Attachment 4ATTACHMENT 4
From: John Shepardson [mailto:shepardsonlaw@me.com]
Sent: Tuesday, September 18, 2018 1:41 AM
To: Rob Rennie; Steven Leonardis; BSpector; Marcia Jensen; Marico Sayoc; Laurel Prevetti;
Mike.Wasserman@bos.sccgov.org; hmiller@saratoga.ca.us; rodsinks@gmail.com;
Mayor@bakersfieldcity.us; MayorSteinberg@cityofsacramento.org; Senator.Beall@senate.ca.gov;
district1@co.monterey.ca.us; district2@co.monterey.ca.us; district3@co.monterey.ca.us;
mayor.garcetti@lacity.org; sam.liccardo@sanjoseca.gov; senator.moorlach@senate.ca.gov;
pamela@pypesq.com; vicemayorchang@gmail.com; Robert Schultz; Council
Subject: For 9/18/18 Council Packet: Public Sector Unions Negotiated Spectacular Benefits From
Government Entities—Retroactive Application of Percentage Rate Increases
Gov Brown’s Brief Supporting Cutting Pension Benefits
http://majlabor.com/wp-content/uploads/2017/11/PA-20171106-State-Answer-Brief-on-the-
Merits-Air-Time-00042485xDC64Ax.pdf
https://californiapolicycenter.org/will-california-supreme-court-reform-california-rule-update/
Most pension experts believe that without additional reform, pension payments are destined to
put an unsustainable burden on California’s state and local governments. Even if pension fund
investments meet their performance objectives over the next several years, California’s major
pension funds have already announced that payments required from participating agencies are
going to roughly double in the next six years. This is a best-case scenario, and it is already more
than many cities and counties are going to be able to afford.
The legal precedent for what is now called the California Rule was set in 1955, when the
California Supreme Court ruled on a challenge to a 1951 city charter amendment in Allen v. City
of of Long Beach. The operative language in that ruling was the following: “changes in a pension
plan which result in disadvantage to employees should be accompanied by comparable new
advantages.”
Starting back in 1999, California’s public sector employee unions successfully negotiated to
increase their multiplier, which greatly increased the value of their pensions. In the case of the
California Highway Patrol, for example, the multiplier went from 2% to 3%. But in nearly all
cases, these increases to the multiplier didn’t simply apply to years of employment going
forward. Instead, they were applied retroactively.
For example, in a typical hypothetical case, an employee who had been employed for 29 years
and was to retire one year hence would not get a pension equivalent to [ 29 x 2% + 1 x 3% ] x
final salary. Instead, now they would get a pension equivalent to 30 x 3% x final salary.
If the California Supreme Court does dramatically clarify the California Rule, enabling pension
benefit formulas to be altered for future work, it will only adjust the legal parameters in the fight
over pensions in favor of reformers. After such a ruling there would still be a need for follow on
legislation or ballot initiatives to actually make those changes.
What California’s elected officials and union leadership, for the most part, are belatedly
realizing, is that without more pension reform, the entire institution of defined benefit pensions is
imperiled. Hopefully California’s Supreme Court will soon make it easier for them all to make
hard choices, to prevent such a dire outcome.
* * *
Edward Ring co-founded the California Policy Center in 2010 and served as its president
through 2016. He is a prolific writer on the topics of political reform and sustainable economic
development.
REFERENCES
California Government Pension Contributions Required to Double by 2024 – Best Case
– California Policy Center
California Public Employees’ Pension Reform Act (PEPRA): Summary And Comment
– Employee Benefits Law Group
Allen v. City of of Long Beach
– Stanford University Law Library
Overprotecting Public Employee Pensions: The Contract Clause and the California Rule
– Alexander Volokh, Reason Foundation
Statutes as Contracts? The ‘California Rule’ and Its Impact on Public Pension Reform
– Amy Monahan, Iowa Law Review
Did CalPERS Use Accounting “Gimmicks” to Enable Financially Unsustainable Pensions?
– California Policy Center
Cal Fire Local 2881, vs CalPERS (Appellate Court case)
– JUSTIA US Law Archive
Cal Fire Local 2881 v. CalPERS, California Supreme Court, Case No. S239958 – Case Review
– Messing, Adams and Jasmine
Intervener and Respondent State of California’s Answer Brief on the Merits
– Amicus Brief, Governor’s Office, State of California
Amicus Brief of the California Business Roundtable in Support of Respondents
– Amicus Brief, California Business Roundtable (CBR)
RSI Supports California Business Roundtable Amicus Brief
– Summary of CBR Amicus Brief by Retirement Security Initiative
Resources for California’s Pension Reformers
– California Policy Center
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https://www.google.com/amp/s/www.forbes.com/sites/realspin/2016/05/02/public-pension-
crisis-solution/amp/
https://www.google.com/amp/www.grassrootinstitute.org/2018/08/report-how-to-resolve-
hawaiis-public-pension-debt-crisis/amp/
Report: How to resolve Hawaii’s public pension debt crisis
Incentives to enroll in a new plan could include lower vesting ages, increased portability and
higher funding ratios. Ideally this would help lead to the eventual elimination of the system’s
debt, strengthening the promises made to Hawaii’s retired public workers and providing relief to
Hawaii’s taxpayers — especially the younger ones, who at the moment appear to be the ones
who will have to pay off most of Hawaii’s unfunded liabilities in the long run.
By creating a new pension plan based on best practices from other states, Hawaii’s lawmakers
could take a step toward helping the ERS match its promised retirement benefits with employee
contributions, helping roll back the system’s — and thereby the state’s — unfunded public
pension liabilities.
The full report is available on the Grassroot Institute’s website
at http://www.grassrootinstitute.org/wp-content/uploads/2018/08/Pension-report-7-31-18a.pdf.
https://www.google.com/amp/www.sj-r.com/opinion/20180721/guest-view-how-to-solve-
illinois-pension-crisis-and-dramatically-lower-property-taxes%3ftemplate=ampart
The Center for Tax and Budget Accountability (CTBA) recently offered a solution on pensions.
Its idea was to use the power of compound interest to help drive down massive pension costs in
the future. Relatively small skips in pension payments, sometimes called "pension holidays," in
the past led to large long-term debt because of compound interest. Their idea was to reverse that
mistake by increasing upfront payments in order to avoid more dramatic increases in the future.
So where would we get the $2.4 billion? There are several options. First, we need to be much
better stewards of the taxpayer's dollars. Things like workers' comp reform, expanding the
pension buyout plans and reforming Medicaid are some immediate areas that can be addressed.
We also need to prioritize our spending. Remember the $3 billion we committed to "medium
speed rail?" Wish we had that back.
https://money.cnn.com/interactive/economy/pension-crisis-retired-workers/index.html
The soaring costs have fueled outrage in some camps, sparking a belief shared regularly in letters
to the editor and conservative magazines that pensioners are living richly on the backs of
taxpayers who themselves can barely afford a secure retirement, if any.
As Pew noted in its report, state and local governments made overly rosy assumptions about the
market returns their funds would make. The median public pension plan’s investments returned
about 1% in 2016, well below the median assumption of 7.5%. That disparity added about $146
billion to the debt, the report found.
Now, calls are mounting to switch public employees into cash balance plans, a hybrid between a
pension and a 401(k). The plans are generally less generous because they calculate benefits
based on the beneficiary’s lifetime earnings rather than their salary right before retirement, when
their earnings are typically at their highest.
https://www.google.com/amp/s/insights.som.yale.edu/insights/can-we-fix-the-public-pensions-
crisis%3famp
Pensions work when employers and employees contribute to a trust through every paycheck. If
everyone contributes enough and the assets earn enough through compounding and wise
investing, then the pension should be fully funded and available when people retire 20, 30, or 50
years down the road.
The State of Wisconsin Investment Board is definitely an example, where the staff the
investment approach and policies, the mission statement, and implementation is world class.
https://en.m.wikipedia.org/wiki/Pensions_crisis
Reform ideas can be divided into three primary categories:
▪ Addressing the worker-retiree ratio, by raising the retirement age, employment policy and
immigration policy
▪ Reducing obligations by shifting from defined benefit to defined contribution pension types and
reducing future payment amounts (by, for example, adjusting the formula that determines the
level of benefits)
▪ Increasing resources to fund pensions by increasing contribution rates and raising taxes.
Proposed solutions to the pensions crisis include
▪ actions that address the dependency ratio: later retirement, part-time work by the aged,
encouraging higher birth rates, or immigration of working aged persons
▪ actions that take the dependency ratio as given and address the finances – higher taxes,
reductions in benefits, or the encouragement or reform of private saving.
In the United States, since 1979 there has been a significant shift away from defined benefit
plans with a corresponding increase in defined contribution plans, like the 401(k). In 1979, 62%
of private sector employees with pension plans of some type were covered by defined benefit
plans, with about 17% covered by defined contribution plans. By 2009, these had reversed to
approximately 7% and 68%, respectively. As of 2011, governments were beginning to follow the
private sector in this regard.[28]
Research indicates that employees save more if they are automatically enrolled in savings plans
(i.e. enrolled and given an option to drop out, as opposed to being required to take action to opt
into the plan). Some countries have laws that require employers to opt employees into defined
contribution plans.[28]
Some argue (FAIR 2000) that the crisis is overstated, and for many regions there is no crisis,
because the totaldependency ratio – composed of aged and youth – is simply returning to long-
term norms, but with more aged and fewer youth: looking only at aged dependency ratio is only
one half of the coin. The dependency ratio is not increasing significantly, but rather its
composition is changing.