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Was it constitutional for Proposition 124 to replace PSPRS' permanent benefit increases with a capped 2% COLA?

In this blog I and multiple commenters have broached the subject of the suspect constitutionality of PSPRS' replacement of the old perma...

Thursday, January 31, 2013

So where do I break even in this deal?

The Bureau of Labor Statistics (BLS) released its Union Members Summary for 2012.  It shows a 2011 to 2012 decline of 0.5% in American union membership from 11.8% to 11.3%.  American unions lost almost 400,000 members from 2011 to 2012, dropping from 14,764,000 to 14,366,000.  For some perspective, unions represented 17.7 million Americans or 20.1% of the labor force in 1983.

The more interesting numbers are in Table 1 (Union affiliation of employee wage and salary workers by selected characteristics), which has a breakdown of union membership by age group.  For 2012, the percentage of union membership breaks down as follows:

                                                                 Percentage employed
                   Age Range                               belonging to unions
                   16-24 years                                          4.2%
                   25-34 years                                          9.5%
                   35-44 years                                         12.5%
                   45-54 years                                         14.0%
                   55-64 years                                         14.9%
                   65 years and over                                 9.1%

What stands out most in these percentages is the difference between younger workers and older workers.  For those between 45 and 64 years of age, union membership has a pretty tight range between 14 to 15%.  However, union membership really drops off to 9.5% for those 25 to 34 years of age and goes all the way down to 4.2% for those 16 to 24 years of age.  These two youngest groups represent the ages when most people will be settling into their chosen career fields, so these workers represent the future of most unions.  When union workers 65 and over make up nearly the same proportion of those employed as those between 25 and 30 years, it indicates a real problem for unions.

So what explains this difference in union membership between younger and older workers?  Depending on where you stand, it could be found anywhere along the spectrum from union-busting politicians in right-to-work states to job-destroying union leaders like those that forced Hostess into bankruptcy.  However, the simplest explanation may be that younger workers no longer see the benefits of unions outweighing the costs.  The combination of trying economic times and a generation of workers who are the most savvy and well-informed consumers in history makes for a difficult market for unions trying to sell themselves as a necessary service.  Joining a union is no longer automatic, and unions must show these younger workers what they get for their monthly union dues.

The greater "cause" of American labor may not resonate with younger workers, who may view unionism as antiquated as suffragism or abolitionism.  Add to this the real possibility that those in the 45-64 years age range will have a better standard of living than younger workers, and you see why a younger person might look at unions with some cynicism.  Someone entering PSPRS since January 1, 2012 might wonder why he should join a union that has bequeathed him a longer working career, higher contributions rates, and a worse retirement.  He will be starting his career already in the hole, so the union will need a really good sales pitch to convince him of the benefits he receives from union membership.

Friday, January 25, 2013

What's mine is mine, what's yours is negotiable

This article, Sacramento city manager details unfunded debt obligations, by Sacramento Bee reporter Ryan Lillis gives another account of a California city with huge unfunded liabilities.  In this case, it involves a monthly subsidy for medical costs that has been promised to retirees.  This liability has grown over the years and now stands at $440 million.  This is hardly surprising, but this matter-of-fact line in the article is worthy of commentary:
Sacramento has taken some steps to ease the burden moving forward. The city's largest labor union – Local 39 – has already agreed to forgo the benefit for newly hired employees. Middle managers and high-ranking officials not represented by a labor group also have agreed to that change.

Middle managers and high-ranking officials agreed to give up the benefit for themselves, but the union only agreed to this for new hires.  Maybe in their own minds the union feels like they "gave something up," but it appears more like they dipped into the pockets of future members to help themselves.  What a sacrifice!

For those of us who are union members, we know that, despite talk of brotherhood, solidarity, and shared sacrifice, unions often act as seniority protection organizations.  This is not to bash seniority as a criterion since it is a fair, and sometimes unavoidable, factor in personnel decisions and the most objective criterion available.  However, the notion that a more senior group should give up nothing as long as some more junior group exists to take all the sacrifice is sometimes a guiding principle for unions.

For PSPRS, we have three distinct groups separated only by a single date: retirees and those who had 20 years on before January 1, 2012, current workers hired before January 1, 2012 but without 20 years as of that date, and those hired January 1, 2012 or later. Depending on when you were hired, your career and retirement will be very different.  The pension reforms put in place two years ago disproportionately affected those hired since January 1, 2012, who, of course, were not even on the job to protest the changes.

The sacrifices expected of new PSPRS members did not end there.  The COLA lawsuits (Have a COLA and a smile) currently filed against PSPRS are an even more egregious assault on those new members of PSPRS since these lawsuits place the personal gain of more senior members over not only more junior members, but over the long-term financial viability of PSPRS itself.  I can find no formal position by any of Arizona's fire fighter and law enforcement unions regarding the COLA lawsuits, but PSPRS mentions no support from any unions in fighting the lawsuits.

As a union member, I know of no argument that can be made for consigning one group to a lower standard of living so another group can continue to get automatic raises.   This strikes at the very heart of a union's purpose to achieve higher benefits as a group than can be gained individually.  If the unions stand by and allow an every man (or group) for himself philosophy to take hold, they will be planting the seeds of their own destruction.

Monday, January 21, 2013

The times are a-changin' for the Tucson Fire Department (an update)

While change is still coming, it seems that the alternative service delivery (ASD) plan mentioned in the previous post has been postponed and is now under further review.  The conditions that necessitated the ASD proposal did not change overnight, so some of the powers that be must have found it unacceptable.  Who found it unacceptable and why is open to speculation, but it is probably not a good sign that a fire department-designed plan is now subject to politics.

Stay tuned.

Monday, January 14, 2013

The times they are a-changin' for the Tucson Fire Department

Along the same lines as the previous post, but closer to home, there are already changes in the air here in Arizona.  The Tucson Fire Department (TFD) will not be merging with its law enforcement brothers in the Tucson Police Department (TPD), but TFD is currently implementing changes that may permanently alter the structure of the department.

The alternative service delivery (ASD) program that TFD is implementing is not new, and this document shows that a version of ASD had already started in 2006.  However in 2006, ASD was going to be used in addition to existing suppression units like engine and ladder companies; in 2013, it is being used in place of those same units.  While there is no strict definition of ASD, TFD has begun to take some four-person suppression units out of service and reassigning those personnel to two-person vehicles called alpha trucks and rescue trucks.  The alpha trucks are staffed by two EMT's, and the rescue trucks are being staffed by a paramedic and an EMT.  TFD will also be putting into service a "day" suppression engine company that will work a 4-day/10-hour workweek, as a suppression unit that can cover areas of the city on an as-needed basis.

In 2006, alpha trucks were designed to take some of the less critical medical calls away from four-person suppression units to allow them to stay in service for fires and more serious medical calls.  This also saved wear and tear on the larger, more expensive engine and ladder trucks.  However, the implementation of ASD now is an acknowledgement of the new reality in Tucson.  First is the changing nature of TFD's service calls, which are now overwhelming medical, not fire-related.  This means resources must be directed to where they are needed, and splitting a single four-person vehicle into two two-person vehicles that can run twice as many medical calls is an obvious choice.

Second is the financial side of the situation.  In a still underwhelming economy, TFD will have to do more with the same or reduced budget.  According to PSPRS' 2012 Annual Report, TPD had 887 employees covered by PSPRS at the end of FY 2003, while TFD had 452.  At the end of FY 2012, TPD had 811, while TFD had 494.  In that nine-year period, Tucson's police have seen their force reduced by 76 personnel, while fire has gained 42.  It is certain that these numbers are noticed by those in Tucson's government, who probably want to know how TPD is able to do its job with fewer people and why TFD can not do the same.  ASD is one response to that question.

Debating the merits of ASD is not the point of this post, but one can not help but speculate as to where it will all lead.  TFD has had two-person paramedic trucks for decades, and these trucks have worked in conjunction with engine and ladder companies on more serious medical calls (known as advanced life support or ALS calls).  However, less critical calls (known as basic life support or BLS calls) have usually been handled by engine and ladder companies alone.  The creation of two-person units designed to run just BLS calls could be the start of a fundamental change as it transfers duties formerly done by suppression crews to other units.  This is where the speculation can really begin.

As suppression units have their BLS call loads reduced, will there be a need for fewer suppression units?  As more alpha and rescue trucks go into service, will EMS be spun off from TFD as either a separate or sub-department of TFD?  Will EMS personnel still need to be trained as firefighters first, or will a separate EMS department simply need qualified EMT's and paramedics? Could EMS services eventually be outsourced to a private company?

The slippery slope of speculation will eventually lead to questions like this last one, and it is tempting to see malevolent forces working toward this end.  However, Tucson, like San Jose, is confronting problems that will not be solved without making some hard choices, and in the end some things are going to change.  No one knows what the future holds, but it is bound to be very different than what we have all been used to.

Wednesday, January 9, 2013

Will PSPRS members see their future engineered by Silicon Valley?

Here is an interesting way one city provides public safety services to its residents:

Sunnyvale Public Safety Officers Fight Both Fires and Crime

According to US Census Bureau estimates, the source for all data unless stated otherwise, the city of Sunnyvale had a 2011 population of 142,299.  By comparison, Phoenix had a population of 1,469,484 and Tucson, 525,798.  The 2011 estimated median household income in Sunnyvale is $93,836; Phoenix's is $43,960, and Tucson's is $35,362.  The CQ Press 2011-12 list of the safest cities, based on crime rate, ranked Sunnyvale as 37th safest with Phoenix 271st and Tucson 305th.  Flint, Michigan was the least safe at number 405.  According to Zillow's Home Value Index (HVI), the median valuation of a home in Sunnyvale is $823,700: Phoenix's HVI is $123,900, and Tucson's HVI is $114,500.  From just this data showing relatively small population, high income, low crime, and high home prices, combined with a Silicon Valley economy, we can see that Sunnyvale has major advantages over Arizona's two largest cities.  Sunnyvale has been using this combined police/fire model for decades and has apparently made it work well enough that it is getting more publicity about its unique approach.

I do not think that this public safety model could ever work in Phoenix or Tucson, but it may be possible in some smaller Arizona communities with lower crime rates and lower fire and EMS call loads.  However, the real significance of this model is that it is coming out a city like Sunnyvale.  Sunnyvale is hardly a bastion of Tea Party "radicals" attempting to shrink city government and outsource every service possible.  According to Wikipedia, in 2009 there were 25,677 registered Democrats, 18,073 independents, and only 12,716 registered Republicans.   All of Sunnyvale's state and federal legislators are Democrat.  Sunnyvale is part of Santa Clara County, where Barack Obama received 70% of the 2012 presidential vote and Jerry Brown won 61% of the 2010 gubernatorial vote.

Sunnyvale borders another heavily Democratic city, San Jose, which approved a pension reform initiative in June 2012.  Measure B, which passed 69% to 31%, gives city workers the option of switching to a new plan with lower benefits or maintaining their current plan with greatly increased contributions.  This basically told city workers that their pension is going broke, and employees are going to help pay to fix it with either decreased retirement benefits or lower paychecks.  Measure B is, of course, being challenged in court, but it is a landmark measure, not only because it attempts to change benefits for current employees, but because it passed so easily in what most would consider a liberal, well-to-do community.  Even more conservative San Diego's successful 2012 pension reform initiative mostly affected new hires only.

So what does this mean for Arizona's public safety employees?  California, unfortunately, is often a bellwether for the rest of the country.  Arizona is a right-to-work state with more a conservative population than California, so any successful ways to cut costs in the delivery of public safety services will meet with more serious consideration here than in a lot of other states.  More importantly, the ease with which San Jose's pension reform passed showed that there is a limit to what city residents, even progressive ones, will tolerate in paying for public pensions.  If San Jose's pension reforms are upheld in court, we will most likely see more reforms like Measure B spread across California.  And if it can work in liberal California, why not in more conservative Arizona?

Tuesday, January 8, 2013

The lost decade of PSPRS

Ryan Parham, the Chief Investment Officer for the Arizona Public Safety Personnel Retirement System (PSPRS), gives an interesting update to the investing activities of PSPRS in the FY 2012 Consolidated Annual Financial Report, starting on page 50.

Mr. Parham gives this historical perspective about the past decade and how brutal the market can be:
A quick review of the portfolio’s historic returns from the year 2000 up to and including 2009 shows the damaging effects of having “our eggs” concentrated in the equities basket.

We had six positive return years during this period including a positive 17.05% in 2007, a positive 14.95% in 2004 and a positive 12.29% in 2000. We also had four negative years. The net of the ups and downs produced a total compounded return over the total period of only 0.25%. With the old portfolio we see clearly the distinct possibility of big “ups” but also big “downs” and the compounding effects of that risk have produced poor returns.
The period from 2000 and 2009 was a lost decade of returns for PSPRS.  The pain of this lost decade can not be emphasized enough since a defined benefit pension lives or dies on its investment returns.  The money not earned during that decade can never be earned again.  If, as in FY 2012, PSPRS pays out more than it takes in that year, net assets (i.e. principal) are reduced, making it all the more difficult to make up past losses since it has less to invest the next year.

A lack of vigilance by past Trustees, or Fund Managers as they used to be called, and a false sense of security created by two decades of good returns caused many of PSPRS' current problems.  The current Board of Trustees, administrators, and investment officers have diversified PSPRS' portfolio to improve its ability to withstand market fluctuations, and all of them should be commended for saving the PSPRS from even greater losses.  Mr. Parham writes that PSPRS' portfolio would have lost 30% in 2009, instead of 17.73%, if diversification efforts had not already been started that year.

Mr. Parham writes that the average endowment had a return of -0.30% last year, which he compares to PSPRS' -0.79% return to show that PSPRS was not out of line with other similar investment pools.  However, most endowments, like those that fund private colleges and charities, do not have the large, guaranteed obligations that pensions have.  During a down market, endowments can cut their current expenses and postpone future obligations until the market improves.  This is not an option available to a defined benefit pension, which must continue paying its current retirees while incurring more future obligations.   In the previous post, Assumed rates of return can make an ass out of you and me, we saw how higher risk investments are not appropriate for defined benefit pensions like PSPRS. 

There are limits to the safety diversification can provide, and a market in a liquidity crisis like in 2008-09 can produce losses across many asset classes.  Unfortunately, PSPRS is trapped in a situation where it needs higher risk investments to get it out of the hole it is in, even though higher risk investments were one of the reasons it got in the hole in the first place.  Here's hoping that 2013 is the start of a sustained bull market.