Public-sector unions are trumpeting a new report that suggests San Jose officials overstated the citys unfunded pension liabilities—even as those officials championed a successful June 5 ballot initiative to cut pension benefits for public employees. The reports author, California state auditor Elaine Howle, says she fears that people were misled by official pronouncements about the citys pension debt as they headed to the polls and approved Measure B with a 70 percent majority. Reporting multiple retirement cost projections in a short period may have caused confusion among the citys stakeholders attempting to make informed decisions, Howles report argues. It is unclear which retirement cost projection the voters relied on, if any, when they voted for these changes.
Howles audit came at the request of a group of irate Democratic state legislators, and it reads like an attempt to support union officials as they seek to invalidate the popular initiative. The unions argue that Measure B rolls back pension benefits for current employees, which state law forbids. But San Jose Mayor Chuck Reed contends that charter cities have authority to make changes to pension benefits, pointing out that San Joses charter includes this language: the Council may at any time, or from time to time, amend or otherwise change any retirement plan or plans or adopt or establish a new or different plan or plans for all or any officers or employees. Regardless of the legal arguments, the unions—in San Jose and in San Diego, where voters also passed pension reform in June—are trying to build a public-relations campaign around the idea that direct democracy is somehow undemocratic.
The San Jose audit found two problems. The report argued that the city used one inadequately supported projection that its annual contributions toward retirement costs would increase to $400.7 million by fiscal year 2015-16 in three bond statement documents that disclosed its financial condition to potential creditors. But San Joses city manager notes that the $400.7 million forecast, developed by an actuary in 2011, was actually lower than an updated review in 2012. Ultimately, however, the city settled on estimated contributions of $320 million. The final figure, city officials explain, reflects reduced pension costs due to large payroll cuts the city enacted in response to its financial mess. In any event, the auditor seems to be picking nits here.
Howles second criticism concerns a $650 million top-of-the-head figure city officials used as a worst-case scenario—a number that came up at council meetings but that never appeared in the official ballot language or city financial projections. Truth is, pension projections are an inexact science, thanks to the peculiar way theyre designed. Governments make pension promises based on formulas approved by legislators (3 percent at 50, for example, in which, say, a firefighter receives 3 percent of his final years pay times the number of years worked, available at age 50). Pension funds such as the California Public Employees Retirement System, the nations largest, invest those dollars and calculate their unfunded liabilities based on guesses about how the markets will perform over the next 30 years. So everyone is guessing. And CalPERS, whose investments earned a pathetic 1 percent rate of return last year, has a vested interest in overestimating those returns.
At worst, the auditor caught pension reformers exaggerating the problem. Of course, politicians use mistaken or, in this case, debatable numbers all the time. So its bizarre—outside of a political context—to see state officials push for a local audit like this one. Naturally, San Joses public-employee unions seized on Howles report, but their anti-reform spin cant overcome the facts. As Howle explained: Although we have concerns with some of San Joses projected retirement costs for future years, its actual retirement costs increased significantly from fiscal years 200910 through 201112. These increased costs appear to have crowded out some of the funding previously available for non-public safety services, such as parks and libraries.
Unions and their supporters have had no qualms about using fuzzy math to expand pension benefits over the past dozen years. When I reported on a retroactive pension increase in Orange County nearly a decade ago, the unions assured the board of supervisors that the increase would not cost the county a penny, since the new benefits would be paid for by higher premiums from workers and investment returns. A few months after approving the new plan, county officials discovered the increase had raised the countys unfunded pension liability by $300 million. The unions response? Too bad. Its the responsibility of legislators to make sure they got the numbers right the first time. Once they vote, its a done deal.
If California wants to start double-checking the official use and abuse of pension numbers, the auditors will have far bigger targets than San Joses mayor and city manager. As former governor Arnold Schwarzeneggers top pension adviser, David Crane, testified a while back before the state senate: In 1999, CalPERS projected that pensions would cost the state budget an average of $450 million per year during the next eleven fiscal years from 2000 through 2011, or a total of $5 billion. But CalPERS will cost the state an average of $2.3 billion per year for that period, or a total of $25 billion. As you can tell, CalPERS was off in its projections by a factor of five. Crane also noted that CalPERSs 1999 projections in support of legislation to expand pension formulas statewide assumed investment returns [that] implicitly required the Dow Jones to reach roughly 25,000 by 2009 and 28,000,000 by 2099.
In San Diego, the public-employee union effort to undo reform is even more anti-democratic. The states quasi-judicial (and thoroughly union-controlled) Public Employment Relations Board (PERB) contends that holding an election and asking voters to reform city-employee pensions is an unfair labor practice per se. A San Diego superior court on July 31 rejected the agencys effort to impose a temporary restraining order on the city as it implements the public will. But the court fight over the measure continues.
Prior to the ruling, San Diego City Attorney Jan Goldsmith dismantled the unions reasoning in a U-T San Diego column: They argue that Proposition B is not really a citizen initiative, but is a sham initiative placed on the ballot by straw men acting for San Diegos mayor who supported and campaigned for the measure. Because its a sham initiative, they argue, it should be treated as a city-sponsored measure that required bargaining with its labor unions before adoption. As Goldsmith explains, the unions argument is really an unprecedented attack on Californians constitutional rights.
PERBs lawsuit in San Diego and the state audit in San Jose are just the latest in a number of efforts by state officials to smother local initiatives that would rein in public-employee compensation. In the Stockton bankruptcy proceeding, for example, CalPERS is claiming that pensions should take precedence over virtually everything else, while Californias attorney general has tried to destroy a state pension-reform initiative by giving it a misleading title and summary. As Moodys warns of a potential tsunami of Golden State bankruptcies, California officials should be on the leading edge of reform, not squelching legitimate campaigns to fix a broken system.