Pension reform initiative would ‘empower’ cities

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.”

Mayor Reed addresses pension conference

Mayor Reed addresses pension conference

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.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com. Posted 14 Oct 13

16 Responses to “Pension reform initiative would ‘empower’ cities”

  1. Mike Genest Says:

    I think my good friend, Steve Maviglio, is right: pension reform on the ballot will be a rallying cry for the public employee unions. That’s sad, of course, because reformers like Reed actually ARE trying to save pensions and do right by not only this generation of public employees, but the next. Doing right does not always mean doing more. While CalPERS state level funds are OK for now, CalSTRS and many local pension funds (including some in CalPERS) are in deep trouble. No question that, despite ongoing budget constraints, something is going to have to be done to infuse substantially more money into CalSTRS and many things (unpleasant things like lay offs, for example) are already being done at the local level around the state. How can we not, at the same time, attempt to address the longer term stability and sustainability of public employee pensions?

  2. Watch Dog Says:

    Reed is nothing but a puppet for former Enron executive John Arnold who is bankrolling Reed’s attempt to break promises to current cops, firefighters, nurses, teachers and school counselors. The Reed math is easy, screw workers out of what was promised them and take that money and dole it out to corporations and developers.

    http://www.thedailyfetch.com/2013/09/27/daily-fetch-9-27-13-fetch-exclusive-document-reveals-chuck-reed-funneled-200000-from-shadow-texas-group-to-sv-chamber-to-change-californias-constitution/

  3. Mike Genest Says:

    Watch Dog, that’s insane. Reed got into
    pension reform the hard way, by being forced to lay off firemen and police and reduce work on street maintenance and other key services. He did NOT want to do that but the escalating costs of pensions left him and the other 3 democrats on the city council no choice (the one Republican saw the same picture and also voted with the Mayor).

    Pension reform is NOT about screwing workers, killing unions and enriching billionaires. It’s about maintaining public services and rewarding public servants as handsomely as is actually fiscally possible. It’s about real math, not make believe.

  4. John Moore Says:

    The CaLPERS defined benefit system is mathematically destined to destroy every member-entity in the system. And for many cities, like Pacific Grove, even mayor Reed’s proposed reform may be, and probably is too late. Pacific Grove’s annual revenue is about 15 million dollars. Its pension liability, including pension bonds, about 80 million(about $27,000. per parcel).

  5. Mike Genest Says:

    I’m big on pension reform, but I disagree with John Moore’s assertion that DB is designed to destroy member entities.

    In fact, it is the member entities who have set their own doom in motion. If a DB is properly administered, such that it uses a very conservative discount rate (but a more aggressive investment strategy than such a discount rate would imply) and if the employers using the system always pay the full normal costs, properly calculated, such a DB would be fine. But, what that all means is that politicians and the unions who put them in office would have honestly faced the true costs of the pension benefits they granted over time. Had this happened in the past, it’s very likely that the member entities would have provided lower cost pensions and the employees would have accepted somewhat lower wages.

    The problem with DB’s is not the DB structure. It is the governance. And, when the governance consists of a virtual conspiracy of false optimism implicitly designed to understate the full costs of the DB, you get these massive UUAL’s. Maybe I don’t disagree with Mr. Moore so much after all.

  6. CJRoses Says:

    Mike – that is correct. DBs in an of themselves are not destructive, it is the way we have chosen to define them (90% of last salary e.g.) and fund them that is destroying the state. See passage of SB 400 where Calpers testimony was basically fraudulent. We are where we are and need to fix now.

    THANK YOU Chuck Reed for being the only elected Democrat in the state (save Jeff Adachi SF) with a spine to address a tough problem.

  7. RSpringbok Says:

    As soon as California voters hear this proposition is funded by an ex-Enron executive from Texas, it is dead on arrival. Californians have consistently rejected propositions funded by wealthy out of state interests.

  8. NTHEOC Says:

    Watch dog, you are right on target!!! We will expose these billionaire pigs like we did with prop 32 and other anti worker initiatives! The people of California have always shown strong support for their teachers,police officers and firefighters. I can’t wait to start hanging signs and knocking on doors! Btw, when are we going to have a ballot that says the people can have a say when they pay their mortgages and what percent it should be set, and not the pig banks? When can people change contracts and obligations as they so choose whenever they want, it’s pretty much the same thing as the pension reform idiots preach!

  9. Tough Love Says:

    Of course it won’t be easy …. Public Sector Unions/workers are perhaps the greediest organizations/people on earth.

  10. Tough Love Says:

    Hey NTHEOC, Lots of “pigs” in that comment. Have you looked in the mirror lately ? Oink Oink.

  11. Bille Says:

    Hey ToughLove, you don’t think Wall Street is greedy? They are doing “the Lord’s work” for little pay and no pension?

    Let’s see, who did the taxpayers bailout again? CalSTRS? CalPERS? You and your 457 and 401k? Well, yes, but twas Wall Street and the GREEDY Banksters and bond raters the PIGS in the financial services industry who brought this calamity to all of us.

    Yup, WE the taxpayers paid for it all and now you want to take a measley pension from someone who works 30-40 years for that promise.

    Why would any contract be worth the toilet paper is was written on if this goes through?

    LOOK!! Over there! A dolphin! Made you look didn’t I?

  12. Bille Says:

    John Arnold helped bankrupt Enron. How is it he could walk away with billions while the shareholders and employees who invested in the company for their retirement lost billions? Why that just can’t be true that Enron no longer exists under the “Free Market” capitalism with 401Ks. But Arnold, Fastow and Lay and others have all their riches at the expense of everyone else including utility rate payers. Oh yeah, Lay died but his widow got to keep the money. Anybody see Lay’s body? I’ve at least seen Obama’s birth certificate.

  13. Captain Says:

    Billie, CalPERS set this mess in motion. CalPERS senior staff has perpetuated the problem with their many illegal shennagans. The union dominated Board of Administration claims from one side of that mouth that city management is to blame, while the other side of their mouth says wall street is to blame. At no point, past or present, have they ever accepted one ounce of responsibility for anything. Make no mistake, this is one of the worst and most destructive agencies in the state.

    Google “CalPERS and Corruption”.

  14. Bille Says:

    Please explain what you mean by “CalPERS set this mess in motion”? CalPERS is cannot make laws or change laws or accounting rules. Also, the Board has elected members and members appointed by the governor. The last Governor stacked the Board with his appointees. He also promised to run KaleeFornia like a business. How did he do?

    The Board meetings are open to the public and you can speak there just like at City Council meetings, Water Board meetings etc. You can still speak your mind in public as long as you are not creating an unsanitary situation. At that point you get tased or pepper-sprayed and hauled off to jail. When did you last speak? You can demand that they take responsibility.

    Responsibility? Again I will be interested to hear a more full explanation. We have been through the greatest financial rip-off in the history of the world and how many people have been prosecuted and are currently in jail for destroying not just our economy but the world economy? Anybody? Anybody? Bueller? Madoff? Talk to me about responsibility when the prosecutions begin like they did with the S&L’s in the late 80’s. And even those were paltry by any standard. Today you get to pay a fine and admit no wrongdoing in private industry even for violating the “Trading With Enemies Act”.

    I recommend you Google “Home Ownership Society”, “Glass-Steagle Act”, “stock market crash 2008″; “bailout nation”; “inside job” and anything related to stock market and crash together.

    I have no idea what you mean by “most destructive agency”. CalPERS is an investor. Anytime you invest in a company, you are an owner of that company and you have a right as an owner to hold the management running your business accountable. They are often referred to as an “activist investor” but so is Carl Icahn and Warren Buffett and…

  15. RSpringbok Says:

    Here’s what I don’t like about Reed’s ballot prop.: if a city or county wants to cut pensions in bankruptcy, they have to prove to a federal judge they really are broke. Under Reed’s proposition, the city or county makes its own finding they are underfunded. The bar is too low, too easy for cities to grab pension funds for projects. Need $500 million for a new sports arena? No need to raise taxes, just break pension contracts and take it from the retirees…

  16. Mike Genest Says:

    RSpringok: I think you have a misunderstanding. Reed’s initiative could not and does not take away or reduce anyone’s pensions. Those already retired would not be affected by it at all. Those still working would not lose any of the benefits they have already earned, but could begin accruing at a lower rate for future pay periods.

    In fact, the only way to reduce retirees pensions is bankruptcy. So, if Reed’s initiative helps a local government avoid bankruptcy, it only strengthens the position of retirees.

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