News

Local officials ‘grab and run’ with health benefits, employees see reductions

For those of you who’ve seen the Oceans Eleven movie with George Clooney, you’ll remember the famous “grab and run” scenes at the beginning. Las Vegas casinos almost have been robbed three times with the technique, but they all failed.

For those who haven’t seen the movie, you’ll easily spot it in your local shopping center, a grocery store with a security guard who’s ready for the daily “grab and run” shoplifter.

But no such security guard exists at local government board meetings in California, where millions of dollars walk out the door every day. This year, the product being shoplifted is the million dollar designer “retiree health insurance” package for the CEO of each local government agency.

The state government and its local agencies have been aware that, behind the backs of the taxpayers, they have accumulated billions of dollars of obligations for employee health insurance in retirement. No one has disclosed these liabilities on any bonds issued by the state and no one has asked the voters to approve these “promises to pay.”

And the chickens are coming home to roost, as the accounting people will be forcing governments to acknowledge their promises to the public and the bondholders over the next few years. Many local governments are, at this very moment, involved in exercises to determine the extent of their “insolvency.” The state itself has estimated its obligations at between $40 and $70 billion.

When these big numbers are identified and thought about, the first thing that comes to the minds of the chief executives of our many local governments is, well, me! And they are grabbing and running with the money. We are talking about big money here: The Retired Teachers Association has estimated that the value of fully paid health insurance in retirement to be worth $750,000. They noted this in a letter to the Sacramento Bee in 2005.

These benefits were promised in collective-bargaining agreements with rank and file employees from the 1970s on. Over time, management employees piggybacked on these collective-bargaining arrangements in a variety of ways. At the top level of a few organizations, the CEO, whether it is a superintendent of schools, a chief administrative officer, or a city manager, separately garnered agreements to pay for benefits. For the most part, the top officials were provided benefits at the level and the conditions of most management employees.

Now, with the big numbers in front of them, they are thinking big. In December 2005, the Elk Grove Unified School District agreed to give their current superintendent, Steven Ladd, a $35,762 a year raise, from $185,774 a year to $221,536 a year. Ladd also received an unusual parity agreement–that is, if a list of comparable school districts raised the pay of their superintendents, he got a raise as well–automatically!

At its December 13, 2005 meeting the Elk Grove School Board approved a new contract for Superintendent Ladd and the minutes show a discussion of the pay raise and the parity agreement. The matter was initially placed on the consent calendar, an unlikely place to encourage public discussion. After being removed from the consent calendar, a five-minute explanation was made by the board member who negotiated the new contract. Less than 10 seconds elapsed from the time the chairperson asked “Any questions?” and the unanimous vote to approve the new contract.

Unbeknownst to the public at the time, but hidden in the district’s new agreement, Ladd was awarded lifetime health insurance benefits for himself and his wife. Under his previous agreement, he, like other Elk Grove management employees, needed 10 years of “vesting,” and should Ladd predecease his wife, she would have had to pay directly for her own benefits.

The new agreement provided lifetime coverage for both Ladd and his wife with no vesting requirements. The value of such a package on the open market, according to the RTA, is $750,000.

For the most part, such agreements to provide $750,000 in lifetime health insurance benefits to officials in comparable circumstances are conditioned on the fact that the official “retire” at the end of their term. Ladd’s agreement was extraordinary in that it did not require “retirement” to take advantage of this $750,000 benefit for himself and his wife. This little “extra” demonstrates just how much flexibility local governments have in granting benefits to its top officials.

Superintendent Ladd was fully aware that the EGUSD has been grappling with an unfunded liability for retiree health care in the range of $150-600 million. During 2005, the Elk Grove Benefits Employee Retirement Trust was examining a major reduction in retiree benefits. In 2006, the EGBER Trust approved an extension of the vesting period for new employees from 10 years to 15 years. Superintendent Ladd’s vesting period was one day.

How was it done? In a closed meeting (December 6, 2005), as per custom when local governments negotiate with their top officials and then with a short notification of the contract agreement in that or a following public meeting (December 13, 2005). The closed meetings were initially held under the cover of a “performance review,” a normal technique utilized by local government officials when seeking a raise.

The board minutes indicated that the full agreement is “on file,” but few members of public are prepared for the difficult process of extracting such agreements from the agency. During the meeting and in the year since approval, only Capitol Weekly has asked for a copy of the agreement–no member of the public asked for a copy.

For most employees of the EGUSD, their retiree health benefits are funded by EGBER Trust, a unit “separate and apart” from the school district. The trust currently has $30 million in assets, current liabilities exceeding $285 million, and potential future liabilities of over $600 million. The trust has been and continues to operate in insolvency. Ladd, the district superintendent, knew of this insolvency and carefully ensured that his contract provided from payment directly the school district should the trust fail to pay for his benefit. No other current employee of the school district has a similar guarantee.

Let’s do a little calculation on the superintendent’s new contract in its first year: $221,536 salary, $26,700 deferred compensation, and $750,000 health insurance package–prepaid (well, guaranteed to be paid). Why all $750,000 in one year? Because that’s how accountants account for the earnings–he earned the $750,000 instantly. Total compensation for the year: $998,236.

All over the state, local government officials will be mimicking Ladd’s “grab and run” maneuver. All a manager has to do is to point out to their board the fact that a neighboring agency gave the benefit to their top officer, as well, and boards will act accordingly. In November 2006, the city of Elk Grove granted similar benefits to its city manager and city attorney.

When forced to defend his vote in the matter, Elk Grove City Council member Mike Leary rejected an initial survey of similar benefits in nearby jurisdictions provided by an Elk Grove staff member with the following e-mail language: “I would hope that we have the information on benefits from the neighboring cities in the region rather than these po-dunk (excluding the EGUSD) government agencies!!!! I asked John [Danielson, the city manager and intended recipient of the lifetime family health benefits] to get some comparatives for me, but I can’t use these to do a presentation at the next regular Council meeting.” You can use Google to look up what the word “po-dunk” means! Obviously, Leary wasn’t finding the backing he needed from the Elk Grove city staff research.

The Legislature can and must act immediately to end this “grab and run” maneuver. Public-employee-backed Democrats will catch the ire of their supporters if they allow top officials to enjoy better retiree health care benefits than rank and file members, and Republicans
can’t have public officials earning more than private sector CEOs–all their contributors will start working for the government.

Clearly, Republicans and Democrats in the Legislature can quickly agree that “grab and run” maneuvers totaling billions of dollars and benefiting only a few top officials ought to be outlawed immediately with an urgency bill. It only takes a couple of board meetings for local officials to “grab and run” with millions of dollars in benefits, as Ladd and the Elk Grove School Board demonstrated.

And if they have trouble coming up with a title for the bill, they can just call it the “Steven Ladd Grab and Run Scandal Act of 2007.”

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