Category Archives: Public Sector

State and Local Governments’ Fiscal Outlook: 2018 Update

Source: U.S. Government Accountability Office, GAO-19-208SP, December 13, 2018

From the summary:
What’s the prognosis for the fiscal health of state and local governments across the nation?

Our annual outlook suggests the sector will have an increasingly tough time covering their bills over the next 50 years. Our model shows both revenue and spending will increase; however, spending will rise faster. Revenues may be insufficient to sustain the amount of government service currently provided.

Our model also suggests health care costs will largely drive the spending increases—in particular, Medicaid spending and spending on health benefits for state and local government employees and retirees.
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Rising U.S. States’ OPEB Liabilities Signal Higher Costs Ahead

Source: S&P Global Ratings, November 28, 2018
(subscription required)

Other postemployment benefit (OPEB) liabilities, which consist primarily of retiree health care plans, are a growing concern for certain states’ credit quality and require attention to control higher future costs. Total unfunded state OPEB liabilities have increased significantly for the third year in a row, according to S&P Global Ratings’ latest survey of U.S. states.

After Janus

Source: Martin H. Malin, Catherine Fisk, California Law Review, Forthcoming, Date Written: September 6, 2018

From the abstract:
The Supreme Court in Janus v. American Federation of State, County, and Municipal Employees Council 31 upended public sector labor law by finding a novel First Amendment right of public employees to refuse to pay union fees and declaring unconstitutional scores of laws and thousands of labor contracts. This Article assesses the constraints on public sector labor law post-Janus, examines the variety of legislative responses, and proposes a path forward.

Janus makes it difficult to address the collective action problem facing all large groups. Although it is in the interest of every member of a group to engage in collective action to provide common goods, it is also in the each individual’s interest to let others incur the costs of doing so. The Janus Court misstated the nature of the collective action problem when it said the problem was free-riding on union-negotiated benefits. The problem is that, without some way to require all who benefit to share the costs, unions will not negotiate effectively for the benefits in the first place, so there will be no common goods to free ride on.

This Article explains public sector unions’ apparently surprising reluctance to respond to the collective action problem exacerbated by Janus in the way that some scholars and a number of legislatures have proposed. Most proposals and enacted legislation continue union financial solvency in the short-term but sacrifice the fundamental nature of unions as membership organizations governed by and for workers. Some adopt some form of members-only representation, thus abandoning the principles of majority and exclusive representation.

Can Unions Be Sued for Following the Law? Responding to William Baude & Eugene Volokh, The Supreme Court, 2017 Term — Comment: Compelled Subsidies and the First Amendment

Source: Aaron Tang, Fred O. Smith, Harvard Law Review, Vol. 132 no. 2, November 2018
(subscription required)

From the abstract:
Here is a short summary of the right-to-work movement’s legal strategy in the aftermath of its victory in Janus v. AFSCME: If you can’t kick a man when he’s down, when can you kick him? For within weeks of Janus’s pronouncement that the First Amendment forbids public sector unions to collect agency fees from objecting employees, right-to-work groups filed a flood of class action lawsuits seeking the refund of millions of dollars’ worth of fees that were paid in the years before Janus was even decided, when such fees were indisputably lawful. Commentators have observed that these retroactive refund suits threaten to bankrupt unions around the nation.

In Compelled Subsidies and the First Amendment, Professors William Baude and Eugene Volokh argue that “Janus makes it likely” that public sector unions will indeed be liable under 42 U.S.C. § 1983 for refunds of money they collected in years before Janus was even issued. We think otherwise, and this Response explains why.

We start in Part I by presenting a vision of the world as it would exist if Baude and Volokh are right. It turns out that imposing financial liability on public sector unions for conduct that was perfectly lawful when it took place (because both state law and judicial precedent authorized the unions to collect fair-share fees) is a kind of maneuver that cannot be neatly confined to the context of union fee refunds.

In Part II, we explain why this unsavory state of affairs is hardly necessary. In fact, the law requires otherwise. In particular, we describe three legal arguments that should stop the union-refund suits from getting off the ground: careful application of the doctrine of civil retroactivity; defenses that were available against the most closely analogous tort at common law, including that unions acted in good faith reliance on existing law; and ordinary principles of class action certification.

Exaggerating the Effects of Janus: A Reply to Professors Baude and Volokh

Source: Erwin Chemerinsky, Catherine Fisk, Harvard Law Review Forum, Vol. 132, p.42, 2018, Forthcoming

From the abstract:
In Janus v. AFSCME Council 31, the Supreme Court held public employers can no longer require employees to pay fair share fees, i.e., the employees’ fair share of the costs unions incur in negotiating and administering labor contracts on the employees’ behalf. This essay responds to an article by William Baude and Eugene Volokh, who argue that unions are likely retroactively liable for the agency fees that union-represented workers previously paid. We explain that public employee unions, as private membership organizations, are not state actors liable under 42 U.S.C. § 1983. We then show that even if unions were found to be acting under color of law for purposes of section 1983, they would be entitled to qualified immunity as a defense because negotiating for fair share fees did not violate the constitution at the time unions negotiated fair share fee agreements and received fees. At the very least, unions are entitled to the separate defense of good faith immunity available to private actors who are sued under section 1983 for conduct undertaken in good faith in collaboration with government actors. Finally, we show that unions are not liable on state law theories. Qualified immunity is a defense only to claims for damages under federal law, and good faith immunity has likewise been applied only to claims for damages. For that reason, plaintiffs in the post-Janus fee recovery litigation have alleged state law claims and styled them as equitable. Some states (e.g., California) have eliminated such liability through legislation. Even in states that have not enacted such laws, however, we show that well-settled equitable principles foreclose liability. Finally, this essay responds to Baude and Volokh’s argument that Janus endangers other mandatory fees imposed by the government, such as bar dues and public university student activity fees.

Stability in Overall Pension Plan Funding Masks a Growing Divide

Source: Jean-Pierre Aubry, Caroline V. Crawford and Kevin Wandrei, Center for Retirement Research at Boston College, SLP#62, October 2018

The brief’s key findings are:
– Under traditional accounting rules, the aggregate funded ratio for state and local pension plans in 2017 was 72 percent, largely unchanged from recent years.
– This overall stability, however, masks a growing gap among plans: the average funded ratio was 90 percent for the top third but just 55 percent for the bottom third.
– The plans in the bottom third are in worse shape because, on average, they receive lower long-term investment returns and pay less of their required contributions.
– In addition, all plans face the possibility of a market downturn, which could set back funding for several years.

Prefunding Public Sector Retiree Health Benefits: The California Example

Source: John G. Kilgour, Compensation & Benefits Review, OnlineFirst, First Published November 1, 2018

From the abstract:
Most state and local governments have historically funded their retiree health care benefits on a pay-as-you-go basis. This has resulted in massive amounts of unfunded liability in many states including the five largest states of California, Florida, Illinois, New York and Texas. Recent accounting and reporting rules changes by the Governmental Accounting Standards Board has made these liabilities more visible and has resulted in more attention being paid to this problem. California has adopted a plan to pay off its huge unfunded retiree health benefit liability by 2044. It might serve as an example for other states with similar problems.

Thanks To A Strong Economy, California’s School Districts Can Face Continued Pension Increases–Though Will This Last?

Source: S&P Global Ratings, November 8, 2018
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Key Takeaways

– School revenue increases, driven by a strong state economy, have far outpaced nominal growth in required pension contributions.
– Although the share of district expenditures for pension contributions has increased, and will likely continue to grow, increases to median carrying charges have been sustainable.
– Most districts are more than two-thirds through the scheduled rise in pension contributions, and we expect growth in contribution rates will slow and stabilize over the next several years.
– Districts have not made significant pension-driven cuts to their operations to date, but may reduce salary increases and headcount through attrition moving forward.
– If the state experiences a recession, volatility in state funding could be a more likely source of adverse credit pressure for some districts.

State Public Pension Funds’ Investment Practices and Performance: 2016 Data Update

Source: Pew Charitable Trusts, Issue Brief, September 26, 2018

Substantial investment in complex and risky assets exposes funds to market volatility and high fees.

From the overview:
State and local public retirement systems held $3.8 trillion in assets in 2016, the most recent year for which comprehensive data are available. With the retirement security of 19 million current and former state and local employees at stake, sound and transparent investment strategies are essential.

In a bid to boost investment returns and diversify portfolios, plans in recent decades have shifted away from low-risk, fixed-income vehicles in favor of stocks and alternatives such as private equity, hedge funds, real estate, and commodities. In 2016, half of plan assets were invested in equities, a quarter in alternative investments, and another quarter in bonds and cash.

Investment performance over the last five to six years has, for the most part, tracked plan target rates, with average returns of about 7 percent. However, during the same time frame the fiscal position of public funds has not improved, and in most cases has declined. And while equities and alternatives can provide higher financial returns, they also leave funds vulnerable to market volatility and the risk of shortfalls. Furthermore, as our population ages and the number of retirees grows, cash outflows increase, adding more pressure to pension fund balance sheets.

Because earnings on these investments are expected to pay for about 50 to 60 percent of promised retirement benefits for public workers and retirees, careful attention to reporting and transparency has become increasingly important. In particular, understanding the impact of market volatility on public plans and their sponsoring governments’ budgets is critical for policymakers and stakeholders. Mandatory stress test reporting and full disclosure of asset allocation, performance, and fee details are therefore essential to determining whether public pension plans have the ability to pay promised retirement benefits…..