Oregon PERS Amendment Not Unconstitutional

No State shall . . . pass any . . . Law impairing the Obligation of Contracts.

That makes for a reasonably interesting blogging afternoon, to be able to quote from that legal document that starts out, “We the People of the United States, in Order to form a more perfect Union, . . .” In this case, from Art I §10 cl 1, the Contract Clause, sometimes raised by states’ public employees dissatisfied with changes made to a public employee retirement system. In a sense, like the ultimate authoritative version of what private pension plans face under IRC §411(d)(6), not only with respect to previously accrued benefits, but with respect to any future accruals or benefit rights to which the public employees felt they had been granted contractual rights by their state employer.

And on several notable occasions, the employees have prevailed, particularly when the issue of whether a contractual relationship existed was not the issue in dispute. Frequently, though, the employees run up against a long-standing presumption expressed by the U.S. Supreme Court in National Railroad Passenger Corp. v. Atchinson Topeka and Santa Fe Railway Co., quoting from its own earlier decision in Dodge v. Board of Education, maintaining that -

[A]bsent some clear indication that the legislature intends to bind itself contractually, the presumption is that “a law is not intended to create private contractual or vested rights but merely declares a policy to be pursued until the legislature shall ordain otherwise.

In Robertson v. Kulongoski (No. 04-35898), the 9th Circuit Court of Appeals today ruled that although the Oregon Public Employee Retirement System had been expressed in prior state litigation as “a contract between the state and its employees,” there exists no clear indication that the Oregon legislature intended to promise its employees a perpetual, immutable right to contribute to specific accounts under the terms of its retirement system. So although the U.S. Constitution prohibits a state from impairing its contracts, the “contours” of the pension contract between Oregon and its public employees may be open to amendment. Granting due deference to the Oregon Supreme Court’s detailed analysis in Strunk v. Public Employees Retirement Board [OR Sup.Ct., SC S50593, 3/8/05], the 9th Circuit has ruled that Oregon’s 2003 legislation modifying terms of OPERS does not violate the Constitution’s Contract Clause, affirming district court summary judgment in favor of the state. Although as previously blogged here, other aspects of the plan amendment remain in dispute.

Independent Audit Report Assails San Diego City Pension System

San Diego officials cultivated and accepted a culture of financial management and reporting premised on non-transparency, obfuscation, and denial of fiscal reality. Under the pressure of short-term needs, City officials gave expedience a higher priority than fiscal responsibility and came to view the law as an impediment to be circumvented through artful manipulation.

- Investigation into the San Diego City
Employees’ Retirement System
and the City of San Diego Sewer Rate Structure

San Diego’s approval of special agreements that led to its pension fund’s $1.4 billion deficit violated city, state, and federal laws, according to an audit report issued by an independent committee that included former SEC chairman Arthur Levitt and former SEC Chief Accountant Lynn Turner. Beyond violations of the California Constitution, the San Diego City Charter, and fiduciary duties of the pension system’s Board, the audit report points out violations of plan qualification requirements and prohibited transactions under the Internal Revenue Code.

Agreements proposed by the City Manager in 1996 through 2002 enhanced retirement benefits for members of the San Diego City Employees’ Retirement System, while reducing the City’s contribution to the pension fund below the rate required by the system’s actuary. According to the audit report, the 1996 action “was, quite simply, an improper agreement by the City and the SDCERS Board to grant immediate benefits while making no corresponding provision for paying for them.” The system’s legal counsel and actuary are faulted for blessing the agreement on the basis of superficial analysis that failed to consider the legality of the changes. Beginning in 1998, a portion of City contributions to SDCERS treated as pension contributions were actually being diverted to pay for retiree healthcare benefits. Liability arising from settlement of a separate dispute were improperly characterized by the system as “contingent,” since proper inclusion of the liability would have forced painful accelerated funding. The system’s problems were compounded by supposedly cost-neutral permissive service purchases subsequently found to have been only 50% funded by member contributions.

When reality caught up with the City and SDCERS in the form of drastic stock market losses in 2000 and 2001, the response was to increase certain retirement benefits for some of the decision-makers in exchange for an agreement to wave aside the City’s pension financing responsibility. One dissenting SDCERS Board member’s characterization of the 2002 agreement as “ethically questionable at best, if not blatantly corrupt,” was simply ignored in what the current audit report characterizes as “a low point in [the City's] management of pension funding issues.” Not only did these pension agreements lead to severe pension underfunding, but the agreements and their financial consequences were not properly disclosed in the City’s financial statements (including treatment of a potentially damaging report on the pension system’s declining financial health, which was delayed and revised out of concerns that the truth might adversely affect a bond offering dedicated to the city’s ballpark). Settlement of 2003 litigation challenging the legality of the agreements partially unwound the knot, yet even that settlement allowed the City to continue to underfund the pension system, for instance to this day continuing to base pension financing on actuarial assumptions that have been frozen in place since 2003.

Separately, legal action is being pursued against several individuals whose activities perpetuated SDCERS’ pension crisis, and the SEC and U.S. Attorney’s Office continue further investigations. SDCERS has also initiated voluntary correction requests through the IRS’ Employee Plans Compliance Resolution System.

Even today, there are serious indications that the City government has not completely come to grips with the depth of its problems and the need for fundamental reform. . . . Even as to the $1.4 billion pension deficit, City government does not seem prepared to face up to fiscal reality. It has been suggested that the City address the deficit through the issuance of pension obligation bonds which would use borrowings from investors to increase pension assets, but which would not reduce the City’s underlying obligation to fund the pension liability. In so doing, the City would continue to push off the funding of these obligations to future generations of taxpayers while avoiding the difficult fiscal decisions that must be made.

The audit report recommends implementation of a detailed Remediation Plan aiming toward enhanced accountability, greater transparency, increased fiscal responsibility, and independent oversight.

Several previous posts here on San Diego’s pension woes: Report Published on San Diego PERS (1/21/2006); San Diego Mayor Wants Voter Approval of Future PERS Improvements (2/3/2006).

Convicted MA Clerk-Magistrate Loses Pension

At the heart of a clerk-magistrate’s role is the unwavering obligation to tell the truth, to ensure that others do the same through the giving of oaths to complainants, and to promote the administration of justice.

AP reports that Massachusetts’ Supreme Judicial Court has ruled that 67-year-old John Bulger, a retired clerk-magistrate of the Boston Juvenile Court and brother of fugitive mobster James “Whitey” Bulger, must forfeit his public employee’s pension of $65,000 per year. John Bulger had previously pled guilty to two counts of perjury and two counts of obstruction of justice relating to false testimony given to a grand jury that had been investigating alleged money laundering, racketeering, and other criminal offenses committed by Whitey Bulger and others. Finding John Bulger’s convictions to involve violations of the law applicable to his office or position, the state’s highest court reversed a Boston Municipal Court judgment, ruling that Bulger must forfeit his pension. [Boston Globe]

The court did dispute the retirement board’s contention that the judgment should take into consideration that had the convictions come while Bulger was still in office, he would have been removed from office. The court found that analysis too broad, failing to recognize that standards for removal from office and forfeiture of pension were different.

Nonetheless, stating that “at stake is the integrity of our judicial system,” the court found that the nature of Bulger’s offenses would not be separated from the nature of a clerk-magistrate’s particular office, thereby requiring forfeiture of his pension. [State Board of Retirement v. John P. Bulger, SJC-09494]

The state’s retirement board is said to be considering action to recover past pension payments, net of Bulger’s own member contributions.

Chicago Fed Blogs Public Pensions

For many, the issue of public pensions is a rather arcane subject best understood by actuaries and public finance experts.

Chicago Federal Reserve Bank President Michael Moskow, speaking at the organization’s State and Local Government Pension Forum, offered his take on “The Regional Perspective on Pension Issues” focusing on retirement income programs sponsored by state and local governmental employers. Moskow explained that public pensions’ exemption from ERISA’s minimum funding standards “made it easier to increase pension benefits to public sector retirees without identifying adequate funding.” But if he meant to be pointing to that exemption as one of the causes of public pension underfunding, eliminating that exemption or creating a PERS version of the ERISA funding standard was not one of the specific solutions Moskow put on the table, although pension financing discipline would be strongly implicated in all three of the recommendations Moskow did advance -

• “More uniform accounting standards are likely needed” to improve understanding of public pension obligations. Moskow did not directly address early rumors that GASB may ultimately follow the road currently being taken by FASB, which for private companies will lead to new balance sheet charges or credits within the next year.

• Public pension plans need to focus on “identifying new funding sources and restructuring pension payouts.” Moskow did recognize that for many jurisdictions, state law, state constitutions, and even the U.S. Constitution impede performance on the “restructuring pension payouts” side of that equation, leaving painful tax increases as the direction policymakers will need to look.

• Public pensions “must be recognized as part of any employee’s total compensation program,” which in the context of Moskow’s presentation is essentially a recommendation that public employers look to IBM’s recent switch from its defined benefit pension plan to an enhanced 401(k) plan as the compensation model of the future.

But what’s cool is that the Chicago Fed used the occasion of its public plan forum to give birth: welcome a new blog to the benefits world! Except that it’s not yet clear whether we might want to kick it down the road a bit with some comments and other encouragement, since at the moment it looks suspiciously as though it might have been using blog layout and syndication simply for pushing this particular single event. Even so, the existing content is worth marking. And hey, it’s not every day you see the likes of the Fed getting into blogging sweats.

Retiree Health Liabilities for California Public Employees

Recognizing the state’s current fiscal condition, we recommend that the state ramp up to an increased level of contributions over a period of several years. The near-term target should be the state’s normal cost level under GASB 45–the amount estimated to cover the cost of future retiree health benefits earned each year by current employees. This amount might be in the range of about $1 billion above what the state spends under the current pay-as-you-go approach.

Retiree health liabilities for California public service retirees under new accounting standards is likely to range from $40 billion to $70 billion, according to a report prepared by the state’s Legislative Analyst’s Office. The state pays an amount that covers all of the retiree health premium for some of its members, funding the state’s costs on a pay-as-you-go basis. Since 2000, retiree health expenditures by California for its public employees have increased 17 percent annually and are expected to exceed $1 billion in the 2006-07 fiscal year (about half of the estimated normal cost for the program). The report suggests action that could be taken to address the state’s retiree health liabilities and costs. [Retiree Health Care: A Growing Cost for Government, Hill, 2/17/06]

• Greater Disclosure and Planning - The report recommends actions to make information on retiree health liabilities more accessible to state policy makers, researchers, and the public, including Internet posting of actuarial valuations and creation of a working group on state retiree health funding.

• Funding of Retiree Health Benefits - The report recommends that the state begin to partially pre-fund retiree health benefits for public employees. Initial state costs for retiree health would double under the report’s suggestion.

• Reduction of Future Retiree Health Costs - The report suggests consideration of options for reducing the state’s retiree health costs for future employees, including raising the number of years required to vest in retiree health benefits, shifting a greater share of the premium to employees or retirees, and establishment of a defined contribution program.

GASB on Medicare Part D

Medicare Part D subsidy payments for prescription drug coverage do not connote transfer to the federal government of a portion of a governmental employer’s obligation for postemployment health care coverage, according to the Governmental Accounting Standards Board. Accordingly, payments received from the federal government should not be reported as reduction of an expenditure or expense, but instead as revenue -

• Payments to Employer - As voluntary nonexchange transactions.

• Payments to an OPEB Plan - As on-behalf payments for fringe benefits.

GASB plans to vote during its February 16 meeting to issue a technical bulletin expressing this position. [Project Pages: Accounting Treatment for Medicare Part D]

San Diego Mayor Wants Voter Approval of Future PERS Improvements

Mayor Sanders also believes that the voter should be able to make an informed decision and that’s why he is including a requirement that an actuarial study be part of the ballot pamphlet.

Another round in the saga of pension difficulties facing the City of San Diego, where retirement benefit increases for city workers are being blamed for the city budget’s $1.4 billion deficit and six former trustees of the pension system are standing trial for alleged conflicts of interest in connection with the benefit boosts: San Diego Mayor Jerry Sanders has proposed a ballot measure that would require voter approval for any future pension benefit increases for city employees. [Fact Sheet, 2/2/05]

• City officials would still be able to negotiate tentative retirement benefit changes with employee organizations, but increases would not be binding until approved by voters.

• Any proposed change to employee retiree benefits - other than those resulting in an increase in benefit - would require approval of a majority of the current members of the system.

• Any proposed change that would affect the vested benefits of retired members must be approved by a majority of the affected retirees.

• When a proposed benefit increase is place on the ballot for voter approval, an actuarial study of cost or savings associated with the proposed change must be published in the ballot pamphlet.

• Any increase in pension benefits would require approval by a majority of voters.

No indication yet as to whether there will be a “plain English” requirement for that actuarial report.