Public pensions: new moves to shift or cut costs

Two charter cities, San Diego and Pacific Grove, are taking action that could shift more of soaring pension costs to employees, and a law firm that specializes in employee benefits says local governments may have “more latitude” than they think to cut costs.

As governments face higher annual payments to pension funds, covering huge investment losses in the stock market crash and what critics say are overly generous benefits, two ways to cut employer costs are common:

Negotiations with labor unions to (1) increase employee payments into the pension fund, and (2) give new employees lower pensions.

Now two of the 108 cities that operate under their own charters, rather than general law, are pursuing a lawsuit in San Diego and a voter-approved ballot measure in Pacific Grove that could force more of the pension burden on to employees.

The two cities are basing the action on provisions in their charters that, if not unique, are not widely shared. But the attempt to cut costs by reducing the employer share is drawing attention.

The suit filed by the San Diego city attorney, Jan Goldsmith, contends that a previously ignored provision in the city charter calls for “substantially equal” pension contributions from the city and employees.

City pension contributions in Pacific Grove would be limited to 10 percent of pay under a measure approved by 74 percent of the voters last month, reinforcing an earlier city council action. A police union filed a lawsuit to overturn Measure R.

In most public pensions, the government employer often contributes much more than the employee. Pacific Grove police contribute 9 percent of pay, while the city contributes 19 percent of pay.

Many cities pay the employee share designated in pension formulas offered through the California Public Employees Retirement System. Under a reform pushed by some city manager groups last year, employees would begin paying part of their share.

The largest state worker union recently agreed to a reform pushed by Gov. Schwarzenegger that increases the employee contribution from 5 to 8 percent of pay. The state contribution is 20 percent of pay.

In contrast, the current private sector contribution for federal Social Security, 12.4 percent of pay for most workers, is split equally between the employer and the employee.

The pension funds in San Diego and Pacific Grove have not been well-managed. Possible bankruptcy has been mentioned in both cities as pension costs eat up more of their budgets, diverting funds from other programs.

San Diego, dubbed “Enron by the Sea“ in the national media, twice dropped city contributions below the actuarially required amount in deals that also raised pension benefits. Lawsuits, probes, a moratorium on bond sales and budget cuts followed.

The San Diego pension fund has a $2.1 billion deficit but recently gave $5.2 million in bonuses to 6,630 retirees, averaging $784 each, the San Diego Union-Tribune reported last week. The “13th check” is a vested right as investment earnings improve.

The San Diego lawsuit was cited as a pension consultant, who made presentations to the watchdog Little Hoover Commission and a CalPERS meeting earlier this year, said he has changed his view about whether employees should help pay off pension debt.

“The next frontier in raising incumbent employee contribution rates may be the employees’ share of unfunded liabilities,” Girard Miller wrote in his column in the October issue of Governing magazine.

Pacific Grove, a city of about 15,000 on the scenic Monterey peninsula, has a pension system operated through CalPERS. The city issued a $19 million pension bond in 2006 to cover benefit increases in 2002 and investment losses a year earlier.

The pension bond is costing the city $1.3 million to $1.6 million a year for 30 years. But despite the bond, the city’s pension debt or unfunded liability has ballooned after the stock market crash to an estimated $28 million to $34 million.

Voters approved an advisory measure in 2008 for a switch from pensions to a 401(k)-style individual investment plan. But some said paying off the debt if the pension plan closed would be too expensive.

The new measure limiting city contributions to 10 percent of pay gives unions options when they negotiate new labor contracts. For example, they could choose a 401(k)-style plan or pay pension costs left unpaid by the city under the new cap.

Pacific Grove bases the 10 percent cap on a provision in its charter that says city employees serve “at will” without the usual civil service protection. As a result, the city contends, employees do not have vested rights to employment or a specific pension plan.

An attempt to impose the 10 percent cap is likely to trigger more lawsuits. The police union suit, similar to a previous regulatory complaint, only contends that the city council acted without formally consulting with unions as required by state law.

The measure placed on the ballot by the city conformed the charter with the city council’s approval of the 10 percent cap. The council chose to enact an initiative written by a citizen group led by Dan Davis, rather than place the initiative itself on the ballot.

At a council meeting on July 23 available by video over the Internet, the lone councilman opposed to the measure said he feared an expensive legal battle, a “long shot” that could be damaging to the city.

Still, Councilman Bill Kampe said he hopes the 10 percent cap succeeds, echoing others who suggested that Pacific Grove may be blazing a trail for other cities desperate for pension relief.

“I hope it does,” said Kampe. “It would be to the benefit not only of Pacific Grove but a lot of cities in California if this proves to be successful.”

Another way to reduce public pension costs, also likely to be challenged in court, would be to lower pension benefits not just for new employees, but for current employees as well.

The conventional view is that the courts have ruled that once an employee is vested in a public pension, the benefits are a contract that cannot be cut. So pension cuts are usually limited to new hires not yet vested in the plan.

But a law firm in Folsom that specializes in employee benefits argues, after taking a close look at court rulings, that governments may be able to make reasonable reductions in pension benefits not yet earned, particularly if needed to preserve the pension system.

The pension benefits (based on years of service and final pay) already earned by time on the job would not be touched. But the theory is that pension benefits that the employee continues to earn in the future could be cut.

Jeffrey Chang made the argument in a paper presented last March 4 to the Northern California Chapter of the International Public Management Association, “Employer Benefits: Identifying Solutions in Difficult Economic Times.”

Another version on the website of his law firm, Chang Rothenberg & Long, makes a similar point:

“A close reading of the pertinent cases suggests that a public employee’s right to a pension benefit is not inviolate, but may be changed or even eliminated under appropriate circumstances.”

At least one major public pension, the University of California Retirement Plan, explicitly guarantees pension benefits earned or “accrued,” but not benefits yet to be earned by time on the job.

“Unlike most statutory or legislated state plans, the terms of UCRP reserve to the Regents the right to change future accruals of UCRP benefits for current faculty and staff,” said a staff presentation to the Regents last September.

A footnote added: “The application of this provision has not been tested in a court of law.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Posted 7 Dec 10

23 Responses to “Public pensions: new moves to shift or cut costs”

  1. Bruce Says:

    Modestly lowering forward-going accrual rates for all employees, as opposed to just setting up a new tier for the newly hired, seems to be obviously the most equitable way to treat workers. This even while cutting costs faster. That everyone connected to CalPERS denies it is legally possible seems based on a misunderstanding, but this particular myth is deeply engrained.

  2. Algy Moncrief Says:


    What do the Colorado Legislature and Bernie Madoff have in common? Both stole retirement benefits that were earned over many decades.

    We have 80-year old widows in Colorado, who worked hard for the State for thirty years, who trusted the State and made their pension contributions like clockwork for decades, only to see their contracted retirement incomes stolen by the State. This money was taken out of their pockets because the State failed to make pension contributions as recommended by their own actuaries, to the tune of $2.7 billion in the last seven years. If the state had responsibly followed the recommendations of its actuaries, the PERA trust funds would now be more than 90 percent funded. The Colorado pension shortfall is primarily a result of legislative action over the last decade, Bill Owens, et al, in 2000 cut contributions and allowed the purchase of cheap service credit, and now the Legislature wants retirees to bear the cost of legislative ineptitude. In testimony to the Legislature even the proponents of the reform bill acknowledged this historic under-funding of the pension. PERA claims that the pension fund was unsustainable without their actions, because the funded ratio of the pension stands at 68 percent. However, the funded ratio of the pension was in the low 50 percent range in the 1970s, and the pension still exists. If a funded ratio of 68 percent this year is unsustainable, how has the pension been sustained since the 1970s when the funded ratio was in the 50s? Not much of a rationale for breaking retiree contracts.

    If you find yourself short on funds, you rearrange your spending priorities, or raise additional revenue, YOU DON’T BREAK CONTRACTS! Why would the Colorado Legislature choose to break pension contracts before breaking other contracts, such as construction contracts? How can a state that is in default, that breaks contracts, maintain its credit rating?

    The fact that what Colorado did to public sector employees in this year’s pension reform bill (SB1) cannot be done to private sector employee pensions under I.R.C. Section 411(d)(6), says quite a lot about the moral underpinnings of SB1. This federal “anti-cutback rule” for private sector DB plans permits changes to the plans only if the changes operate on a prospective basis.

    Colorado PERA’s actions make it clear that the time has come for the inclusion of public defined benefit plans under all Internal Revenue Code Qualified Plan requirements. It is now obvious that allowing the states to regulate public defined benefit plans does not afford equal protection to state and local government employees.

    PERA has put it in writing in pension plan materials over the years, that the COLA “is guaranteed”. Members purchasing service credit gave PERA thousands of dollars based on these materials. Money that they could have left in their 401Ks. PERA officials now claim that the members cannot rely on their pension plan documents regarding their defined benefits. However, Goldman Sachs recently paid a half billion dollar settlement to the SEC based on promises made in plan documents. Apparently, some judges believe that plan documents can set forth contractual terms. In any event, the contractual pension language is set forth clearly in Colorado law.

    Colorado’s retiree COLA (and those of 36 other states) are “automatic COLAs” as opposed to “ad hoc COLAs” (which exist in about a dozen states and can be periodically altered.) Colorado’s COLA of 3.5 percent is guaranteed in Colorado law in an identical fashion to the base retirement benefit itself. So, the PERA retiree’s claims are based on both statutory language and plan documents. This 3.5 percent COLA won’t look so hot in the coming years if inflation spikes.

    The Colorado pension reform bill’s (SB1) proponents should accept that states cannot legislate away a debt for work that was completed in the past. What the state is attempting is a claw back of deferred pay. The bill’s sponsors should accept that states cannot avoid their contractual obligations simply because they prefer to spend resources on alternative public services or obligations.

    Some pension reform advocates argue that public sector pensions should be held to the same standards as private sector pensions. My response to that is “I agree wholeheartedly!” Under the federal Internal Revenue Code reducing accrued pension benefits for private pensions is illegal. If the public sector PERA pension were covered under this I.R.C. law and held to the same standards as private pensions, then last February’s theft of accrued benefits by the Colorado Legislature would not have been attempted. Essentially, federal law provides higher protection to private pensions than it does to public sector pensions. Public pension members are forced to appeal to the courts to prevent the theft of their benefits. (Happening.)

    Members of the Legislature pointed out many times, to no avail, that the so called “pension reform bill” was a violation of contracts to which the State was a party. Here are some examples (on tape from the floor debate):

    Rep. Lambert: “I have heard from my constituents, as many of you have, that this proposal will breach retiree’s contracts.”
    Rep. Swalm: “We’re breaking new territory in this state by trying to reduce the COLA. We’re probably going to get a lawsuit out of that. If we cut the 3.5 percent COLA there will be a lawsuit.
    Rep. Gerou said that it is a disservice to the state to rush a bill through when her committee knew that it will go to litigation, and said what we are doing to the retirees is wrong.
    Rep. Delgroso said that it is tough for him to tell people that he is going to break their contract.
    Senator Harvey said “We have made a commitment. We have a contract with current retirees. That is already in place. Reforms should be made for new hires. We do not have that commitment to new hires.
    Senator Spence said “The bill places an unfair burden on retirees.”
    Senator Scheffel said “We are breaching our promises to existing retirees.”
    Senator Lundberg said “This bill is a deal that was cut before this body met.”

    The cavalier abandonment of contractual obligations brings shame to the state of Colorado, aligns Colorado with Third World countries like Bolivia. No person, Republican or Democrat should countenance the breach of contracts. Conservatives support contract law as the foundation of capitalism.

    So, why is the SB1 theft more egregious than the Madoff theft? The Colorado Legislature stole money from retirees who are less well off than Madoff’s pre-qualified hedge fund clients.

    The Madoff victims were taking risks to seek a higher return on their investments, the Colorado PERA victims simply trusted that their contracts would be honored.

    Colorado PERA and the Legislature justified their theft on false premises, citing 2008 market numbers when they knew the markets had recovered approximately 20 percent in 2009. PERA’s General Counsel stated on tape before the 2010 legislative session began that he expected a pension return “north of 15 percent”) for 2009.

    It appears that Colorado PERA used the very resources of PERA members to hire a team of lobbyists (up to a dozen) to take earned benefits from those same members. That’s just insane.

    Many members of the Legislature acted in ignorance. Spoonfed by the lobbyists, they ignored the legal rights of PERA retirees, and swallowed whole without question the assertions of PERA’s CEO and its chief legal counsel. If the members had read any case law, (for example, the state defined benefit pension case law summary by Prof. Amy Monahan at the University of Minnesota School of Law, Google it!), or even the 2004 Colorado AG opinion on pension benefits (retiree benefits are inviolate) they would not have supported the bill.

    PERA’s own General Counsel was quoted in a 2008 Denver Post article as follows: “The attorney general’s opinion seems clear that fully vested employees — those retired or with enough years of service to retire — cannot see any benefits reduced, including cost-of-living adjustments, Smith said.”

    Although members of the Colorado PERA Board of Trustees are fiduciaries, charged to act only in the interests of the members and the retirees, they recommended SB1, acting primarily in the interests of PERA employers who were concerned with keeping their contribution rates low.

    Adding insult to injury the Legislature stole more money than it needed. The pension theft bill sought to increase PERA’s funded level to 100 percent, although an 80 percent funded level is considered well-funded among pension experts. You don’t have to pay off your mortgage tomorrow, and PERA doesn’t have to pay off all of its pension obligations tomorrow.

    There were many other options available to address the pension shortfall, options that have been adopted, or are under consideration in dozens of states. See the legal, prospective pension reform that was accomplished in Utah this year.

    Members of the Legislature have taken an oath to uphold the constitution and yet voted to violate the Contract Clause and the Takings Clause. Proponents of the bill refused to see that the retiree COLA (annual benefit increase) is set forth in Colorado law with the same force, status and weight as is the base retirement benefit. Only tortured legal reasoning, and wishful thinking, lead them to believe otherwise.

    The Legislature had the ability to investigate the legality of its actions up front, but chose to act with no legal advice. Throughout the floor and committee debates on SB1 the members displayed an ignorance of, or an intentional disregard for the relevant case law. They failed to conduct the due diligence expected of an elected body. State legislatures across the nation are examining the legal limitations on their actions regarding pension reform, exploring all legal options prior to acting. (PERA claimed to have a legal opinion to justify their actions, but never released it.)

    PERA has been disingenuous by claiming that the reform bill represents “shared sacrifice” among employees, employers, and retirees, by not making it clear that retirees bear most of the burden of their proposed reforms, for many retirees the confiscation of benefits will reach one-quarter of their total retirement benefits received over the rest of their lives. In debate, the bill’s sponsors said that retirees would bear 90 percent of the cost of the reform. In any event, I am not relieved of my contractual obligations just because someone else has better terms in their contract. The entire premise is ludicrous.

    While ignoring its own contractual pension obligations (underfunding of $2.7 billion in the last seven years according to PERA’s own actuaries) the State of Colorado has pumped half a billion dollars into pension obligations that are not its responsibility, those of local governments (Old Fire Police Pension obligations).

    The Legislature made a pact with unions to support the “pension reform bill” (SB1) to protect union jobs. Incredibly, these union members tossed their former members, their retired “brothers” under the bus. From the beginning the plan was “let’s steal the money we need from retirees.”

    Finally, Madoff eventually admitted to his crime, but the Colorado General Assembly is still pretending that their theft of pension benefits is something to be celebrated. They tout it as a “bi-partisan accomplishment. This will be a long-standing embarrassment to and black mark on our state.

  3. Tough Love Says:

    Quoting …”Voters approved an advisory measure in 2008 for a switch from pensions to a 401(k)-style individual investment plan. But some said paying off the debt if the pension plan closed would be too expensive.”

    Although I personally believe ALL Public sector workers should be in 401K style plans (by freezing the DB plan and shifting to DC Plans for Current workers), lets address this quote.

    Assuming it applies only to new employees, it’s complete nonsense. Sure, the contributions of the new employees (as well as the city’s contributions therefore) would cease, but THESE contributions are really not available to pay for the long timers in the Plan. They’re probably even insufficient to fund the formula benefits promised to the new employees. The argument that ceasing this source of revenue is problematic is smoke and mirrors. IF you spend the NEW workers’ contributions to pay for the retirement of the older workers, someday your going to have to make up for the amounts taken (with interest).

    Yes, there WILL be pain by the shift to a 401K Plan. but the reality is that it CANNOT be avoided, and the sooner it’s addressed the smaller and more manageable it will be.

  4. Tough Love Says:

    Bruce said …”Modestly lowering forward-going accrual rates for all employees, as opposed to just setting up a new tier for the newly hired, seems to be obviously the most equitable way to treat workers.”

    I’m from the school of NJ’s Gov. Chris Christie …. ZERO BS.

    Why a “Modest” reduction (remembering this is only for future service)?

    The reduction should bring the formula, years of service, retirement age, # of years included in the calculation of the pensionable compensation, the inclusion (or NOT) of COLAs , allowances, sick time, vacation time, etc …. IMMEDIATELY and FULLY in line with the average Private sector taxpayers.

    And YES, that will lead to VERY significant reductions ….. but ONLY because our Civil Servants are NOW getting GROSSLY EXCESSIVE pensions & benefits.

  5. Rex The Wonder Dog! Says:

    Please BAN Algy Moncrief from posting here-he has posted that same book long spam post on every pension site on the west coast multiple times, including this one.

  6. mickjag Says:

    “the benefits are a contract that cannot be cut”, from the old 70’s song chorus “you don’t get me I’m part of the union”. Too bad tough love, you will be paying taxes for my pension for a long time!

  7. Tough Love Says:

    mickjaq, I doubt that. The song on the horizon is …. “When the money’s gone, it’s GONE”.

    I can hear you whining: …

    But I was promised
    But I was promised
    But I was promised …………

  8. Tough Love Says:

    John Stossel (from ABC) summed it up quite well:

    “…. governments are monopolies. They face no competition and get their money by force. So they can conspire with public-sector unions to milk taxpayers. That explains the fix we’re in today.”

    The “FIX” is for taxpayers to renege on these uncouth arrangements.

  9. mickjag Says:

    time will tell…see you here in fifteen years when I’m still collecting and you’re still bitching

  10. Tough Love Says:

    If Americas elected officials don’t wise up (which includes ending the Excessive pensions & benefits given to Civil Servants) we’ll all be working for China in 15 years

  11. mickjag Says:

    Not to get overly patriotic here but my Dad fought as a marine in WWII. I hate to see what would have happened if he and his fellow comrades had your defeatist attitude. Jeez, in “fifteen years we all will be working for China”. give me a break, buck up and move forward and collectively maybe we can solve these problems.

  12. davew Says:

    MickJag – don’t worry you’re not even mildly patriotic. Your dad was in WW2? How does that make you in any sense patriotic? I’m guessing because you didn’t write anything that you never served? Just milked the taxpayers for excessive salary and benefits?

  13. Tough Love Says:

    Mickjag said …”buck up and move forward and collectively maybe we can solve these problems.”

    Collectively ?

    Your obviously one of the Civil Servants “milking the taxpayers” (quoting from John Stossel above).

    What are YOU offering except to continue feeding at the trough ?

  14. Charles Sainte Claire Says:

    The largest state worker union recently agreed to a reform pushed by Gov. Schwarzenegger that increases the employee contribution from 5 to 8 percent of pay. The state contribution is 20 percent of pay.

    In contrast, the current private sector contribution for federal Social Security, 12.4 percent of pay for most workers, is split equally between the employer and the employee.

    Sorry Sir, but you are mentally challenged. The private employee pays Both halves of the 12.4%. Employers have a bottom line for salaries. They have to make a profit or go out of business. And the same with the State or California. That twenty percent comes out of salary. If the State did not have to pay that, and gave it to you in salary, 20% of gross pay, you would indeed be a millionaire in short order.

  15. Tough Love Says:

    Charles, You’re the one who claims to be the brilliant engineer ….

    You’d think that you’d realize your position it idiotic because the TYPICAL Civil Servant pension (at the SAME salary level) is 4+ TIMES that of the Social Security.

    So your getting 4X the pension for half the cost (in total) and YOUR share AFTER the increase to 8% is only slightly more than the employees SS contribution who gets 1/4 the benefit.

    Either you realized this … and conveniently chose to ignore it …. or after you 40 year career, you’ve become senile !


    And that …”20% comes out of salary” is BULL …. it’s coming out of the taxpayer’s hide.

  16. joan joaquin Says:

    I worked for the City & Co. of San Francisco for more than 30 years and paid 8.25% toward my pension all that time. I have been retired since 1986 and with COL raises now receive about 100% of my last salary – $32K annually. It’s different now and I don’t think the employees pay anything toward their pensions. I have no idea how or when it changed but I know we have a big deficit, also that proposed changes failed in the last election.

  17. Tough Love Says:

    Joan, We all realize that the $33 K you are now receiving is hardly providing a luxurious lifestyle, but needn’t we feel MORE for the equivalently paid Private sector worker (who likely made too little to save on their own) who now gets perhaps only $10K annually from Social Security.

    That’s the problem … (no offense), but it’s unfair Civil Servants get more … while Private sector taxpayers pay for 80-90% of it.

    That being said, I’ll qualify it in your case. Since you retired so long ago, during MOST of your career it’s likely that your cash wages WERE less than your Private Sector counterparts and therefore (for fairness) your pension should be greater. That’s true for those retiring long ago, but certainly NOT for more recent or future retirees since cash wages in the public sector now generally exceed those in comparable Private sector jobs.

  18. john moore Says:

    I live in Pacific Grove. Except for a possible “meet and confer” BlIB that many electors feel was conspiratory,Pacific Grove will establish its’ pension reform. But it will still have an 80 million dollar pension liability to deal with,that even with pension reform,may put the City in bankruptcy,which would be the best immediate course of action. It should quit screwing around and hire bankruptcy counsel fortwith.

  19. Jan Goldsmith Says:


    A motion heard in September tested the legal sufficiency of our “substantially equal” claim. We were successful in defending the motion. The full hearing on the merits is scheduled for February.

    Thanks for maintaining this blog. It is helpful in sharing information on this common issue and raising new ideas. But, I miss you at the Union Tribune.

    My best,

    Jan Goldsmith
    San Diego City Attorney

  20. davew Says:

    I know Mr. Goldsmith has commented in the past that he didn’t think canceling public pensions in bankruptcy was an option – he specifically recently said that no municipal pensions have ever been canceled in U.S. history. I wish he would comment on the recent article here that supposes that canceling future benefits for current employees (i.e. years not yet worked) may be viable and that Vallejo was specifically allowed to do it but opted not to.

  21. john moore Says:

    Vallejo was not specifically allowed to cancel future benefits for work not yet performed. It simply did not request pension relief that affected pension benefits.It has never explained why. There is a strong argument that based on the courts’ ruling that MOUs’ can be rejected in a Chap 9,just like in a Chap 11,a city in a Chap 9 could get pension relief similar to an entity in an 11. What Atty Chang asserts in his memo,is that outside of Chap 9,a city can reduce pension benefits for work not yet performed,especially if pension liabilities have put a city totally under water. The reform in Pacific Grove does not affect pensions for work already performed and for work to be performed under the POA MOU,which expires at the end of 2012. As to non-POA and the POA as of Jan.1,2013 the reform will apply. Pension liabilities in Pacific Grove have put Pacific Grove totally under water. Another question related to Vallejo is whether it can get relief against Calpers for the 180 million dollars unfunded deficit that Calpers has created. Evidently Vallejo is going to attempt to get some relief from that burden in its’ PLAN, otherwise the Chap 9 was probably a waste of time.

  22. Tough Love Says:


    Below is an article from the listings in today’s pensiontsunami website. It looks like the Republicans are cooking up a big surprise for the Civil Servant Unions (not that accomplishing it will be easy)

    I can’t think of anything better for America’s Private Sector taxpayers …. so long overdue !

  23. facebook’ta sayfa açmak Says:

    “time will tell…see you here in fifteen years when I’m still collecting and you’re still bitching”

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