Former San Jose Mayor Chuck Reed and current Atlanta Mayor Kasim Reed have more in common than their last names. Both have the same broad pension story. But last week, Atlanta had a very different ending.
With growing pension costs eating into their city budgets, the two men pushed through reforms that could require employees to pay more for their pensions — up to 16 percent of pay more in San Jose, up to 10 percent of pay more in Atlanta.
Both were accused of pension reforms that led to police flight, depleting the force and reducing public safety. The two mayors, both lawyers, said city laws (the charter in San Jose’s case) say that pensions can be changed.
But in both cities, the employees or unions filed lawsuits contending their pension benefits are “vested rights,” protected by contract law, that can only be reduced if offset by a comparable new benefit.
Two years ago a superior court judge ruled the San Jose employee contribution increase violated employee vested rights. The city dropped the appeal this year in a settlement of the lawsuits against Measure B, approved by 69 percent of voters in 2012.
Last week the Georgia Supreme Court ruled the Atlanta employee pension contribution increase, approved by the city council four years ago, did not violate the vested rights of employees.
“Today’s ruling allows one of the most comprehensive and effective examples of pension reform in the United States of America to move forward,” Atlanta Mayor Reed said in a statement.
“Thanks to pension reform, 30 years from now the city will have saved more than $500 million and a pension deficit that was once protected to be over $1.5 billion will be zero,” he said.
For employers trying to cut pension costs, getting employees to pay more for their pensions can be important but difficult.
When the debt or “unfunded liability” soars, as happened after huge pension investment fund losses during the recession, it’s the employer or taxpayers who must pay to close funding gaps, not employees.
Employee rates are usually set by labor bargaining. Increases, if any, are relatively small. Some of the biggest come when employers, who agreed in bargaining to pay the employee rate, end the “pension pickup” or “employer paid member contribution.”
An extreme example of how employers pay more than employees is the city of Vallejo. The rate paid by police and firefighters, 9 percent of pay in CalPERS reports, was little changed during a 3½-year bankruptcy that ended in November 2011.
The employer rate, 28.3 percent of pay in 2009, is 57.6 percent of pay this year, and projected to be 72 percent in 2020. In the latest CalPERS report (June 30, 2013), the plan only had 64.6 percent of the projected assets needed to pay future pensions.
The powerful California Public Employees Retirement System, following projections by its actuaries, can raise employer rates. But CalPERS cannot raise the rates paid by employees.
A pension reform Gov. Brown pushed through the Legislature three years ago calls for a 50-50 split between the employer and employee of the “normal” cost, the pension earned during a year excluding the debt from previous years.
But the normal cost tends to be stable and a small part of total cost. In the Vallejo plan, the current normal cost is 18.6 percent of pay. The rate for unfunded debt from past years is twice that amount, 39 percent, bringing the total to 57.6 percent of pay.
The superior court ruling that blocked the San Jose employee contribution increase was based on what is often called the “California rule.”
A series of state court decisions, one in a 1955 Long Beach case, are widely believed to mean that the pension offered on the date of hire becomes a vested right, protected by contract law, that can only be cut if offset by a comparable new benefit.
The California rule was observed last year when the Legislature approved a rate increase for the California State Teachers Retirement System, which unlike CalPERS and other public pension systems has only tightly limited power to raise employer rates.
The teacher rate increase was limited to an amount said to be offset by a new benefit: An annual pension cost-of-living adjustment of 2 percent, a routine practice that could be suspended, was converted to a vested right.
Teachers and school districts had been paying nearly equal rates, 8 and 8.25 percent of pay, respectively. The teacher rate increase is a maximum of 2.25 percent of pay, increasing the rate for most from 8 percent of pay to 10.25 percent of pay.
The rate for school districts and other employers more than doubles, increasing in seven annual steps from 8.25 percent of pay to 19.1 percent of pay by 2020. A separate rate paid by the state, a total of 5.5 percent of pay, increases to 8.8 percent of pay.
Georgia is not among the dozen states that have adopted the California rule, according to Amy Monahan, a University of Minnesota law professor, in “Statutes as Contracts? The ‘California Rule’ and Its Impact on Public Pension Reform.”
The unanimous Georgia Supreme Court ruling cited several supporting rulings in Georgia courts while concluding that pension plans can be changed without violating vested rights, if change is clearly allowed by the pension contract.
The court said all three Atlanta pension plans contain language saying enrollment “shall constitute the irrevocable consent of the applicant to participate under the provisions of this act, as amended, or as may hereafter be amended.”
San Jose pointed to two city charter sections that say the city council has the power and the right to change, or repeal and replace, any of the city’s retirement plans or systems.
Superior Court Judge Patricia Lucas cited several California rule cases, including Allen v. City of Long Beach (1955): “Changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages.”
In the key part of her ruling on the rate increase, Lucas cited a state Supreme Court ruling, Legislature v. Eu (1991), and a footnote in a state appeals court ruling, Walsh v. Board of Administration (1992).
“Accordingly, this court concludes that a reservation of rights does not of itself preclude the creation of vested rights,” Lucas said.
Former San Jose Mayor Chuck Reed and former San Diego Councilman Carl DeMaio are leading a bipartisan group that is trying to put a pension reform initiative on the statewide November ballot next year.
After filing an initiative in June, the group refiled two initiatives last month, quickly amended. They want to avoid a ballot summary from Attorney General Kamala Harris suggesting the vested rights of current workers would be eliminated.