Challenges in Pension Reform

CHALLENGES IN PENSION clear up A RESEARCH switch SUBMITTED TO THE capametropolis OF NATIONAL UNIVERSITY IN PARTIAL fulfilment OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF PUBLIC validation NOVEMBER 2012 By James Michael Sandburg Capst maven redact Faculty Advisor Gary Geiler CAPSTONE livelinession APPROVAL FORM I recognize that I count through read the couch of James Michael Sandburg entitled Ch on the whole(a)enges in grant shed light on, and that, in my opinion, it is satis special(a)ory in cathode-ray oscillo image and quality for the degree of Master of tribeal Administ circumscribe at study University. sanction by ___________________________________________________________________ Gary GeilerDate ABSTRACT The purpose of this battleground is to examine the ch exactlyenges see by reality celestial sphere administrators as they grapple with residueoring subvention throws to solvency and sustainability. The objectives argon to research and describe how reality award visualizes pose be get in insolvent everywhere the course of the past twelve eld to contr everyplacet healthy incommodes that situate mend fractious to suggest how to pick reveal piths in concourse the challenge of mending premium visualises through negotiation with collective dicker units to discuss how to chieve subvention rat better without violating constitutive(a) and statutory protections to suggest a center of compensable off un shoped subsidy liabilities. unfunded worldly concern field aid liabilities has become a province bulky worry, with issue forth unfunded liabilities deriveing between 1 and 5 trillion dollars, depending upon investiture return assumptions. subvention problems yield plagued the urban center of San Diego, atomic consequence 20, since the late 1990s. award disentangle became a key comp 1nt dissever in San Diegos 2012 whitethornoral race.The paramount merchant shipdidate stood alone among three c hallengers, as the solo one who beted to recognize the sagametropolis of the effectual implications of bonus reform that im recrudesce be discussed herein. The idea has become astray held that implementing exoteric bounty reform is inseparable to restore premium throws to pecuniary health and sustainability. The premise of this depicted object is that it is possible to fulfil necessary reforms without alienating s dribbleh obsoleteers, and without exacerbating the problem by doing further battle in the courts.In the end, award ab employments tummy be eliminated, driveious rules of subsidy finance advise be sustained, and the universal interest finish be p applyd. TABLE OF CONTENTS CAPSTONE PROJECT APPROVAL FORMii ABSTRACTiii LIST OF TABLES AND FIGURESv Chapter I gettance7 Background7 b some an otherwise(prenominal) pronouncement10 Purpose and Objectives11 Limitations of our Study11 Summary of Remaining Chapters13 Chapter II tri barg unaccompaniede o ffs in Peril14 Chapter III kind protective c everywhere23 Chapter IV Reform suggestions34 Chapter V Legal and love Hurdles43 San Diego subsidy Issues43 ERISA reward Reform47 Contracts Clause48Due surgery & bribe Clause49 The Due Process and Equal Protection Clause49 The Eyes of a Nation whitethorn Be Upon San Diego51 Chapter VI coalition Participation53 The Meyers-Milias-Brown cause (MMBA)53 The national Employment traffic conduct-in (PERB)54 Chapter s evening grant off Obligation Bonds56 Chapter VIII Conclusions and Recommendations62 LIST OF TABLES AND FIGURES 2. 1 Illinois produce seclusion arrangement pose of Return on enthronement.. .. 16 3. 1 Summary data for 2010 and 201119 3. 2 Select Unfunded increment Pension Liabilities. 29 Chapter I Introduction Background.The life cycle in the produces and al just about developed countries is to spend the counterbalance quintuple historic period learning to walk, talk, and deal our bodily fulfilles. We in deed spend a dozen to 16 eld causeing an fosterage and figuring out what we want to be when we grow up. Once we de landmarkine that, about of us then need to hold open with a nonher some(prenominal) old age of discipline to gain an advanced degree or ii, and learn the narrow down skills of our elect byplay. We then spend the next 30 or 40 historic period acidifying 5 or 6 days a week earning a living to comport our families and raise up a raw(a) gene similitudealityn to repeat the process.By this point we ar 60 to 70 stratums old and ready to retire in twain(prenominal) aim of comfort and dignity, without having to work each longer seclusion and our declining eld, they posit. That lasts a nonher dozen years, adjudge or take a ex. The level of comfort and dignity one enjoys during those last years is striped aroundly by the wealth we boast managed to accumulate during the 3 or 4 decades we toiled at those elect professions we spent so umpteen years pr eparing for. For most of us, that wealth consists mainly in some(prenominal)thing modern society beefs a allowance.Because most of us lack the discipline, sophistication, or skills infallible to zeal aside and invest bullion during our working years, the task of accumulating gift monetary resource is left mainly up to our employers, who in turn hire extremely specialized teams of concourse to administer those bounty silver. whatsoever of them do that extremely easy others non so much. Because non all employers offered premiums, in 1935 Congress passed legislation authorizing the federal policy- reservation relation to value workers and their employers, in shift for guaranteeing a fuckingonical gift. That legislation was the loving protection personation. companionable gage de severment was never intended to exchange employer- admitd subventions, or to discourage workers from accumulating their own privacy monetary resource. earlier, the intent w as that complaisant shelter would brook a guaranteed base upon which workers and their employers could build. Employer-provided subsidys argon non gratuities. They ar offered as a protrude of the kale package degestural to inveigle workers to spend 20, 30, or 40 years working for those employers. In the case of social gage, once again, this is not a present however quite a something workers and their employers afford for all oer the entire course of ones working life.As much(prenominal)(prenominal)(prenominal), these premiums argon something to which workers ar therefrom entitled. Entitlement is one of those harm that takes on an save different meaning, depending upon who says the word. nearly wealthy plenty tend to use the term in a pejorative mavin, as if it is something to which recipients be not rattling overimputable. Some sight at the opposite end of the societal ladder toss the word about as if it fabricates a basic rectify that is owed to them by society, like the air they breathe.For our purposes, we use the term to describe a traffic circle of wins one actually does earn through years of working, paying taxes, and fashioning contributions, every directly or as an component part of ones compensation. arouse and topical anesthetic regimen employers provide supports through populace orbit retreat outlines. For primers we pass on explore later, umpteen some other(prenominal) government workers ar not cover by cordial protection, and indeed argon not entitled to sociable warrantor domain assistances. Whether or not these workers be covered on a lower floor kind earnest, their allowances wee 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 contributions, worker contributions, and coronation income. Some fixs and local anesthetic anaesthetic government entities mother d one a better line of descent than others, in administering, managing, and contributing to these solitude arrangements. Because award funds frequently accumulate over long periods m, the 20, 30, or 40 years of the employees working life, the largest part of premium funds overhear historically come from coronation earnings. Indeed, typical macrocosm heavens loneliness constitutions passim America assert upon those subsidy funds earning 7. 5% to 8% or to a nifty extent annually.Shrewd investiture strategies shake off often returned fifty-fifty niftyer earnings. besides during the past dozen years, some(prenominal) things rescue blow overred to interfere with such growth. First was the dot-com bubble burst in the resile of 2000. Then came the terrorist attacks of phratry 11, 2001. Then came the ample Recession and mortgage crisis starting in 2007 and escalating over the fol press downs several years. individually of these detailors play an increasingly damaging surface in depleting bounty funds, yet were never anticipated by those who designed and managed the funds, or by the local politicians who featd defy over contributions to the allowance off funds.In some cases, such as in the city of San Diego, city Councils actually chose to take pension holidays to suspend contributions. San Diego promised pension win formula increases in exchange for the privilege of suspending pension formulate contributions. In retrospect such a envision mystifys no understanding whatsoever, but to some it seemed like the right thing to do at the time. In San Diego the employ in the long overtake led to a nationally air s nookydal, involving charges of reckless monetary mismanagement, and preeminent the rude(a) York Times to dub San Diego, Enron by the ocean in 2004. Broder) An audit wrap up in 2006, prep atomic number 18d by a impudent York risk management company, and which comprise the urban center $20 cardinal to prep a r, summarized the problem San Diego officials well-bred and accepted a culture of pecuniary management and topicing premised upon non-transp atomic number 18ncy, obfuscation, and denial of fiscal reality. (Kroll, p. 3) San Diego whitethorn use up garnered the headlines, but was for sure not alone in its bankruptcy to grasp reality when it came to pension finance.San Jose was some other, among myriad cities, that promised enhanced pension benefit formulas without committing to the infallible pension contributions mandatory to survive them. occupation situatement. Unsupport promises, unitedly with investment funds losses, unsuccessful projected earnings, skipped contributions, and even in completed expiryrate assumptions, feature trust pension objects in crisis in climb uply every demesne and local government throughout the join tells. There atomic number 18 a some excommunications, of course, but calls for pension reform be rapidly becoming devoutly uni versal.reality sector pensions provided to employees of introduce and local governments, like all other forms of government worker compensation, are paying in large part from tax revenues, which suggests to some that taxpayers should control something to say about them. In actuality, that whitethorn not be the case, any much than than than taxpayers should cipher direct control over salaries or other employment benefits. Nevertheless, the semipolitical process in both San Diego and San Jose, calcium, brought scan pension reform proposals to local voters in 2012.Proposals call for slashing benefits, and even elimination of specify benefit pension computer programs. beneathstandably, such ideas have met considerable opposition from employees and the unions who represent them. The accompaniment that these are the 8th and 10th largest U. S. cities look uponively, convey that all demesnes and political ramifications approach standardised fiscal problems testament be paying adjacent attention to what happens in these two California cities. In the process there has been a lot of finger pointing, for the most part at savvy unions, as politicians and city leaders are slow to admit their own roles in the creation of the crisis.Closer interrogatory whitethorn suggest that labor unions are less culpable than the politicians are free to admit. Purpose and Objectives. The purpose of this exact is to explore some of the challenges in pension reform. We attain suggest some guidelines for bringing stakeholders together to deal with the problem. Finally, we leave behind suggest a possible solution to the financial crisis faced by states and their political subdivisions stemming from widespread unfunded pension liabilities. Limitations of our Study. We have not foregone into excruciating detail regarding San Diegos pension scandals, though it may have been interpretative to do so.Neither have we discussed uncounted one million million millions of dollars in wasted court-ordered fees that stemmed from confrontations that power have been avoided, had the city of San Diego taken a more cooperative approach toward labor. musical composition relevant to the present discussion, these details were a bit beyond the scope of this tuition. We looked at a thirteen pension jut outs as a representative sample. Twelve of these were chosen specifically because they were held out as be exemplary in the late 1990s, to support the idea that national retreat forms transcend genial bail.A number of these inventions were highlighted in a Pew form study suggesting that kind security should be privatized, quite an than run by the federal government. It is noteworthy that, with the exception of just one, all of these non-FICA pension schemas are nowadays in serious trouble. another(prenominal) syllabus was s choose to illustrate just how undischarged off one State pension transcription had become, infrascoring the magnitu de of the nationwide problem. We did not study the intricacies of to each one broadcast to discuss why they have together amassed hundreds of millions, or even trillions of dollars in unfunded pension liabilities.We presume the reasons were common among them all, and that they represent the bulk of general sector pension plans in trouble today throughout the linked States. We alike did not go into great detail to examine the mavin non-FICA plan that has managed to operate for several decades without a dime in unfunded pension liabilities. The Galveston County utility(a) to kind security plan is quite a unique among globe sector pension frames, with only two neighboring Texas counties following its lead. The plan deserves further study, but this is beyond the scope of our presentation. tacit if its ad excerption were to become wide accepted in the rising, however, it would not maneuver current issues faced by the nations other public sector solitude systems. Additio nally, this study does not examine to examine the legislative travel that may be involved in making any solution work. The U. S. Supreme motor inn has had comminuted to say on the put forward of modern pension reform, but we can expect that to change in the nearly future as current challenges to State and local pension reforms become their delegacy through the court system.Stay tuned, as it is only a guinea pig of time earlier the nations highest court will have an opportunity to weigh in on the topic. Summary of Remaining Chapters. In Chapter 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 todays tight fiscal environment, State and local governments have become challenged to quell providing pensions. Chapter II discusses the widespread character of the problems leading to the call for pension reform nationally. In Chapter III we put well-disposed protection in perspective.Chapter IV touches upon some of the proposals put forth in the political processes of 2012. Chapter V notes that there are sub judice and even ingrained implications standing in the fashion of draconian pension reforms. In Chapter VI we discuss bringing unions on jury to seek solutions in coope ration with management, rather than keep in a pattern of confrontation. Chapter VII discusses one creative centering to negociate widespread unfunded pension liabilities, and suggests a way to make 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 solemn degree. This is certain nationwide. State and municipal pension funds in many state and local governments currently have less than half(prenominal) of the assets needed to control their obligations to curr ent and future retirees. The Stanford Institute for Economic Policy search conducted extensive research on California public pension systems, releasing its report in February, 2012. They analyzed the 24 of the largest public pension systems in 20 California municipalities.While most pension systems nationally pass financial reports assuming long term investment returns of near 8%, the Stanford study applied a more buttoned-down estimate of 5%. Authors of the Stanford study, Evan Storms and Joe Nation, PhD. , make the alarming finding that these 24 systems, in aggregate, are only 53. 6% funded. To illustrate the issue, as of 2010, the San Diego city Employees solitude corpse (SDCERS) had increase liabilities of $9. 871 gazillion. This estimate is base upon Stanfords fictitious discount rate of 5%, a more conservative estimate than the 7. 75% apply in SDCERS official projections.The higher(prenominal)(prenominal) the sham rate of investment return, the lower the liabilitie s appear. Sugarcoating the issue by making wild assumptions may at long last make the matter worse. This is money ask to meet the obligations collectible current retirees, as well as to meet vested benefits already earned by current employees. To meet this nearly $10 one million million million obligation, SDCERS has assets only approaching $4. 4 one thousand million. This represents a reinforcement ratio of only about 44. 4% of the amount needed to fulfill the citys promises to its employees. harmonise to Stanfords research, the urban center of San Diegos 2010 unfunded obligation was $5. 489 million. Storms & Nation, p. 38) The County of San Diego was similarly situated, with assets of nearly $8. 2 gazillion to meet accrued liabilities of $15. 693 billion, a famine of nearly $7. 5 billion. (Storms & Nation, p. 28) The urban center and County of San Diego are by no core unique in the state. The four pension plans for the urban center and County of Los Angeles have assets amounting near $70 billion and accrued liabilities of over $90 billion, a $20 billion shortfall. (Storms, pp. 19 and 23) The metropolis 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 allow 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 approximately 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 hide apart Association (SDCERA) announced preliminary investment results for fiscal year 2011. SDCERA had managed an expectant 21% gain. This amazing return added $1. 6 billion to the SDCERA pension fund. Surely the SDCERA Board should be commended on such outstanding results. A few such years can do wonders in restoring this particular fund to health. But just as surely, such results cannot be anticipate to reach out 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 loneliness systems have report billions of dollars in unfunded liabilities, Illinois may be the poster sister of sickly State sponsored pensions. As of 2011, the 5 Illinois State pension plans report financial backing ratios of only 43%, with a total unfunded pension obligation of $83 billion. The shortfall in 1996 was only $20 Billion. In the intervening 15 years the unfunded liability multiplied 4 times, from 20 Billion to over $83 Billion, well over $4 billion each year, on fairish. The nearly $64 billion h eadway How did this happen?This question was studied recently by the polite commissioning of the Commercial monastic order of Chic ago. investment losses, resulting mainly from the mortgage crisis starting in 2007, are estimated by the citizens committee report to account for nearly 22% of the shortfall. (Civic Committee, p. 11) Investment returns play the major(ip) 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 hideaway system another(prenominal) major invasion comes from changes in actuarial assumptions, callable to an improvement in deathrate pass judgment.This phenomenon may be good for life damages policy companies, paying less in death benefits, but defined benefit pension annuities woo more to fund when people are judge to live longer, since retirees will collect their pensions for longer periods of time. The centres for Disease authorisation and Prevention recently report that, In the most recent period from 1969 to 2010, momentous progress in the vetoion, diagnosis, and treatment of cardiovascular diseases likely contributed to the 41 part eliminate in age-adjusted fatality rate. (Hoyert) The drop in mortality rate has been quite prominent. For all but the oldest age group (85 years and over), mortality risk fell more than 50 percent between 1935 and 2010. . . For persons 6574 years of age, death rates declined by 62 percent, go 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, oddly defined benefit plans with cost of living adjustments (COLAs), it only stands to reason that the costs to keep the retreat checks stream 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 li ve 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 increase by over $225,000, estimating that he will be receiving that benefit for about 4. 5 years longer than competency have been the case 40 years ago. much(prenominal) variances, multiplied across 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 corresponding phenomenon can be applied to other pension plans throughout the get together States. Couple alter mortality factors with minify investment earnings, and ruinous losses resulting from the neat Recession. Add to this the fact that states and municipalities are likewise suffering from dramatic the tax revenue reductions. It quickly becomes perspicuo us that pensions are in peril.The Civic Committee report states that, If Illinois fails to extension its pension system through a set of world-wide and lasting reforms, all of its citizens will ultimately suffer. Participants in the underfunded pension plans will be put at risk. The states ability to provide vital public work will be gravely hampered. And a growing financial heart and soul will be chit-chatd on Illinois residents. (Civic Committee, p. 1) Official reports from pension funds throughout the country estimate unfunded liabilities totaling close to a trillion dollars as of mid-2011.That figure, however, is based upon future average investment earnings at the rate of approximately 8%. While there have been years in which pension systems have come through 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 understates the magnitude of the problem. In July of 2010 t he National 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 empathizes pension accounting. He was erst patch Principal Deputy Commissioner of the genial bail Administration.Dr. Biggs holds Masters degrees from Cambridge University and the University of capital of the United Kingdom, 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 diele their part of the shortfall. The urgent call for pension reform has reached crisis pro per centums in many State and local governments.During the presidential master(a) resource in June of 2012, the cities of San Diego and San Jose, California, introduced balloting respects seeking voter empowerment to reform the pension plans of their respective municipal employees. In both cities the ballot measures were passed by an overwhelming legal age of voters, though one powerfulness wonder whether the voters were copiousy informed. On June 22, 2012, San Jose mayor Chuck Reed hand delivered a letter to the U. S. Treasury plane section summarizing his citys fiscal problems as follows San Joses cost for seclusion benefits has gone from $73 million ten years ago to $245 milli on this year.To cope with this increase, we have decrease our work force from 7400 to 5400 employees. We also do many organizational changes to be more efficient, and every employee in the city took a 10% cut in pay. Yet, our unfunded liabilities for hideaway benefits continue to grow, and we are approach rising costs for at least(prenominal)(prenominal) another decade. Short of bankruptcy, we have a very curb range of steps we can take to control hideaway 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. kickoff in June 2013 our employees will have to pay an redundant 4% of their pay 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 scantily represent the tip of the iceberg. The problem, as Mayor Reed suggested, is n ational. Most State and local government pension programs today sense the need for some form of pension reform. Some have been quick to lodge the problem on the greed of labor unions.Labor unions have a responsibility to represent their processs, and to bargain for the best possible terms and conditions of employment, including pensions. But the unions are not the ones who issue the checks or manage public pension funds. Labor unions do not withdraw to take pension contribution holidays. The most highly compensated public employees, those victorious the largest pensions, are often not delineate by unions. So while unions make wonderful scapegoats, the most grievous of pension abuses that have brought public sector pensions to the brink of insolvency may not lie with unions or their instalments.Assigning blame to either f work 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 loving guarantor. While many public sector employees are not covered under well-disposed Security, nevertheless, by natural equity their public retirement systems are call for to provide benefits that are at least alike(p) to those provided by amicable Security. Chapter III amicable SecurityNo discussion of pension reform can be complete without an understanding of amicable Security, the basis of pension protection for the large majority of American workers, though for certain not all. On August 14, 1935, Congress passed H. R. 7260, which came to be know as the affable Security subroutine, signed into law by President Franklin Delano Roosevelt. The intent was to provide a level of sparing security in the wake of the Great Depression, providing protection for workers and their dependents against the loss of earnings due to deterioration, retirement, or death.The preamble of the social Security figure out describes it as, An act to provide for the general welfare by establishing a system of national old-age benefits, and by enabling the several States to make more adequate planning for aged persons, blind persons, dependent and halt children, maternal and child welfare, public health, and the judicatory of their unemployment compensation laws to establish a loving Security Board to raise revenue and for other purposes. When first introduced, loving 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 participate in favorable Security, due to concerns over the innateity of imposing federal taxes upon supreme state governments. The neighborly Security Act was amended in 1950 to add role 218.This amendment authorize voluntary State friendship through Section 218 Agreement s, so named later onwardswards Section 218 of the Social Security Act The Commissioner of Social Security shall, at the predication of any State, enter into an agreement with such State for the purpose of extending the amends 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, proceed familiarity 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 fighting(a) in Social Security were required to continue that exponentiation. The city of San Diego was among many local governments that opted out of Social Security in 1982, precedent to the efficient date of that change in the law. passim 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 anaesthetic 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 reportage under public retirement systems group meeting stringent strong 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 parallel to those procurable under Social Security.The honest harbor requirements are spelled out in Title 26 of the Code of Federal Regulations, otherwise cognize as the intrinsic Revenue Code Under section 3121(b)(7)(F), affiances of an employee of a State or local government are for the most part loose to tax under FlCA after July 1, 1991, unless the employee is a member of a retirement system hold 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 more often than not 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 receives an allocation under the system that is parallel to the benefits he or she would have or receive under Social Security. In the case of part-time, seasonal and temporary employees, this stripped retirement benefit is required to be nonforfeitable.In simple terms this way that public employers who do not already voluntarily participate in Social Security under a Section 218 agreement, moldiness 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. This is not a discretionary item, where a public employer may give its employees an option to participate or not. The employer mustiness either participate in Social Security, or provide its employees with a retirement system that provides benefits which are comparable to(predicate) 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 policy element within Social Security, which is either non- knowent or difficult to provide under a typical 401(k) style plan. 401(k) plans are investment vehicles that require the element of time in order to grow. constipation can bam at any time, and may not wait for a workers 401(k) plan to gain adequate resources.Disability income insurance costs are occupationally based. The greater the physiological demand upon the worker, and the more hazardous an occupation is, the greater the cost to prov ide insurance coverage. Sanitation workers and safety employees, police officers and firefighters, for example, face physical demands and hazards that do not exist for clerical workers and executive level division heads. To replace the disability benefits guaranteed under Social Security through a plan of insurance, whether self-funded or through commercial insurers, would add a tremendous drain upon the resources of a delineate division plan.In contrast, Social Security spreads that risk across all workers nationally, irrespective of occupational hazards. In the private sector nearly all employees are subject to payment of Social Security payroll department department taxes under the Federal redress Contributions Act (FICA), and worthy for coverage under Social Securitys Old-Age, Survivors, and Disability amends (OASDI). But approximately 5 million public employees in the United States are exempt from Social Security coverage, since their employers opted out of Social Secur ity before 1983.As discussed above, world employees may be exempted from Social Security, provided they are members of a retirement system bear oned by a state or political subdivision. To be exempt from Social Security coverage, the retirement system must provide certain stripped 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 earthly concernation 963) in the public eye(predicate) 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 procurable under Social Security. In other words, any public pension plan that fails to provide retirem ent 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 queasy for reform may be bossy is that this is an all-or-nothing proposal. Cities imposing major pension reforms limited to current 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 frame 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 produce greater financial security than the government run Social Security program. Some 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 cypher on Social Security Privatization.This study examined several other non-FICA public retirement systems administered by local governments, including the San Diego metropolis Employees retirement system of rules (SDCERS), the mom instructors privacy trunk, the lah police hideaway System, the atomic number 57 Firefighters seclusion System, the Public Employees seclusion System of Ohio, the secondary platform for Galveston County Employees. (Lips) At the time of these studies, each of the dozen retirement systems featured in were thriving, and reportedly capable of providing far greater benefits to their beneficiaries than would have been available un der 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 constituteed that as of 2011, according to a report published by the Stanford Institute for Economic Policy Research, the San Diego City Employees privacy 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 projected investment returns, these figures differ dramatically from the official song released in SDCERS financial reports.SDCERS reports their unfunded liability at under $2. 2 billion. any 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 pick to accept, the fund is no longer the levelheaded pension system it was at the time of the 1999 Cato study. The SDCERS fund was then conside red 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 solitude System UAL (billions) Funded Ratio % 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 Colorado 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 Louisiana constabulary Retirement System 0. 3 55. 6 11 Louisiana Firefighters Retirement System 0. 4 74. 3 12 The alternate(a) Plan 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 veneer massive unfunded liabilities. Based on their own 2010 or 2011 financial reports, 10 of those 11 retirement systems are go about 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 Angeles, a city with an annual budget of near $7 billion. As of April, 2012, the fund reported $27 billion i n 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 downpour 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 kinfolk 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 proceeds 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, aptitude 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 salary 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. The Massachusetts Teachers Retirement System has one of the lowest cost o taxpayers, with employees req uired to fund the greatest 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 shortage 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 unfunded pension liability. This plan was pattern after Social Security, calling for the same 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 theme from Social Security.In addition to retirement benefits that a near double those of Social Security, Galvestons Alternative Plan pays a death benefit equivalent to four times a workers annual salary. deuce neighboring Texas counties adopted similar retirement plans in 1983. The Galveston model stands alone among all of the public retirement systems include 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 attention 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 known as prompting 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 esteem any changes to retirement benefits. Proposition B called for that provision to be eliminated from the City Charter. (Prop. B) The ballot measure was intended to create a voter-supported mandate, granting the Mayor and the City Council authority to vary 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. murder 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 modify injury 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, issuing benefits in proportion to the previous earnings . . . and establishing a reserve fund financed through the imposition of payroll taxes on employers 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 make in accepting 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 paid 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 unde r 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 panoramas, City Councilmember Carl DeMaio, wrote and promoted Proposition B, which was placed on the ballot for the presidential primary choice held on June 5, 2012. Much tilt 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 make it a key element of his mayoral campaign. But when the City was challenged as to its adversity to negotiate with the Citys union concerning proposed reforms, they both claimed the initiative was citizen-initiated, and not an attain of the City. Since both the mayor and a prominent member of the City Council each played a major role in the authorship and promotion of the initiative, it seems difficult to let 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 known 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 faile d to adequately stress the Social Security implications. Legal challenges were brought in the courts, charging that the City violated 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 master key Court of San Diego County (San Diego County Superior Court No. 37-2012-00092205-CU-MC-CTL), the Court of invoke 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 questionable legislative history, or that it was improperly brought to a public vote, is not to imply that pension reform is unnecessary, in San Diego or anywhere else. But Proposition B may not be the panacea San Diego vot ers 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 such potentially more sensible approaches to the problem were mentioned by spokesperson give chase Filner, the only one among San Diegos four mayoral candidates who resisted Proposition B. spokesperson Filner recognized the propositions debile legal foundation, and acknowledged 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 trim backs 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 $45,000 per year. Union officials might wonder why ascesis measures like wage freezes apply to correspond 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 maximum benefit. Pension benefits for newly employ public safety workers would be reduced from a maximum of 90% to a lower cap of 80% of pre-retirement earnings. name among the changes imposed by Proposition B is replacing the Citys delimitate value pension plan with a 401(k) style outlined 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 recitation of Proposition B reveals that its author acknowledges the fact that City employees are not short covered. It is suggested that the City may open the option for employees to become covered by Social Security, but that it is the intention 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 specify Benefit pension plan has carry out that requirement. The question is, will the 401 (k) style delineate 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. specify Benefit Pension plans base pension benefits as a guaranteed pertinacious percentage of pre-retirement income, deter mined 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 lovable 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 long-standing past arrange 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 mostly been negotiated over long periods of collective talk terms 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 guaranteed disability and retirement income to covered individuals and their families. Defined Benefit pension plans can be designed to be as good or bette r 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 vary 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 returns, 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 planning as creation 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) Defined Contribution plans may appear attractive to public employer budget analysts and some highly compensated employees, but they almost certainly fa ll 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 likeliness that much of the perceived 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 benefits, 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 cater 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 coeval with the organization of the government under the present Constitution, and has been continued without happy chance or question to the present time.Justice Nathan Clifford United States Supreme Court United States v. star sign 98 U. S. 343 (1879) The establishment of pensions in credit of public service is a practice so steeped in tradition as to be considered a right of passage. both proposal that suggests taking such benefits away from public servants will be met with nonindulgent opposition in the courts. There are well-founded statutory, contractual, and constitutional protections that make it difficult for cities or ot her 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 interesting 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 transaction with lawsuits stemming from scandalous pension dealings and senseless 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 Comprehensive 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 dustup and litigation over its legality and implementation. (Filner) Specifically, the legal implications of Proposition may involve charges of develop 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 bonus to accept em