Will San Jose & San Diego ‘B’ for pension reform?

The mayors of San Jose and San Diego are backing local measures on the June ballot that aim to make the change critics of costly public pensions say is the key to major reform — cutting the cost of pensions earned by current workers in the future.

Using different methods, Measure B in San Jose and Proposition B in San Diego would allow current workers to keep pension amounts already earned, but pensions earned in the future could be cut or cost workers more.

The San Jose measure would give current workers the option of switching to a lower pension or staying in the current plan and paying off pension debt with annual contribution increases of 4 percent of pay, capped at 16 percent or half the debt cost.

The San Diego proposition could impose a six-year freeze on the amount of pay used to calculate pensions and would switch all new hires, except police, to the 401(k)-style individual investment plans now common in the private sector.

A widely held view is that the courts have ruled pensions promised current workers cannot be cut, even by requiring workers to pay more toward their pensions, without providing an offsetting benefit of equal value.

But the nonpartisan Little Hoover Commission and others argue that cutting current worker pension costs is needed to prevent soaring pension costs from eating up government budgets, diverting money from other programs.

“The Legislature should give state and local governments the authority to alter the future, unaccrued retirement benefits for current public employees,” was the lead recommendation in a Little Hoover report last year.

Most public pension funds are deep in debt after a decade of below-forecast investment earnings, punctuated by a stock market crash in 2008. Critics say the retirement systems also are burdened with overly generous pensions.

The commission and others think that financially troubled government employers, who are responsible for ensuring that pensions are funded, will not get enough savings from the two standard attempts to cut government pension costs:

1) Giving new hires lower pensions may take decades to yield significant savings. 2) Getting current workers to agree through bargaining to increase worker contributions often is a temporary saving, offset by an equal benefit such as a future pay raise.

Federal courts allow private-sector pensions to lower amounts earned in the future. A law professor told the commission the state courts have not explained why future public pension amounts cannot be cut.

“Legal experts have told the commission it likely will take a financially distressed county, city or special district to scale back its promised future benefits for current employees, then attempt to defend the action in court before the Supreme Court would have an opportunity to consider a new precedent,” said the Little Hoover report.

Two state Supreme Court actions last year may not be encouraging for those seeking new precedents that weaken the legal protection of public employee retirement benefits.

The high court upheld a pension increase for years already served, the opposite of the proposals to cut pensions for years not yet served. A suit contended that a retroactive pension increase given Orange County deputy sheriffs violated a state debt limit.

Because no employer-employee contribution increase had paid for the big boost in pensions for years already served, the suit argued that the retroactive pension increase created an “unfunded liability” that was a debt exceeding the state limit.

A lower court ruled that the unfunded liability is not a debt but only an estimate based on variables, mainly investment earnings expected to provide two-thirds of pension revenues. The high court unanimously refused to hear an appeal.

In another Orange County suit, the court unanimously ruled that when local elected officials approve a retiree health care benefit, an “implied contract” can create a lifetime right to the benefit even though no resolution or ordinance specifically grants it.

The legal arguments for the San Jose and San Diego ballot measures are based in part on the fact that they operate under their own charters, rather than state general law, and have their own pension systems.

To what extent, if any, a court decision on the measures would affect the giant California Public Employees Retirement System, which covers about half of the non-federal government workers in California, or other retirement systems is not clear.

But approval of the measures might set new benchmarks for controlling pension costs and inspire more pension-reform ballot measures. Statewide pension initiatives have failed to attract funding in the past.

If voters approve the San Jose measure, unions won’t have to immediately file a legal challenge. Mayor Chuck Reed and five council members say in the ballot pamphlet that the city will seek a judicial review to minimize legal disputes.

The city has a nine-page memo from the Meyers Nave law firm outlining the legal argument for the measure and a key issue: whether increasing current employee pension contributions is a cut in pay that violates vested rights.

Citing the city charter, past practices and other things, the memo concludes that the city has “reasonable arguments” for requiring current employees to share in the cost of paying off unfunded liabilities.

“But as in any case involving vested rights, there can be no certainty as to any judicial outcome in the event of a legal challenge,” said the memo.

If the courts rule that the city cannot increase current employee contributions to pay off half of the pension unfunded liability, the San Jose measure authorizes the city to obtain similar savings by cutting the pay of current workers.

The San Diego proposition, placed on the ballot by voter signatures gathered for an initiative rather than a city council vote, is backed by Mayor Jerry Sanders and council members Carl Demaio and Kevin Faulconer.

“We researched the legal issues before we crafted the initiative,” said Lani Lutar, president of the San Diego County Taxpayers Association.

Lutar said the legal support for the six-year freeze on pay used to calculate pensions is based on provisions in the city charter and a part of the state constitution, section 5(b), that gives charter cities full authority over employee compensation.

The proposition requires the city to begin labor bargaining with the position of freezing the pay used to calculate pensions at the fiscal 2011 level. But the position can be overridden by a two-thirds vote of the city council.

“That’s a key provision we think makes it legally defensible,” said Lutar.

Proposition B in San Diego was favored by 52 percent of city voters and opposed by 29 percent, with 19 percent undecided, a shrinking lead in the latest U-T San Diego poll. There has been no public poll on Measure B in San Jose.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 7 May 12

4 Responses to “Will San Jose & San Diego ‘B’ for pension reform?”

  1. Ted Steele, Leader of the Internet Says:

    The law can be a pesky little thing, ya know, protecting people’s rights and property and stuff.

    These measures are a sad waste of time…if passed they will be struck down.

    Pension reform and col bargaining could work.

    It will take more time and more millions in legal fees for the anti pension crowd to learn this lesson yet again. Like that blowhard pol in Orange County (Moorlock) who spent millions fighting a well known loser lawsuit against all advice and odds– he lost of course and now we pay the bill and costs of the suit AND HE HAS ONE OF THE PENSIONS HE IS AGAINST!

  2. Al Moncrief Says:

    ILLINOIS RETIREMENT SECURITY INITIATIVE PUBLISHES PAPER DEFENDING PENSION RIGHTS: “IN SUM, WELCHING IS NOT A LEGAL OPTION AVAILABLE TO THE STATE.”

    The Illinois Retirement Security Initiative has published a very well-crafted and thorough legal analysis of the pension rights of Illinois’s public employees.

    The paper, written by Eric M. Madir, notes that the Illinois Supreme Court has invalidated the taking of vested pension benefits from public employees based on both the Pension Clause and the Contracts Clause of the Illinois Constitution. “The court’s principal holding that the Pension Clause (and the Contracts Clause in the public pension context) is an absolute bar to legislative impairments or reductions in pension benefits” cannot be ignored.

    The paper addresses the development of pension law in Illinois and other states, focuses on Illinois’s historical underfunding of its pension systems, and summarizes the past campaign for a constitutional pension protection provision in Illinois.

    Here is an introduction to the paper by the Illinois Retirement Security Initiative:

    http://www.ilretirementsecurity.org/reports?id=0059

    Here is a PDF (76 pages) of the paper:

    http://www.ilretirementsecurity.org/admin/reports/files/Pension-Clause-Article-Final.pdf

    I gave the paper a quick read last night and was struck by the fact that it exclusively addresses the pension rights of current workers. The idea of taking of fully-vested benefits from retirees (Colorado’s pension theft target) is so far beyond the pale that it is not even contemplated.

    Below are some excerpts from the paper (in no particular order) that I found interesting:

    First a quotation:

    “There is no moral exemption for any man or body of men that breaks contracts. Nor is there any hope of public or private respect for a contract breaker. A contract breaker is an utter misfit as a citizen or a business man.”

    —Franklin MacVeagh, former President of the Commercial Club of Chicago and U.S. Secretary of Treasury.

    Particularly relevant to the current Illinois Governor’s pension reform proposal is the following statement:

    “An Illinois Appellate Court has explained that “the [government] cannot whipsaw citizens into ‘voluntarily’ choosing one of two means by which they will be divested of an existing property interest.”

    “Public employees have paid their required fair share of pension costs; it is incumbent on the State to meet its end of the bargain.”

    “These unfunded liabilities, though, are not the fault of public employees. Public employees have historically paid their fair share of the normal cost of benefits through payroll deductions. Rather, the liabilities principally stem from the State’s decades-long failure to make its required contributions to the five pension systems.”

    “Illinois courts have long held that the General Assembly lacks the power to amend or repeal legislation that affects vested rights.”

    “The Legislature and various governors chose for decades to use the pension system as a credit card to fund public services and stave off the need for tax increases or service cuts.”

    “In sum, welching is not a legal option available to the State.”

    From the case Felt v. Judges Retirement System: “The court ‘found that a contract clause violation was not defensible as a reasonable exercise of police power.’”

    “These are the ill effects of decades of skipping pension contributions to avoid tax increases and service cuts—a circumstance Illinois Governor John Peter Altgeld described long ago as the “cost of [getting] something for nothing.”

    From an Illinois Appellate Court decision in: Sklodowski v. State: “Once rights are created by the constitution or statute, ‘It is within the realm of judicial authority to assure that the action of members of the executive branch do not deprive [individuals] of an institution of rights conferred by statute or by the Constitution.’”
    The paper includes a concept from the case Ziebell v. Forest Park Pension Fund that adds clarity to public employee pension rights where employee pension benefits have increased over time. An employee’s right to a pension benefit is protected where the employee made contributions to the pension system after an increase in a pension benefit takes effect (for example, Colorado PERA members have continued their pension contributions after past increases in the COLA benefit took effect, and therefore have a vested right to that statutory benefit.)

    The paper cites an Arizona Supreme Court decision in Yeazell v. Capins. In that case, the court held that since pension benefit rights of public employees became “vested” upon accepting employment, the legislature could not later change those rights retroactively without the mutual assent of the employee. The court also held that the fact that the employee continued to work after the statutory change took effect could not be construed as employee acquiescence or a waiver of rights.

    The Madir paper notes that even if Illinois’s pension funds were to default, pension recipients would have a cause of action to receive their pension benefits. “Pension recipients will receive their pension payments when due even if a pension fund defaults or is on the verge of default. Any state pension participant placed in such a position would have a cause of action in circuit court to enforce this guarantee and obtain payment directly from the State’s General Fund. A participant need not pursue payment before the Illinois Court of Claims and depend upon the largesse of the General Assembly.” The Illinois Supreme Court has held that “where a constitutional or statutory provision categorically commands the performance of an act, so much money as is necessary to obey the command may be disbursed without any explicit appropriation.”

    Can legislatures breach contracts and blame it on a recession?

    “Courts, though, “sit to determine questions on stormy as well as calm days,” and the Constitution was upheld during the Great Depression.”

    “As the Oregon Supreme Court stated in a similar context, “Once offered and accepted, a pension promise made by the state is not a mirage (something seen in the distance that disappears before the employee reaches retirement).”

    What can you do? Go to the saveperacola.com website, click on the “Support” tab, and send them a contribution. Call or e-mail every PERA member and retiree you know and ask them send support. Call your public employee union representatives and ask them how they can stand idly by while the Colorado Legislature attempts to breach its contracts with public employees. Colleagues of our public sector union officials across the country are aggressively defending the pension rights of their union members. What has happened in Colorado is truly bizarre.

    To follow developments in the Colorado pension theft lawsuit sign up as a Friend of Save Pera Cola on Facebook.

    Have your friends sign up as Friends of Save Pera Cola. Copy this post and e-mail it to PERA members and retirees you know.

  3. Chris Says:

    “The law can be a pesky little thing, ya know, protecting people’s rights and property and stuff.”

    You know what is even more pesky? A little thing called bankruptcy!

    You think your ilk are liked now. Wait until cities and counties go bankrupt. There will be wanted posters on the streets for teachers! And not for hire.

  4. SeeSaw Says:

    There is that pesky little thing called taxes, Chris. Pay your bills and everything will be fine.

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