Monday, January 16, 2012

Musings From The Battlefield

As we struggle to repel the advancing enemy, two severe wounds have slowed our counter-attack.  Retreat is no longer unthinkable.  The jubilant send off parade down main street seems far removed tonight.  Before assessing the mortal wounds, let's talk about how we got into this war - The Public Safety Pension War.

Back in aught two (2002), we will were riding high in public esteem, but somewhere that began to change.  That was about aught five or maybe aught six?  It doesn't really matter today.  At first, the attacks were small and not well thought out.  We just painted the the assailants as nut cases and shouted them down.  You should have seen them go down in flames.  They were no match for our actuaries and propaganda, but slowly they grew in number and obtained more and better weapons.  Then came aught eight and the stock market began to tank.  By aught nine the pension reforming barbarians were at our gate.  They had a formidable mob assembled, but not enough to breach our walls. Tonight, they have us out-numbered.  There are not enough boulders and hot tar to turn back the attackers.

The premise that the basic public safety pension is predicated on - public safety is an occupation requiring people in the prime of their physical abilities (similar to professional athletics).  A simple solution for the consumer would be to administer a physical endurance exam every year and then fire everyone who could not pass it.  Actually, that would be the model of efficiency - decisive and totally objective.  The problem would be with finding enough qualified applicants for the jobs.  Getting the old heave ho fifteen years before being eligible for Social Security and Medicare would not be very attractive to most potential employees.

The solution developed was a pension plan that kicked in between age 50 and 55; and paid from 75% to 90% of the last employment year's pay.  This allowed employers to hire and keep well qualified employees.  It was a solution that addressed both sides' issues.  But slowly over time, changes were made that allowed manipulation of both the pension amount and the retirement age.  What are these two points of contention?

Spiking - Spiking is the ability of an employee to unilaterally inflate the pension benefit.  This is possible when overtime and cash for comp time and unused paid time off is used in the computation base for the last year. Many employees plan in advance to inflate their pension.  Fortunately, most pension plans do not allow this.  Those of you that are able to spike your pension are probably seeing red after reading my comments.  I understand, but think about this.  What if the chief told you that you could only work 30 hours per week once you were one year away from retirement?  The city is trying to save money on pensions.  Spiking has to go.  Maybe your pension needs to be increased, e.g. 70% to 75%, but whatever the solution - "a deal has to be a deal."  There can be no escape clause for either side.

Drop Plans - Let's see - the reason for having a retirement plan that starts at age 55 or lower is to have a younger and stronger force, but you want a five year extension for your employment when you reach retirement age?  What is needed is the elimination of DROP Plans and a mandatory retirement age - possibly something based on rank:

Minimum Retirement Age 50

Mandatory Retirement Age
Police Officer - Age 55
Sergeant - Age 58
Lieutenant - Age 61
Captain - Age 64
All Others 67 (except the Chief)

This would be consistent with the case for the current pension structure.  Hey man, you have to walk the talk.  If we sell the early retirement as a necessity, then we need to retire early or find another argument - I don't know what it would be.  You can rant and rave about how these are hard fought and won benefits, but that will not change the dilemma that confronts you today.  The defined benefit boat is sinking.  There are two large holes in the hull.  You can either plug those holes, or ride the ship all way down to Davy Jones locker.

Saturday, January 14, 2012

The Source of The Pension Attack

The source of the fight against public employees pension plans, not just public safety, is a website from Southern California.  It is operated by man named Jack Dean, a long-term Libertarian who believes in small and efficient government.  Before you hastily assign some sinister motivation to him, forget about it.  He is not some crackpot idiot spewing right-winged mantra like a robot.  I have known Jack for about five years, I have even had dinner with him.  He is a good and decent person, with a well thought out and articulated opinion.  I count him as a friend - seriously.  We speak by phone occasionally.  I can assure you that he believes in what he is doing.  This is why he is so effective.  He is not alone either.  The Libertarians are well organized in California.

The argument coming from this website has to be effectively rebutted.  Unfortunately, it has a large head start on us.  Read Pension Tsunami on a regular basis. better yet Jack will put you his mailing list and you will get his report everyday.  I do.  Until we admit that the opposition has some valid points (spiking being the most glaring) and start to address those issues, we will keep on losing the pension battle; and right now we are getting our butts kicked.

The only effective antidote for this Tsunami is to rehabilitate the image of public safety pensions by removing the obvious faults and to develop a coherent and effective message that shows the real cost and the reasons for how they are structure.  Simply attacking the opposition will only energize their efforts.

p.s.  Do not send Jack a nasty email.

Thursday, January 12, 2012

San Diego - Real Pension Cost To City Is 11.66% - Cheapskates!

The City of San Diego is crying about its contribution rate for its pension system - 42.68%.  A close examination of the 2010 actuarial study shows that the real cost to the city is 11.66% - less than what the employees pay.  To get to the 42.68% number, 16.84% to cover under-funding prior to 2007 and 14.18% for the mark-to-market and smoothing nonsense must be added.

The bottom line is that the city did not make all of its required contributions prior to 2007 and are now paying the piper for that and the mark-to-market smoothing crap since 2006.

Pay me now or pay me later.  The city chose later.  Later has arrived.  Look at the fact sheet below.

Fact Sheet

Wednesday, January 11, 2012

The Big Lie - Pensions Are Bankrupting Us

On October 26, 1997, the Florida Marlins won the the World Series. Five days later, team owner H. Wayne Huizenga completely dismantled the team. The Marlins finished the 1998 season with 108 losses and the worst won/lost record in major league baseball for 1998. Huizenga said the team was too expensive. The payroll was $53 million in 1997 and fell to $13 million in 1998. Huizenga claimed that the team lost $40 million dollars in 1997, but we now know, based on the Zimbalist Report, that there was really a profit of $14 million dollars. Mr. Huizenga was showing some of the normal team income on the books of the stadium, which he also owned. This was legal, and his prerogative, but it did not show the true results for the team.

Since 1990, the per capita crime rate in the United States has declined 40%. This is one of the biggest success stories in our culture. This dramatic reduction occurred during the same period that the quality of police departments in the country were improved dramatically. Entry requirements were raised significantly. Training, both at entry and throughout an employee's career became more stringent and longer in duration. Turn over rates among police officers became very low, with many officers staying with one police department until retirement. The average retirement age was reduced, resulting in a much younger and more fit force.

Many people claim that the reduction in crime is the result of economics and society's reaching out to those who struggle to comply with cultural standards of conduct. Obviously, this has had some impact. However, if you work in jungle of the deviants, as police officers do, you quickly learn that the criminal element does not read the Wall Street Journal or react rationally to reasoning. Force and containment they understand.

Today, there are those who are calling for the dismantling of the winning team, under the banner of “we can no longer afford the payroll.” Just like Mr. Huizenga, the leaders of the attack on police officers are not taking into account all economic factors. Crime comes with a very high price tag, not just in tangible property, but human suffering too.

Who are these “reformers” who seek to curtail police compensation? For the most part, they are business and professional people who have more annual income than police officers. It would appear that they are not opposed to above average wages in general – just for those in occupations that do not meet some criteria that has yet been articulated.

Just like a good general, the leaders of this attack have identified the enemy's weakest point in its line of defense – pension plans. Although attacking one individual component of compensation makes little sense, it has not deterred these self appoint gatekeepers of the local government wallet. Police and fire pensions have a real public image problem. A 90% pension at age 50 to 55 looks very generous to someone who gets Social Security and a meager 401K at 66 or 67. This is not the group that is advocating the curtailment, but the recipients of the message being broadcast by the reformers.

What is the case against the police and fire pension plans? There are three points:

1 - Too generous

2 - Too early

3 - Too expensive

What objective benchmark or criteria was used to develop these three assertions? None, it is all”feel in my gut” rationale. It is much like the man who said he could not name any good art, but he knew it when he saw it. The opposition thinks they have “seen it.” Let's examine each of the three claims.

Too Generous

Just on it's face, this appears to be correct, but a comparison of annual income needed to retire at 55 and 67 shows a different perspective. At 67, most people have a paid for home and car and no children at home or in college. At 55, most people still have a mortgage and a car payment, along with children in college. I know, I will cover that next.

Too Early

If you do not care how old the police officer is that comes to your house when you are being robbed during the middle of the night, or how old the firefighter is that has to drag your children out of your burning house, then I would agree. Let them stay until 67, just like everyone else. I wonder why Joe Montana is not still in the NFL? I know what you are thinking “why don't they get a second job until age 67?” So you are an accountant? Why don't you quit at age 55 and get a job in an unrelated field – maybe mechanical engineering? After all, both occupations are mostly about numbers.

Too Expensive

One guy in San Francisco ask another how much he paid in rent this month for a small efficiency. The second guy answered $20,000. Wow, that is outrageous. Take This Apartment and Shove It! I Ain't Livin' Here No More. Oh, one other thing – the guy had not paid the rent for the previous nine months. The monthly rate is only $2,000. This is exactly what employers are doing today. They have paid little or nothing for many years and are now having to pay through the nose to bring the accounts current.

What does a 90% pension at age 55 add to payroll cost? The answer is about 24%. This would be for a a plan that had a generous vesting rights. A 90% pension adds very little marginal cost for an employer when compared to one with no pension, that provides Social Security and a 5% 401K contribution.

Total Pension Contribution 24.0%

Less: Employee Contribution (8.0%)

Less: Social Security Contribution (6.2%)

Less: 401K Contribution (5.0%)

Net Marginal Cost 4.8%

Can't believe your eyes? Let's go through this line-by-line. We can provide the computations for the 24% total cost. Actually, 24% is a high number. Most employees contribute 8%. The Social Security savings of 6.2% is just the employer's portion. The 401K contribution should be easy enough to understand. The employer has to contribute 16%, but it is offset by the elimination of the Social Security and 401K contributions.

Then why are some cities having to contribute up to 50% of payroll. One reason is that these cities failed to fully fund the plan in prior years. In effect, they have a mortgage payment to cover the funding shortages in prior years. Another reason is that the dumb accounting rules for pension liability assume that the plan is liquidated each year. When the pension is over-funded, the city contributes nothing. When the stock and real estate markets go into the tank, the city has to pay out the wazoo.

If you would like to rebut this article, add a comment

Facts Sheets

Tuesday, January 10, 2012

Hawaii - Lingle Endorsed by Police Union

Lingle Endorsed by Police Union | Maui Now: "By Sonia Isotov

Today, former governor Lingle visited the State of Hawaii Organization of Police Officers (SHOPO) Maui Chapter headquarters in Wailuku to accept their endorsement of her bid for Hawaii’s open US Senate seat.

Joined by the Board of Directors of the State of Hawaii Organization of Police Officers (SHOPO), President Tenari Ma’afala announced yesterday that Hawaii’s police officers’ union is endorsing former governor Linda Lingle in her bid for Hawaii’s open US Senate seat."

US Supreme Court won't hear San Diego police suit

US Supreme Court won't hear San Diego police suit - Sacramento News - Local and Breaking Sacramento News | Sacramento Bee: "SAN DIEGO -- The U.S. Supreme Court has declined to hear the appeal of San Diego police officers who argued they should get overtime for putting on their uniforms.

U-T San Diego ( says the court announced Monday that it won't rule on a police union lawsuit filed in 2005.

The federal suit demanded that San Diego pay millions of dollars in overtime and back pay to officers for the time they spent before their shifts putting on uniforms and gear and performing tasks such as answering emails."

Monday, January 09, 2012

Cape Coral - Police union ratifies contract with city

Police union ratifies contract with city of Cape Coral - WBBH News for Fort Myers, Cape Coral & Naples, Florida: "After a year of negotiations, the city of Cape Coral and its police union have finalized a deal on a new contract. The deal will save the city more than a million dollars.

"It's tough to take a pay cut. No one wants to take a pay cut, but I think we recognize it's important to help the city out right now," said union president Kurt Grau.  The deal will save the city $1.5 million.  The deal means police officers will take a 2-percent cut in pay, will pay 3-percent more into their own pensions and will lose 2 paid holidays.  The city and union have been negotiating the deal for more than a year.  It's a similar deal to one the union rejected months ago. We asked what changed.  Grau said the city's new administration and new city council made a big difference.  "I don't want a pay cut but I think it was best for us to mend fences and move on," said Grau.

CalPERS role in preventing Vallejo pension cuts « Calpensions

CalPERS role in preventing Vallejo pension cuts « Calpensions: "Were Vallejo officials pushed away from trying to cut pensions during bankruptcy by fear of a long and costly legal battle with deep-pocketed CalPERS, promised by attorneys representing the giant pension fund?

The bankruptcy of Vallejo, an old port city of 118,000 on San Francisco Bay, was widely watched as a possible way for struggling local governments to cut soaring pension costs.

But when Vallejo emerged from a 31/2-year bankruptcy last November, pensions were untouched. The city actually increased annual payments to CalPERS, reducing pension debt sooner.

Public employee unions, alarmed by Vallejo’s rare move in May 2008, sponsored several versions of legislation making it more difficult for local governments in California to declare bankruptcy under federal law.

Phoenix employee unions request more benefits

Phoenix employee unions request more benefits: "Raises aren't the only compensation increases some Phoenix employee unions are asking for in contract proposals as they prepare for labor negotiations with the city.

Labor groups also have requested increased perks and benefits, including better health coverage, more vacation days and more protection for employees' rights.

The proposals are different for each group.