Will ballot measures test vested pension rights?

A local ballot measure in San Jose and a statewide initiative, both only proposals at this point, would attempt to cut the cost of public pensions promised current workers, believed by many to be “vested rights” protected by court decisions.

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

20 Responses to “Will ballot measures test vested pension rights?”

  1. Keen Observer Says:

    How does Pellissier justify a contribution cap lower than Social Security (6.2%) for employees who are not eligible for Social Security?

  2. Captain Says:

    “A paper on vested rights issued by the California Public Employees Retirement System this month suggests the giant system… would go to court to protect the rights of its members…it seems likely that CalPERS would support a legal challenge to a precedent-setting change in vested rights.”

    Why is this a CalPERS issue? Shouldn’t this be a union issue? By CalPERS adopting an advocacy position aren’t they stepping outside their role as a pension fund manager? And aren’t they really just using taxpayer money to fight the unions fight (since we need to cover all pension fund shortfalls)?

  3. FLAK88 Says:

    Well, any court cases resulting from these ballots (and you can bet on it …) will be heard by judges who are in the state and/ or federal retirement system themselves. Do I really need to connect the dots for anyone ?

  4. john moore Says:

    The “contract clause” and the “due process” clause protect contract rights “if” there are contract rights.They do not “create ” contract rights.So for each city,it is a question of whether the voters granted the power to its’ legislative body and then did the legislative body grant “vested rights” vesting workers with the highest pension,with no reserved reduction rights. Keep in mind that voters had a veto right by referendum to set aside any legislative action purporting to grant such “vested rights” and so it must be shown that the referendum rights were protected by notice,public hearing and due process. Otherwise,the claim to such “vested rights” is a religious claim based on a God given Divine Right,and no more than that. Look to the evidence!

  5. Rex The Wonder Dog! Says:

    Future years not yet worked are NOT “vested rights”, although the public trough feeding piglets like to make that bogus claim to try to scare people into not testing the issue.

    The employee does not obtain, prior to retirement, any absolute right to fixed or specific benefits, but only to a “substantial or reasonable pension.” (Wallace v. City of Fresno (1954) 42 Cal.2d 180, 183 [265 P.2d 884].) Moreover, the employee’s eligibility for benefits can, of course, be defeated “upon the occurrence of a condition subsequent.” (Kern, supra, at p. 853.)
    864*864 (3) However, there is a strict limitation on the conditions which may modify the pension system in effect during employment. We have described the applicable principles as follows:

    “An employee’s vested contractual pension rights may be modified prior to retirement for the purpose of keeping a pension system flexible to permit adjustments in accord with changing conditions and at the same time maintain the integrity of the system. [Citations.] Such modifications must be reasonable, and it is for the courts to determine upon the facts of each case what constitutes a permissible change. To be sustained as reasonable, alterations of employees’ pension rights must bear some material relation to the theory of a pension system and its successful operation, and changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages.

    http://scholar.google.com/scholar_case?case=17080363232227008395&hl=en&as_sdt=2&as_vis=1&oi=scholarr

    BAM!! Case CLOSED, Rex wins again!

  6. Rex The Wonder Dog! Says:

    “A paper on vested rights issued by the California Public Employees Retirement System this month suggests the giant system… would go to court to protect the rights of its members…it seems likely that CalPERS would support a legal challenge to a precedent-setting change in vested rights.”

    ===============
    Of course CalTURDS will go to court-there are hundreds of billions of dollars at stake, LET THEM, they will LOSE.

  7. Captain Says:

    Rex

    Why should CalPERS even have the option of going to court? What business is it of CalPERS what rules are established or litigated? There charter is to manage and invest assets that are contributed by employees and taxpayers, and not to advocate for policies that make that mission more difficult. Am I missing something here?

    “Of course CalTURDS will go to court-there are hundreds of billions of dollars at stake, LET THEM, they will LOSE.”

    I agree with your post regarding the absurdity of CalPERS perpetuating what amounts to an “Old Wives’ Tale“, but if CalPERS were to litigate this issue it is the taxpayers that lose. Considering taxpayers cover all shortfalls in investment income, and cover all expenses of CalPERS operations, wouldn’t you agree?

    Here is more disturbing news from this article:

    “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.”

    OK, they want to protect the rights of their members – I’ve already shared my feelings. But there is more:

    “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.”

    – even if you disagree with my premise, CalPERS has no business doing anything other than managing pension contributions assets of their members & member employers/taxpayers, why are they stinking their nose into a non CalPERS pension plan? It isn’t about their members? And isn’t it taxpayer money they would spending?

  8. Captain Says:

    One more thing, why should taxpayers fund litigation that is contrary to the very reforms that most people – not working in the public sector, are asking for.

    Allowing CalPERS to fund any litigation, when the taxpayers ultimately foot the bill, is the equivalent of providing CalPERS/the Unions with a blank check!

  9. Rex The Wonder Dog! Says:

    Rex

    Why should CalPERS even have the option of going to court?
    ===============
    Well, even CalTURDS has the right to seek redress from the courts, equal protection under the law.

    I want the isseu in court-from calTURDS or one of the 20 or so other public systems. It is an issue that needs to be litigated so the answer can be known-once ad for all.

    I believe the case law posted above is very clear-future year pensions are open to be chnaged unilaterally.

    IMO ANY pension can be changed at the end of any employment contract.

  10. Rex The Wonder Dog! Says:

    One more thing, why should taxpayers fund litigation that is contrary to the very reforms that most people – not working in the public sector, are asking for.

    ======================
    If it were litigated the taxpayers could/should ask that all fees be paid out of the CalTURDS fund without the ability to seek reimbrsement from taxpayers.

  11. Captain Says:

    “Well, even CalTURDS has the right to seek redress from the courts, equal protection under the law.”

    I don’t have a problem with CalPERS seeking redress from the courts for things such as:

    – bad advice on realeastate investments that cost them 1 billion per pop

    – former executives and their illegal practices

    – pay to play scandals, etc…

    But why should taxpayers be charged for litigation that goes beyond the scope of the institutions charter? Whether or not future pension benefits can be reduced isn’t an issue within the scope of CalPERS reason for being, IMO. Their entire focus should be based on managing & investing the pension funds assets. Therefore, they shouldn’t be spending one penny on litigating future benefits or “what constitutes a vested right”. If the unions want to litigate this issue so be it – it is there fight.

  12. Tough Love Says:

    Folks …. None of this will really matter if/when the funds run out, and considering that getting more from taxpayers is not likely, nor is getting the Civil Servants to significantly ramp up their own contributions (by perhaps another 10-20% of pay), I see a HUGE pension haircut in all Participants’ future.

    Greed has consequences !

  13. Captain Says:

    TL

    I’ve been paying attention and the only significant haircut so far has been to services. Most concessions have accompanied an offsetting raise, or have provided consessions in 2011 that have followed raises in 2007-08-09-10 (the great recession).

    One thing I find interesting is that two city employee groups, from different cities, have recently agreed to pay 4% of their “city’s” pension contributions, even though they don’t even pay the employee contribution (there own portion). Looks like a new trend may be emerging in the collective bargaining process. It is sold as a cost savings by city council members but it is really just a payoff for those getting close to retirement, with little long term promise of any real savings, and at the expense of some identifiable short term savings if the employees were to instead contribute to their own (employee share) of pension contributions.

  14. Tough Love Says:

    Captain,

    I didn’t mean haircuts now … actual Pension haircuts are quite a bit down the road and then only when it’s clear that all benefits can NEVER be paid … and issues of fairness between retirees, actives , and taxpayers need to be hashed out.

    Unless there is a miraculous market surge, the relentless budgets pressures will ultimately translate into a reduction in pension accrual rates for FUTURE service for current workers (notwithstanding current legal impediments). While that will certainly help long-term, since it has no impact on the existing unfunded pension liabilities for PAST service accruals, the budget pressure to fund these shortfalls will continue. As the inability to adequately fund these leads to a deterioration in the funding ratio, we’ll start moving in the direction of those haircuts. The timetable is not only uncertain, but will vary widely from location to location.

    As to your last paragraph, it is a rare Union that “gives back” anything of material value. E.g., police in CA agreeing to change the 90%@50 to 90%@55. How many officers really started at age 20 to get 30 years by 50 ? AND, as is the usual situation, the change ONLY applies to new hires. The Unions cannot/will-not agree to the very material reductions needed …. it MUST be forced upon them

  15. Rex The Wonder Dog! Says:

    But why should taxpayers be charged for litigation that goes beyond the scope of the institutions charter?
    =============
    We shouldn’t, CalTURDS should have to pay for it with the investment earnings, or alternatively dock the pay of CEO Anne and her cronies who pursues litigation that proves to be meritlesss.

    I agree, we the taxpayers should nto be stuck with THEIR legal costs.

  16. Rex The Wonder Dog! Says:

    TL

    I’ve been paying attention and the only significant haircut so far has been to services.
    ================
    Haircut my furry butt-the public trough feeding piglets have BANKRUPTED municipal services. We don’t really have any.

    Oakland closed 14 of 18 libraries. Vallejo closed down ALL of their community services.

    What we have for “services” today is peanuts-if that.

    Gov services are bankrupted. Bankrupted by a fraudulent process of public employee collective bargaining that should be ruled illegal.

  17. Captain Says:

    “Folks …. None of this will really matter if/when the funds run out, and considering that getting more from taxpayers is not likely…”.

    TL,

    They are alredy gettiing more from the taxpayers in the form of increased contribution rates. The “normal cost” for 3@50 is about 16% of payroll. Most cities are paying close to 30% of payroll now, and the cost is going up. The only reason we’re not paying 50% of payroll has to do with the CalPERS smoothing policy (15 years vs. the industry norm of 3-5 years), amoritization of 2008-09 market losses over 30 years, and an inflated discount rate of 7.75%.

  18. Captain Says:

    “But why should taxpayers be charged for litigation that goes beyond the scope of the institutions charter?
    =============
    We shouldn’t, CalTURDS should have to pay for it with the investment earnings, or alternatively dock the pay of CEO Anne and her cronies who pursues litigation that proves to be meritlesss.”

    Rex, I’m going to disagree with you regarding docking anyones pay or expecting CalPERS would agree to not charge taxpayers for litigation costs. It would never happen.

    “I agree, we the taxpayers should nto be stuck with THEIR legal costs.”

    Rex, I agree with that. To take it a step a further, CalPERS needs to work within established guidlines. It is not within the scope of their charter to determine what those rules or guidlines should be as it relates to what is/isn’t vested, IMO.

    Vested rights is a union issue and it is the unions right to litigate. It is the unions right and it should be at the expense of the unions.

  19. Bob Smith Says:

    Never forget that it all comes out of the same pot. The distinction between “employer” and “employee” contributions is economically meaningless. It’s also meaningless in terms of actual costs if wages are increased, as the unions will likely demand should the “burden” shift to employees, and those wages will drive higher pension benefits at the back end. It is unlikely governments will be able to stay firm on both the pension *and* wage front.

    As to the idiot AG, unilateral rewriting of contracts happens all the time. It’s called “bankruptcy”. Government should not be a suicide pact, in which government employees must get what they think they deserve no matter the cost the give it to them.

  20. Houdini Says:

    60 year old firefighters?

    Just exactly how are these 60 year old firefighters going to get the work done?

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