It was in 1978, after property taxes had doubled in less than a decade, when Proposition 13 was proposed and passed in California. It is well known that politicians have never seen a tax they did not like; hence, Prop 13 has suffered from finger pointing and criticism every year since.
Ted Harris wrote a piece in the Nevada Journal entitled The Property Tax: The Unfairest Tax of All (Aug. 27, 2005). He asked the question "What can a property owner do to defend against ever increasing assessed property values and tax rates? The answer is "Not much." He points out that Nevada law allows a tax system with virtually no limit as to what cities and counties can extract from the home owner each year. "Property taxes," he goes on to say, " have become confiscatory."
Prop. 13 applies a 1% tax on the selling price of homes. So every time a home is sold, the property tax is adjusted. A survey here reveals the average period of time a homeowner holds a piece of property is five years; hence the property tax has been adjusting itself accordingly. So, when your local politician criticizes Prop 13, you might ask: "If you bought a $10-million home in California, is the $100,000 in annual property taxes simply not enough?!
But there was more to Prop 13 than limiting property taxes. It set up certain rules requiring a public vote prior to any increase in taxes. Bond issues and tax measures, which impose a tax for a specific use, require a two-thirds vote by the public. Recently, the two-thirds voter approval was amended to a 55% approval vote if the tax was to provide revenue for General Fund budgetary uses. It remains to be seen if this was a wise decision by California taxpayers.
We come, at last, to the public workers pension plans which are covered under the California Public Employees Retirement System (CalPERS) and the California State Teachers' Retirement System (CalSTRS). The public employee pension is not calculated in accordance to actual contributions made, as is the case with social security, but instead offers the reverse formula whereby the participant can be awarded retirement based upon a percentage (2 or 3%) times an average of his highest income years, times the number of years served. An actuary is then employed to determine how much must be contributed to the fund in order to pay for this retirement when it comes due.
Currently, some State and local cities are paying as much as 30% of employee wages toward pension plans and this does not include the "Pension Obligation Bond" which adds another 10 % to the mix. According to a Contra Costa Times editorial (April 8, 2013): ". . .CalPERS and CalSTRS have a common thread: They each lack sufficient money to pay for pension benefits workers have already earned." Additional editorial remarks point out that both of these pension funds have a combined $173 billion unfunded liability which works out to about $14,000 per California household.
The alarming reality is the California taxpayer will ultimately pick up the tab for any losses or shortfalls to the system. Equally alarming is the fact most local residents are not aware they are on the hook for this massive pension short-fall.
You might ask, "If we have Prop 13, which sets rules for tax increases and we, the voting public, did not have opportunity to vote for the Public Employee Pension Program, how can we be liable for this massive pension deficit?"
This is what you might call an indirect or "hidden tax." Your city, county or state has entered into agreement with employee unions which established the afore-mentioned pension formula. At the outset, the employee was to pay 9% of his wage and the employer (city, county or state), would pay the remaining costs.
Some financial actuaries claim that CalPERS and CalSTRS made, and continue to make, unrealistic projections with respect to their investment returns which resulted in underfunding of the pensions at the very outset. Because of the economic downturn, ill-advised reliance on unrealistic forecasts and irresponsible accounting to defer funding the system, the pension fund deficit now requires a huge influx of cash to remain solvent. But the pension system is plagued with other problems.
For many years there was no "cap" limiting pension benefits. Some public jurisdictions allowed overtime pay, accumulated sick leave and even vacation time to be added to the final pension calculation. The Sacramento Bee reported in June, 2011, that nearly 9,000 retirees in the state currently receive $100 thousand or more in annual benefits.
Recently, according to an A.P. editorial by Fenit Nirapril, Governor Jerry Brown requested CalPERS consider the problem of additional pension costs because retirees were living longer than original calculations which is a contributing factor to the huge pension deficit.
It should be noted the CalPERS board is dominated by public employees who will benefit from the pension system and the other board members include Democratic appointees who receive significant campaign contributions from government labor unions. The CalPERS Board, according to the AP article, has already indicated it will ignore the governor's request to tackle the problem immediately.
The entire public retirement system has the appearance of placing the fox in the hen house. Even on a local level involving cities run by the "so-called" City Manager style government, pension negotiations are headed up by persons who will benefit directly from favorable negotiations with the employee unions.
Because those in charge of employee negotiations for the city, county and state have agreed to pay for additional pension costs, and these costs could very well result in a massive deficit to the city, county and state General Funds; the California taxpayer will likely be asked to pick up the tab. The other option, of course, is bankruptcy.
Is there room for a taxpayer revolt based on the very real prospect of increased taxes to pay for a pension plan that the public did not, in fact, have opportunity to vote for?
Probably not! Pacific Grove has been attempting to adjust or eliminate the CalPERS pension program for several years, but the outright termination of CalPERS would cost $30 million and the city could not afford that expense. After a brief look at bankruptcy, P.G. finally settled on Measure "R" which voters approved by a 73.89 percent vote on the November 2, 2010 ballot. The subsequent city ordinance put a cap on the city's contributions to employee pension benefits at 10% of worker's salaries.
The police union lawsuit immediately followed alleging breach of contract, but was dismissed with prejudice by Superior Court Judge Larry Hayes in July of 2011; however, this was subsequently overturned on appeal.
A group of Pacific Grove residents, on the other hand, argue the expensive police pension benefit package which provides for 3 percent of salary for each year of service at age 50 was illegally approved by the city in 2002. In January, 2014, Judge Thomas Wills, in the first part of a divided case, ruled the city must place the pension rollback initiative on the ballot in the city's next election which would be in November. Backers of this measure were pleased with this ruling, but it remains to be seen if this will conclude the matter without further litigation.
The real solution is for your state legislators to pass a measure limiting employer contributions to no more than 10 percent and bring this matter to a halt before more cities are forced into bankruptcy.