Originally posted at CalPensions.
By Ed Mendel.
San Jose Mayor Chuck Reed may soon file a proposed statewide initiative aimed at allowing cuts in pensions earned by current workers in the future, triggering an all-out battle with labor and possibly with CalPERS.
Reed and others say soaring retirement costs are eating up funds needed for basic programs. Because court decisions protect current workers, retirement costs are difficult to reduce without waiting decades for a shift to a workforce with lower benefits.
The mayor is proposing a state constitutional amendment intended to allow cuts in pensions earned by current state and local government workers in the future, while pensions already earned through time on the job would be protected.
Reed said private-sector pensions and public pensions in 12 other states have the flexibility to control costs by reducing pension amounts that current workers earn in the future.
Under the constitutional amendment, cuts in the pensions earned by current workers in the future could be bargained with unions or placed on ballots through initiatives. There also could be no change.
“It’s all about empowering cities to solve their own problems,” Reed said after addressing a pension conference last week at Stanford’s Hoover Institution. “How they do it will be up to them.”
Reed said the proposal is similar to the top recommendation of the bipartisan Little Hoover Commission in a 2011 report that warned rising pension costs could “crush” government.
“The Legislature should give state and local governments the authority to alter the future, unaccrued retirement benefits for current public employees,” said the report.
The commission said the standard way of dealing with unaffordable pension costs (lower pensions for new hires and increasing employee pension contributions) will not cut soaring pension costs quickly enough.
A pension reform pushed through the Legislature by Gov. Brown last year, AB 340, did not attempt to cut the pensions of current workers. Instead, lower pensions were given to new hires.
The reform did little to reduce the large debt or “unfunded liability” of the California Public Employees Retirement System, the California State Teachers Retirement System and 20 county retirement systems.
Significant savings from lower pensions for new hires will not come until they dominate the workforce decades from now. Meanwhile, an attempt to cut pensions earned by current workers in the future faces a big problem.
In a widely held view, a series of state court decisions means the pension promised a worker on the date of hire becomes a “vested right,” protected by contract law, that can only be cut if offset by a new benefit of comparable value.
Pensions can go up, as Orange County found when it lost a court battle to overturn an unfunded, retroactive 50 percent pension increase that created debt. But pensions cannot go down, unless the employee is a new hire with no vested right.
An initiative to alter pension vested rights faces a series of hurdles. A pension initiative plan proposed by a Marcia Fritz-led group folded in 2010 when funding for a signature-gathering faded. Some say about $2 million is needed.
Dan Pellissier said California Pension Reform suspended an initiative drive last year “after determining the attorney general’s false and misleading title and summary makes it nearly impossible to pass.”
Reed’s initiative will get well-funded opposition from public employee unions. Steve Maviglio, a consultant, said defeating the initiative would be labor’s “top priority” if enough signatures are gathered to place it on the ballot.
“If labor was looking for an organizing tool for the 2014 elections, it’s going to be handed to us on a silver platter,” said Maviglio. “What he is proposing is a politician’s broken promise to millions of people who were promised a secure retirement.”
Reed told the pension conference cost-cutting reform is needed not only to provide adequate public services, but also to ensure that retirement systems have enough funds to keep their commitments to workers.
If the initiative makes the ballot and is approved by voters, several kinds of legal challenges are likely. Reed saw that happen after his San Jose pension reform, Measure B, was approved by 70 percent of voters in June last year.
The San Jose measure, while protecting pensions already earned, cuts the cost of current worker pensions with an option: Choose a lower pension for future service or contribute up to an additional 16 percent of pay to continue receiving the old pension.
San Jose is awaiting IRS approval of the tax-deferred status of the option. Orange County is still awaiting IRS approval of a similar option negotiated with employees four years ago.
The state Public Employment Relations Board filed challenges to the San Jose measure, similar to the board’s attempt to block a pension reform initiative approved by 66 percent of San Diego voters last year.
Several public employee union suits to block the San Jose measure were consolidated in a complex one-week trial last July. A ruling from Santa Clara County Superior Court Judge Patricia Lucas is pending.
Measure B does not violate the vested rights of employees, San Jose argued, because of unusual city foresight: A provision in the San Jose charter reserves the right to change the retirement plan at any time.
San Jose, the nation’s 10th largest city, operates its own retirement systems. Measure B did not draw a legal challenge from the deep-pocketed CalPERS, which intervened to protect pensions in the Vallejo, Stockton and San Bernardino bankruptcies.
But the constitutional amendment proposed by Reed would affect CalPERS members. The giant pension system issued a 17-page paper on vested rights in July 2011, four months after the Little Hoover report.
A sentence from “Rule 1” in the CalPERS vested rights paper: “The courts have established that this rule prevents not only a reduction in the benefits that have already been earned, but also a reduction in the benefits that a member is eligible to earn during future service.” (The word “future” is in boldface.)
Since becoming San Jose mayor in 2007, Reed, a Democrat and a lawyer, has presided over the layoffs of police and firefighters and deep cuts in services. Retirement costs grew to about 20 percent of the city general fund.
Reed has talked to mayors and others while working on the statewide initiative. He asked a group connected with a wealthy Texan active in pension reform, John Arnold, to give $200,000 to the San Jose chamber of commerce for pension policy analysis.
At the pension conference last week, Reed said he hoped to be able to file the initiative for title and summary “in a few days,” keeping open the option of putting the measure on the ballot in November 2014 or 2016, depending on political circumstances.
“We want our employees to get paid what they have earned, and we want to provide services to our residents and taxpayers,” Reed said. “That’s all we are trying to do. Easier said than done. This is California. It’s not easy and will not be easy.”