San Jose, San Diego pension reforms go to court

Two California cities attracting national attention for big pension-reform votes look like they are on the same path — court filings last week to speed up legal decisions, and city council meetings this week to consider plans for new hires.

But the public pension reforms approved by 66.25 percent of voters in San Diego, the state’s second largest city, and by 69.58 percent of voters in San Jose, the third largest, are not the same and face different problems.

The San Diego plan is more radical for new hires, placing them in a 401(k)-style investment plan. The San Jose new-hire plan set limits (employees pay half, employers no more than 9 percent of pay, later retirement ages) but could be a smaller pension.

Many private-sector employers switched from pensions to 401(k) plans and make fixed payments to an employee’s tax-deferred investment plan, avoiding risky long-term pension debt. Some doubt that most 401(k)s provide adequate retirement security.

The San Jose plan is more radical for current workers, allowing them to switch to a lower pension or pay more to keep their existing pension. The San Diego plan directs the city to bargain with unions for a six-year freeze on pay used to calculate pensions.

Both plans allow current workers to keep pension amounts already earned, only reducing future amounts. The nonpartisan Little Hoover Commission argues that cutting current pensions is the only way to give struggling governments significant savings now.

Some unions agree to reduce soaring government pension costs (others holdout) by giving new hires lower pensions and increasing contributions from current workers. But lower pensions for new hires can take decades to yield sizable savings.

When employees contribute more of their pay toward pensions, government employers can lower their contributions by a similar amount. But the government savings are limited and often temporary, offset by an equal benefit such as a delayed pay raise.

Unions take the widely held view that the courts have ruled that pensions promised government employees on the date of hire are a “vested right,” protected by contract law, that can be cut only if a benefit of equal value is provided.

In San Jose, this issue was tackled head on by the measure placed on the ballot by a council led by Mayor Chuck Reed. The city asked a federal court last week for an expedited ruling on whether Measure B violates vested rights and due process guarantees.

The employee contribution option does not take effect until June 23 next year, a “grace period” to allow time for a court decision. The city filing said a decision is urgent because soaring pension costs are diverting money from essential services.

Retirement costs were $107 million in fiscal 2009-10, will soar to $245 million next fiscal year and are projected to be $319 million in 2014-15, about 24 percent of the general fund.

The city argued that Measure B does not violate employee vested rights because San Jose is a charter city with “plenary authority” and has reserved the right to amend city retirement plans, particularly to cover unfunded liabilities.

“City practices confirm this authority,” said the city filing. “For these reasons, the City has retained the right for the City’s voters to make changes to employee contribution rates and to make the other changes in Measure B.”

The police union and several firefighters, who are in one of the two San Jose city retirement systems, filed separate suits last week asking a superior court to overturn Measure B.

Going beyond contract law and due process, the San Jose Police Officers Association suit adds several other violations.

The measure allows workers to keep their current pensions by increasing their contributions by up to 16 percent of pay or until half the unfunded liability is covered. But if this provision is overturned, the measure calls for an equivalent pay cut.

The police suit calls this a “poison pill” and a violation of the right to free speech and to petition the courts.

“Despite serving in the capital of Silicon Valley, San Jose Police Officers are among the lowest paid Police Officers in the Bay Area,” the suit said. The union agreed to a 10 percent pay cut last year.

The suit argues that Measure B violates Proposition 162, a constitutional amendment backed by labor in 1992 after former Gov. Pete Wilson “raided” CalPERS funds, cut state worker pensions and gave lawmakers control of the CalPERS actuary.

While giving public pensions total control of their funds and rate-setting actuaries, the initiative also gave pension boards the “fiduciary” duty of placing the interests of current and future retirees above the interests of taxpayers, which previously were equal.

The suit argues that the measure compromises the fiduciary duty of the pension board by compelling the board to “ensure fair and equitable treatment for current and future plan members and taxpayers with respect to the costs of the plans.”

Since at least last January, said the police suit, the city has known that its plan to give current employees the choice of lower pensions or higher contributions “will not receive IRS approval in 2012 and is likely never to receive such approval.”

In San Diego, Proposition B requires the city to begin labor bargaining with the initial position of freezing the pay used to calculate pensions at the current level through June 30, 2018.

This provision can be overridden by a vote of six of the eight city council members. The measure apparently would allow pay increases, if they are not used in pension calculations.

If a union agreed to freeze pensionable pay, it’s possible that a legal challenge might come from individuals. If the city imposes a freeze after going through a lengthy bargaining process, a legal challenge from unions seems likely.

City attorney Jan Goldsmith asked the state court of appeal last week to rule on unfair labor practice complaints to the state Public Employment Relations Board from five unions. He wants to avoid lengthy hearings that could delay voter-approved reforms.

The unions contend that the city failed to bargain with unions before the wage-and-benefit initiative went on the ballot, violating a court ruling. San Jose extended talks to ensure compliance with the rule before the council placed the measure on the ballot.

Goldsmith argued that when Mayor Jerry Sanders and Councilmen Carl DeMaio and Kevin Faulconer led a signature-gathering drive for the initiative, Proposition B, they were acting as individuals, not a city council covered by the bargaining rule.

A union filing with the court of appeal last April said the “citizen’s initiative” was “merely the pretextual means for the Mayor and other City officials” to get the initiative on the ballot without having to “meet and confer” with the union.

The Public Employment Relations Board unsuccessfully tried to get a court to block the initiative from the ballot. The union said public employees throughout the state depend on the board to determine whether labor laws are being violated.

As “pension reform issues sweep the state,” said the union, other employers may copy San Diego’s “brazen” undermining of bargaining and “contemptuous behavior” toward the board. The filing quoted a Goldsmith radio interview last February.

“I think what they (PERB) do more than anything else is sit down and have coffee with the unions,” Goldsmith, a former assemblyman, told KFMB. “They are owned and operated by labor unions. As is most of Sacramento by the way.”

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 11 Jun 12

13 Responses to “San Jose, San Diego pension reforms go to court”

  1. Tough Love Says:

    Sue sue sue ….

    Someone should manufacture a load of mirrors and pass them out to all those suing, so when their Plans fail (due to their greed) they’ll easily see who to blame.

  2. UptightTO Says:

    “Unions take the widely held view that the courts have ruled that pensions promised government employees on the date of hire are a “vested right,” protected by contract law, that can be cut only if a benefit of equal value is provided.” I’m not a lawyer so I have no idea if my thought on this matter has any validity but here go’s …If the contract law government unions hang their hat on was negotiated with and enacted by politicains on the take then shouldn’t the law be set aside until after an investigation into what many now believe is a corrupted process?

  3. Jan Goldsmith Says:

    Ed, when a city council places a measure on the ballot, it must first be negotiated with the labor unions. Not so when citizens place a measure on the ballot via petitions signed by the requisite number of registered voters. In San Diego, 116,000 registered voters signed the petition gaining ballot access.

    Once the signatures are submitted, the constitution states it gets on the ballot and the city cannot change it. There is nothing to negotiate.

    PERB and the labor unions want to change the distinction between a city council sponsored proposition and a citizens initiative in order to deter future citizens-based pension initiatives supported by a mayor. Each judge who has ruled on this thus far has pointed out that PERB and the labor unions have no law to support this legal position. That hasn’t stopped them from fighting on for their cause.

    PERB is four people, including a relatively new general counsel who is a labor activist and a 3-person board with a labor activist majority.

  4. spension Says:

    And so it goes. Odd how it rarely gets mentioned that a fair number of non-union public positions have generous pensions, like, say, Dean Chris Edley of Boalt Hall, the law school at UC Berkeley.

    Or that the generous pensions and golden parachutes given to executives in the private sector influence both non-union and union employees in the public sector.

    But it was and is wrong to saddle the taxpayer with filling the divot from lower-than-projected gains in the securities markets. Although the securities markets have been particularly corrupt since the 1990’s, frankly they were never clean enough to rely upon. All public pension funds should have been invested in lower risk, lower rate securities, and lower pension benefits promised.

    Now California is between the devil and the deep blue sea. Darn it. I think the best move remains: pensioners and vested employees devise a sequence of cuts that preserve, say, the first $45K of income per 30 years of service credit (so, if you have 10 years of service credit, the first $15K is protected), and then progressively trim amounts above that. Protect the low end and trim the high end.

    If not, the ballot box and/or sovereign default will do less rational things to pensioners. Maybe all health benefits, which are not usually vested, will disappear, for example.

  5. spension Says:

    Whoops meant to add… 401(k)s are a terrible solution. More expensive, less well invested, just a turd in the teacup.

  6. SeeSaw Says:

    I don’t know how Jan Goldsmith considers the San Diego initaitive one put forth and passed by the people. It was put forth by the Mayor and one Councilman, who hired the consultants, who hired the $8 per signature- gatherers to take the petitions door-to-door, and indoctrinate the residents with the Council’s propaganda. The people of SD might just choke on that kool-aid, once the initiative is ruled on, by the judicial branch of our state government.

  7. Captain Says:

    Seesaw,

    Just what do you have against the voters. Tax payers want pension reform. That message is clear.

    UptightTO,

    The unions have been perpetuating “the old wives tale” that their pensions can be made retroactive but can’t be modified going forward; the definition of having your cake and eating it too. Unfortunately for the unions the court decisions they’re hanging their reputation on are weak at best. The union threats of litigating all challengers is about to be met head-on.

    Let’s roll!

  8. UptightTO Says:

    Lets Roll…

  9. SkippingDog Says:

    Captain – I think you’ll find the court decisions supporting what you call “the old wives tale” to be far more legally robust than you’re willing to credit, but we will certainly see more visible evidence in the near future.

    Remember, it was the California Supreme Court that denied review of the matter attempting to reverse negotiated pension improvements for Orange County law enforcement employees, thereby reasserting the same “weak cases” cited by the Court of Appeals.

    If the San Jose and San Diego propositions survive legal scrutiny at all, it will be in a much more limited form and application than their supporters and cheerleaders hope.

  10. skippingdog Says:

    Interesting idea, UptightTO, but that’s not the way either our law or litigation works. Other than the fact that you may not like the outcome of a law, what would lead you to conclude it was either illegally passed or the product of a corrupt process? If that were the case, wouldn’t your position require that all laws passed by that same corrupted process would also be defunct?

    I’ve attached a link to the controlling California law on public pensions for your enjoyment.

    http://scocal.stanford.edu/opinion/betts-v-board-administration-30508

  11. Ted Steele, Head Renter, it's cozy up here in Poodle's tiny head! Says:

    Skipdog– I have read every Calif and most US published pension cases and you are very correct. While there are some good ideas in these new plans— the other side seems unable to learn the reality that the solution for them is at the col bargaining table.They seem to enjoy pouring taxpayer legal fees down the black hole. OC was a 5 mil dollar mistake by Moorlock after being told over and over not to do it…..as Vonnegut would say…..and so it goes….

  12. UptightTO Says:

    I’m not lawyer but suspect you are Skippingdog. I’m just your average construction worker who with my hard working wife, we kept our heads down, saved for a rainy day, paid our bills and raised three terrific kids so I can’t intelligently argue the merits of Betts v. Board of Administration , August 17, 1978.

    But let me tell you what gripes me is that folks like you and Ted Steele who had our admiration and confidence to police our streets and respond to life threatning situations seem to take delight that while we worked so hard to take care of our own you guys were taking us to the cleaners via your Police and Fire unions. That you guys who we put our complete trust in to adminster justice for all turn a blind eye to obvious collusion between your unions and the politicans they buy. Your attitude comes through loud and clear You don’t care how we got it, It’s ours now and you Mr. private citizen can go pound sand. What was once true still is…Collective bargining corrupts democratic priciples and the idea that you have some inalienable right to collective bargaining with the public is preposterous. Such collective bargaining is a privilege public workers have obtained by exercising their political muscle, and state officials around the country are right to try to roll it back to the extent they can.

    One last thing…The same guy who pins a badge on his chest and expects the respect of those he serves should be not allow anything to tarnish that badge. True? Yet you seem to not care if a growing number of hard pressed private sector folks think of you as bandits when you take the uniform off.

  13. Captain Says:

    “SkippingDog Says: Captain – I think you’ll find the court decisions supporting what you call “the old wives tale” to be far more legally robust than you’re willing to credit, but we will certainly see more visible evidence in the near future.”

    Then you should have nothing to worry about, right skip?

    Bring it on. While I disagree with your analysis it is time to settle the argument once and for all. I’m all for it!

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