As Councilmember Heystek said following the approval of the firefighter contract in December,
“The biggest problem that I have with the contract is that it does very little to address our structural challenges in any meaningful way and it sets the tone for the contracts that we are poised to consider and adopt in the very near future.”
“Things that concern me the most are those things that some of us would trust future councils to go farther on. The issues of vesting or new hires, retiree medical benefits, the sharing in the decrease in PERS rates, etc. All these things, we tell that we are going to give them a letter and tell them this is what our thinking was and this is what we would do in the future. There is nothing to guarantee that any of us will be on a future council to effect any change. So when we say that we’re going to have to count on future councils to continue and carry the torch, I can’t as much as I’d like to trust people who are following us to do that kind of work, there’s nothing that guarantees that they will do that. In fact, as we continue to play politics with certain bargaining groups, the prospect that we will drive a harder bargain will be less.”
However, at least on pensions the plan for the city may not be for the next council to carry the torch, instead, the city may believe it can implement a two-tier pension system after the MOUs are signed.
They can do this, they think, because by changing the formula for new hires, they are not affecting existing employees.
We see this rationale embedded in language in the management MOU.
The city’s staff report from January 12 reads:
“One of the City’s Council’s objectives was to explore differential compensation packages for future employees. Included in the MOU for the Individual Management Employees is language that acknowledges the City’s intention to implement a reduced second-tier retirement benefit for new employees, as early as July 1, 2010.”
“The City anticipates taking steps to establish a reduced retirement benefit formula, with minimum required employee contributions, for all new-non-safety employees during the term of the contract.”
Only the management contract contains the following language as fire would apparently not even discuss it and PASEA pulled it at the last second. This is SECTION 4. PERS RETIRMENT SYSTEM, subsection A:
“The EMPLOYEES acknowledges the City’s intention to implement a reduced second-tier retirement benefit for new employees, as early as July 1, 2010. The City expects to engage in discussions with other cities within the region which have an interest in implementing standardized, sustainable retirement plans for their local government employees; provided, the City may move forward to implement a second tier retirement benefit notwithstanding any
decisions on the issue reached by other cities within the region.
The City anticipates taking steps to establish a reduced retirement benefit formula, with minimum required employee contributions, for all new non-safety employees during the term of the contract. This provision does not affect the City’s rights to pursue a second-tier retirement plan for new employees and the parties understand that the city is not required to meet and confer regarding implementation of a second tier retirement benefit for new employees.”
Key in on that last sentence: “the parties understand that the city is not required to meet and confer regarding implementation of a second tier retirement benefit for new employees.”
The city apparently believes that it can implement a second tier retirement benefits for new employees without approval from the bargaining units.
Now let us back up a step here because the claim that the Vanguard among others have made is that the city blew its real chance for reform when it failed to obtain agreements from the bargaining units to address pensions in this round of negotiations. Our logic is fairly simple in that, this is the year with the $3.5 million deficit, this is the year where all of the political pressure is on the city to make reforms, if we cannot make the reforms this year, there is no way that future councils will have the leverage.
As much as the MOUs failed to address these issues, the city has failed to utilize its leverage.
This language is a potential game-changer, but in our view very risky. It is notable that the only group to agree to this language even was the management group which is a bargaining unit but not an actual union like the firefighters or PASEA. We do not believe any union would agree to this language and have to question the council for even allowing it to be placed into a contract for a group that was not union.
The Vanguard spoke with a number of unions across the state and not one of them believes that the city can implement a second tier outside of the collective bargaining process. They do not believe it is legal and believe that any changes in an employee contract have to be done through the collective bargaining process. The Vanguard concurs.
One pointed us to language in the Legislative Analysts Report about the legal risk the state makes in trying to unilaterally increase employee contributions for PERS pensions.
“For example, it is quite unclear if the state can unilaterally — without agreements with its employee unions — increase required employee contributions for CalPERS pensions. While the state’s collective bargaining law explicitly gives the Legislature the authority to not fund some costs — such as salaries — included in state employee collective bargaining agreements, retirement funding decisions are subject to much more stringent legal restrictions.”
A key note may be that “retirement funding decisions are subject to much more stringent legal restrictions.”
The city appears to acknowledge this problem and appears set to negotiate these reforms. But that really gets us back to the first problem, outside of the MOU where is the city’s leverage? This was the year where all the pressure was on the bargaining units and the city had all of the leverage. Outside of the MOU, what incentive does a bargaining unit have to negotiate away retirement pensions for future members and once these future members become members, what is to preclude the city from upgrading the pension benefits to make for a more coherent system?
Moreover, if the city does this outside of the collective bargaining process, we believe that the unions would have no choice but to sue. Remember it is not just the city’s bargaining groups with a stake in this process, it is all bargaining groups across the state and Davis would set a precedent if they were allowed to create a two-tiered system outside of the collective bargaining process.
So from our standpoint, the city is running a tremendous risk by failing to lock changes into the MOU. The other key point to note is that while the city and management have agreed to this language, safety have not.
Indeed the language in the management group MOU specifically precludes safety employees:
“The City anticipates taking steps to establish a reduced retirement benefit formula, with minimum required employee contributions, for all new non-safety employees during the term of the contract.”
So even if the city can create a two-tiered system, they are not fixing the formula for the most lucrative and unsustainable employees, the safety employees who retire at 50 and get 3% of their final contract for every year of service.
Bottom line here is that the city probably squandered their chance when they failed to actually lock in a second tier pension reduction into this round of MOUs. But all may not be lost.
Ed Mendel of Calpensions.org reported yesterday that the CHP Union CEO, Jon Hamm is considering negotiating a “two-tier” retirement system.
Writes Mr. Mendel:
Jon Hamm, the CEO of the California Association of Highway Patrolmen, said he is concerned about “pension envy” among private-sector workers with dwindling retirement security as corporations switch to 401(k) individual investment plans.
Hamm said “public employee unions are becoming villains” because some are playing on public fears. He also said assuming that economic growth will return to “normal” and generate the big pension investment earnings of the past could backfire.
“I never thought that negotiating a ‘two-tier’ retirement system would be something that I would ever consider,” Hamm said.
“But I have come to the conclusion it’s a very strong likelihood I would be looking out for future employees by negotiating a second-tier retirement system,” he said. “The last thing we want to do is leave it to the initiative process.”
Mr. Hamm seems to be acknowledging what I have been saying for a long time, unless concessions are made at some point a more draconian approach for pension reform will pass the legislature. One such initiative is in the works this year but at this point unlikely to pass. But there will come a time.
My concern is fundamental here and that is that while public safety pensions, $100,000 pensions, and pension spiking are in the news, the average person who receives a pension is making around $27,000 per year upon retirement, not $100,000. Pension reform plans such as the one being proposed would reduce that even more. Many public employees not in city service have been asked to forgo salary increases in the belief that at least they will have security in retirement and now that is being threatened. And it is being threatened because of the people at the top have abused the system.
Mr. Mendel writes,
“Creating a second tier of lower benefits for new hires is one way to lower pension costs. But significant savings can take decades, until employees with the lower benefits begin to retire.
Pensions promised current employees and retirees are regarded as vested rights, protected by contract law, that cannot be reduced without providing something of equal value.”
This is where I disagree with Mr. Mendel. A second tier is the beginning of the reform process. Another portion is to ask public employees to pay more into their retirement. An appropriate solution however is not to take away from what they have already received in future contracts.
Moreover and this gets back to the city of Davis, the collective bargaining process is sacrosanct, it should not be subverted. And it probably cannot be done so legally.
The collective bargaining process is much like the legal system, it is adversarial and it works best when both sides fight hard for their own interests and through a system of compromises and bargains arrive at a deal to the mutual benefit of both sides. Where the process has broken down at the local level is by allowing some groups to buy influence into the system.
By buying influence through contributions, these groups have elected public officials that are representing their bargaining groups as much as the public. Now suddenly one does not have an adversarial system of give and take.
The city of Davis has made a huge error, they gave up their advantage of leverage in order to get an agreement. Why did they absolutely need an agreement this year? They should have held out for a contract that actually addressed the pension system and the unfunded liabilities.
Moreover, while Councilmember Souza has downplayed the problematic nature of the cafeteria cash out, that benefit alone costs the city $4 million per year. That is a huge liability to the city that could be used to plug the immediate deficit while the city works longterm to fix the structural issues that could lead to far worse problems.
Unfortunately all of this needed to occur during THIS MOU through the bargaining process, by missing this chance, the city has probably missed its opportunity to correct itself fiscally.
—David M. Greenwald reporting