San Jose Court's Flawed Decision Strikes Down Heart of Measure B Pension Reform

In November of 2013, the San Jose voters approved a Charter Amendment that made measured changes and reductions in the cost of the City pension plan. The changes did in fact require greater contributions by the employees and reduced the value of the existing plan to current employees.

The employee unions and others sued the city, contending that current city employees had statutory contract rights which under California case law could not be modified. The court agreed and found the key modifications were illegal and unenforceable.

With due respect, the court was wrong in two major ways: First, the 1965 San Jose Charter specifically provided that all pension plans authorized by the Charter or the City were subject to modification and could even be repealed, and Second, The court misapplied the modification of pension provision set forth in the seminal vested rights pension cases—Kern v. City of Long Beach and Allen v. City of Long Beach.

New Hires after the Effective Date Of The 1965 San Jose City Charter Were Subject to the Charter powers to Modify and/or Repeal Pensions

The court correctly found that under Ca. Rules for determining a vested contract for a pension, San Jose had met all of the criteria. The only question was whether the power set forth in the 1965 Charter granting the city council the power to amend and/or repeal all pensions prevented the city from modifying pensions as attempted by Measure B. The court bent beyond permissible backwardness to rule that the reservation of the right to amend or repeal did not prevent the city employees from acquiring “vested contract rights” to a pension that could not be modified or repealed.

In making its ruling, the court over-looked that under the rules of Kern/Allen, all San Jose employees, except for those who were employed prior to the 1965 Charter containing the amend/or repeal provisions became effective, were “new employees” whose pension rights may always be eliminated or altered even without a reservation of the power to amend and repeal. In the instant case all of the parties “conceded” that Measure B applied to new hires, which makes my point. In Kern/Allen Long Beach had terminated all pensions. “New hires” received no pension at all until years later when the city joined CalPERS. Cases that find a vested right to a pension often state that upon accepting employment, the employee acquires an irrevocable right to the pension that existed at that time. Since 1965, all new City of San Jose hires accepted employment with constructive knowledge that the pension available at the time of hire was amendable and even subject to repeal.

Here is how the judge in the San Jose pension case arrived at its ruling. In the 1960’s California went from a part time to full time legislature. Also, there was substantial re-districting that pushed many legislators out of office. There was a need to increase salaries and pensions for full time legislators and to provide pensions for legislators who were pushed out. So the legislature enacted a series of pension laws to fix the problems from the disruptions. In one instance it enacted a bill that allowed certain legislators to draw pensions immediately after leaving the legislature without waiting for the minimum age limit. In the case of one senator Walsh, that act allowed him to begin receiving his pension 14 years prior to the previous minimum retirement age. The early pension was not funded and the legislature had a change of heart.

Relying on Article IV, section 4, paragraph 3, of the state constitution the legislature rescinded the early retirement act, and thereby, Walsh’s early pension. That section said, in relevant part: “The Legislature may, prior to their retirement, limit the retirement benefits payable to members of the legislature who serve during or after the term commencing in 1967.” Walsh sued claiming a vested right to the early pension. The court, relying on the quoted language found that the rescission was valid.

But the San Jose judge referred to footnote 6 of the Walsh opinion which said that its decision may have been different in the Eu case if benefits for retired legislators had not been funded or subject to a continuing appropriation. Which takes us to Legislators v. Eu.

In Eu, the infamous state-wide initiative, proposition 140 was at issue. Among other things, it terminated pensions for legislators and placed them under social security. That obviously violated the sitting legislator’s vested pension rights per Kern. In footnote 6, the court said: “We have no doubt that incumbent members of the Legislature had contractually vested pension rights under the LRL (Legislature Retirement Law) which would be protected under the contract clause. The question whether a former member of the Legislature acquired a contractual right to a wholly unmodifiable pension benefit when he served during a time when the LRL was neither actuarially funded nor supported by a continuing appropriation, was not a question which was implicated in the Legislature v. Eu decision.” The San Jose trial judge cited this footnote as the KEY to its finding that the power to amend and/or repeal all pensions as set forth in the 1965 City Charter , did not prevent new hires after the 1965 Charter from acquiring vested rights to pensions that could not be impaired in spite of the Charter power to amend/repeal pensions.

The judge, ignoring that the San Jose employees were “new hires” under the 1965 Charter read into that footnote that if a pension plan was actuarially funded, or subject to a continuing appropriation, it was untouchable and could not be impaired. Yes, the logic escapes me too. If anything, I read footnote 6, in Walsh as implying that if the LRL for retired Legislators was both unfunded and without a continuing appropriation, then the pension switch to social security as set forth in Prop. 140 may have been upheld. And since when do trial judges make serious legal decisions based on dicta contained in a confusing footnote of an appellate decision? What about the clear language of the Charter?

Also, the court made a monumental leap in describing the limited modification right set forth in Walsh as a “reservation of rights.” It was clearly a very limited modification right appropriate for rapidly changing circumstances. At best it was a provision to correct oversights, not a condition precedent to pension benefits as set forth in the City’s 1965 Charter. To treat the two as equal led to the court’s flawed decision. All scholars agree that reservation of the right to amend pensions for employees hired after the effective date of the reservation are subject to its terms. If a city can terminate pensions for new hires, then obviously it may take the less impairment path to make modifications to the reduce the cost of the plan.

The San Jose Charter provisions gave the city the specific power to modify or even repeal pensions, consistent with Kern/Allen. The attorneys who drafted the 1965 Charter had obviously read Kern/Allen. They knew that Long Beach had been allowed to terminate pensions for “new hires.”That was clearly the reason for the modify/repeal Articles in the 1965 Charter.

Section 1503 of the San Jose Charter (never amended to date), in effect prior to any plaintiff’s “date of hire” said: “However, subject to other provisions of this Article, the Council shall at all times have the power and the right to repeal and amend any such retirement system or systems,…” The first rule of statutory construction is the “plain meaning rule.” If the meaning of the statute or charter is clear that ends it. Nothing could be plainer as it related to “new hires.” The Charter provision was and is a clear power to modify or repeal pensions. To demean it as only equal to the over-sight power of the legislature involved in the Walsh case did not justify the trial courts conclusion that the amend/repeal provisions of the City Charter were meaningless. Remember, there is a presumption of legality that applies to the Charter.

Mis-application of Kern and Allen

In Kern and Allen, the court dealt with the impact of a termination of all city pensions on the rights of current employees as of the date of termination. In Kern, it found that as to current employees, their pension rights could not be affected by the termination of pension rights. Thereafter, the city attempted to reduce the value of those pension rights and in Allen, the Court held that it could not do so. The termination of pension rights as to “New Hires” was not and could not be challenged.

Both Kern and Allen were cases that did NOT involve the issue of whether the cost of the pension plan was so out of hand that it threatened the integrity(the ability to pay reasonable pensions) of the City pension system. The Court made it clear that the rules concerning modification were entirely different in such cases and cited several material modifications (reductions in benefits) that it had allowed in previous cases so that Agencies could preserve the integrity of its pension system. In the reduction cases off-setting replacement of reduced benefits was NOT required. In one of the reduction cases, the court had allowed a reduction of 2/3 to 1/2 of final salary without off-setting benefits.

The mis-application of Kern/Allen arose because of non-attorneys not understanding that the off-setting benefits rule applied only to cases where the integrity of the pension system was not in jeopardy. Also, City Attorney’s in concert with employee unions consistently mis-advised the city and the courts.

But the appellate courts share blame, because they often cite the canard that pensions may not be impaired without equal off-setting benefits without clearly stating that per Kern/Allen that rule only applies in cases where the integrity of the pension system is not threatened. Re-read Kern. What I have just said is clear. Kern v. City of Long Beach(1947) 29 Cal. 2d. 128.

In the San Jose case, the financial evidence showed that the pension system lacked “integrity” and was threatening the pension system. Therefore, the reduction in the value of employee pension arising from the adoption of Measure B by the people were valid per Kern.

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Click here to read more posts by John Moore.

About the Author:  John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34749) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. John graduated from San Jose State College with majors in Political Science and Economics (summa cum laude). He then received a JD from The Stanford School of Law and practiced business and trial law for 40 years before retiring. In 1987, he was the founding partner of a Sacramento law firm that he formed in 1987 to take advantage of the increased bankruptcies brought about by the Tax Act of 1986. Although Moore did not file and manage bankruptcy cases, he represented clients in numerous litigation matters before the bankruptcy court, including several cases before judge Klein, the current judge of the Stockton bankruptcy case. Moore is an admirer of Judge Klein, for his ability and accuracy on the law. As managing partner at his law firm, Moore understood the goals of bankruptcy filings and its benefits and limitations.

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