A tale of two cities and blocked pension reforms

A San Diego city attorney urged an appeals court last week to order talks with unions on repaying 4,000 employees for pensions illegally replaced by 401(k)-style plans under an initiative, a cost some estimate could reach $100 million.

If the talks result in agreement, the city attorney suggested the pact could go back to voters for approval. Though not mentioned by the attorney, that’s what happened to another cost-cutting pension reform in San Jose also approved by two-thirds of voters in June 2012.

The two reforms had different cost-cutting curbs. But both had trouble in the courts. The San Diego reform was overturned. The San Jose reform lost a key provision. Both also were found by a powerful state labor board to have failed to bargain with unions in good faith.

In the end, San Diego seems likely to have increased pension costs, not cut them. San Jose got some cuts in pension costs, but not the big one. The winner, for better or worse, seems to be the status quo in pension protection.

Last August the state Supreme Court ruled that former San Diego Mayor Jerry Sanders, the city’s designated bargaining agent, violated state labor law when he did not bargain or “meet and confer” with unions before pushing the reform initiative.

“He consistently invoked his position as mayor and used city resources and employees to draft, promote, and support the Initiative,” the ruling said. “The city’s assertion that his support was merely that of a private citizen does not withstand objective scrutiny.”

The Supreme Court ordered a three-justice appeals court panel, which upheld the San Diego reform two years ago, to “address the appropriate judicial remedy.” The appellate court had not done so previously because of its ruling of no violation.

At the hearing last week, Travis Phelps, a city attorney, urged the court to order city bargaining with the unions on the reform initiative and any repayment for losses, possibly resulting in an alternative to the reform initiative that could be placed before voters.

An attorney for four city unions, Ann Smith, urged the court to adopt the state Public Employment Relations Board traditional order to “make employees whole for any losses” with an interest rate of 7 percent, the pension fund earnings forecast at the time.

“In every instance the status quo ante must be restored in full or otherwise employers are encouraged to violate the act” that requires bargaining, Smith said, because they could keep some of the gain.

Estimates of complying with the board order have ranged from $20 million to $100 million, depending on a variety of factors, the San Diego Union-Tribune newspaper reported last week.

Smith said the court had not received a compelling argument that the labor board abused its discretion in ordering a make whole remedy. She said the state Supreme Court ruling noted that labor board rulings have received high court deference in the past

In a suggestion apparently not mentioned in the briefs, Smith said the make whole remedy could be applied to city employees represented by unions, but not to managers and other city employees who are not members of unions

Appellate Justices Richard Huffman, Judith McConnell, Gilbert Nares

The Proposition B pension reform initiative approved by voters in 2012 has not been invalidated. New city hires are still receiving a 401(k)-style retirement plan rather than a pension.

The state labor board said it lacks the authority to invalidate the initiative. What the state Supreme Court said about invalidating the initiative resulted in a clash of metaphors at the hearing.

Smith said the Supreme Court did not tell the appeals court to invalidate Proposition B but “they dropped all the bread crumbs on that trail.” Justice Richard Huffman said he was “long past reading Supreme Court tea leaves.”

The city attorney, Phelps, argued that a voter-approved initiative can only be overturned through a separate “quo warranto” process filed in superior court. He said citizen backers of the initiative, barred from labor board proceedings, presumably could testify.

Phelps said problems would be created if the appeals court, as the union attorney urged, made a straight invalidation of the initiative without modification or ordering bargaining to seek a solution.

About 4,000 employees hired since the reform have individual vested rights to the matching employer contributions to their 401(k)-style retirement plan, 9.2 percent of pay for miscellaneous employees and 11 percent of pay for firefighters and lifeguards.

“You can’t simply take that away,” Phelps said.

Retroactively enrolling employees in the city pension plan who have been in the 401(k)-style plan would require approval of the IRS, he said, which is not a given. He said tax exemption for the city and its employees could be at risk.

Smith said a quo warranto hearing is not needed because of the Supreme Court ruling of a procedural error and that hearing from the citizen proponents doesn’t matter at this point, drawing a rebuke from Justice Huffman.

“The notion that we can invalidate their measure, based on PERB’s facts without the participation of the proponents, strikes me as not the kind of process I’m used to,” Huffman said.

Smith said the state Supreme Court has reiterated that local initiative rights are not absolute. They must be “harmonized” with statewide rights, she said, which proponents had the opportunity to do before and after the initiative passed.

An attorney for the citizen proponents of the initiative, Alena Shamos, said a make whole remedy would gut the intent of the initiative, a response to the “crisis” of high pension costs, and would be the same as invalidation.

“We would agree with the city that meet and confer would be the proper remedy,” Shamos said, which could result in fines and penalties for the city.

A PERB attorney, Joseph Eckhart, said allowing initiative rights to override state bargaining law would undermine the case as much as if there had been no violation. He said any remaining dispute after city and union bargaining would go back to the labor board.

The San Diego reform excluded police and was limited to new hires, avoiding the San Jose reform’s clash with police and the “California Rule,” a series of state court rulings that prevents cuts in the pension offered at hire unless offset with a new benefit.

A key part of the San Jose measure pushed by former Mayor Chuck Reed gave current employees an option: pay more for a pension or begin earning a smaller pension in the future.

The option for current employees who have vested rights, unlike new hires, was overturned by a superior court judge citing the California Rule. But much of the measure placed on the ballot by the city council was allowed.

Reed and other reformers thought the option for current workers might get a long-sought review of the California Rule by the state supreme court. But the superior court ruling was not appealed as the reform battle continued for three more years.

In November 2014 Councilman Sam Liccardo was elected mayor, defeating a union-backed candidate reportedly supported by an $800,000 campaign. A day later two PERB rulings said the reform measure was not bargained in good faith.

Liccardo announced a settlement in 2015 that dropped an appeal of the superior court ruling and avoided a long and costly battle over nine union lawsuits. Reed endorsed the settlement expected to save the city $3 billion over 30 years and aid police retention.

In March 2016 the city used a quo warranto procedure to repeal Measure B in superior court, allowing a more generous pension plan to attract police to a long-depleted force working mandatory overtime.

In November of that year 61 percent of San Jose voters approved Measure F, a replacement for the original reform backed by a coalition of labor and business leaders, including Liccardo and police and firefighter union officials.

Supporters said Measure F would lock in pension savings and end years of bitter union-management fighting and litigation. Opponents said it was a capitulation to unions that allowed retroactive pension increases and other cost increases.

As San Diego awaits the appeals court ruling on a Proposition B remedy, the U.S. Supreme Court announced today that it will not review the city’s appeal based on the state Supreme Court ignoring Sanders’ First Amendment free speech rights.

Click here for video of the appeals court hearing, March 11 beginning at 2:30.

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 18 Mar 2019

One Response to “A tale of two cities and blocked pension reforms”

  1. SeeSaw Says:

    Now that we know the US Supreme Ct. has decided not to intervene in the San Diego case, I think it is time to start winding this situation down. The CA Supreme Ct did not order the City of San Diego to determine what to do to rectify Prop. B which was ruled illegal because the City did not negotiate with its unions before placing the measure on the ballot. If if wants to bring this to some satisfaction for everyone without “breaking the bank” I would suggest: Invalidate Prop. B and go back to square #1. It is certainly not fair to keep the defined benefit system for its Police Department, only, while abolishing it for all other new hires. The new hires in place since 2012 should be placed on the defined benefit system effective ASAP and they could keep the 401(k) plan they were given and continuing funding it themselves if they choose.

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