Originally posted at CalPensions
The mayors of San Jose and San Diego are backing local measures on the June ballot that aim to make the change critics of costly public pensions say is the key to major reform — cutting the cost of pensions earned by current workers in the future.
Using different methods, Measure B in San Jose and Proposition B in San Diego would allow current workers to keep pension amounts already earned, but pensions earned in the future could be cut or cost workers more.
The San Jose measure would give current workers the option of switching to a lower pension or staying in the current plan and paying off pension debt with annual contribution increases of 4 percent of pay, capped at 16 percent or half the debt cost.
The San Diego proposition could impose a six-year freeze on the amount of pay used to calculate pensions and would switch all new hires, except police, to the 401(k)-style individual investment plans now common in the private sector.
A widely held view is that the courts have ruled pensions promised current workers cannot be cut, even by requiring workers to pay more toward their pensions, without providing an offsetting benefit of equal value.
But the nonpartisan Little Hoover Commission and others argue that cutting current worker pension costs is needed to prevent soaring pension costs from eating up government budgets, diverting money from other programs.
“The Legislature should give state and local governments the authority to alter the future, unaccrued retirement benefits for current public employees,” was the lead recommendation in a Little Hoover report last year.
Most public pension funds are deep in debt after a decade of below-forecast investment earnings, punctuated by a stock market crash in 2008. Critics say the retirement systems also are burdened with overly generous pensions.
The commission and others think that financially troubled government employers, who are responsible for ensuring that pensions are funded, will not get enough savings from the two standard attempts to cut government pension costs:
1) Giving new hires lower pensions may take decades to yield significant savings. 2) Getting current workers to agree through bargaining to increase worker contributions often is a temporary saving, offset by an equal benefit such as a future pay raise.
Federal courts allow private-sector pensions to lower amounts earned in the future. A law professor told the commission the state courts have not explained why future public pension amounts cannot be cut.
“Legal experts have told the commission it likely will take a financially distressed county, city or special district to scale back its promised future benefits for current employees, then attempt to defend the action in court before the Supreme Court would have an opportunity to consider a new precedent,” said the Little Hoover report.
Two state Supreme Court actions last year may not be encouraging for those seeking new precedents that weaken the legal protection of public employee retirement benefits.
The high court upheld a pension increase for years already served, the opposite of the proposals to cut pensions for years not yet served. A suit contended that a retroactive pension increase given Orange County deputy sheriffs violated a state debt limit.
Because no employer-employee contribution increase had paid for the big boost in pensions for years already served, the suit argued that the retroactive pension increase created an “unfunded liability” that was a debt exceeding the state limit.
A lower court ruled that the unfunded liability is not a debt but only an estimate based on variables, mainly investment earnings expected to provide two-thirds of pension revenues. The high court unanimously refused to hear an appeal.
In another Orange County suit, the court unanimously ruled that when local elected officials approve a retiree health care benefit, an “implied contract” can create a lifetime right to the benefit even though no resolution or ordinance specifically grants it.
The legal arguments for the San Jose and San Diego ballot measures are based in part on the fact that they operate under their own charters, rather than state general law, and have their own pension systems.
To what extent, if any, a court decision on the measures would affect the giant California Public Employees Retirement System, which covers about half of the non-federal government workers in California, or other retirement systems is not clear.
But approval of the measures might set new benchmarks for controlling pension costs and inspire more pension-reform ballot measures. Statewide pension initiatives have failed to attract funding in the past.
If voters approve the San Jose measure, unions won’t have to immediately file a legal challenge. Mayor Chuck Reed and five council members say in the ballot pamphlet that the city will seek a judicial review to minimize legal disputes.
The city has a nine-page memo from the Meyers Nave law firm outlining the legal argument for the measure and a key issue: whether increasing current employee pension contributions is a cut in pay that violates vested rights.
Citing the city charter, past practices and other things, the memo concludes that the city has “reasonable arguments” for requiring current employees to share in the cost of paying off unfunded liabilities.
“But as in any case involving vested rights, there can be no certainty as to any judicial outcome in the event of a legal challenge,” said the memo.
If the courts rule that the city cannot increase current employee contributions to pay off half of the pension unfunded liability, the San Jose measure authorizes the city to obtain similar savings by cutting the pay of current workers.
The San Diego proposition, placed on the ballot by voter signatures gathered for an initiative rather than a city council vote, is backed by Mayor Jerry Sanders and council members Carl Demaio and Kevin Faulconer.
“We researched the legal issues before we crafted the initiative,” said Lani Lutar, president of the San Diego County Taxpayers Association.
Lutar said the legal support for the six-year freeze on pay used to calculate pensions is based on provisions in the city charter and a part of the state constitution, section 5(b), that gives charter cities full authority over employee compensation.
The proposition requires the city to begin labor bargaining with the position of freezing the pay used to calculate pensions at the fiscal 2011 level. But the position can be overridden by a two-thirds vote of the city council.
“That’s a key provision we think makes it legally defensible,” said Lutar.
Proposition B in San Diego was favored by 52 percent of city voters and opposed by 29 percent, with 19 percent undecided, a shrinking lead in the latest U-T San Diego poll. There has been no public poll on Measure B in San Jose.
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune.