The watchdog Little Hoover Commission, warning in February that soaring pension costs could “crush” government, said cuts to new hires would not yield enough savings and recommended legislation allowing pension cuts for current workers.
A key point: The commission and the proposed ballot measures would not cut pension amounts already earned by current workers through years of service. The cuts (in benefits or employer contributions) only apply to pensions earned after the change.
The Little Hoover Commission said the courts have held that public employees have a vested right under contract law to the pension benefits offered on their first day on the job, even if it takes five years of work to qualify for them.
But the commission said the rulings, which differ from private-sector pensions that can be cut for future work, have provided openings to modify benefits for current workers that must be clarified.
“Government agencies cannot generate the needed large-scale savings by reducing benefits only for new hires,” said the commission. “It will take years if not decades to turn over the workforce, and the government is hardly in hiring mode today.”
The backers of the proposed ballot measures are already hearing from defenders of the vested rights of current workers.
A paper on vested rights issued by the California Public Employees Retirement System this month suggests the giant system, which covers half the non-federal government workers in the state, would go to court to protect the rights of its members.
San Jose is one of a half dozen large cities in California that have their own retirement systems. But it seems likely that CalPERS would support a legal challenge to a precedent-setting change in vested rights.
Peter Mixon, the CalPERS general counsel, told a board meeting in Petaluma last week that several years ago bankruptcy court looked like an option for struggling local governments.
He said after the Little Hoover recommendation, and the example of the city of Vallejo still in bankruptcy after three years, more local governments may look at modifying the vested rights of employees.
San Jose Mayor Chuck Reed’s proposal, based on California court rulings, would use the declaration of a fiscal emergency to modify vested rights. Mixon said he is unaware of the emergency case law actually being used to modify public pensions.
“That being said, I think this is going to be the battleground to watch,” Mixon told the CalPERS board.
He mentioned that two Detroit pension funds filed a lawsuit to block a new Michigan law authorizing the appointment of “emergency managers” to oversee fiscally troubled local governments, potentially altering pension plans.
In California, the CalPERS paper said, the emergency allowed by the court rulings must meet a rigorous test based on the best interest of society, need and appropriateness and then can only be temporary.
“Thus, even if vested pension rights may be temporarily impaired in a true emergency situation, it is clear that the state’s emergency powers do not enable it to solve its budgetary problems by eliminating or reducing the long-term benefit promises it has made,” said the CalPERS paper.
The office of state Attorney General Kamala Harris, asked by four legislators to review the San Jose emergency proposal, said in a preliminary response last month that the “unilateral impairment” of any contract “causes us deep concern.”
A spokeswoman for Mayor Reed said the city plans to meet with the attorney general’s office to explain its proposal.
San Jose and other local governments, where employee costs are a big part of budgets, have been hit hard by soaring pension costs. Benefits were increased when a booming stock market pumped up pension funds, punctured later by a market crash.
Retirement costs for San Jose, $73 million a decade ago, are $245 million this year and projected to increase to $400 million by 2016 – possibly to $650 million if longer life expectancy, early retirement and other updated experience is included.
The city retirement contributions set by two pension board are now more than 50 percent of the payroll. The city has cut its workforce by 30 percent, laid off police and firefighters, closed libraries and community centers and cut employee pay 10 percent.
Reed persuaded voters last fall to approve a limit on binding arbitration of labor contracts, prohibiting the creation of new unfunded liabilities as well as pay and benefit increases exceeding a five-year average in general fund growth.
The pension boards were restructured early last year to have a majority of independent members with financial expertise, replacing the old “stakeholder” model dominated by representatives of labor and management.
Reed’s new proposal, requiring voter approval in the charter city, would give new hires a “hybrid,” a lower pension and a 401(k)-style investment plan. City contributions would be capped at 9 percent of pay or 50 percent of benefit costs, whichever is less.
Pensions earned by current workers in the future would be lowered to 1.5 percent of final pay for each year served. Among other changes, full retirement age would be gradually extended to 60 for police and firefighters, 65 for other workers.
Last month Reed delayed council action on his proposal until Aug. 2. He also reportedly pushed back a public vote on the plan until next March, allowing time for negotiations with labor unions until Oct.31.
A group led by Dan Pellissier, a former Republican legislative and gubernatorial aide, wants to put a statewide pension initiative on the November ballot next year. But it’s still seeking funding and has not yet filed an initiative.
“It’s getting better and better for us,” Pellissier said last week. “We have some of our top folks in California helping us.”
His plan is different from the Little Hoover and San Jose proposals to lower the pensions earned by current workers in the future. Instead, future employer contributions would be capped at 6 percent of pay, more if needed to pay off any unfunded liability.
Current employees presumably could increase their contributions to maintain current pension levels or accept a smaller pension. New hires would receive a 401(k)-style investment plan.
Pellissier said the group’s lawyers think key vested rights court decisions are “ripe” for review because they were made before public employees were authorized to bargain labor contracts in the late 1970s.
He said one of the “non-vested rights” listed on page 14 of the CalPERS paper supports his view that employer contribution rates are not vested and can be capped by the initiative.
The non-vested right: “Continuation of a benefit or contribution rate where the benefit or contribution rate is subject to change under the terms of the applicable statute, memorandum of understanding or employment contract.”
CalPERS did not immediately respond to a query about Pellissier’s view last week. But it seems possible that the non-vested right may refer to employee contribution rates, not employer rates.
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/ Posted 25 Jul 11