School Bond Criteria
OCTax neither supports nor opposes school bond ballot initiatives. Instead, we recommend that voters insist that every school bond initiative meet the following criteria:
1. There is a clear need to build or modernize facilities, documented by a list of specific problems to be corrected and specific projects to be completed.
2. The bond intiative tells voters specifically how the bond funds will be spent.
3. The projects to be funded are capital facilities. The bonds will pay for land, construction, safety improvements, and modernization, but not maintenance, operations, or salaries.
4. The facilities will have useful lives at least as long as the terms of the bonds, so that future property taxpayers will realize benefit from their taxes. Bonds will not pay for computers, vehicles, audio-visual aids, or other equipment that will wear out or become obsolete while the bond debt is outstanding.
5. Bonds will be issued incrementally, in response to the school district's needs and prevailing interest rates, not necessarily all at once.
6. The bonds' interest rates will be no higher than current market rates for municipal debt.
7. A "sinking fund," equivalent to 2%-4% of the value of the bonds issued, will be set aside (from the district's general fund, not from bond money) in an interest-earning account for future construction and repair.
8. The district will budget 2%-3% of its operating funds (not bond money) for maintenance of facilities.
9. The district will maintain a reserve of 2%-3% of general funds (not bond money) for economic uncertainties.
10. There will be an annual outside audit of bond proceeds and expenditures.
11. The district will appoint a citizens' oversight committee of property taxpayers to verify that bond funds are spent as approved by voters. No member of the committee may be an employee of, or do business with, the district.
12. Projects to be funded will be eligible for State of California matching funds, if available.
13. The bond initiative states clearly whether the district plans to build and maintain its bond-financed facilities under a Project Labor Agreement (PLA).
Public Employee Pensions and Other Post-Employment Benefits
Governor Schwarzenegger calls public employee pensions “a train on a track to disaster. ”Former Assemblymember Keith Richman says public employee pensions are “devastating government budgets statewide.” The California Public Retirement Journal (the industry’s own publication) admits “public pensions are “richer than they need to be.” Business Week says public employee pensions are a “sinkhole for taxpayers.” The Chief Actuary of the California Public Employees’ Retirement System (CalPERS) says pension costs are “unsustainable,” and the League of California Cities agrees. Even some public employees admit privately that the benefits are too generous. OCTax says public employee pensions and Other Post-Employment Benefits such as health care are “principal causes of high taxes and the near-bankruptcy of our state and local governments.”
How did the State, the County of Orange, cities, other agencies and taxpayers get stuck in this multi-billion dollar morass?
Here is OCTax’s summary of the causes, and some of the cures.
1. Public employee pensions have been, and continue to be, deceptively managed.
2. They are needlessly lavish.
3. They are unfair to taxpayers.
4. Public employee pensions are a tough problem, but fixable.
Let’s examine these issues one by one.
1. Public employee pensions have been, and continue to be, deceptively managed.
In 1968, (during Governor Reagan’s administration) the state enacted the Meyers-Milias-Brown Act, which gives public employees the right to organize into unions. There may have been some justification; at that time public employee salaries may have been relatively lower than private-sector salaries.
In 1990, in response to union pressure, the Legislature enabled pensions to be calculated on the single highest year of salary (usually the last year), instead of the average of the last three years. There was no justification. It was simply a fat pension increase, so the measure was sneaked to the Governor at 2:45 a.m. on the last day of the Legislative session. Both political parties were to blame; the only dissenter was then-Assemblyman Tom McClintock. (There should be a statue of him in the Capitol rotunda.) The immediate cost to the state was $100 million per year (and growing). California is the only state that allows pensions to be calculated on the single highest year of salary. It causes California pensions to be about 30% more generous than those in other states, which typically are calculated on the basis of the average of the last three years of salary. It also invites the pernicious practice of “pension spiking,” the art of increasing one’s highest year’s salary by foregoing vacation, sick leave etc. and adding the cash value of such benefits to the final salary.
In 1999, after only 45 seconds of debate and by a vote of 39-0, the Senate gave final approval to SB 400 (Ortiz, Correa), which allows the pensions of public safety officers (police and firefighters) to be set by a formula called “3% at 50.” That means an Orange County deputy sheriff or firefighter with 30 years of service can retire at age 50 with a pension equal to 3% of highest salary multiplied by 30, all of which equates to 90% of the highest year’s salary (plus possible pension spiking). Governor Davis signed SB 400 into law. SB 400’s immediate statewide cost was $500 million (and growing). Legislators pretended to believe that the robust stock and bond markets of the time, where most pension money is invested, would boom forever, so that taxpayers would never again have to pay into the pension system. The stock market tanked three years later, leaving us with high-cost pensions and less revenue to pay for them. The worst effect of 3% at 50 was more subtle: it destroyed the concept of the Defined Benefit system, whereby employee pensions were guaranteed by taxpayers (i.e., not subject to the vagaries of investment markets) in exchange for a fair but modest level of benefits. 3% at 50 had the devastating effect of giving public employees the best of both worlds: it locked in the new high pension benefits, while the higher, risk of paying for them continued to fall on taxpayers regardless of the investment performance of the pension funds.
In 2001, the Orange County Board of Supervisors unanimously adopted 3% at 50 for public safety officers and took the astounding step of making the pension retroactive for all past years of service as well as future service. At the time, OCTax visited the then-chair of the Board to ask, “Do you realize what it will cost? It could bankrupt the County.” The answer:
“It doesn’t matter what it costs. If we don’t grant it, all our sheriff’s deputies and firefighters will go to other counties.” In OCTax’s opinion, what the Supervisor really meant was, “I’m running for re-election, and I can’t win without the support of the deputies and firefighters.”
Also in 2001, the Legislature created a “2.7% at 55” benefit for non-safety employees, giving them pensions of 81% of highest year’s pay (inflation-adjusted up to 3% per year for life).
In 2005, the Orange County Board of Supervisors adopted 2.7% at 55 (a 62% pension increase), with Supervisors Norby and Smith voting “no.” This too was retroactive, but current employees pay for the extra benefit. Those who protested the new pension (including OCTax) were called “uninformed political opportunists” by a Supervisor who had voted for it.
2. Public Employee Pensions are needlessly lavish.
Here are the arguments offered by the County’s largest public employee union in support of the 2.7% at 55 pension.
“We need it to attract employees.” No, we don’t. People flock to public employment. In the same week that our County Supervisors adopted 2.7% at 55, the ports of Long Beach and Los Angeles advertised for new workers. 400,000 applicants showed up. Professor Steven Frates, of the Rose Institute of State and Local Government at Claremont McKenna College, cites a recent advertisement to fill a single firefighter position. It drew a crowd of 600 applicants, some of whom camped in line overnight.
Dr. Frates said, “the market is telling us that we don’t have to offer 3% at 50 to get qualified applicants for firefighting positions.” “We need it to retain employees.” No, we don’t. Public employees almost never quit, and thanks to union power, are almost never fired. In fact, the early and rich retirement benefits have the opposite effect: they encourage people to leave early. 894 people retired from the County soon after the 2.7% at 55 benefit was adopted. Why stay when you can make almost the same amount, inflation-adjusted for life without working, or you can work at a new job to collect salary and qualify for Social Security?
“2.7% at 55 will save money, because the new person hired to do the job will start at a lower level of pay.” No, it doesn’t work that way. It’s more expensive, because the County must pay two people for the same job: the retiree and the new hire.
“We must give higher benefits because public employees make less money than private sector employees.” No, we don’t. The Bureau of Labor Statistics says public sector employees “make an average of $23.30 per hour, compared to $19.00 per hour in the private sector.” The Employee Benefits Research Institute says, “Benefits in the public sector are 72.8% higher than those in the private sector.” In 2007, the U.S. Census Bureau estimated that the average wage in the public sector was $53,958, compared to $40,991 in the private sector. OCTax offered these rebuttals during the hearing. The Board of Supervisors wasn’t listening.
3. Public employee pensions are unfair to taxpayers.
Public employees are good workers, absolutely equal to those in the private sector. So they deserve equal benefits. They do not deserve extraordinarily richer benefits. In the private sector, there is healthy tension between management and labor. Unions want more money; management is reluctant to give it to them. After a tug-of-war in the bargaining room, they reach agreement somewhere in the middle, at a level that rewards workers appropriately yet still enables the company to be competitive. In the public sector, there is no such healthy tension. Managers (including the County Supervisors themselves) get the same benefits as labor. Taxpayers are poorly represented; they’re just handed the bill.
Dr. Frates, says, “We’re making millionaires of our public employees,” in the sense that non-government workers would need several million dollars in the bank to live as comfortably and securely in retirement as do public employees. Dr. Frates also says, “all tax increases are de facto pension taxes” because expensive pensions and other post-employment benefits absorb money that otherwise could be spent on public services.
Public employee benefits tend to metastasize. For example, the “public safety” designation initially applied to police officers and firefighters because those people are sworn to put their lives on the line to protect us. Now, “public safety” includes probation officers, district attorney investigators, milk testers, billboard inspectors, barbering examiners and deputy directors of the Department of Real Estate. If your house is on fire, or someone is trying to break down your door in the middle of the night, do you really want a milk tester to respond to your 911 call?
Orange County’s employees are well compensated in other ways. They enjoy 12 holidays per year, compared to seven or eight in the private sector. They receive an additional one percent of pay (a so-called “merit” bonus that actually is given automatically to 95% of employees) in the form of additional days off; that bonus counts toward their pensions. They get a week of sick leave, sick or not. They have ironclad job security. Only 40% of private-sector workers are lucky enough to have an employer-sponsored pension plan at all. Most likely, they save for it in a Defined Contribution 401(k) plan, which is subject to the vagaries of investment markets. Public employees have a Defined Benefit plan, which guarantees full retirement benefits regardless of what happens to the national and local economies. Private sector employees are working longer and retiring poorer. Even the California Public Retirement Journal says, “The mixture of personal greed, wishful thinking, and faulty numbers that surrounded the adoption of these new formulas is something which has now clearly come back to bite us.”
Pensions and Investments magazine asks, “Why should public employees have better benefits than the working stiffs paying the taxes?”
4. Public employee pensions are a tough problem, but fixable.
Local elected officials, most of whom lack the courage to confront their unions, pray that the State Legislature will fix the problem of excessive benefits. Not a chance. The California Public Retirement Journal boasts: “. . . the unions could, and did, easily cover the perimeter of Capital Park, causing elected officials who were inside the building even thinking about voting against a benefit increase or a labor rights bill to quiver with fear. And that’s a sight to be seen indeed . . . think jellyfish in a suit.“
A couple of years ago, OCTax visited the Orange County delegation in Sacramento to discuss public employee pensions. Most sympathized but acknowledged they could do nothing. One said, “Why are you talking to me about this?” OCTax said, “Because you’re one of our representatives.” The legislator said, “Yes, but this is a labor issue. You need to talk to the unions, not to me.”
Yes, the odds are stacked against taxpayers, but there is hope.
In 2006, the Orange County Board of Supervisors negotiated an agreement with the Orange County Employees’ Association and the Service Employees’ International Union that reduced the County’s $1,413 Billion retiree health care liability by $578 million.
In 2008, Orange County voters approved Measure J, which gives the public the right to vote on any future increases to County employees’ pensions. OCTax was proud to co-sign the ballot argument with Supervisor Moorlach, and featured Measure J in our mailed Voter Guide.
In 2009, the County of Orange and the Orange County Employees’ Association co-sponsored SB 752 (Correa), a one-county bill that enabled Orange to introduce an optional “hybrid” pension that consists of a 1.62% at 65 Defined Benefit plan coupled with a new Defined Contribution plan with matching contributions from the County. All new employees will be required to make an irrevocable choice between the existing 2.7% at 55 pension and the new hybrid plan. There is no certainty that the hybrid will save taxpayers’ money (in part because we can’t predict how many new employees will choose it), but just introducing the DC concept, once anathema to unions, is a big step toward future fiscal solvency. If it is successful, OCTax hopes other counties will adopt it.
Pressure from taxpaying constituents is the only force that will compel state legislators, county supervisors, and city councilmembers to set aside their obeisance to unions and fix the pension problem. Judging by newspaper reports, OCTax thinks the public finally is inclined to demand action.
Here’s OCTax’s advice to taxpayers and voters: Whenever you meet or correspond with your elected representative, ask what he or she will do about excessive public employee pensions. You’ll get a knowledgeable answer, but it’s likely to be vague about actual steps. Don’t stop there. Demand specifics. Then tell your representative that your vote in the next election will depend on his or her actions on this long-ignored problem.
