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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 [- Select an author - \/] [- Select a category - \/] SEARCH 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.