I couldn’t let today pass without noting that it’s the one-year anniversary of FACT’s resounding court victory which blocked the state of California from issuing hundreds of millions of dollars worth of pension obligation bonds without a vote of the people as required by the state constitution.

Well, actually, yesterday was the anniversary of the court’s ruling. But by the time we all learned of the decision, we were already moving into Fourth of July mode and it seemed logical to celebrate on that auspicious date. Here’s the Associated Press story as it appeared in the July 3, 2008 issue of The Bakersfield Californian:

State loses legal battle over pension bonds

By AARON C. DAVIS

SACRAMENTO (AP) — Gov. Arnold Schwarzenegger’s administration on Tuesday lost a long-running court battle over its plan to sell bonds to cover the state’s public employee pension costs.

The ruling by the 3rd District Court of Appeal could complicate negotiations over the state’s already overdue budget. Republican lawmakers are holding up the $104 billion spending plan in part because they believe it will leave California with an unmanageably large budget deficit next year.

Tuesday’s ruling may only add to that concern, depriving the state of more than $500 million to help close the estimated $5 billion-plus deficit in the 2008-09 budget year.

Schwarzenegger and Democratic leaders have proposed balancing the current, 2007-08 fiscal year budget with billions of dollars from a prior-year tax windfall. That money will run out by the time officials begin drafting the budget that begins on July 1, 2008.

Consumer rights and anti-tax groups praised Tuesday’s ruling. They said it set an important precedent limiting the state’s ability to borrow money to pay ongoing expenses without voter approval.

“If they had gotten permission to do this, we could have seen massive deficit spending,” said Harold Johnson, an attorney for the Pacific Legal Foundation, which fought the bonds. “It’s a big victory and a sobering message for the spendthrifts in the Legislature. They can’t use the credit card to cover ongoing costs of government.”

Former Gov. Gray Davis’ administration designed the pension bond plan.

In 2004, Schwarzenegger endorsed the plan. He proposed paying a portion of the state’s annual contribution to the Public Employee Retirement System with money raised from a $560 million bond sale.

Schwarzenegger’s administration argued the state did not need voters’ approval to do so.

But a three-judge panel on Tuesday upheld a lower court ruling that said voters - or two-thirds of the Legislature - had to approve the use of bond money to pay the state’s pension obligation.

H.D. Palmer, spokesman for Schwarzenegger’s Finance Department, said the administration would not appeal the decision to the state Supreme Court.

“This is a great Fourth of July gift to Californians,” said Pacific Legal Foundation attorney Harold Johnson, who represented the Fullerton Association of Concerned Taxpayers (FACT) in challenging the bonds. “The court upheld the basic right of the people of California to chart their fiscal destiny and have the ultimate say over major state borrowing. The court affirmed that the Legislature can’t saddle the people of California with major debt without first getting their permission. This ruling should also be a warning to spendthrifts in government. They can’t spend like tipsy sailors and automatically borrow their way out of the mess they make.”

The decision was the subject of a subsequent editorial in The Orange County Register and was a hot topic on several blogs, such as this entry on the Cal Law blog and this one on the San Diego Union-Tribune’s editorial blog by Chris Reed regarding the decision’s application to local governments.

The case is Pension Obligation Bond Committee v. All Persons Interested in the Matter of the Validity of the State of California’s Pension Obligation, Appellate Court No. CO51749. You can read or download the court’s decision here.

While not perfect, the compromise hammered out and announced late yesterday on the websites of the Union-Tribune and the voiceofsandiego.org as well as on television goes a log way toward achieving the pension reform that has been promised by San Diego’s officials for quite some time but not delivered. Among other changes, it will increase the retirement age from 55 to 62, and base the amount that someone will earn in retirement on the employee’s three highest years of pay rather than the highest single year. The news report broadcast by the local Fox affiliate XETV (available here) provides a good summary of the details and includes brief comments from Lani Lutar, head of the San Diego Taxpayers Association.

Richard Rider, head of San Diego Tax Fighters, said this of the compromise, “It’s not nearly as good as I would want, but quite a change. A rather remarkable compromise.”

In response to an editorial on pension reform in Wednesday’s San Diego Union-Tribune, Richard Rider — chairman of the San Diego Tax Fighters and a longtime pension reform activist — issued the following statement:

San Diego Pension Reform Is Secondary to Pension Reduction;
Current 140% City Pensions Are Outrageous

Today the San Diego Union-Tribune’s lead editorial supported Mayor Sander’s tepid pension reform. While the editorial was right in its thesis, the facts were wrong. Current San Diego pensions for the non-safety employees are far more generous than the editorial stated.

The editorial incorrectly states that these general employees (not police and firefighters) get 90% of their highest pay at age 55, presumably for completing 30 years work – the benchmark used for evaluating retirement pensions. Actually they get “only” 75% from this plan – it’s the police, firefighters and lifeguards who get the full 90% payout. But then the editorial asserts that this is the only city pension these general workers get.

Wrong!

San Diego is one of the few cities in the state that gives its general employees (not police and firefighters) not one but TWO full pensions. A typical 30-year general employee can retire as early as age 55 with total annual pension payments equaling 140% of their highest single year’s salary.

In addition to the “defined benefit” city pension the paper describes, the city has a 401(k)-type “defined contribution” plan (their SPSP plan) where the taxpayer matches worker contributions dollar for dollar up to 6% of pay. The workers pick their preferred investment options (normally mutual funds) and the assets are in their earmarked accounts.

Assuming a city worker averages only 8% on their SPSP investments and pays out only the annual earnings after retirement, the total payout from the two pensions equals about 140% of their highest pay. No private company in America offers anything even approaching this level of generosity. Neither does any government that I’m aware of.

But that’s not all. Under this scenario, upon the death of the city worker, his or her beneficiaries, charities, or pets will receive a lump sum payment from the SPSP plan exceeding eight times their highest salary. To read the Excel spreadsheet with the variables for verification and experimentation with different scenarios, click here.

Scott Peters and his labor union handlers want to continue this largess. But such payouts are busting the city treasury. More important, it’s fundamentally unfair that city worker get pensions three to six times bigger than their employers – the taxpayers who foot the bill.

The mayor’s proposal is a weak reform – far less than what is needed. But Peters and the city unions want NO reform at all – or to expand the pension programs!

The battle lines are clearly drawn.

I’d like to thank the Pew Charitable Trusts’ Center on the States for issuing a blockbuster study on the same day that I finally decided to launch this blog. It makes getting started so much easier.

The headlines posted on PensionTsunami.com today are almost all related to the study which is titled Promises with a Price. According to Pew’s press release:

… the first 50-state analysis of its kind finds that states have saved enough to cover about 85 percent of their long-term pension costs, but only 3 percent of the funds needed for promised retiree health care and other non-pension benefits. All told, states already have set aside about $2 trillion to meet their long-term obligations. But they still need to come up with about $731 billion—a conservative figure that does not include all costs for teachers and local government employees.

As usual, New York Times reporter Mary Williams Walsh has an excellent story on the study that gets right to the heart of the matter in the lead sentence:

Almost half of the states have been underfunding their retirement plans for public workers and may have to choose in the years ahead between their pension obligations and other public programs …

For those who are more visually oriented, Sue Urahn of the Pew Center is interviewed by CNBC and provides additional background on the study.

Zeroing in specifically on California is Gilbert Chan in his article in the The Sacramento Bee which is accompanied by an excellent chart from the study showing the obligations of the states with the largest liabilities. It shows how much the states ought to be putting away to fund the promises made to their employees versus what they actually have put into their funds. In 2006, California should have contributed an additional $2.2 billion, and once again will be avoiding making its full contribution in the 2007-2008 budget year as pointed out in an editorial Monday in The San Diego Union-Tribune:

An honest assessment of the budget picture – of the sort required of corporations by the Sarbanes-Oxley law – would put the 2007-08 deficit at $16.3 billion, not $14 billion. That’s because Sacramento treats the $48 billion in guaranteed-but-unfunded health care benefits for state retirees as if it were something ethereal instead of a huge fiscal obligation that state Controller John Chiang says should be prefunded with $2.3 billion a year.

Over the next few days we’re certain to see dozens of stories on this report appearing in publications across the country as the data is analyzed and evaluated. In addition to today’s piece in the Sacramento Bee, there’s already another story in The Indianapolis Star that will be posted on PensionTsunami.com tomorrow. As always, we’ll do our best to provide links to whatever stories are generated.

Of course, policy wonks will want to download the complete report.

Today I was shamed into blogging.

The PensionWatch daily e-mail list was started over three years ago, and this website was launched over two years ago. But I’ve avoided launching this blog because . . . well . . . I know how much time a blog takes.

But today I was shamed into finally starting it because the Voice of San Diego mentioned PensionTsunami.com in their Blog Roll column even though we didn’t have an active blog on our site. How nice is that?!

So, here we go!