for reasons discussed above and noted the plan also did not have IRS approval (more below). She did, however, agree that the city could cut workers’ pay to achieve savings equivalent to savings achieved by the proposed plan.
Despite the court setback, Mayor Reed estimates the city will save $20 million this year from the elimination of a city bonus payments to employees and retirees and some retiree health care changes. He has initiated a proposal for an initiative to put a constitutional amendment on the ballot that would give state and local governments the option of cutting current workers future earnings, while protecting pension amounts already earned.
The mayor’s initiative has been delayed by a battle with State Attorney Genreral Kamala Harris. Ms. Harris’ office is charged with writing the 100 word ballot description for initiatives. Mr. Reed filed suit against the description written by Ms. Harris and the ensuing battle has delayed the initiative until 2016.
In researching pension reform, a recurring theme that kept popping up: “disability pensions.”
But I could not find any current studies on the subject. Consulting Union Watch, I found there are no current studies, and pensions plans do not release any information on the topic. There were, however, two studies from the 1990’s that showed that two-thirds of all San Jose Fire fighters and two-thirds of all Highway Patrolmen (80% of all Highway Patrol management) retire on a disability pension. Further research revealed that CalPERS “presumes” that any filing for a disability pension is correct, even if years or decades AFTER the person has retired.
The result of a disability pension is that 50% of retirement pay is provided tax free, boosting retirement payouts by approximately 25%. In other words, there are significant financial costs to government agencies for disability pensions, especially for public safety employees that already retire at age 50 with up to 90% or more of their pay (the 3% at 50 retirement rule).
No one, this writer included, wants to deny disability payments to those who have been injured or disabled on the job. But, at the minimum, transparency is called for here and new guidelines for granting disability payments should be implemented statewide.
The Internal Revenue Service
Another fact popped up in researching this article. Meeting with Mr. Vince Wells, Fire Captain for ConFire and President of Local 1230. Mr. Wells told me he and members of his union pay 24-27% of their pay for their pensions and would look at an option of a lower pension for smaller monthly contributions. He also said, that the Deputy Sheriff’s Association, “negotiated the ability to opt into another retirement tier but it was forbidden by the IRS under “constructive receipt.” Wells stated the IRS has not responded to requests by the County, CCERA, or the union for clarification or a ruling for over six years.
This issue first arose in 2009 when Orange County negotiated an agreement its union that included giving the workers an option of moving from their expensive, defined benefit plan into a less-expensive hybrid (defined benefit plan with a less expensive defined contribution plan). The new plan would have saved the county $10 million per year and increased workers take home pay.
The glitch? Local government contributions into a defined benefit plan are not counted as part of an employee’s taxable wages, BUT the IRS won’t decide (or if it has won’t tell anyone) if a portion of the employee’s pension contributions are taxable if a worker moves into a plan such as the one proposed by Orange County.
According to news reports, Orange County has repeatedly pressed the IRS for answers; other cities have also repeatedly pressed the IRS for answers, as have the Conference of Mayors and the National League of Cities, all to no avail.
Republican John Campbell, Congressman from Orange County and Democratic Congresswoman Loretta Sanchez, also from Orange County have introduced legislation into the House of Representatives to clarify the situation. The bill has not moved forward since its introduction in January, 2013. Ms. Sanchez has told reporters this is due to union opposition. Unions, she says, are unhappy because clarification of the tax issue would spur more cities to move employees into hybrid plans.
Surprisingly, WILL may have arrived unceremoniously
Reviewing the above narrative, I believe, demonstrates that rather than growing the will to solve the current financial crises in fire and other government services delivery, the people and groups with a “vested interest” have spent decades erecting significant obstacles to sound government financial operations in California. And we should expect those groups and individuals to continue to squash every effort to change the status quo.
There is, however, the beginning rumblings of a change.
The voters in San Diego and San Jose (66% and 70% for pension reform, respectively) show that the polities are now more aware and more willing to address the current situation.
Democratic Mayor Chuck Reed in San Jose and new Republican Mayor Kevin Falconer and former city council man and congressional candidate Republican Carl De Maio in San Diego are leading the fight for pension reform and fiscal responsibility in California.
Interestingly enough, in a recent speech to the Contra Costa Taxpayers Association, Mayor Reed said he took on the task of pension reform because “Democrats broke it, Democrats should fix it”.
I applaud his stance, but disagree. It is critical that we all, the citizens of the State of California, support these serious reform efforts by demanding our elected officials, such as the County Board of Supervisors, support like efforts and work to implement reforms, as Ventura County is now doing. Otherwise it’s back to the merry-go-round.
Fortunately, the bankruptcy of Detroit will push this effort to the forefront as, in parallel, more cities and fire districts in California have greater and greater financial difficulties. It is incumbent on local community organizations and elected officials to push more efforts through the California courts and into Federal courts.
This will be a long battle. There is no silver bullets or quick fix. It will take perhaps a decade, to change the current playing field and rescue our cities, counties, and the State from financial collapse.
Can we grow a backbone on the small resolve that has nudged itself in the door or will government in California implode first?
I have a granddaughter in the State. I am up for the fight.