Pension Measure Wave Crests, Court Slog Remains

Publisher, CalPensions.com

One of the first local ballot measures aimed at cutting public pension costs, a cap on Pacific Grove payments to CalPERS approved by voters three years ago, was ruled unconstitutional by a Monterey County superior court judge last week.

Judge Thomas Wills ruled Friday that Measure R violated the contract clause of the state constitution, reaffirming the view that pensions promised on the date of hire are a “vested right” that can’t be cut without providing a new benefit of equal value.

In a tough week for the measure‘s backers, the Pacific Grove city council voted 5-to-0 Wednesday to seek a court ruling on the legality of a follow-up measure to roll back police pensions, rather than put the plan on the ballot as the council did with Measure R.

“It’s a constant battle down here,” said Daniel Davis, who worked on both measures. He is a former two-term councilman of Pacific Grove, a city with 15,000 residents located between Monterey and Pebble Beach.

The only pension measure listed so far this year by Ballotpedia was approved by Los Angeles voters in March. Sworn police officers transferring from general services to the police department will be allowed to purchase pension-boosting service credits.

Pensions moved into the spotlight after a deep recession and stock market crash. As other programs were hit by painful budget cuts, pensions stood out — not only untouchable, but often with costs projected to grow at an alarming rate.

All eight local pension measures on the November 2010 ballot were approved, except one in San Francisco. A union-backed alternative to a second pension initiative by Public Defender Jeff Adachi helped Ed Lee win election as San Francisco mayor in 2011.

In Los Angeles voters approved a modest union-backed measure in March 2011. After briefly gathering signatures last fall, former Mayor Richard Riordan dropped an initiative to switch new Los Angeles hires to a 401(k)-style plan.

The wave may have peaked last June when voters in San Diego and San Jose approved widely watched measures. In different ways, both aim to do what some say is needed to get big savings quickly: cut pensions earned by current workers in the future.

The state Public Employment Relations Board (PERB) upheld labor complaints that the measures in San Diego, San Jose and Pacific Grove violated state labor law requiring bargaining.

The board filed an unsuccessful lawsuit to prevent a vote on the San Diego measure. An administrative law judge ruled in February that former Mayor Jerry Sanders should have bargained before putting an initiative on the ballot, triggering a court battle.

“PERB forgets that citizen initiatives are constitutional rights in California,” said the city attorney, Jan Goldsmith. The initiative was placed on the ballot by the signatures of 120,000 registered voters and received 66 percent of the vote.

Now all new hires, except police, are receiving 401(k)-style individual invest plans instead of pensions. The initiative requires the city to begin labor bargaining with the initial position of freezing pay used to calculate pensions through June 30, 2018.

The provision can be overridden by a vote of six of the eight city council members. If a union agrees to freeze pensionable pay, an individual might sue. If the city imposes a freeze after lengthy bargaining, a union might sue.

San Jose was hit in March by a PERB complaint of bargaining violations and providing inaccurate information to unions. A hearing on the issues before an administrative law judge is pending.

“What PERB thinks about what happened is irrelevant,” Mayor Chuck Reed told the San Jose Mercury News. “The voters have already spoken.”

Pending approval by the IRS is a cost-cutting provision in the initiative that would give current workers an option: earn a lower pension in the future or increase their contributions by up to 16 percent of pay or until half the unfunded liability is covered.

If this provision is overturned, the measure calls for equivalent city savings through a pay cut.

A half dozen labor lawsuits against the measure have been consolidated in superior court for a trial July 22 expected to last five days. A hearing is scheduled June 7 on a city motion that the lawsuits have no merit and should be dismissed.

Some of the pension issue in Pacific Grove and San Diego is based on the argument that they are among the 121 California cities operating under their own charters, not general state law used by the other 361 cities.

Davis criticized Pacific Grove officials for failing to defend Measure R on the grounds that “statutory vested pension rights were expressly prohibited by the city in its original charter up to and including” the approval of the first CalPERS contract in 1957.

The city attorney, David Laredo, argued in a 2009 memo that the distinction of being a charter city is unlikely to affect pension vested-rights case law based on contract clauses in the state and federal constitutions.

Much of the oral argument made last week by the attorney representing the city, Steve Berliner, was that several unions have agreed to the Measure R cap on city pension contributions to CalPERS of no more than 10 percent of pay.

He said the police union that filed the suit might agree to benefits, such as a pay bonus, that would offset employees paying the part of the employer contribution above the 10 percent cap.

Judge Wills said police have had no contract since 2010, and the city did not show the court a benefit offsetting the contribution cap. Unless given something of comparable value, he said, employees have a vested right to the pensions promised when hired.

In addition, the judge ruled, the measure is invalid because a decision about employee compensation is delegated to voters, violating a provision in the city charter giving the city council the power to set compensation.

The San Diego city council unanimously voted to sue the city pension system in 2010 to force compliance with a 1954 amendment to the city charter requiring the city and employees to contribute “substantially equal” amounts to the pension fund.

The San Diego City Employees Retirement System contends that the “substantially equal” provision applies to the “normal cost” of pensions earned during a year, not the $2.3 billion “unfunded liability” resulting from investment gains and losses.

Mayor Bob Filner last month urged the city attorney, Goldsmith, to drop the lawsuit. The mayor called the suit a “loser” that has cost the city pension system $3.2 million in legal fees, the U-T San Diego newspaper reported.

Goldsmith said the city position is supported by an outside legal expert and a 1983 state Supreme Court decision. After a judge granted a union request to move the trial to Los Angeles, the city got a reversal from an appeals court. A trial is scheduled July 9.

In Pacific Grove, the new initiative would roll back a police pension increase in 2002. The initiative says the city council was not told of a recently discovered CalPERS report showing the higher pensions would sharply increase city pension costs.

Like many other cities, Pacific Grove adopted a major trend-setting pension increase given the Highway Patrol in legislation sponsored by the California Public Employees Retirement System, SB 400 in 1999.

A 17-page CalPERS brochure told legislators SB 400 would not increase state costs. The lawmakers were not shown a CalPERS actuarial forecast that accurately predicted how much costs would soar if investment earnings faltered.

Actuaries estimated that if investment earnings during the next decade hit the target assumed by CalPERS at the time, 8.25 percent, state pension costs would be $679 million in 2010.

That’s well below the $1.2 billion state pension cost in 1997 before a booming stock market prompted CalPERS to give employers a contribution “holiday,” dropping the state payment in 2000 to $160 million.

What lawmakers weren’t shown, as SB 400 sailed through the Legislature with little opposition, was a CalPERS actuarial forecast that state costs would be $3.9 billion in 2010 if earnings averaged 4.4 percent during the decade.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune.

Crossposted on Calpensions

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