A retiree group won a big victory last month. Reversing a superior court ruling, an appeals court overturned part of a voter-approved San Francisco pension reform in 2011 that ended higher payments to retirees when investments have “excess earnings.”

But the feisty retiree group, Protect Our Benefits, is unhappy because the appeals court ruled higher payments can be ended for city workers who retired on or before Nov. 5, 1996, when the supplemental cost-of-living adjustment was first approved by voters.

“The appellate court has denied the POB petition for rehearing,” Larry Barsetti, chair of Protect Our Benefits, said in a message last week on the website of the retiree group.

“Unless they made any changes to their ruling that we haven’t seen yet, as is possible with these things (and we won’t know that until we get the formal written denial from them, possibly Monday April 27th), the next step is to petition the California Supreme Court and attempt to have the ruling regarding the pre-1996 retirees overturned,” Barsetti wrote.

The reform, Proposition C, was the milder establishment alternative to deeper pension cuts in Proposition D by Jeff Adachi, one of the 16 candidates for mayor on the San Francisco ballot that year, including the incumbent and winner, Mayor Ed Lee.
Retirees, scattered and no longer union members, might seem unlikely to be formidable, particularly when battling a cost-cutting pension reform backed by all 11 county supervisors, business and labor groups, and 69 percent of San Francisco voters in 2011.

“The epitome of greed,” Gary Delagnes, president of the San Francisco Police Officers Association, told SF Weekly in 2012 when the retiree group began its legal challenge. Barsetti is executive secretary of Veteran Police Officers Association.

And it was the police association’s own retiree group, VPOA, that Barsetti said last week was “instrumental” in the birth of Protect Our Benefits, a political action committee financed by donations that has spent more than $225,000 on attorney fees.

Barsetti said an estimate that the supplemental COLA targeted by Proposition C would cost $300 million over the next two decades came from an actuary hired by a wealthy supporter of the measure.

“We don’t think it’s anywhere near that,” he said.

Of the nearly 27,000 San Francisco Employees Retirement System members receiving benefits last year, Barsetti said about 8,300 retired before voters approved the supplemental COLA on Nov. 5, 1996.

Retirees in the city-run pension system receive a basic COLA of up to 2 percent, depending on inflation. San Francisco voters approved a supplement on Nov. 5, 1996, that could boost the COLA to 3 percent of the pension amount.

The money for the supplemental COLA comes from pension fund investment earnings “in excess of the expected earnings on the actuarial value of assets” in the previous year.

The city pension system currently assumes investments will earn 7.5 percent a year, the same as California’s three large state retirement systems, which critics say is too optimistic.

Skimming investment earnings looks dubious after a recession and stock market crash left most public pensions underfunded. Growing pension costs are causing concern that too much money is being diverted from government programs and services.

But in the past, for example, “excess earnings” paid for a “13th check” pension bonus in San Jose and two CalPERS programs, the Investment Dividend Disbursement Account and the Extraordinary Performance Dividend Account.

All three of those programs have been discontinued. But 20 county retirement systems operating under a 1937 act can still use “excess earnings” for retiree bonuses, retiree health care or lowering employer contributions.

Barsetti’s response to criticism of skimming “excess earnings” is that the San Francisco pension system is different. Pension increases must be approved by voters, rather than bargained by unions and then approved by elected local or state lawmakers.

After initial voter approval in 1996, the supplemental COLA was strengthened by a vote in 2002 making the supplement permanent, not reducible once granted. Another vote in 2008 increased the supplement from 3 to 3.5 percent of the pension amount.

“I believe that the people who are paying the bill should have a vote,” said Barsetti.

Enjoying a surplus, the San Francisco pension system went without employer contributions from 1996 to 2004. The city became the model for requiring voter approval of pension increases in San Diego in 2006 and Orange County in 2008.

Big investment losses and a civil grand jury report in 2009 on soaring pension costs led to San Francisco voter approval of Proposition C in 2011, part of which required full or 100 percent pension funding the previous year to provide a supplemental COLA.

Because of retroactive salary and annual inflation adjustments, said the civil grand jury, pensions exceeding their highest salary on the job were being received by 60 percent of police and 55 percent of firefighters retired since 1998.

Last year the pension system was 94 percent funded using market value assets. This year employer contributions for police are 37 percent of pay, firefighters 44 percent and miscellaneous 19 percent. The aggregate employee contribution is 11 percent.

(In contrast, the California Public Employees Retirement System plan for state workers was 72 percent funded. Employer contributions are 47 percent of pay for the Highway Patrol, 25 percent for miscellaneous, and employee contributions are 6 to 11 percent.)

The grand jury report in 2009 said San Francisco employer costs, $178 million the previous year, were expected to soar to $520 million in 2011. The latest actuarial report expects employer costs to be $527 million this year, while employees pay $304 million.

In the court battle over Proposition C, the city said switching the supplemental COLA from “excess earnings” to a requirement that pensions be fully funded “clarified” voter intent in 2008 when the supplement was increased to 3.5 percent.

A superior court judge, agreeing with the city, said the “legislative history” of the previous votes showed that the supplemental COLA was tied to whether the pensions were fully funded.

“Indeed, were the Retirement Fund not fully funded in 1996, 2002 or 2008, it seems quite unlikely that the voters would have approved or extended supplemental COLAs, as they did,” the judge said.

In a 3-to-0 ruling March 27, a state appeals court overturned the superior court decision. The 2008 ballot materials “do not mention full funding,” said the panel, and Proposition C is clearly a pension cut violating “vested rights” under long-established contract law.

The appeals court also said retirees before Nov. 6, 1996, have no vested right to the supplement. The “contractual basis of a pension right” is an exchange for services, said the court, and those retirees left service before the supplement was offered.

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Originally posted at CalPensions.