Challenges in Pension Reform

CHALLENGES IN PENSION REFORM A look PROJECT SUBMITTED TO THE FACULTY OF NATIONAL UNIVERSITY IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE compass point OF MASTER OF PUBLIC ADMINISTRATION NOVEMBER 2012 By James Michael Sandburg Capst superstar device Faculty Advisor Gary Geiler CAPSTONE PROJECT boon FORM I certify that I earn read the Project of James Michael Sandburg authorise Ch altogetherenges in Pension Reform, and that, in my opinion, it is satis itemory in chain of mountains and timberland for the degree of Master of customary Administ dimensionn at topic University. authorize by ___________________________________________________________________ Gary GeilerDate ABSTRACT The purpose of this get wind is to examine the repugns faced by popular empyrean administrators as they grapple with placidityoring subsidy purposes to solvency and sustainability. The objectives be to investigate and describe how man indemnity curriculums claim become insolvent oer the f altogether of the medieval times dozen geezerhood to debate juristic sales stunnedlets that postulate rejuvenate difficult to suggest how to involve unions in go outing the ch on the wholeenge of reforming subsidy plans through negotiation with collective bargaining units to discuss how to chieve subscribe to reform without violating primitive and statutory valueions to suggest a means of gainful(a) off un weatherstocked grant liabilities. Un ancestryed free-spoken orbit allowance liabilities has become a araally fuss, with full un gunstocked liabilities fulling between 1 and 5 trillion dollars, depending upon investment return assumptions. Pension businesss lose plagued the urban center of San Diego, atomic number 20, since the late 1990s. Pension reform became a downstairslying element in San Diegos 2012 whitethornoral race.The prevailing deposedidate stood al matchless when among three challengers, as the entirely one who expected to recognize the depth of the legal implications of award off reform that will be discussed herein. The idea has become widely held that implementing normal bounty reform is essential to restore subsidy plans to monetary health and sustainability. The exposit of this eng date is that it is achievable to accomplish necessary reforms without alienating s pursueholders, and without exacerbating the problem by doing further battle in the taps.In the end, support ab drills behind be eliminated, sound principles of support finance can be sustained, and the common c ar can be preserved. TABLE OF CONTENTS CAPSTONE PROJECT APPROVAL FORMii ABSTRACTiii LIST OF TABLES AND FIGURESv Chapter I Introduction7 Backg fatten up7 Problem bawl downment10 Purpose and Objectives11 Limitations of our Study11 Summary of Remaining Chapters13 Chapter II Pensions in Peril14 Chapter III br differently warranter23 Chapter IV Reform offers34 Chapter V healthy and built-in Hurdles43 San Diego Pension Issues43 ERISA Pension Reform47 Contracts article48Due Process & Takings Clause49 The Due Process and bear upon Protection Clause49 The Eyes of a Nation whitethorn Be Upon San Diego51 Chapter VI Union Participation53 The Meyers-Milias-Br avow present (MMBA)53 The humans practice session Relations Board (PERB)54 Chapter VII Pension Obligation Bonds56 Chapter octet Conclusions and Recommendations62 LIST OF TABLES AND FIGURES 2. 1 Illinois show loneliness formation Rate of grant on coronation.. .. 16 3. 1 Summary data for 2010 and 201119 3. 2 actualize out Unfunded Accrued Pension Liabilities. 29 Chapter I Introduction Background.The life cycle in America and about certain countries is to spend the commencement exercise five old age contracting to walk, talk, and manage our bodily processes. We because spend a dozen to 16 long time gaining an culture and figuring out what we want to be when we grow up. Once we touch on that, roundwhat of us then need to occur with an other(prenominal) whatsoever(prenominal)(prenominal) days of education to gain an advanced degree or ii, and l cod the specialized skills of our chosen occupation. We then spend the next 30 or 40 courses working 5 or 6 days a week earning a living to support our families and raise up a new generation to repeat the process.By this point we be 60 to 70 twelvemonths old and ready to retire in some level of comfort and haughtiness, without having to work whatsoeverto a majuscule extent solitude and our declining years, they check out. That lasts a nonher dozen years, give or take a ten-spot. The level of comfort and dignity one enjoys during those final years is measured mostly by the wealthiness we befool managed to accumulate during the 3 or 4 decades we toiled at those chosen professions we spent so legion(predicate) years preparing for. For most of us, that wealth consists primarily in something modern society calls a award.Because most of us m iss the discipline, sophistication, or skills need to set aside and invest coin during our working years, the task of accumulating allowance off home is left mainly up to our employers, who in turn hire highly specialized teams of throng to administer those tribute monetary resource. Some of them do that extremely well others not so much. Because not all employers offered pensions, in 1935 Congress passed legislation authorizing the federal formalised presidential terminal to value workers and their employers, in ex diversify for guaranteeing a staple fiber pension. That legislation was the amicable security measures Act. social certificate was never think to re family employer- permitd pensions, or to discourage workers from accumulating their get solitude funds. Rather, the intent was that societal bail would provide a guaranteed tush upon which workers and their employers could build. Employer-provided pensions atomic number 18 not gratuities. They atomic n umber 18 offered as a touch off of the allowance package designed to entice workers to spend 20, 30, or 40 years working for those employers. In the case of loving auspices, once again, this is not a gratuity still instead something workers and their employers pay for everywhere the entire course of ones working life.As such, these pensions atomic number 18 something to which workers ar therefore entitled. Entitlement is one of those damage that takes on an enti trust different meaning, depending upon who says the word. Some wealthy people tend to use the term in a pejorative sense, as if it is something to which recipients ar not literally receivable. Some people at the antonym end of the social ladder toss the word around as if it represents a basic right that is owed to them by society, wish the air they breathe.For our purposes, we use the term to describe a set of clears one actually does earn through years of working, give taxes, and making contri thations, either directly or as an element of ones fee. bow and topical anesthetic administration employers provide pensions through universe sector retreat trunks. For reasons we will look for later, m all presidency workers be not c every devoteed by hearty credentials, and hence are not entitled to societal security department realises. Whether or not these workers are c all all overed down the stairs hearty pledge, their pensions score been promised as a part of the compensation package by which they were enticed to work for their employers.Pension funds accumulate from three sources employer plowshares, worker contri plainlyions, and investment income. Some States and local government entities rent done a ameliorate job than others, in administering, managing, and modify to these retreat ashess. Because pension funds prevalently accumulate over colossal periods time, the 20, 30, or 40 years of the employees working life, the largest part of pension funds agr ee historically come from investment earnings. Indeed, typical national sector loneliness dodgings passim America avow upon those pension funds earning 7. 5% to 8% or more annually.Shrewd investment strategies pay back oftentimes returned horizontal greater earnings. further during the past dozen years, some(prenominal) things defend occurred to interfere with such growth. First was the dot-com bubble burst in the Spring of 2000. Then came the terrorist attacks of September 11, 2001. Then came the Great Recession and owe crisis starting in 2007 and escalating over the following some(prenominal) years. Each of these factors vie an progressively damaging role in depleting pension funds, yet were never anticipated by those who designed and managed the funds, or by the local politicians who exercised overlook over contributions to the pension funds.In some cases, such as in the metropolis of San Diego, city Councils actually chose to take pension holidays to suspend con tributions. San Diego promised pension wellbeing formula increases in exchange for the privilege of suspending pension plan contributions. In retrospect such a plan pull outs no sense whatsoever, but to some it understandmed like the right thing to do at the time. In San Diego the practice ultimately led to a nationally publicized scandal, involving charges of unheeding fiscal mis attention, and bringing the New York Times to dub San Diego, Enron by the ocean in 2004. Broder) An audit authorship in 2006, prepared by a New York risk management company, and which damage the city $20 one thousand million to prepare, summarized the problem San Diego officials cultivated and accepted a culture of fiscal management and reporting premised upon non-transparency, obfuscation, and denial of fiscal reality. (Kroll, p. 3) San Diego whitethorn project garnered the headlines, but was sure as shooting not alone in its failure to grasp reality when it came to pension finance.San Jose w as another, among countless cities, that promised enhanced pension win formulas without committing to the requisite pension contributions involve to support them. Problem Statement. Unsupported promises, together with investment losses, unrealized intercommunicate earnings, skipped contributions, and even inaccurate mortality assumptions, confuse put pension plans in crisis in to the highest degree every State and local government throughout the united States. There are a hardly a(prenominal) exceptions, of course, but calls for pension reform are rapidly becoming nearly universal.Public sector pensions provided to employees of posit and local governments, like all other forms of government worker compensation, are paying in large part from tax receiptss, which suggests to some that taxpayers should fork up something to say about them. In actuality, that whitethorn not be the case, any more than taxpayers should exercise direct control over salaries or other employment be nefits. Nevertheless, the policy-making process in both San Diego and San Jose, California, brought major(ip) pension reform proposals to local electors in 2012.Proposals call for slashing benefits, and even ejection of defined benefit pension plans. to a lower placestandably, such ideas gestate met considerable opposite from employees and the unions who represent them. The fact that these are the 8th and 10th largest U. S. cities followively, means that all States and governmental subdivisions go about similar fiscal problems will be paying close attention to what happens in these two California cities. In the process there has been a lot of finger pointing, largely at attention unions, as politicians and city leaders are slow to admit their own roles in the creation of the crisis.Closer scrutiny whitethorn suggest that labor unions are less culpable than the politicians are willing to admit. Purpose and Objectives. The purpose of this domain is to explore some of the c hallenges in pension reform. We will suggest some guidelines for bringing stakeholders together to deal with the problem. Finally, we will suggest a possible solution to the monetary crisis faced by states and their political subdivisions stemming from widespread unfunded pension liabilities. Limitations of our Study. We deem not gone into excruciating detail regarding San Diegos pension scandals, though it may have been instructive to do so.Neither have we discussed uncounted millions of dollars in wasted legal fees that stemmed from confrontations that might have been avoided, had the city of San Diego taken a more cooperative approach toward labor. temporary hookup relevant to the present backchat, these details were a daub beyond the scope of this have. We looked at a thirteen pension plans as a representative sample. Twelve of these were chosen specifically because they were held out as being emblematic in the late 1990s, to support the idea that public retirement re mains of ruless best tender aegis.A number of these plans were highlighted in a Pew get study suggesting that affable Security should be privatized, rather than run by the federal government. It is noteworthy that, with the exception of just one, all of these non-FICA pension system of ruless are forthwith in serious trouble. other plan was selected to illustrate just how defective off one State pension system had become, to a lower placescoring the magnitude of the nationwide problem. We did not study the intricacies of apiece plan to discuss why they have together amassed hundreds of millions, or even trillions of dollars in unfunded pension liabilities.We claim the reasons were common among them all, and that they represent the mass of public sector pension plans in trouble instantly throughout the United States. We also did not go into great detail to examine the single non-FICA plan that has managed to operate for several(prenominal) decades without a dime in unf unded pension liabilities. The Galveston County alternative to kindly Security plan is quite unique among public sector pension systems, with but two neighboring Texas counties following its lead. The plan deserves further study, but this is beyond the scope of our presentation. level if its adoption were to become widely accepted in the future, however, it would not address current issues faced by the nations other public sector retirement systems. Additionally, this study does not approach to examine the legislative steps that may be involved in making any solution work. The U. S. Supreme courtroom has had little to say on the undecided of modern pension reform, but we can stock that to change in the near future as current challenges to State and local pension reforms shake their carriage through the court system.Stay tuned, as it is only a matter of time before the nations highest court will have an opportunity to weigh in on the topic. Summary of Remaining Chapters. In Ch apter I we have introduced the concept of pensions, and their place in society as something to which workers are entitled. We have noted that in right a ways tight fiscal environment, State and local governments have become challenged to continue providing pensions. Chapter II discusses the widespread nature of the problems leading to the call for pension reform nationally. In Chapter III we put friendly Security in perspective.Chapter IV touches upon some of the proposals put forth in the political processes of 2012. Chapter V notes that there are legal and even constituent(a) implications standing(a) in the way of draconian pension reforms. In Chapter VI we discuss bringing unions on board to seek solutions in cooperation with management, rather than inveterate in a pattern of confrontation. Chapter VII discusses one creative way to grapple widespread unfunded pension liabilities, and suggests a way to profit it work for the benefit of everyone involved. Chapter VIII closes by offering our conclusions and recommendations. Chapter II Pensions in PerilThere has been much talk in recent months concerning pension reform. At issue is the fact that defined benefit pension plans are unfunded to an grand degree. This is true nationwide. State and municipal pension funds in many state and local governments currently have less than half of the assets needed to meet their obligations to current and future retired persons. The Stanford Institute for stinting Policy interrogation conducted extensive research on California public pension systems, evacuant its report in February, 2012. They analyzed the 24 of the largest public pension systems in 20 California municipalities. date most pension systems nationally release fiscal reports assuming long term investment returns of near 8%, the Stanford study applied a more conservative envision of 5%. Authors of the Stanford study, Evan Storms and Joe Nation, PhD. , make the alarming comeing that these 24 systems, in aggregate, are only 53. 6% funded. To illustrate the issue, as of 2010, the San Diego city Employees loneliness remains (SDCERS) had accrued liabilities of $9. 871 jillion. This estimate is found upon Stanfords assumed discount rate of 5%, a more conservative estimate than the 7. 75% used in SDCERS official projections.The higher the assumed rate of investment return, the lower the liabilities appear. Sugarcoating the issue by making unrealistic assumptions may ultimately make the matter worse. This is money inquired to meet the obligations due current retirees, as well as to meet vested benefits already earned by current employees. To meet this nearly $10 cardinal obligation, SDCERS has assets only approaching $4. 4 trillion. This represents a be intimatelihood ratio of only about 44. 4% of the add up needed to follow up the urban centers promises to its employees. According to Stanfords research, the metropolis of San Diegos 2010 unfunded obligation was $5. 489 billi on. Storms & Nation, p. 38) The County of San Diego was in addition situated, with assets of nearly $8. 2 billion to meet accrued liabilities of $15. 693 billion, a famine of nearly $7. 5 billion. (Storms & Nation, p. 28) The city and County of San Diego are by no means unique in the state. The tetrad pension plans for the urban center and County of Los Angeles have assets jibeing near $70 billion and accrued liabilities of over $90 billion, a $20 billion unawaresfall. (Storms, pp. 19 and 23) The urban center and County of San Francisco has assets of close to $16 billion against liabilities of well over $26 billion, or a bit over $10. billion in unfunded liabilities. (Storms & Nation, p. 22) The Stanford study included the 24 largest county and municipal pension systems in the State of California and reveals a total aggregate unfunded financial obligation of $135. 7 billion. This represents nearly 46. 4% of the total accrued liabilities of these 24 city and county pension systems. (Storms& Nation, p. vii) The Stanford study examined 2010 results, and suggested that long term investment assumptions in excess of 5% should not be relied upon.On July 21, 2011, the San Diego County Employees solitude Association (SDCERA) announced preliminary investment results for fiscal year 2011. SDCERA had managed an neat 21% gain. This amazing return added $1. 6 billion to the SDCERA pension fund. for sure the SDCERA Board should be commended on such outstanding results. A a few(prenominal) such years can do wonders in restoring this particular fund to health. But just as surely, such results cannot be expected to continue each and every year. Neither can other funds rely upon such results. Indeed, few have ever done so well.In 2012 the SDCERA fund realized investment income at the rate of only 6. 5%. While most State retirement systems have reported billions of dollars in unfunded liabilities, Illinois may be the poster child of sickly State sponsored pensions. As of 2011, the 5 Illinois State pension plans report funding ratios of only 43%, with a total unfunded pension indebtedness of $83 billion. The shortfall in 1996 was only $20 Billion. In the intervening 15 years the unfunded liability calculate 4 times, from 20 Billion to over $83 Billion, well over $4 billion each year, on average. The nearly $64 billion question How did this happen?This question was examine tardily by the civil delegation of the Commercial purchase order of Chicago. Investment losses, resulting mainly from the mortgage crisis starting in 2007, are estimated by the Committee report to account for nearly 22% of the shortfall. (Civic Committee, p. 11) Investment returns play the major role in pension fund growth, but they are unpredictable, as illustrated in the following chart, taken from the Civic Committee of the Commercial Club of Chicago report on the Illinois State solitude organisation Another major impact comes from changes in actuarial assumptions, d ue to an improvement in mortality evaluate.This phenomenon may be healthy for life indemnity companies, paying less in death benefits, but defined benefit pension annuities personify more to fund when people are expected to live long-run, since retirees will collect their pensions for longer periods of time. The Centers for Disease Control and Prevention recently reported that, In the most recent period from 1969 to 2010, significant senesce in the prevention, diagnosis, and treatment of cardiovascular diseases possible put upd to the 41 percent go down in age-adjusted mortality. (Hoyert) The drop in mortality rates has been quite prominent. For all but the oldest age group (85 years and over), mortality risk vanish more than 50 percent between 1935 and 2010. . . For persons 6574 years of age, death rates declined by 62 percent, while death rates decreased by 58 percent for those 7584 years of age, and declined 38 percent for persons 85 years or more. (ibid. ) Applying these statistics to pension plans, curiously defined benefit plans with cost of living adjustments (COLAs), it only stands to reason that the cost to keep the retirement checks flowing to retirees who are living longer, will have a major impact on pension funds.According to the Chicago study, in 1970 a 60 year old was expected to live to the age of 78. By 2007, however, a 60 year old was expected to live to the age of 82. 5. Paying benefits to a 60 year old retiree receiving a pension of $50,000 per year, therefore, has thus increased by over $225,000, estimating that he will be receiving that benefit for about 4. 5 years longer than might have been the case 40 years ago. Such variances, multiplied crossways the hundreds of thousands of articipants in the state pension plans and without corresponding increases in employee contributions, can have a significant impact on the plans unfunded liabilities. (Civic Committee, p. 14) The analogous phenomenon can be applied to other pensi on plans throughout the United States. Couple improved mortality factors with reduced investment earnings, and catastrophic losses resulting from the Great Recession. Add to this the fact that states and municipalities are also suffering from dramatic the tax revenue reductions. It quickly becomes evident that pensions are in peril.The Civic Committee report states that, If Illinois fails to address its pension system through a set of comprehensive and lasting reforms, all of its citizens will ultimately suffer. Participants in the on a lower floorfunded pension plans will be put at risk. The states ability to provide vital public services will be severely hampered. And a growing financial burden will be obligate on Illinois residents. (Civic Committee, p. 1) Official reports from pension funds throughout the land estimate unfunded liabilities totaling close to a trillion dollars as of mid-2011.That determine, however, is based upon future average investment earnings at the ra te of approximately 8%. While there have been years in which pension systems have attained such a return, or even greater, to rely upon such returns long term, in todays tight economy, may seem unrealistic. Accordingly, such an assumption grossly beneathstates the magnitude of the problem. In July of 2010 the subject field Center for Policy Analysis estimated unfunded public pension liabilities throughout the United States in excess of 3. 1 trillion dollars. Collins & Rettenmaier) Even this estimate may be optimistic. In July of 2012, Andrew Biggs, Ph. D. , a scholar with the American Enterprise Institute in Washington, D. C. , released a report suggesting a more accurate calculation for public sector unfunded pension liability may be closer to $4. 6 trillion. (See Table 1) The wide differences among these estimates are accounted for by investment returns, or discount rates, that are more or less optimistic. Andrew Biggs understands pension accounting. He was formerly Principal De puty Commissioner of the accessible Security Administration.Dr. Biggs holds Masters degrees from Cambridge University and the University of London, along with a Ph. D. from the London School of Economics. (Biggs) Whether the actual number is 1 or 5 trillion, either number represents a seemingly insurmountable crisis for public pensions in the U. S. Faced with such a situation, governors, county administrators, mayors, and city councils throughout the nation are seeking creative solutions to handle their part of the shortfall. The urgent call for pension reform has reached crisis proportions in many State and local governments.During the presidential primary resource in June of 2012, the cities of San Diego and San Jose, California, introduced voter turnout measures seeking voter authorization to reform the pension plans of their heedive municipal employees. In both cities the voter turnout measures were passed by an overwhelming majority of voters, though one might wonder wheth er the voters were fully informed. On June 22, 2012, San Jose mayor toss out Reed hand delivered a letter to the U. S. Treasury Department summarizing his Citys fiscal problems as follows San Joses cost for retirement benefits has gone from $73 million ten years ago to $245 million this year.To cope with this increase, we have reduced our work force from 7400 to 5400 employees. We also made many organisational changes to be more efficient, and every employee in the city took a 10% cut in pay. Yet, our unfunded liabilities for retirement benefits continue to grow, and we are facing rising costs for at least another decade. Short of bankruptcy, we have a very limited range of steps we can take to control retirement costs. In addition to layoffs and pay cuts, we can require our employees to pay more for the cost of their benefits.Hundreds of cities in California and in other states have already done so. Starting in June 2013 our employees will have to pay an additional 4% of their pa y towards unfunded pension liabilities. That amount will increase annually until it reaches 16% of pay or 50% of the cost of unfunded liabilities. San Diego and San Jose barely represent the tip of the iceberg. The problem, as whitethornor Reed suggested, is national. Most State and local government pension designs today sense the need for some form of pension reform. Some have been quick to blame the problem on the greed of labor unions.Labor unions have a responsibility to represent their members, and to bargain for the best possible terms and conditions of employment, including pensions. But the unions are not the ones who write the checks or manage public pension funds. Labor unions do not choose to take pension contribution holidays. The most highly compensated public employees, those taking the largest pensions, are often not represented by unions. So while unions make wonderful scapegoats, the most grievous of pension abuses that have brought public sector pensions to the br ink of insolvency may not lie with unions or their members.Assigning blame to either f legal action does little to address the problem, and it is not within the scope of this report to point fingers at anyone. Rather we hope to point the way toward a workable solution. Before looking at proposed or potential solutions we should first understand the role of social Security. While many public sector employees are not cover under fond Security, nevertheless, by faithfulness their public retirement systems are required to provide benefits that are at least parallel to those provided by accessible Security. Chapter III Social SecurityNo parole of pension reform can be complete without an understanding of Social Security, the basis of pension protection for the vast majority of American workers, though certainly not all. On August 14, 1935, Congress passed H. R. 7260, which came to be cognize as the Social Security Act, signed into law by death chair Franklin Delano Roosevelt. The intent was to provide a level of economic security in the wake of the Great Depression, providing protection for workers and their dependents against the loss of earnings due to disability, retirement, or death.The preamble of the Social Security Act describes it as, An act to provide for the general welfare by establishing a system of Federal old-age benefits, and by enable the several States to make more adequate provision for aged persons, imposture persons, dependent and crippled children, maternal and child welfare, public health, and the administration of their unemployment compensation laws to establish a Social Security Board to raise revenue and for other purposes. When first introduced, Social Security covered most private-sector workers. Excluded from reporting, however, were state and local government employees. Prior to 1951, State and political subdivision government employers were not required to record in Social Security, due to concerns over the inbuiltity of i mposing federal taxes upon sovereign state governments. The Social Security Act was amended in 1950 to add Section 218.This amendment authorized conscious State participation through Section 218 Agreements, so named after Section 218 of the Social Security Act The Commissioner of Social Security shall, at the request of any State, enter into an agreement with such State for the purpose of extending the insurance system established by this title to services performed by individuals as employees of such State or any political subdivision thereof. 42 U. S. C. 418 (a)(1) Prior to 1983, continue participation under Section 218 Agreements was optional, with States having the right to withdraw from those agreements.Beginning in 1983, however, those public employers which were act in Social Security were required to continue that participation. The city of San Diego was among many local governments that opted out of Social Security in 1982, precedent to the effective date of that change in the law. Throughout the United States today there are approximately 86,000 public employers, with 23 million public employees, according to the Social Security Administrations State and local anesthetic Government Employers Information webpage.Approximately 5 million of those government employees work for public entities that do not participate in Social Security, but rather provide coverage under public retirement systems meeting taut beneficial harbor requirements. Under current law, Social Security coverage is extended to include employees of state and political subdivisions, unless they are covered under a retirement system that provides benefits that are comparable to those available under Social Security.The rock-steady harbor requirements are spelled out in championship 26 of the Code of Federal Regulations, otherwise cognize as the inner(a) Revenue Code Under member 3121(b)(7)(F), wages of an employee of a State or local government are generally subject to tax unde r FlCA after July 1, 1991, unless the employee is a member of a retirement system maintained by the State or local government entity. This section 31. 3121(b)(7)2 provides rules for determining whether an employee is a member of a retirement system.These rules generally treat an employee as a member of a retirement system if he or she participates in a system that provides retirement benefits, and has an accrued benefit or forgathers an allocation under the system that is comparable to the benefits he or she would have or receive under Social Security. In the case of part-time, seasonal and temporary employees, this minimum retirement benefit is required to be nonforfeitable.In simple terms this means that public employers who do not already voluntarily participate in Social Security under a Section 218 agreement, must now do so unless they provide benefits under a public retirement system which are at least as comprehensive and beneficial as those provided under Social Security. T his is not a discretionary item, where a public employer may give its employees an option to participate or not. The employer must either participate in Social Security, or provide its employees with a retirement system that provides benefits which are comparable to the benefits he or she would have or receive under Social Security. Another consideration is that Social Security OASDI benefits include a great deal more than a simple retirement plan paying retirement income to its participants. Social Security also offers income to a workers dependent children until their age 18. There is also a disability income insurance element within Social Security, which is either non-existent or difficult to provide under a typical 401(k) musical mode plan. 401(k) plans are investment vehicles that require the element of time in order to grow. baulk can strike at any time, and may not hold in for a workers 401(k) plan to gain adequate resources.Disability income insurance costs are occupatio nally based. The greater the physical demand upon the worker, and the more unwarranted an occupation is, the greater the cost to provide insurance coverage. Sanitation workers and natural rubber employees, police officers and firefighters, for example, face physical demands and hazards that do not exist for clerical workers and executive level department heads. To replace the disability benefits guaranteed under Social Security through a plan of insurance, whether self-funded or through mercantile insurers, would add a tremendous drain upon the resources of a outlined theatrical role plan.In contrast, Social Security spreads that risk across all workers nationally, regardless of occupational hazards. In the private sector nearly all employees are subject to payment of Social Security payroll taxes under the Federal insurance pieces Act (FICA), and eligible for coverage under Social Securitys Old-Age, Survivors, and Disability indemnification (OASDI). But approximately 5 milli on public employees in the United States are exempt from Social Security coverage, since their employers opted out of Social Security before 1983.As discussed above, Public employees may be exempted from Social Security, provided they are members of a retirement system maintained by a state or political subdivision. To be exempt from Social Security coverage, the retirement system must provide certain minimum retirement benefits. To meet the minimum requirement, IRS regulations require that a retirement system provide benefits to the employee that are comparable to those provided in the Old-Age portion of the OldAge, Survivor, Disability Insurance (OASDI) program under Social Security. IRS Publication 963) Public employees who participate in a retirement system that meets the minimum requirements are said to have safe harbor. Such a retirement plan may be either a defined benefit or a defined contribution plan, but benefits derived from the plan must be comparable to those available under Social Security. In other words, any public pension plan that fails to provide retirement and disability benefits at least as good as those provided under OASDI, also fails to exempt the pubic employer from participating in Social Security.Drastic changes to public retirement systems may disqualify municipalities from continued safe harbor. Another consideration those anxious for reform may be commanding is that this is an all-or- postcode proposition. Cities imposing major pension reforms limited to new hires may find that the new employee plan fails the safe harbor test, thus requiring Social Security participation from all employees, including those not previously covered. While this remains to be tested in the courts, the law seems pretty clear on this issue. Social Security has had its detractors from its very beginnings.Many people have believed private investment strategies could formulate greater financial security than the government run Social Security program. So me have called for Social Security Privatization. In 1997, William Even and David MacPherson published a study that examined 7 public retirement systems not participating in Social Security, referred to as non-FICA plans. The study suggested that these 7 plans would provide greater retirement benefits than Social Security to the million covered employees. (Even MacPherson) In 1999, the Cato Institute published the Cato Project on Social Security Privatization.This study examined several other non-FICA public retirement systems administered by local governments, including the San Diego City Employees Retirement schema (SDCERS), the Massachusetts Teachers Retirement System, the atomic number 57 Police Retirement System, the lah Firefighters Retirement System, the Public Employees Retirement System of Ohio, the Alternative figure for Galveston County Employees. (Lips) At the time of these studies, each of the dozen retirement systems featured in were thriving, and reportedly capab le of providing far greater benefits to their beneficiaries than would have been available under Social Security.They were spotlighted to illustrate that such funds were outperforming Social Security as a means of providing retirement security for public employees. In Chapter II we mentioned that as of 2011, according to a report published by the Stanford Institute for Economic Policy Research, the San Diego City Employees Retirement System (SDCERS) only had assets of $4. 4 billion to cover accrued liabilities of $9. 871 billion, an unfunded liability of $5. 489 billion. Due to differences in project investment returns, these figures differ dramatically from the official numbers released in SDCERS financial reports.SDCERS reports their unfunded liability at under $2. 2 billion. Either way you slice it, whether $2 billion or $5 billion, this is a great deal of money for any single municipality to come up with. Whichever figure you prefer to accept, the fund is no longer the healthy p ension system it was at the time of the 1999 Cato study. The SDCERS fund was then considered among the best public employee retirement systems in the country, an example used to promote the idea of Social Security privatization. Today it has an unfunded pension liability approaching 56%. Select Unfunded Accrued Pension Liabilities Non-FICA Public Retirement System UAL (billions) Funded symmetry % 1 San Diego City Employees Retirement System (SDCERS) 2. 1 68. 5 2 Los Angeles City Employees Retirement System (LACERS) 3. 7 72. 4 3 Maine Public Employees Retirement System (Maine PERS) 4. 1 66. 0 4 Ohio Public Employees Retirement System (OPERS) 67. 8 63. 0 5 State Teachers Retirement System of Ohio (STRS Ohio) 40. 6 58. 8 6 conscientious objector Public Employees Retirement System (PERA) 30. 0 7 Nevada Public Employees Retirement System (NVPERS) 10. 9 70. 2 8 California State Teachers Retirement System (CalSTRS) 65. 69. 4 9 Massachusetts Teachers Retirement System 13. 6 58. 7 10 l anthanum Police Retirement System 0. 3 55. 6 11 atomic number 57 Firefighters Retirement System 0. 4 74. 3 12 The Alternative forge for Galveston County Employees 0. 0 100. 0 239. 0 With the exception of one, each of the other public retirement systems cited in the 1997 and 1999 studies are today facing massive unfunded liabilities. Based on their own 2010 or 2011 financial reports, 10 of those 11 retirement systems are facing total unfunded accrued actuarial liabilities (UAL) of $239. 0 billion. 1.As of June 30, 2011 the unfunded actuarial liability (UAL) of the San Diego City Employees Retirement System (SDCERS) was 2. 1778 billion, a funding ratio of 68. 5%. Those are SDCERS own estimates. As shown above, however, reducing the assumed investment income rate to 5% changes the funding ratio to 44% and suggests an unfunded liability of between $5 and $6 billion. 2. The Los Angeles City Employees Retirement System (LACERS), administers pensions for employees of the City of Los A ngeles, a city with an annual cypher of near $7 billion. As of April, 2012, the fund reported $27 billion in unfunded pension liabilities. source http//www. calwatchdog. com/2012/04/30/los-angeles-teeters-on-the-brink-of-bankruptcy/ 3. As of May 24, 2011, the Maine Public Employees Retirement System (MainePERS) reports an unfunded accumulated liability (UAL) of $4. 1 billion in the MainePERS State/Teacher Plan, amortized at a 2-year cost of $689 million on top of normal contributions of $159 million. as reported by letter to Senator Richard Rosen and Representative Patrick Flood of Maines Joint Standing Committee on Appropriations and Financial Affairs, May 24, 2011 4.As of April 2, 2011, the Ohio Public Employees Retirement System (OPERS), with its 5 pension plans, including the Highway Patrol Retirement System, the Ohio Police and Fire Pension Fund, the Ohio Public Employees Retirement System, the State Teachers Retirement System, and the School Employees Retirement System, has a total unfunded pension liability of $67. 8 billion, against assets of $115. 5 billion. That makes Ohios pensions only 63% funded. source http//sunshinereview. org/index. php/Ohio_public_pensions 5. The State Teachers Retirement System of Ohio (STRS Ohio) reported an unfunded liability of 40. 5 billion, as of November 10, 2011. https//www. strsoh. org/ On September 26, 2012 Ohio Governor Kaisich signed the Ohio pension reform bill passed by the Ohio Legilature on September 12, intending to improve the financial condition of its five Ohio pension systems. The bill continues to support Ohios specify Benefit Pensions as major economic drivers for the state, and providing a stable retirement income for public workers in Ohio. https//www. strsoh. org/legislation/main. html At Ohio State University, faculty contribute 10% of their salary to the retirement plan, while the university contributes 10. % of the faculty members salary to his or her retirement plan. An additional 3. 5% of sala ry is contributed to STRS to reduce unfunded liabilities. http//hr. osu. edu/benefits/rb_strs. aspx 6. The Colorado Public Employees Retirement System (PERA) faced a 30 billion unfunded liability in 2010. 7. The Nevada Public Employees Retirement System (NVPERS) has assets of $25. 8 billion, and has generated a net return of 9. 3% over its 28 year existence, exceeding its actuarial objective of 8%. That sounds great, until you realize that returns over the past 5 years average closer to 2. %. The Nevada PERS estimates its funded ratio at 70. 2% for 2011, its lowest level since its 1992 inception. This leaves the plan with an unfunded liability of 10. 95 billion. 8. California State Teachers Retirement System (CalSTRS), 152. 2 billion in assets, as of June 30, 2011, had an unfunded liability of $65. 5 billion, representing a funding ration of 69. 4%. source Pensions Investments Research Center, April 9, 2012, available at http//www. pionline. com/article/20120409/REG/120409899 9. Th e Massachusetts Teachers Retirement System has one of the lowest cost o taxpayers, with employees required to fund the superior portion of their own retirement. New employees pay 95% of the cost of their pensions. But the system still faces an unfunded pension liability of $13. 6 billion against assets of 19. 4 billion, in 2009, with a funded ratio of just 58. 7%. 10. The Louisiana Police Retirement System is a small system with assets of only $360. 9 million, but its unfunded liability is $313 million. Its funded ratio is only 55. 6%. 11. The Louisiana Firefighters Retirement System, as of June 30, 2011, had an unfunded actuarial accrued liability of $416,177,743, against assets of 1. billion. This fund has a funded ratio of 74. 33%, which is very good compared to the rest of Louisianas retirement systems, facing a total deficit of 18. 5 billion, with a funding ratio of 56%. 12. The Alternative Plan for Galveston County Employees is unique among the reviewed plans, claiming no un funded pension liability. This plan was patterned after Social Security, calling for the aforesaid(prenominal) level of contribution as with Social Security, from the employer and the worker alike. The plan also incorporates an insurance element that improves on the written report from Social Security.In addition to retirement benefits that a near double those of Social Security, Galvestons Alternative Plan pays a death benefit resembling to four times a workers annual salary. twain neighboring Texas counties adopted similar retirement plans in 1983. The Galveston model stands alone among all of the public retirement systems included in the 1997 and 1999 studies used to support the idea of privatizing Social Security. Galveston Countys approach seems worthy of further study and emulation, as a plan fair to participants, employers, and taxpayers alike.Chapter IV Reform suggestions In the past dozen years, since the disaster of 9/11/2001, and especially since the mortgage industr y meltdown in 2008 and 2009, pension reform has become an increasingly pressing issue. Some municipalities, including San Diego, and San Jose, California, have passed ballot measures calling for pension reform. These were cognize as hypnotism B in San Diego, and Measure B in San Jose. San Diego and San Jose are the 8th and 10th largest cities in the U. S. respectively, so what happens in these communities with respect o pension reform will gain the attention of all cities throughout the nation that are seeking solutions to the problem of unfunded pension liabilities. San Diegos City Charter included a provision that requires a majority vote of all city employees to approve any changes to retirement benefits. Proposition B called for that provision to be eliminated from the City Charter. (Prop. B) The ballot measure was mean to create a voter-supported mandate, granting the city manager and the City Council authority to modify the Citys pension plans. These make up a major part of the compensation packages of city government workers.If the City denies its employees voting rights over control of their pensions, such a move could have serious property right implications. Implementation of such a plan may lead to very costly legal battles for reasons we have explored in previous chapters. Among the most fundamental of employee benefits upon which the vast majority of U. S. workers have come to rely is the Social Security system, which we discussed in Chapter III. Social Security ensures a degree of financial stability to retired workers, or in the event of a disabling spot or disease that would prevent a worker from earning a living.This basic employee benefit has been a part of American workers life since passage of the Social Security Act of 1935. The act instituted a system of mandatory old-age insurance, way out benefits in proportion to the previous earnings . . . and establishing a reserve fund financed through the imposition of payroll taxes on employ ers and employees. (Farlex) But what many voters may not have realized when they supported Proposition B in June of 2012, is that participation in Social Security is among the sacrifices San Diego employees made in evaluate careers with the City.As explained in Chapter III, while virtually all private sector employers are required by law to participate in Social Security for the benefit of their employees, only some local government entities are exempt. The City of San Diego elected to withdraw from Social Security participation in 1982, and since then has not paying(a) Social Security payroll taxes. Instead, San Diego and many similarly situated municipalities provide retirement and disability related financial security to its employees through the Citys pension plan.San Diego City employees are only eligible to receive Social Security retirement benefits if they worked in covered employment other than for the City of San Diego, or worked for the City prior to 1982. Instead, San Diegos employees are covered only by the public retirement system provided by the City. Public employees in many other cities across the nation work under similar circumstances. But since the vast majority of voters are covered by Social Security, it likely does not occur to them that local government workers are not eligible.While pension reform became a political football in San Diegos 2012 mayoral campaign, pension issues have plagued the City of San Diego for over a dozen years. One of the four mayoral candidates, City Councilmember Carl DeMaio, wrote and promoted Proposition B, which was placed on the ballot for the presidential primary election held on June 5, 2012. Much controversy surrounded this ballot measure, following allegations that the City had circumvented the legally required process of meeting and conferring with its labor unions.Both outgoing Mayor Jerry Sanders and City Councilmember Carl DeMaio openly claimed authorship of the ballot initiative. Mr. DeMaio made it a key element of his mayoral campaign. But when the City was challenged as to its failure to transact with the Citys union concerning proposed reforms, they both claimed the initiative was citizen-initiated, and not an action of the City. Since both the mayor and a prominent member of the City Council each played a major role in the authorship and progress of the initiative, it seems difficult to legitimize the claim that this was not an official action of the City.As the ballot measure was presented to the voters, however, supporters of the initiative failed to mention or remind voters that San Diegos pension plan had replaced Social Security for City employees 30 years before. Had voters understood the full ramifications to City workers, and the fact that they are not covered by Social Security, the election results on Proposition B may have been different. Indeed, had the voters who signed petitions to have the measure placed on the ballot cognise this vital detail, some may have withheld their signature.Promoters carefully avoided any discussion of Social Security as they cajoled voters to pass the measure, while opponents also failed to adequately stress the Social Security implications. Legal challenges were brought in the courts, charging that the City break its legal obligation under the Meyers-Milias-Brown Act to meet and confer with the Citys unions regarding provisions of the ballot initiative. The City won the first round in this battle, succeeding in getting the measure placed on the June 2012 ballot. In San Diego Municipal Employees Association v.The Superior Court of San Diego County (San Diego County Superior Court No. 37-2012-00092205-CU-MC-CTL), the Court of Appeal for the Fourth Appellate District overruled that decision, but too late to have any impact. That decision came on June 19, 2012, two weeks after the election. The suggestion that San Diegos Proposition B had a so-called legislative history, or that it was improperly broug ht to a public vote, is not to inculpate that pension reform is unnecessary, in San Diego or anywhere else. But Proposition B may not be the panacea San Diego voters were led to expect.There may be other actions San Diego can take to address its pension problems actions that would be both more effective and more fair to City employees and taxpayers alike. several(prenominal) such potentially more sensible approaches to the problem were mentioned by spokesperson Bob Filner, the only one among San Diegos four mayoral candidates who resisted Proposition B. Congressman Filner recognized the propositions shaky legal foundation, and hold that such a reform plan may meet with constitutional challenges we will explore in the next chapter.Proposition B involved several elements. One part of Proposition B imposes a wage freeze. Curiously, however, even after the wage freeze was announced, Mayor Sanders authorized pay raises for several members of his administration, totaling nearly $45,00 0 per year. Union officials might wonder why austerity measures like wage freezes take for to represented employees, but apparently not to another class of employees. If serious belt-tightening is called for, the City might do well to apply such measures universally.To expect the burden to be borne by the Citys unionized workers, but not by management employees, does not do much to promote labor peace. The proposition also modifies the police pension plan, raising the retirement age and lower the level best benefit. Pension benefits for impertinently hired public safety workers would be reduced from a maximum of 90% to a lower cap of 80% of pre-retirement earnings. Key among the changes imposed by Proposition B is replacing the Citys delineate Benefit pension plan with a 401(k) style delimitate Contribution plan that make no financial security guarantees.These would be for all new employees who are not a part of the Police Department. As to Social Security, close reading of Pro position B reveals that its author acknowledges the fact that City employees are not presently covered. It is suggested that the City may open the option for employees to become covered by Social Security, but that it is the pattern of the City to maintain its safe harbor exemption from Social Security participation. In this respect San Diegos Proposition B approach to pension reform may have a fatal flaw.Recall from our discussion of Social Security that municipalities can maintain exemption from participation in Social Security, but only if its pension plan provides benefits comparable to those available under Social Security. For the past 30 years the Citys be Benefit pension plan has fulfilled that requirement. The question is, will the 401 (k) style specify Contribution plan proposed under Proposition B, meet the same stringent requirements? Unless the plan provides a level of benefits at least as comprehensive as Social Securitys Old-Age, Survivors, and Disability Insurance (OASDI), the answer is likely no.Defined Benefit Pension plans base pension benefits as a guaranteed fixed percentage of pre-retirement income, determined by a benefit formula that considers both rates of pay and years of service. These benefits are paid for by employer and employee contributions to the pension fund, and also by the investment income derived from the fund. When fund investments do well, contributions required from the employer are lessened. When investment income suffers, greater contributions are required from the employer to meet fund obligations.Defined Contribution Plans, in contrast, do not feature benefit guarantees, but rather base their security in a known fixed cost for the amounts paid into the plan. (Bennett-Alexander, p. 774) Defined Contribution plans may seem attractive from the point of view of the employer, but for the worker it means financial uncertainty. Eliminating the financial security features of Defined Benefit plans is a major change from l ong-standing past practice in San Diego and in cities similarly situated.The principle of past practice may give yet another basis upon which unions may mount a challenge to such a drastic change as to eliminate participation in Defined Benefit plans. Defined Benefit Pension Plans account for nearly 73% of union-negotiated retirement plans across the Nation, particularly in the public sector. (Carrell, p. 329) Income maintenance plans pensions and other employee benefits such as severance pay, death and disability insurance, wage guarantees, supplemental unemployment plans, and the like have generally been negotiated over long periods of collective bargaining by employee organizations and unions. Carrell, p. 328). In many cases, such as for San Diego city employees, these negotiated income maintenance plans take the place of programs made available to other workers through Social Security. Based upon ones term of employment and level of earnings, Social Securitys OASDI provides gu aranteed disability and retirement income to covered individuals and their families. Defined Benefit pension plans can be designed to be as good or better than Social Security. Benefits under Social Security are not in any way dependent upon investment returns, and the same is true, by definition, in Defined Benefit pension plans.The very nature of a Defined Benefit plan is that what is defined is the benefit, not the contribution. Benefits are established, and contributions may go to meet the scheduled benefits. If investment returns fail to fund the plan at sufficient levels to meet plan obligations, the shortfall is simply overcome by making greater contributions to the plan. In a Defined Contribution plan, however, what is guaranteed is not the benefit, but rather the amounts to be contributed. Costs are fixed benefits are contingent upon the funds resources, which come both from contributions and investment earnings.Simply put, benefits are directly dependent upon investment r eturns, which cannot be guaranteed. Highly compensated employees (HCE) see another attractive feature of 401(k) style retirement plans. Participating in such a plan offers very significant tax benefit, allowing voluntary contributions to accrue free of income taxes. Those workers whose income is lower, however, can neither afford voluntary reductions in pay, nor benefit to the same degree from 401(k) plan participation.From the perspective of lower paid workers, particularly those younger workers who do not sense retirement prep as being pertinent, every dollar an employer pays into a pension plan is a dollar that is not available in this weeks paycheck. While equally true for the highly compensated, that dollar has less significance. As explained in a recent study by the Center for Retirement Research at Boston College, high income workers benefit disproportionately due to higher participation rates, higher contribution rates, and higher tax benefits. Toder and Smith, p. 7) Define d Contribution plans may appear attractive to public employer budget analysts and some highly compensated employees, but they almost certainly fall short of being comparable to Social Security. To make them comparable, contribution rates would likely have to be set so high as to make investment returns unimportant. Suddenly then, Defined Contribution plans lose their attraction, as they may cost even more than the Defined Benefit plans they are intended to replace.That may be even more true considering the attorney and court fees taxpayers may be required to suffer to defend legal and constitutional challenges. During the San Diego mayoral race, candidate Congressman Bob Filner, noted that should Proposition B be implemented, there is a strong likelihood that much of the comprehend savings might be spent instead on legal fees defending the lawsuits that would likely follow. Discussing the pension reform problem on the National scene, and the move toward cutting back on pension bene fits, Stuart Buck, J. D. as noted, The problem is how to do this in a way that is most fair to workers and in a way that is consistent with state or federal Constitutional provisions that prohibit states from impairing the obligations of contracts. (Buck. ) Chapter V Legal and Constitutional Hurdles world power to grant pensions is not controverted, nor can it well be, as it was exercised by the States and by the Continental Congress during the war of the Revolution and the exercise of the power is synchronous with the organization of the government under the present Constitution, and has been continued without interruption or question to the present time.Justice Nathan Clifford United States Supreme Court United States v. manor hall 98 U. S. 343 (1879) The establishment of pensions in recognition of public service is a practice so steeped in tradition as to be considered a right of passage. Any proposal that suggests taking such benefits away from public servants will be met wit h stern opposition in the courts. There are well-founded statutory, contractual, and constitutional protections that make it difficult for cities or other political subdivisions to impose pension reforms. The U. S.Constitution has several clauses that can be interpreted to protect pensions. Numerous State constitutions offer similar protections. San Diego Pension Issues The City of San Diego, California, presents an evoke backdrop for the discussion of the legal and constitutional implications of pension reform. During the past decade the City of San Diego incurred millions of dollars in legal expenses dealing with lawsuits stemming from scandalous pension traffic and futile attempts to make unilateral changes to its pension plans.Such money enriched a few lawyers, but only worked against the interests of the City and its taxpayers. Attempts by the City of San Diego to impose pension reforms again gained attention during the 2012 election year. One of the Citys mayoral candidates, City Councilmember Carl DeMaio, wrote a ballot proposition known as the super Pension Reform Initiative, making pension reform the basis of his campaign. Of the four candidates in the 2012 San Diego mayoral race, only Congressman Filner seemed to acknowledge the legal and constitutional issues applicable to pension reform.During the campaign, candidate Bob Filner, a 20 year veteran of the U. S. House of Representatives, predicted that should Mr. DeMaios Proposition B pass voter approval, its implementation would be met by legal and constitutional challenges that may cost the City dearly to defend. Mr. Filner also noted that, Proposition B does nothing to reduce the current pension deficit, it takes retirement security from employees who are not in the Social Security system and it will result in years and years of more political wrangling and litigation over its legality and implementation. (Filner) Specifically, the legal implications of Proposition may involve charges of breach of contract. Under California law, employers enter into an implied and enforceable contract with employees as of the date of hire, with respect to the terms and conditions of employment. Employee benefits, including pensions, that are promised as an inducement to accept em