A statewide constitutional initiative planned for 2014 would tackle the biggest obstacle to meaningful pension reform: vested benefits. Right now, with certain exceptions, California municipalities may not reduce pension benefits for current employees—unlike in the private sector, where employers can change the terms of employees’ current pension plans, making them less generous. The courts have said that benefit increases, even retroactive ones, constitute binding contracts that must be paid for the life of all current employees. The ballot measure, largely conceptual at this point, would allow cities to change future pension benefits. San Jose voters did that last year, voting to change benefit levels for current employees.
The initiative will probably also include a requirement that all agencies offering defined-benefit plans put them up for a vote. These plans impose debt on the public, so reformers reason that voters should have a say in whether to approve any new plans or change existing ones, as San Jose did. The measure would also likely include limits on pension-spiking and governance reforms for the union-dominated California Public Employees’ Retirement System (CalPERS).
Unions are already challenging San Jose’s June 2012 ballot initiative, as well as a similar measure San Diego voters approved that same month, in court. They understand that these reforms, if allowed to stand, threaten to demolish the status quo. San Jose officials believe that they have a strong chance to prevail because of the way their city charter is written, but not all California municipalities are charter cities. It’s unclear what a favorable court ruling for San Jose would mean for them.
The unions are waging their fight against pension reform in the hope of blunting San Jose’s effects statewide. A Monterey County superior court ruled recently that a pension initiative passed in Pacific Grove is unconstitutional because it rolls back benefits for current employees. Like San Jose, Pacific Grove is a charter city, but each city’s charter is different. The Monterey County judge ruled that Pacific Grove’s charter vests compensation power in the hands of the city council, not voters. The court reaffirmed that “what is vested in the employee is the right to earn a pension on the terms promised to him or her upon employment.” Therefore “no subsequent legislation . . . can take these rights away once given.” The Peace Officers Research Association of California (PORAC)—a union group best known for bankrolling the defenses of police officers accused of wrongdoing—funded the case, knowing that it would have statewide implications. Organizations such as PORAC will be ready when a reform initiative reaches the statewide ballot.
Meantime, CalPERS is worried that municipal bankruptcies elsewhere could undermine the state pension fund’s income stream. In San Bernardino, for example, city officials have stopped making contributions to the fund. Stockton’s bankruptcy is still winding through the courts, but a central question remains whether CalPERS must join other creditors in taking a haircut. To avoid similar debacles during future (practically inevitable) municipal bankruptcies, CalPERS is lobbying for a bill that would make it easier for the state pension fund to put liens on city assets. The city of Vallejo, which has emerged from bankruptcy, is headed into the fiscal morass again because it never embraced the kind of rollbacks that reformers say are necessary.
The now-concluded strike by Bay Area Rapid Transit (BART) workers underscores the ongoing pension struggles local governments face. Union members clearly prefer stopping work to helping pay for their benefits. As the liberal Contra Costa Times editorial board put it: “They’re already the top-paid transit system employees in the region and among the best in the nation. They also have free pensions, health care coverage for their entire family for just $92 a month and the same sweet medical insurance deal when they retire after just five years on the job.” As the editorial points out, BART’s pension and retirement-benefit debt is a whopping $636 million, while the transit system faces a $142 million operating deficit in the coming decade. BART has also piled up billions in deferred maintenance and repair costs. Something’s got to give.
Pensions will remain big news, if the BART strike is any indicator. And reformers have suffered a number of setbacks in recent months. In November, prominent San Diego pension reformer Carl DeMaio lost his bid to become mayor to Bob Filner, a union-friendly Democrat, and Democrats gained supermajorities in both houses of the state legislature, thus assuring the defeat of any pension-reform measure. Even the so-called Democratic moderates who hold increased power in Sacramento are uninterested in further reform. A year ago, mayors of California’s eight largest cities sent a letter to the state senate and assembly leadership arguing, “Cities need clear authority to modify future pension accruals and to give their employees an option to choose a lower-cost benefit.” The legislature never responded.
It remains to be seen whether reformers can generate enough funding to run a viable statewide initiative campaign. Union spokespeople continue to portray them as the tools of Wall Street and right-wing groups. But reformers—many of whom gathered in May in Sacramento to plot strategy—are a remarkably diverse group. And there’s no reason to think that last year’s setbacks will be permanent, despite the unions’ wishful thinking. “Today, we spend $1 out of every $7 on pension and benefit costs for city employees; by 2018, it will be one out of every $4,”observed San Francisco public defender Jeff Adachi, an outspoken liberal Democrat. Conservatives aren’t the only ones concerned about the problem.
Steven Greenhut is vice president of journalism at the Franklin Center for Government and Public Integrity and a contributor to City Journal’s new collection, The Beholden State: California’s Lost Promise and How to Recapture It. Write to him firstname.lastname@example.org. This article originally appeared in City Journal on July 17, 2013, entitled “Tackling the Pension Problem,” and is republished here with permission.