Public Employment

I. State Employees

On January 8, 2010, the Governor issued an executive order to have state agencies other than constitution officers and the Franchise Tax Board to cap their workforce to achieve an additional 5% salary savings to assist in meeting the $21 billion anticipated deficit. In the order, he requested the Board of Equalization, University of California, State Colleges, the legislative branch, and judicial courts to implement similar salary savings for the 2009-10 and 2010-11 fiscal years. Because of the delay in passing the budget in June, the Governor ordered three furlough days per month until the 2010-11 fiscal year budget was in place and the Department of Finance director determined that there was sufficient cash to allow the state to meet it’s obligation to pay for critical and essential services The order did not apply to state employees bargaining units 12,16, 18 and 19, who had tentatively agreed to a memorandum of understanding with the state, the California Highway Patrol, the Department of Forestry and Fire Protection, the Franchise Tax Board, Board of Equalization, Employment Development Department, State Compensation Insurance Fund, California Housing Finance Agency and the California Earthquake Authority. The Governor also requested the same governmental agencies that were mentioned in the January Executive Order to follow suit.

The following state employee bargaining units memorandum of understanding were ratified this year through the enactment of SB 846 (Correa), AB 1592 (Buchanan) and AB 1625 (John A. Perez): California Association of Highway Patrolmen, California Department of Forestry Firefighters, California Association of Psychiatric Technicians Union of America, Union of American Physicians and Dentists, International Union of Operating Engineers, Craft and Maintenance Workers, American Federation of State, County and Municipal Employees, and Service Employees International Union Local 1000.

The following is what was agreed to in the memorandum of understanding:

Other Provisions:

Personal Leave Program: One unpaid leave day per month for 12 months, which reduces pay by roughly 5%. This leave cannot be cashed out.

Furloughs: Nine furlough days (covering August through October 2010)

Health premiums: State increases its share of health premiums to 2010 rates for bargaining unit 3 only (from 2008 rates); this share will be adjusted each January during the contract period to reflect annual changes in health premiums.

Pay scales: Effective July 1, 2013, increase top step by 3%; only affects employees who reach top step.

Holidays: Columbus Day and Lincoln’s Birthday eliminated as paid holidays; employees will receive premium pay if required to work any of six major holidays: New Year’s Day, Memorial Day, Fourth of July, Labor Day, Thanksgiving, and Christmas.

Professional development days: Employees entitled to two professional development days per year.

Continuous appropriations: Continuously appropriates payroll during term of this contract, which protects employees from minimum wage payments in the event of budget delays.

Employees will not be furloughed during the 12 months that Personal Leave Program is in effect.

The following is a pay package for excluded and exempt employees that was contained in Executive Order S-15-10 issued by the Governor.

Pension: Effective November 2, 2010, employees’ retirement contributions will increase by 3%. For the Miscellaneous category, it goes from 5% to 8% of pay over $513/month; for Safety, I goes from 6% to 9% of pay over $327/month. There are no changes in the pension formulas for current employees.

Personal Leave Program (PLP): Effective November 2, 2010, pay will be reduced by the equivalent of one day per month, for 12 months, in exchange for 12 days of “personal leave.” This leave cannot be cashed out. While this PLP program is in effect, employees covered by it will not be subject to furloughs. (The PLP does not apply to exempt appointees whose pay is set by statute; their pay will be reduced by the same amount but without any leave time in return.)

Furloughs: The current furlough program remains in effect through, the end of October 2010, for a total of nine furlough days this fiscal year for employees covered by the current furloughs.

Pay Ranges: Effective July 1, 2013, an additional step will be added to civil service and exempt pay ranges, raising the maximum pay for these classes by 3%. Only employees who reach the top step will be affected by this change.

Professional Development: Excluded employees and non-statutory exempt employees will be entitled to two days of professional development leave per fiscal year. This leave must be used in the fiscal year it is accrued. Unused leave cannot be cashed out.

Because of the court’s upholding of the Governor’s authority to furlough state employees, it made it easier for some of the employee bargaining units to agree to the new memorandum of understanding and pension reform.

II. Pension Reform

One of the major issues of 2010 was providing reforms to pension programs CalPERS and CalSTRS because of the fiscal difficulties facing the state and because of bad investments which saw a loss of $700 million in the programs.

CalPERS provides retirement and health benefits to more than 1.6 million public employees, retirees, and their families and more than 3,000 employers. Membership is divided approximately in thirds among current and retired employees of the state, schools, and participating public agencies. As of January 31, 2010, the market value of their investment portfolio was approximately $200 billion. CalPERS is administered by a 13-member Board of Administration. Members are either elected by members of the system, appointed, or are designated by law to be on the Board. The Board’s responsibilities include, but are not limited to, setting employer contribution rates, determining investment asset allocations, and providing actuarial valuations. The Board does not have the authority to add, change, or delete benefits without the concurrence of the Legislature. CalSTRS provides retirement related benefits and services to teachers in public schools and community colleges. It has approximately 833,000 members and assets of $132.6 billion as of February 28, 2010. CalSTRS is administered by a 12-member board which sets similar policies.

Legislation was enacted as part of the 2010-11 Budget rolling back SB 400 of 1999 retirement benefits, ending the practice of pension spending and increasing transparency in CalPERS. These reforms are projected to save CalPERS up to $100 billion in the decades. Specifically, these bills SB 867 (Hollingsworth) and SB 6 X6 (Hollingsworth):

• Roll back SB 400: The expansion of pension benefits adopted in 1999 under SB 400 will be rolled back for new employees.

• End pension spiking: Employee retirement rates will be based on the highest consecutive three year average salary as opposed to the single highest year.

• Increase transparency: Requires CalPERS, any time it adopts contribution rates, to submit a report to the Governor, Treasurer and legislature that in plain language describes (a) the discount rate it uses to report pension liabilities and how those liabilities would be valued if a risk-free discount rate was used, (b) the investment return it assumes for projecting contributions and how those contributions would change if a lower investment return assumption was used, (c) the period over which it amortizes unfunded liabilities and how contributions would change if unfunded liabilities were amortized over a period equal to the estimated average remaining service periods of employees covered by the contributions, and (d) the market value of its assets and how that value differs from its chosen actuarial value for those assets. It will also require the Treasurer to evaluate and provide its opinion of the report to the legislature.

A pension scandal in New York early last year led to the disclosure by CalPERS that the firm of one of its former board members, Al Villalobos, collected about $60 million in “placement agent” fees for helping private equity firms get CalPERS funds.

Placement agents are intermediaries hired by private investment managers, such as hedge funds or private-equity investment firms, to seek funds from public pension funds for placement with the investment manager. Following major losses in private equity investments during the past two years, the activities and compensation of placement agents have received considerable scrutiny. For instance, investigations of placement agent activity in New York resulted in criminal charges against several state officials, and similar investigations are occurring in California.

In May 2009, the CalPERS Board Investment Committee adopted a policy for disclosure of placement agent fees to add transparency to the investment decision-making process. The policy requires the disclosure of relationships between CalPERS managers (defined as External Managers in the Policy) and placement agents and the fees that are paid to these placement agents. According to CalPERS, the policy was “adopted to help ensure that CalPERS’ investment decisions are consistent with investment policy and fiduciary responsibilities; to increase the pool of information available to CalPERS board members, staff, and consultants when evaluating an investment opportunity; to help prevent impropriety and the appearance of impropriety; and to provide transparency and confidence in CalPERS’ investment decision-making processes.”

In 2006, as part of its policy governing ethical and fiduciary conduct, the CalSTRS Board adopted a policy for the disclosure of third party relationships and payments. The policy requires a person or entity involved with any investment transaction or investment management contract to disclose all third party relationships with persons or entities that assisted with the solicitation of CalSTRS as a potential client or the retention of CalSTRS as an existing client. The policy also requires the disclosure of any fees paid or payable to the third party for assisting with the solicitation, which includes placement agent fees. CalSTRS also has regulations in place to add transparency and eliminate potential conflicts of interest in investments and to prevent “pay-for-play” activities.

CalSTRS has noted that it does not engage in, or make payments to placement agents. Fees to placement agents as a result of a CalSTRS investment are “the result of an arrangement between an outside investment manager and the placement agent.”

In response to the placement agent scandal, CalPERS, the State Treasurer, and the State Controller had legislation introduced to restrict placement agents. The Legislature passed and the Governor signed AB 1743 (Hernandez) prohibiting a person from acting as a placement agent in connection with any potential investment made by a state public retirement system unless that person is registered as a lobbyist in accordance with, and is in full compliance with, the requirements of the California Political Reform Act (PRA). It requires placement agents connected with investments made by local public retirement systems to comply with any applicable requirements imposed by a local government agency on lobbyists pursuant to the PRA. According to the author, by requiring placement agents that do business with California’s public retirement systems to be subject to the same reporting and ethics rules that govern lobbyists, this bill increases the confidence of retirement system members and the public that public retirement systems’ investment decisions are made in an impartial manner, free from any potential bias caused by gifts, campaign contributions, or the financial interests of placement agents, retirement system officials and third parties who have supported these officials.

At least five states (New York, New Jersey, Illinois, Connecticut, and New Mexico) and the Securities and Exchange Commission have established, augmented, or are in the process of establishing placement agent statutes ranging from increased disclosure to a complete ban in order to shield investment decisions from actual or perceived unwarranted influence.

III. City of Bell

On July 15, 2010, a City of Bell salary controversy was reported by the Los Angeles Times when it had reporters investigating possible malfeasance in a neighboring City of Maywood. In an expose, the reporters, Jeff Gottlieb and Ruben Vives, revealed that Bell city officials were receiving unusually large salaries. There reports of the City high salaries led to widespread criticism and called for city officials to resign. The controversy grew with subsequent investigations into unusually high property tax rates in the city, allegations of voter fraud in municipal elections and several other irregularities. In response to this scandal, Senate Pro Tem Steinberg and Assembly Speaker Perez tried to advance a package of bills to bring transparency and accountability to salary and compensation agreements adopted by local governments. The following were the bills in this package:

• SB 501 (Correa) would have required filers of a county, city, city and county, school district, special district, or joint powers agency, to annually file a compensation disclosure form that provides compensation information for the proceeding year. (Died on the Senate Unfinished Business File)

• SB 1425 (Simitian) and AB 1987 (Ma) would have established minimum standards and requirements for all public retirement systems in California with respect to final compensation, ongoing audits with penalties for noncompliance, and prohibitions against a retiree from immediately returning to employment with the public employer on a part-time or contract basis. (Vetoed)

• AB 192 (Gatto) would have prevented an increase in liability for a former local employer when a Public Employees Retirement System contracting agency increases a nonrepresented employee’s salary by more than 15%. (Died in Senate Rules Committee)

• AB 194 (Torrico) would have limited the amount of compensation earnable that a public employee may have included in calculation retirement benefit. (Vetoed) In his veto message, the Governor stated: “The bill limits the salary that retirement benefits are based on for individuals, prospectively after January 1, 2011, to 125% of the Governor’s salary, as specified. The current compensation limit imposed by the federal government to determine public employee retirement benefits is $245,000. Currently, this bill would cap the compensation counted towards retirement at $217,483. While this two tiered cap that would be created by this bill would make a very small dent in the pension problem California faces, it cannot be considered real pension reform. I am still hopeful that the Legislature will pass an acceptable bill that addresses the real cost issues that have driven up the liability in public pension systems.”

• AB 827 (De La Torre) would have prohibited a local agency’s contract executed or renewed on or after January 1, 2011, with an “excluded employee” from containing: (1) an automatic contract renewal, (2) an automatic compensation increase that exceeds a cost-of-living adjustment, (3) an automatic compensation increase that is linked to a third-party contract, including agreements under the Meyers-Milias-Brown Act or the Education Code’s employee relations provisions, and (4) a severance payment greater than the amount allowed by current law. It would have required local agencies to complete a performance review before it can increase the compensation of an “excluded employee.” (This requirement would not have applied to cost-of-living adjustments.) In his veto message, the Governor stated the following: “The scandal with the City of Bell was a disgraceful use of public funds. I share the public outrage expressed over the abuses attributed to the City of Bell’s management of employee contracts. Assembly Bill 827 presents good public policy in that it provides transparency with regards to some municipal personnel contracts, but it should be applied to all public employees, including labor union members and state employees. I encourage the Legislature to enact thoughtful and meaningful solutions rather than a rushed proposal that is severely limited in its application.”

• AB 1955 (De La Torre) would have created consequences to cities, including charter cities that pay higher salaries to their council members than general law cities are allowed. City council members would have paid a 50% personal income tax rate on their excess compensation and redevelopment officials in an excess compensation city could not use, create new, or expand existing redevelopment projects, could not create new redevelopment debt, and could not spend redevelopment money except to meet obligations. (Died on the Senate Floor)

• AB 2064 (Huber) would have required, constitutional officers and their exempt or appointed deputies, and most elected or appointed local government officials to make available on the Internet annual salary information. (Died in Senate Governmental Organizational Committee)

In August, responding to the events in Bell, the State Controller required all California cities and counties to clearly and publicly report salary information for elected officials and employers and the information is now available on the State Controller’s Web site. The Local Government Compensation Reporting Web site covers elected officials as well as public employees. It includes the following information for each position:

• Minimum and maximum salary ranges

• Actual wages paid

• The applicable retirement formula

• Any contributions by the employer to the employee’s share of pension costs

• Any contributions by the employer to the employee’s deferred compensation plan

• Any employer payments for the employee’s health, vision and dental premium benefits

In addition, the Web site will show employees who hold multiple positions within a single local agency.

In a related matter, an investigation into the City of Bell’s property taxes found that the homeowners of Bell were paying a rate higher than those close in affluent communities in Los Angeles County. Homeowners in Bell pay the second highest tax rate of any city in Los Angeles. The Los Angeles County Auditor-Controller revealed that residents were paying as much as 1.55% of their house’s assessed value in taxes, 34% above the norm. The State Controller’s Office has determined that for years the City of Bell had charged property taxes at rates higher than allowed by State law. Property owners in the city paid an estimated $3 million in extra taxes over the past three years. The State Controller’s auditors discovered that Bell’s city council began raising property tax rates in 2007 to pay for pension obligations, even though State law caps those taxes at the rate used in fiscal year 1983-84. Property taxpayers saw their assessments for pension obligations rise almost 50% from 2007 to 2010. The State Controller instructed the County of Los Angeles to reduce the property tax rates as quickly as possible. The lower rates would deliver an estimated $250 in annual savings for a property worth $275,000. Unfortunately, existing state law prohibits the overpayments from being returned to the property owners who were victimized in Bell. The State Controller sponsored AB 900 (De Leon), Chapter 223, Statutes of 2010, which enacted tax refunds provisions related to overpayments.

At the time of this writing, several Bell city officials have resigned over the scandal and some have been indicted. A recall drive has taken place to hold an election to have some of the current city councilmembers be removed from office by the voters. Attorney General Jerry Brown tried unsuccessfully to negotiate with the City council over the appointment of an outside monitor to preside over the city. Officials have considered requesting a judge to put the city into receivership, which would give a court-appointed official the power to veto council decisions and set policy. Some community activists indicate they support having outside oversight as long as it is terminated when a new council election is held in 2011.

In response to the Bell situation, the Senate and the Assembly have placed on their respective Web sites, the salaries of the members and staff for public inspection.

Other Public Employment legislation of interest enacted into law included AB 1651 (De La Torre) giving CalPERS classified school employees and local police and firefighters the same retirement service credit they would have received absent any mandating furlough; AB 1729 (Yamada) extending from six months to 12 months, the amount of time a veteran may receive preference points on employment lists resulting form open nonpromotional civil service examinations; AB 1856 (Fong) establishing a means for a member of CalPERS making after-tax installment payments on a service credit purchase to suspend or prospectively cancel their service credit purchase election; and AB 2742 (Blakeslee) allowing establishment of a catastrophic leave bank for a deceased state retiree, and accumulation of leave credit donations, which in turn could be cashed out by the person designated by the deceased individuals leave balance.

Vetoed Public Employment legislation of note included AB 1765 (Solorio) which would have exempted employees of the Unemployment Insurance Appeals Board and the Employment Development Department from being furloughed when the unemployment rate in California during the previous month reached or exceed 8.5%; AB 1821 (Ma) which would have used the excess reserves from CalPERS’ 1959 Survivor Benefit Program to merge the 1st, 2nd and 3rd benefit levels into a single contracting agency pool paying the current Level 3 survivor benefit; and AB 2008 (Arambula) which would have exempted employees of the Franchise Tax Board and the Board of Equalization from being subject to any furloughs implemented by Executive Order or by any other action of a state agency, board, or commission. The Governor vetoed AB 1765 and AB 2008 stating “while there may be a need to exempt specific employees from furlough, that exemption should be determined on a case-by-case basis depending on the exigencies of the fiscal crisis. By statutorily exempting certain employees from furloughs, this bill limits a Governor’s discretion to tailor a furlough policy to appropriately meet the needs of the State.”