A proposal by Southern California’s Metropolitan Water District to increase pensions for its employees has been receiving a considerable amount of criticism since it was first exposed by reporter Teri Sforza of The Orange County Register’s investigative team in its “OC Watchdog” blog. A growing chorus of opposition to the boost has come from editorials in The Register and the San Diego Union-Tribune and in numerous news and editorial blog posts.

Today the California Foundation for Fiscal Responsibility sent a letter to the board of the MWD urging it to reject the proposal.  Here’s the complete text of the letter:

To  Members of the Board, Metropolitan Water District of Southern California:

Your District’s mission is to provide its service area with adequate and reliable supplies of high-quality water to meet present and future needs in an environmentally and economically responsible way. Granting RETROACTVE pension benefit increases to employees for service already rendered under prior labor contracts does not fulfill this mission. The negotiations and analysis of “savings” resulting from labor concessions to offset the cost of the benefit increases were handled by senior staff that stands to gain the most from the MOU you will vote on next Tuesday. This inherent conflict of interest, although unavoidable, demands that you use extreme care in your duties as a board member.

The analysis of savings omitted many important items which are listed below:

1. There was no analysis of expected vacancies from earlier retirements and increased salaries for workers who will fill more senior positions. Staff assumes that senior employees at higher salaries will retire and that remaining employees will perform their duties at a lower cost. Generally, salaries should be set based on duties and responsibilities of the job. If remaining employees will be promoted to fill vacant positions with more challenging tasks, they will likely expect higher salaries.

2. Staff is proposing that new employees pay 8% of wages for retiree health benefits. Staff is also proposing that new employees vest in retiree health benefits gradually and fully vest after 20 years. How will OPEB contributions be applied for employees who partially vest?

3. Why is staff proposing that new employees contribute for OPEB and nothing for pensions? Is the employer “pick-up” of the employee’s contribution currently added to final wages for pension purposes? If so, more savings would occur if new employees are required to pick up their share of pension costs vs. OPEB costs because pension costs would be lower.

4. Why is staff proposing that existing employees contribute 2% of wages for OPEB and nothing for pensions? As in #3 above, if the employer “pick-up” of the employee contribution is included in final wages, the new formula will give current employees an additional 1% in final pay on top of a 25% increase in the pension formula! This is because the new formula requires an 8% employee contribution and the current formula requires a 7% employee contribution.

5. Staff is proposing that the District no longer match employee contributions to a 401K plan. This begs the question why the District provided a supplemental defined contribution in addition to a generous defined benefit retirement benefit in the first place. Defined benefit pension promises made to government workers are probably the most valuable asset in the world. Federal law ensures they can’t be changed once granted, they are guaranteed, and have COLAs and even purchasing power protection in the event the dollar collapses. No other asset, including treasury bills, has guarantees like this.

6. Retroactive pension benefit increases create a liability to existing employees for service already rendered under prior labor contracts. Nothing was exchanged for this benefit and, as such, the cost should be funded immediately and not shoved to future ratepayers. Instead, the costs, including interest of 7.75%, in the analysis are being funded over 20 years — long after most of the employees have retired.

7. The actuarial analysis did not display the amortization of the retroactive benefit liability for each of the next 20 years. The benefit increase is similar to long-term debt, and the schedule of payments in gross dollars should be shown and understood completely before you vote.

8. Staff’s analysis suggests that by forgoing salary increases, not requiring the District to contribute toward 401K contributions, and requiring current workers to contribute 2% toward OPEB that the “savings” will partially offset the cost of enhanced pension benefits. The benefit increase is millions more than current workers are giving in concessions; it puts the District at considerable risk of market losses, and will encourage many workers to retire earlier than they might otherwise. The District’s pension funds have been hit by market losses and will fall further with more retirements. OPEB costs will soar as well. None of these expected events have been flushed out.

9. Staff did not reveal that the cost of living did not increase last year. Social security and other federal government programs do not contain cost of living increases. Why does the District’s staff consider forgoing a COLA increase the first year a labor concession? COLA increases in remaining years of the contract are not benchmarked to actual consumer price increases that occur. The nation is struggling with an economic downturn that is unprecedented, and experts worldwide expect prices of basic goods and services to remain depressed for several years. For staff to presume conditions will be different from what experts expect will result in unnecessary feather bedding of salaries.

10. Staff does not reveal that the MOU does nothing to limit or reduce longevity and step increases. Many employees who are not yet at the top of their pay scale and especially employees who are younger or mid career will continue to receive pay increases.

11. Retroactive pension increases will do nothing to retain employees, and staff admits employees will retire sooner. The District’s current pay and benefit package exceeds what is available among comparable jobs in the private sector. Increases in benefits are not required to attract employees. Staff provided no analysis that compares its compensation package to workers in both the private and public sector. How can you, as a Board Member, uphold your District’s mission statement to deliver water supplies in an economically responsible manner if you don’t have access to basic data. Simply comparing defined benefit pension formulas to those provided to workers in other water districts doesn’t go far enough.

On behalf of the District’s ratepayers, we urge you to reject this proposal.

Sincerely yours,

Marcia L. Fritz, CPA
Vice President
California Foundation for Fiscal Responsibility