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Two charter cities, San Diego and Pacific Grove, are taking action that could shift more of soaring pension costs to employees, and a law firm that specializes in employee benefits says local governments may have “more latitude” than they think to cut costs.
As governments face higher annual payments to pension funds, covering huge investment losses in the stock market crash and what critics say are overly generous benefits, two ways to cut employer costs are common:
Negotiations with labor unions to (1) increase employee payments into the pension fund, and (2) give new employees lower pensions.
Now two of the 108 cities that operate under their own charters, rather than general law, are pursuing a lawsuit in San Diego and a voter-approved ballot measure in Pacific Grove that could force more of the pension burden on to employees.
The two cities are basing the action on provisions in their charters that, if not unique, are not widely shared. But the attempt to cut costs by reducing the employer share is drawing attention.
The suit filed by the San Diego city attorney, Jan Goldsmith, contends that a previously ignored provision in the city charter calls for “substantially equal” pension contributions from the city and employees.
City pension contributions in Pacific Grove would be limited to 10 percent of pay under a measure approved by 74 percent of the voters last month, reinforcing an earlier city council action. A police union filed a lawsuit to overturn Measure R.
In most public pensions, the government employer often contributes much more than the employee. Pacific Grove police contribute 9 percent of pay, while the city contributes 19 percent of pay.
Many cities pay the employee share designated in pension formulas offered through the California Public Employees Retirement System. Under a reform pushed by some city manager groups last year, employees would begin paying part of their share.
The largest state worker union recently agreed to a reform pushed by Gov. Schwarzenegger that increases the employee contribution from 5 to 8 percent of pay. The state contribution is 20 percent of pay.
In contrast, the current private sector contribution for federal Social Security, 12.4 percent of pay for most workers, is split equally between the employer and the employee.
The pension funds in San Diego and Pacific Grove have not been well-managed. Possible bankruptcy has been mentioned in both cities as pension costs eat up more of their budgets, diverting funds from other programs.
San Diego, dubbed “Enron by the Sea” in the national media, twice dropped city contributions below the actuarially required amount in deals that also raised pension benefits. Lawsuits, probes, a moratorium on bond sales and budget cuts followed.
The San Diego pension fund has a $2.1 billion deficit but recently gave $5.2 million in bonuses to 6,630 retirees, averaging $784 each, the San Diego Union-Tribune reported last week. The “13th check” is a vested right as investment earnings improve.
The San Diego lawsuit was cited as a pension consultant, who made presentations to the watchdog Little Hoover Commission and a CalPERS meeting earlier this year, said he has changed his view about whether employees should help pay off pension debt.
“The next frontier in raising incumbent employee contribution rates may be the employees’ share of unfunded liabilities,” Girard Miller wrote in his column in the October issue of Governing magazine.
Pacific Grove, a city of about 15,000 on the scenic Monterey peninsula, has a pension system operated through CalPERS. The city issued a $19 million pension bond in 2006 to cover benefit increases in 2002 and investment losses a year earlier.
The pension bond is costing the city $1.3 million to $1.6 million a year for 30 years. But despite the bond, the city’s pension debt or unfunded liability has ballooned after the stock market crash to an estimated $28 million to $34 million.
Voters approved an advisory measure in 2008 for a switch from pensions to a 401(k)-style individual investment plan. But some said paying off the debt if the pension plan closed would be too expensive.
The new measure limiting city contributions to 10 percent of pay gives unions options when they negotiate new labor contracts. For example, they could choose a 401(k)-style plan or pay pension costs left unpaid by the city under the new cap.
Pacific Grove bases the 10 percent cap on a provision in its charter that says city employees serve “at will” without the usual civil service protection. As a result, the city contends, employees do not have vested rights to employment or a specific pension plan.
An attempt to impose the 10 percent cap is likely to trigger more lawsuits. The police union suit, similar to a previous regulatory complaint, only contends that the city council acted without formally consulting with unions as required by state law.
The measure placed on the ballot by the city conformed the charter with the city council’s approval of the 10 percent cap. The council chose to enact an initiative written by a citizen group led by Dan Davis, rather than place the initiative itself on the ballot.
At a council meeting on July 23 available by video over the Internet, the lone councilman opposed to the measure said he feared an expensive legal battle, a “long shot” that could be damaging to the city.
Still, Councilman Bill Kampe said he hopes the 10 percent cap succeeds, echoing others who suggested that Pacific Grove may be blazing a trail for other cities desperate for pension relief.
“I hope it does,” said Kampe. “It would be to the benefit not only of Pacific Grove but a lot of cities in California if this proves to be successful.”
Another way to reduce public pension costs, also likely to be challenged in court, would be to lower pension benefits not just for new employees, but for current employees as well.
The conventional view is that the courts have ruled that once an employee is vested in a public pension, the benefits are a contract that cannot be cut. So pension cuts are usually limited to new hires not yet vested in the plan.
But a law firm in Folsom that specializes in employee benefits argues, after taking a close look at court rulings, that governments may be able to make reasonable reductions in pension benefits not yet earned, particularly if needed to preserve the pension system.
The pension benefits (based on years of service and final pay) already earned by time on the job would not be touched. But the theory is that pension benefits that the employee continues to earn in the future could be cut.
Jeffrey Chang made the argument in a paper presented last March 4 to the Northern California Chapter of the International Public Management Association, “Employer Benefits: Identifying Solutions in Difficult Economic Times.”
Another version on the website of his law firm, Chang Rothenberg & Long, makes a similar point:
“A close reading of the pertinent cases suggests that a public employee’s right to a pension benefit is not inviolate, but may be changed or even eliminated under appropriate circumstances.”
At least one major public pension, the University of California Retirement Plan, explicitly guarantees pension benefits earned or “accrued,” but not benefits yet to be earned by time on the job.
“Unlike most statutory or legislated state plans, the terms of UCRP reserve to the Regents the right to change future accruals of UCRP benefits for current faculty and staff,” said a staff presentation to the Regents last September.
A footnote added: “The application of this provision has not been tested in a court of law.”
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune.