California Lawyer Magazine on Public Pensions

From California Lawyer, "A Thousand Cuts" by Thomas Brum:

In February 2010 the Pew Center on the States reported that, in the next 30 years, state governments would be on the hook for $3.35 trillion for pensions. Two months later the Stanford Institute for Economic Policy Research reported that California's three main public pension funds had unfunded liabilities of $425 billion. And last October the Milken Institute reported that, by 2013, the combined liabilities of these three funds will be more than 5.5 times larger than total state general fund revenue...

In California, the state constitution protects public pension benefits, like other contracts, from impairment. (Cal. Const., Art. I, § 9.) Described succinctly by the state Supreme Court, "A public employee's pension constitutes an element of compensation, and a vested contractual right to pension benefits accrues upon acceptance of employment." (Betts v. Bd. of Admin., 21 Cal. 3d 859, 863 (1978) (citing Kern v. City of Long Beach, 29 Cal. 2d 848 (1947)).)...

[T]he court noted, "Imprudence...is not unconstitutional." (County of Orange v. Ass'n. of Orange County Deputy Sheriffs, 2011 WL 227711 at *8.)

More here. Unfortunately, the article doesn't discuss how these government benefits were negotiated. Many people don't know that government workers received their compensation packages behind closed doors--away from the average voter's oversight--due to an exception in the Brown Act for labor negotiations. Thus, government union compensation contracts are not the same as ordinary arms-length contracts. Instead, such contracts are the product of union organizing and using superior organization to get better compensation for themselves. But when compensation is negotiated behind closed doors and in a system where residents/voters must pay whatever is negotiated, it is clear that government unions have an advantage that is not necessarily compatible with the interests of the general public.

Private unions are different. If a GM worker is paid a million dollars a year, it does not necessarily concern me, because I do not have to buy a GM product. I have a choice, and if a private union gives themselves overly generous pay packages, they destroy the company and their own work prospects. No such check and balance exists when government unions negotiate overly generous compensation packages. Taxpayers must pay whatever is negotiated behind their backs, no matter how outrageous. If you say the problem is negligent oversight by politicians, I agree, but when the system is designed to favor politicians who cozy up to government unions, it's hard not to blame government unions as well as the voters. Just my two cents.

On California Education

Three must-read links on education:

Grand Theft Education [Warning: PDF] (Hat tip to Jon.)

Reason.com: "The two largest teachers unions, The American Federation of Teachers and the National Education Association, overwhelmingly supported Obama with their votes and their contributions. Some 95 percent of the groups' campaign contributions go to Democratic candidates and the NEA, spends more money on elections that Microsoft, ExxonMobil, Walmart, and the AFL-CIO combined. No wonder Obama's big talking point is that he wants to add 10,000 more teachers to public payrolls despite the fact that there are already more teachers per student than ever.

Reforming education may not be politically easy, but the solution is pretty simple: Give parents and students more ability to choose - and exit - schools. This works for every other sort of business and it works for higher education, too. There's no reason to think it wouldn't work for K-12 education."

Economist blog: "America's public-sector unions...have an extraordinary power to force the state to dance to their tune, squashing innovation, reducing productivity and undermining competitiveness."

"With poor prospects in the ultra-competitive private sector, government work is increasingly desirable for those with limited skills; at the opposite end of the spectrum, the wage compression imposed by unions and civil-service rules makes government employment less attractive to those whose abilities are in high demand..."

Bonus: more facts here.

Union Arbitration = No Transparency

Most of the time, when our politicians make decisions, the process is open and transparent. That openness allows voters and residents to oppose shady or unreasonable deals. In contrast to the normal principle of transparency, most of California's government unions negotiated compensation packages behind closed doors (via arbitration). About two years ago, the California Supreme Court issued a decision (mostly) rejecting the government unions' claims to privacy protection, finally forcing the unions to disclose their generous compensation packages. Since then, most Californians have been shocked to see union workers receiving benefits far above the norm in the private sector. Consider the following scenario:

Blackwater operatives come to San Jose, call for a private meeting, and tell the Council that they have information about a possible impending attack. Blackwater then demands, in private, $2,000/yr from each resident and his or her child for the next 60 years to help the city avoid the attack. The Council, behind closed doors, agrees. Later, someone becomes upset with his increasing taxes and sues the City to figure out what is going on with the budget. Two years later, after much litigation, the state Supreme Court forces the Council to reveal the Blackwater deal to the public.

Should voters be able to revoke or modify the private deal because they may have received some benefit from Blackwater and because Blackwater employees may have relied on expected future income? Keep in mind that the the deal affects the voters' children (i.e., like government pension promises, the private deal forces our children to pay higher taxes in the future).

The union arbitration system--under which the unions received their generous pay packages--is similar to the scenario above. The pay was privately negotiated and not subject to any real checks and balances. In fact, the hypothetical scenario above is generous to the unions and their enabling city council members, because the gun-to-your-head factor mitigates the government's acquiescence. Sadly, at this time, cities and counties cannot do much legally about the private promises they've made to unions except for declaring bankruptcy.

The union arbitration system is terrible for taxpayers. The only other political issue that boils my blood more is gerrymandering. Gerrymandering is where the two major political parties carve up voting districts to avoid competition. It's like Microsoft and Google got together one day and said, "You get these areas on the West Coast, and we'll get these areas on the East Coast, and we both agree not to sell our products in each other's areas." If that actually happened, we would be outraged. Why aren't we more outraged about gerrymandering?

Mish on California's Government Unions

But Mish, tell us how you really feel:

Outrageously overpaid California public union parasites have every intention of sucking the last drop of blood out every taxpayer. Regardless of the cost to taxpayers, and even though their bloated benefit programs vastly exceed what the private sector gets, nothing will get in the union's way of protecting the overgenerous benefits they have, while still demanding more money from taxpayers, no matter what fiscal shape any of the cities are in because of those contracts.

More HERE. Mish is referring to police officers, firefighters, teachers, government lawyers, and anyone else who is part of a California government union that is refusing to accept wage cuts. The unions' refusal to be reasonable has caused layoffs of newer government workers, including teachers. It's sad, but tenured and retired teachers don't seem to care much about the next generation of educators, as long as their own gold-plated benefits are covered.

Here are three ideas: 1) every California government employee, including politicians, with more than seven years' tenure and making more than $65,000/yr should accept at least a 10% pay cut; 2) all new government employees should be eligible for 403b plans, not undefined pensions; and 3) all existing government employees eligible for pensions should increase their pension contributions by 5%.

Also, eliminate "3 Strikes and You're Out" for non-violent crimes and get rid of the death penalty, which costs over 200 million dollars a year to implement. (Do you want to spend 200 million dollars killing a murderer, or do you want to spend 200 million dollars on UCs, roads, community centers, etc.?)

People to Government Unions: Baaaa Baaaa

More on government unions HERE. I've shown this article to some people, and they never address it directly--they just start talking about the increasing prison population, the increasing immigrant population, etc.

In short, people keep trying to justify out-of-control state spending by referring to the specific expense they hate the most; however, the point isn't that some people dislike specific expenditures--everyone dislikes some expenses, whether it's Medi-Cal, prisons, pensions, etc.

The point is that overall state spending is out of control, and a specific segment of the population has made themselves immune to economic fluctuations at the expense of taxpayers, including the middle-class.

The Simpsons on Unions

The Simpsons show always has the best lines:

You can't treat the working man this way. One day, we'll form a union and get the fair and equitable treatment we deserve! Then we'll go too far, and get corrupt and shiftless, and the Japanese will eat us alive!

Oh, the tragedy.

California Dreamin': Fiscal Irresponsibility

This is old news, but still worth sharing, because of California's upcoming special election:

http://online.barrons.com/article/SB123941269948510457.html

Chris Street, treasurer of Orange County, Calif., warns if the federal government backs California's debt, the market for city bonds will be harmed. "Why would anybody buy the debt of a local issuer if they can get federally backed debt sold by the state?" he asks. He should know. The OC declared bankruptcy several years ago. Barron's is too smart not to notice the irony of quoting an OC official about the demand for municipal bonds.

Just in case you forgot--the CS Monitor reminds you that taxpayers back and insure government employees' retirement plans. Ultimately, every dollar that goes to them--the police, firefighters, and teachers--comes out of our pocket. Other states besides California also pay disproportionate amounts for their public pensions, showing the system itself is fundamentally flawed. For example, Illinois had $40.9 billion in future general and special obligation bond debt service as of June 30, 2006 ($22.7 billion principal and $18.2 billion interest). $10 billion of that–almost half of the principal--was tied to public sector pensions. (From http://www.wh1.ioc.state.il.us/fiscalcondition/DebtLevels.htm.)

Meanwhile, in California, things keep getting worse:

San Jose officials said Tuesday that the tanking stock market could force taxpayers to pony up as much as $50 million extra the following year to cover losses in the city's retirement funds.

Things look even worse in the longer term, as city officials say the cash-strapped general operating fund could have to pour tens of millions of additional dollars into the city's two pension programs by 2013.

If it's not painfully obvious by now, the current government retirement system--which is tethered to the vagaries of the stock market--is untenable. It promotes civil war between taxpayers, Wall Street, and government employees. We need to eliminate the special pension plans given to public sector employees and let them have the same retirement plan most private sector workers have--namely, a 401k or a 403b plan. In exchange, taxpayers can boost some government salaries, which are easier to track and not tied to the stock market.

As for the upcoming special election, California's governor wants Californians to vote "yes" on all the measures in the upcoming special election. I've already voted by absentee ballot, but I voted "no" on some measures. I am sick of my legislature not being able to handle basic accounting. When your income declines, you need to cut expenses. Will Sacramento ever learn third grade math?

Bonus: Robert Frank on people buying property.

Bonus II: Steve Malanga on public sector unions:

http://online.wsj.com/article/SB124227027965718333.html