The newspapers are full of stories about lavish public employee pensions nearly bankrupting cities and public agencies. But I haven’t seen much about how it came to be. So I would like to describe what I think was the major driving force that created the problem at AC Transit, where I am serving my third term as a member of the elected governing board.
First a disclaimer: I can’t say that these same forces acted the same way in Emeryville back in 1987 to 1999, when I was a council member more focused on the city’s development. But you’ll see that, over the past 6 or 7 years, what I’m describing probably occurred at most government and public agencies in this area.
AC Transit’s service is concentrated in the labor-friendly political environment of Berkeley, Oakland, and San Francisco. Usually, the renegotiation for each contract with our 1,750 or so unionized drivers and mechanics would begin with management coming to the board with an estimate of what the agency could afford to give them in additional compensation.
Once the board agreed on a negotiating range, the question would arise as to what form the additional compensation should take – added benefits or increased pay. The board’s answer was always the same: “Money is money, ask the union.” The stated reasons for this deference were: 1) the union knows its members’ needs better than management does; and 2) if the union gets the form of compensation it wants, it might settle for less. The unstated, more important reason was that the Alameda County Central Labor Council is a heavy participant in local elections, and it would be nice if it put in a good word – and money – for our next re-election campaigns.
Always, the union’s preference was for most of the additional compensation to be in the form of increased pension benefits. A few years back I began to wonder why; now I know.
Almost all public agencies have “defined-benefit” pension plans. After an employee works for a few years, she is guaranteed a pension upon retirement. The amount is calculated as a percentage of her average income in her last years on the job, multiplied by the number of years she worked at the agency. The percentage is usually between 2 and 3 percent and scales up with her age at retirement. In the worst cases (not at AC Transit), the payment increases with inflation during retirement.
Public agencies contribute between 90 and 100 percent of the money necessary to fund the pension, which is invested in the market, hopefully to be augmented by anticipated market returns; so the agency bears the risk of low market performance. (In contrast, private employers, to the extent they still have pension plans, usually have “defined-contribution” plans in which the employer matches the employee contribution to a tax-deferred plan that is then invested in the financial markets. The employee bears the risk of low market performance.)
Now, visualize the people at the negotiating table: management on one side, unions on the other. These are important meetings. A large majority of any agency’s expenses are wages, salaries and benefits. Invariably, the most experienced people are at the table, usually people close to retirement.
So, imagine you are a 60-year-old union representative with 32 years as a driver at AC Transit. You’ve just been asked how you want $9 million added to your members’ annual compensation. The math is pretty simple. You have 1,750 members in your union making an average base wage of $23 an hour. At 2,000 hours per work year, you could agree to raise average base pay to $25.50 an hour, giving your members an extra $5,000 a year per year on average, maybe $10,000 for you as a senior driver.
But then you think to ask how much the retirement percentage could be raised for your members if that $9 million was put into the retirement plan. The answer: .2 percent. That seems paltry, but if it’s multiplied by your 32 years of service, it will net you another 6.4 percent of your $60,000 per year compensation as a senior driver; $3,840 extra for every year of your soon-to-be retired life; a total of $77,000 if you live 20 years past retirement. It’s a huge temptation to focus most of the immediate benefits of the new contract on senior employees like you.
Now think of yourself on the management side of the table. You too are close to retirement. It’s so much easier to ask the board to increase your retirement percentage accordingly rather than arguing that a $2.50 per hour wage increase for drivers justifies raising your $250,000 per year base salary by the same percentage, resulting in another $28,000 dollars.
In addition, you can remind the board of the glorious 1990’s, when market returns were so consistently high that by the end of the decade, further contributions were not even needed from many agencies. If we’re lucky, you’ll say, the extra $11 million (now including management) could go into increased bus service. Sure, after 9/11 the market was off for a few years, but since late 2005 it has been soaring again. Maybe, like homeowners taking second mortgages these days, this could be like free money.
Now, imagine you sit on a public agency board or city council. The market crashes and you are faced with the opposite of the free-ride scenario. Your pension actuaries had assumed an average annual market return of 7.75 percent, but the assets have dropped by 30 percent, and you have to make that up quickly. Worse yet, the auditors, newly chastened by the crash, are saying that given the certainty of your pension liability, its assets should be invested more conservatively, where expected returns are closer to 4 or 5 percent. Instead of the $25 million you were planning to pay annually into the fund, you need to pay $60 million.
But wait, that’s not all. The crash precipitated a deep, prolonged recession, so your revenues from sales taxes and property taxes are all down. And those program subsidies your agency received from Sacramento and Washington, D.C. are history. Oh, then there’s the cost of employee health insurance benefits. But that’s another story.
Greg Harper is an attorney with Harper & Associates in Emeryville. He is a member and former president of the AC Transit Board of Directors.
In the face of a major budget crisis, Oakland is considering closing 14 of its 18 libraries, including Golden Gate on the Emeryville border. Other locations to be closed are Asian, Brookfield, Cesar Chavez, Eastmont, Elmhurst, Lakeview, Martin Luther King, Melrose, Montclair, Piedmont, Temescal, West Oakland, AAMLO, and the Tool Lending Library.
