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Pension Reform – The San Jose Model

Pension reform in San Jose began in June 2012 when voters, by a margin of 69% to 31%, approved Measure B. Despite overwhelming support from voters, however, this vote triggered a cascade of union funded lawsuits which by 2015 had overturned several of the key provisions of the reform measure. Finally, in August 2015, the San Jose city council passed a compromise resolution that replaced Measure B with a scaled down reform; this was approved by voters in November 2016.

The provisions of this new pension reform measure should be of keen interest to local reformers everywhere in California, because they survived relentless attacks in court. While these reforms may not prove sufficient to completely solve the challenge to adequately fund pension benefits for city workers in San Jose, they are nonetheless significant. San Jose’s current unfunded pension liability now stands at just over $3.0 billion. These reforms are estimated to save $1.7 billion over the next ten years. Here are highlights:

HIGHLIGHTS OF SAN JOSE’S 2016 PENSION REFORM

1 –  Voter approval required from now on:
Any retirement benefit – including pensions and retirement healthcare – cannot be enhanced as the result of negotiations between the city council and union leadership, unless those enhancements are first approved by voters.

2 – New employees will be subject to a reformed package of retirement benefits:
Employees hired after the following dates (Police, 8/04/2013; Fire, 1/02/2015; Misc., 9/30/2012) shall be deemed “Tier II” employees, with the following retirement benefits:

  • Cost sharing: The city shall not pay more than 50% of the normal and unfunded payments due the pension system; this will be phased in by increasing the employee share of the unfunded payment at a rate of 0.33% of additional withholding of their pay per year.
  • Age of eligibility: Police and firefighters shall be eligible for retirement benefits at age 57; miscellaneous employees at age 62.
  • Cost of living adjustments: annual COLA increases to pensions shall be limited to the lessor of the CPI index or between 2.0% and 1.25%.
  • Pension eligible compensation: Final compensation for purposes of calculating the pension shall be based on the average of the final three years of work, and (with some exceptions for police and firefighters) be limited to base pay only.
  • Cap on pension benefit: Police and fire retiree pensions are capped at 80% of pension eligible salary, for miscellaneous employees the cap is 70% of pension eligible salary.

3 – “Disability” retirements awarded by independent panel.

4 – “Supplemental Payments” discontinued:
Prior to this reform, whenever investment returns in any given year exceeded the target percentage, supplemental payments were made to retirees. This practice took place even when the pension system was carrying a significant unfunded liability. This new provision even bars supplemental payments if the fund eventually exceeds 100% funding, in order to take into account the possibility that subsequent annual returns may again fall short of projections.

5 – Defined benefit retirement healthcare discontinued:
The defined benefit retiree healthcare plan is ended and instead a Voluntary Employee Beneficiary Association (VEBA) is established for new and current Tier 2 employees. The contribution rate will be 4% into the VEBA. Tier One employees can opt-in to the new VEBA, or keep their defined benefit healthcare plan with a contribution rate of 8% of payroll.

6 – Retirement contributions fixed:
Similar in intent to item #4, even if the pension system becomes more than 100% funded, there will be no lowering of the required employee contributions to the fund via payroll withholding – again, to take into account the possibility that subsequent annual returns may again fall short of projections.

7 – No retroactive benefits enhancements:
If retirement benefits are approved by voters, they are only to apply to work performed subsequent to the date of approval. If an employee transfers into a new job with the city that offers better retirement benefits than the job they vacated, these enhancements only apply to their work subsequent to their transfer.

PENSION REFORM – SAMPLE LANGUAGE

Section 1503-A. Reservation of Voter Authority.
(a) There shall be no enhancements to defined retirement benefits in effect as of January 1, 2017, without voter approval. A defined retirement benefit is any defined post-employment benefit program, including defined benefit pension plans and defined benefit retiree healthcare benefits. An enhancement is any change to defined retirement benefits, including any change to pension or retiree healthcare benefits or retirement formula that increases the total aggregate cost of the benefit in terms of normal cost and unfunded liability as determined by the Retirement Board’s actuary. This does not include other changes which do not directly modify specific defined retirement benefits, including but not limited to any medical plan design changes, subsequent compensation increases which may increase an employee’s final compensation, or any assumption changes as determined by the Retirement Board.

(b) If the State Legislature or the voters of the State of California enact a requirement of voter approval for the continuation of defined pension benefits, the voters of the City of San Jose hereby approve the continuation of the pension benefits in existence at the time of passage of the State measure including those established by this measure.

Section 1504-A. Retirement Benefits – Tier 2.
The Tier 2 retirement plan shall include the following benefits listed below. This retirement program shall be referred to as “Tier 2” and shall be effective for employees hired on or after the following dates except as otherwise provided in this section: (1) Sworn Police Officers: August 4, 2013; (2) Sworn Firefighters: January 2, 2015 and (3) Federated: September 30, 2012. Employees initially hired before the effective date of Tier 2 shall be Tier 1 employees, even if subsequently rehired. Employees who qualify as “classic” lateral employees under the Public Employees’ Pension Reform Act and are initially hired by the City of San Jose on or after January 1, 2013, are considered Tier 1 employees.

(a) Cost Sharing. The City’s cost for the Tier 2 defined benefit plan shall not exceed 50% of the total cost of the Tier 2 defined benefit plan (both normal cost and unfunded liabilities), except as provided herein. Normal cost shall always be split 50/50.In the event an unfunded liability is determined to exist, employees will contribute toward the unfunded liability in increasing increments of 0.33% per year, with the City paying the balance of the unfunded liability, until such time that the unfunded liability is shared 50/50 between the employer and employee.

(b) Age. The age of eligibility for service retirement shall be 57 for employees in the Police and Fire Retirement Plans and 62 for employees in the Federated Retirement System. Earlier Retirement may be permitted with a reduction in pension benefit by a factor of 7% per year for employees in the Police and Fire Retirement Plan and a reduction in pension benefit by a factor of 5% per year for employees in the Federated Retirement System. An employee is not eligible for a service retirement earlier than the age of 50 for employees in the Police and Fire Retirement Plan or age 55 for employees in the Federated Retirement System. Tier 2 employees shall be eligible for a service retirement after earning five years of retirement service credit.

(c) COLA. Cost of living adjustments, or COLA, shall be equal to the increase in the Consumer Price Index (CPI), defined as San Jose – San Francisco – Oakland U.S. Bureau of Labor Statistics index, CPI-Urban Consumers, December to December, with the following limitations:

1. For Police and Fire Retirement Plan members, cost of living adjustments applicable to the retirement allowance shall be the lesser of the Consumer Price Index (CPI), or 2.0%.

2. For Federated Retirement System members, cost of living adjustments applicable to the retirement allowance shall be the lesser of CPI or:
a. 1-10 total years of City service and hired after the effective date of the implementing ordinances of the revised Tier 2: 1.25%
b. 1-10 years total years of City service and hired before the effective date of the implementing ordinances of the revised Tier 2: 1.5%
c. 11-20 total years of City service: 1.5%
d. 21-25 total years of City service: 1.75%
e. 26 or more total years of City service: 2.0%

3. The first COLA adjustment will be prorated based on the number of months retired in the first calendar year of retirement.

(d) Final Compensation. “Final compensation” shall mean the average annual earned pay of the highest three consecutive years of service. Final compensation shall be base pay only, excluding premium pays or other additional compensation, except members of the Police and Fire Plan whose pay shall include the same premium pays as Tier 1 members.

(e) Maximum Allowance and Accrual Rate. For Police and Fire Plan members, service retirement benefits shall be capped at a maximum of 80% of final compensation for an employee who has 30 or more years of service at the accrual rate contained in the Alternative Pension Reform Settlement Framework approved by City Council on August 25, 2015. For Federated Retirement System members, service retirement benefits shall be capped at a maximum of 70% of final compensation for an employee who has 35 or more years of service at the accrual rate contained in the Alternative Pension Reform Settlement Framework approved by City Council on December 15, 2015, and January 12, 2016.

(f) Year of Service. An employee will be eligible for a full year of service credit upon reaching 2080 hours of regular time worked (including paid leave, but not including overtime).

Section 1505-A. Disability Retirements.

(a) The definition of “disability” shall be that as contained in the San Jose Municipal Code in Sections 3.36.900 and 3.28.1210 as of the date of this measure.

(b) Each plan member seeking a disability retirement shall have their disability determined by a panel of medical experts appointed by the Retirement Boards.

(c) The independent panel of medical experts will make their determination based upon majority vote, which may be appealed to an administrative law judge.

Section 1506-A. Supplemental Payments to Retirees.

The Supplemental Retiree Benefit Reserve (“SRBR”) has been discontinued, and the assets returned to the appropriate retirement trust fund. In the event assets are required to be retained in the SRBR, no supplemental payments shall be permitted from that fund without voter approval. The SRBR will be replaced with a Guaranteed Purchasing Power (GPP) benefit for all Tier 1 retirees. The GPP is intended to maintain the monthly allowance for Tier 1 retirees at 75% of purchasing power of their original pension benefit effective with the date of the retiree’s retirement. The GPP will apply in limited circumstances (for example, when inflation exceeds the COLA for Tier 1 retirees for an extended period of time). Any calculated benefit will be paid annually in February.

Section 1507-A. Retiree Healthcare.

The defined benefit retiree healthcare plan will be closed to new employees as defined by the San Jose Municipal Code in Chapter 3.36, Part 1 and Chapter 3.28, Part 1. Section 1508-A. Actuarial Soundness (for both pension and retiree healthcare plans).

(a) In recognition of the interests of the taxpayers and the responsibilities to the plan beneficiaries, all pension and retiree healthcare plans shall be operated in conformance with Article XVI, Section 17 of the California Constitution. This includes but is not limited to:

1. All plans and their trustees shall assure prompt delivery of benefits and related services to participants and their beneficiaries;

2. All plans shall be subject to an annual actuarial analysis that is publicly disclosed in order to assure the plan has sufficient assets;

3. All plan trustees shall discharge their duties with respect to the system solely in the interest of, and for the exclusive purposes of providing benefits to participants and their beneficiaries, minimizing employer contributions thereto, and defraying reasonable expenses of administering the system;

4. All plan trustees shall diversify the investments of the system so as to minimize the risk of loss and maximize the rate of return, unless under the circumstances it is not prudent to do so;

5. Determine contribution rates on a stated contribution policy, developed by the retirement system boards and;

6. When investing the assets of the plans, the objective of all plan trustees shall be to maximize the rate of return without undue risk of loss while having proper regard to the funding objectives of the plans and the volatility of the plans’ contributions as a percentage of payroll.

Section 1509-A. Retirement Contributions.

There shall be no offset to normal cost contribution rates in the event plan funding exceeds 100%. Both the City and employees shall always make the full annual required plan contributions as calculated by the Retirement Board actuaries which will be in compliance with applicable laws and will ensure the qualified status under the Internal Revenue Code.

Section 1510-A. No Retroactive Defined Retirement Benefit Enhancements.

(a) Any enhancement to a member’s defined retirement benefit adopted on or after January 1, 2017, shall apply only to service performed on or after the operative date of the enhancement and shall not be applied to any service performed prior to the operative date of the enhancement.

(b) If a change to a member’s retirement membership classification or a change in employment results in an enhancement in the retirement formula or defined retirement benefits applicable to that member, except as otherwise provided under the plans as of [effective date of ordinance], that enhancement shall apply only to service performed on or after the effective date of the change and shall not be applied to any service performed prior to the effective date of the change.

(c) “Operative date” would be the date that any resolution or ordinance implementing the enhancement to a member’s defined retirement formula or defined retirement benefit adopted by the City Council becomes effective.

REFERENCES

City of San Jose, “Alternative Pension Reform Act,” 2016 (full text)
http://sanjoseca.gov/DocumentCenter/View/59737

City of San Jose, Alternative Pension Reform Act Ballot Measure – references for voters, 2016
http://www.sanjoseca.gov/index.aspx?nid=3208

City of San Jose, Framework Agreement summarizing Alternative Pension Reform Act, 2015
http://www.sanjoseca.gov/DocumentCenter/View/46068

City of San Jose, “Sustainable Retirement Benefits and Compensation Act,” 2012 (full text)
http://www.sanjoseca.gov/DocumentCenter/View/5166

City of San Jose, Measure B (Sustainable Benefits and Compensation Act) – references for voters, 2012
http://www.sanjoseca.gov/index.aspx?NID=5187

Ballotpedia – San Jose Pension Modification Agreement, Measure F (November 2016)
https://ballotpedia.org/San_Jose,_California,_Pension_Modification_Agreement,_Measure_F_(November_2016)

Ballotpedia – San Jose Pension Reform, Measure B (June 2012)
https://ballotpedia.org/San_Jose_Pension_Reform,_Measure_B_(June_2012)

San Jose Mercury News, August 25, 2015 – San Jose council approves Measure B settlement
http://www.mercurynews.com/2015/08/25/san-jose-council-approves-measure-b-settlement/

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.

Pension Battle Shifts to San Jose, San Bernardino, Stockton

Now that a federal judge in Michigan has properly ruled pension obligations are not sacrosanct (see Lesson for Union Dinosaurs) the spotlight is once again on union dinosaurs in California.

Bankrupt San Bernardino foolishly did not attempt to shed pension obligations in bankruptcy, but perhaps it can now reconsider.

What about Stockton and Vallejo?

On April 1, 2013 Judge Rules Stockton CA Bankruptcy is Valid, City Acted in Good Faith. Hopefully Stockton will follow inevitable pension cuts in Detroit.

Second Chance for Vallejo

Vallejo had a golden opportunity to shed pension obligations in its first bankruptcy. When the city failed to do so, I made an easy prediction: Within years, Vallejo would be back in bankruptcy court.

That prediction appears well-founded. On October 20, 2013 I penned Vallejo, Mired in Pension Debt Again; Lesson for Stockton and Detroit – Shed Those Pension Obligations Now!

My comment from above: “Stockton and Detroit have a choice. They can cut pensions now, or cut them later in a second bankruptcy, just like Vallejo will.

Will Stockton get it right? Hopefully, but some things will depend on Detroit. We have not yet seen the final ruling, but steep haircuts on pension promises and unsecured general bonds should be forthcoming.

Battle in San Jose

The battle in San Jose, population 983,000 and California’s third-largest city, is of a similar nature.

San Jose spends 33% of its general fund revenue on pensions, the highest among the 25 most populous U.S. cities.

Mayor Chuck Reed wants to make changes to the pension plan. Specifically, Reed, a 65-year-old Democrat, is leading a statewide voter initiative to allow changes in future benefits for existing employees.

Union Dinosaurs Part II

Of course union dinosaurs are fighting the initiative, which means unions would rather see San Jose go bankrupt than negotiate.

Bloomberg reports San Jose Pension Crush Spurs Bid to Ease California Pacts.

San Jose, a city of 983,000 that is California’s third-largest, has been forced to make deep cuts in basic services as its retirement costs soared to $245 million in 2012 from $73 million in 2002. The city’s pension and retiree health-care liability is almost $3 billion, according to Reed, who was first elected in 2006.

San Jose voters last year approved retirement changes requiring new employees to pay 50 percent of the plan’s total cost, or about twice as much as current employees. Workers already on the city’s payroll could keep their existing plans by increasing their contributions or keep their costs steady by choosing a plan with more modest benefits.

Unions including the San Jose Police Officers’ Association and the San Jose Retired Employees Association sued to block the change. The case is pending.

Reed’s ballot initiative would amend the California constitution to give local governments the power to negotiate changes to existing employees’ future pension or retiree health care, while protecting benefits they’ve already earned.

“What they’re trying to do is overturn decades of case law, Supreme Court decisions and change the California constitution to allow public employers to either change, cut or eliminate public employees’ pensions in the middle of their career,” said Dave Low, executive director of the California School Employees Association and chairman of Californians for Retirement Security, a coalition of public employees and retirees.

“It’s a vested right,” Low said.

“In talking with other mayors around the state, everybody would benefit from having clear authority to be able to negotiate changes for future benefits for work yet to be performed for current employees,” Reed said of his ballot measure.

Mayors Pat Morris of bankrupt San Bernardino, Tom Tait of Anaheim and Bill Kampe of Pacific Grove are backing the plan. Santa Ana Mayor Miguel Pulido dropped out as a formal supporter and was replaced by Vallejo Vice Mayor Stephanie Gomes. Opponents include Oakland Mayor Jean Quan and San Francisco Board of Supervisors President David Chiu.

Also assailing the plan are the California Public Employees’ Retirement System, the largest U.S. public pension, and the California State Teachers’ Retirement System, the second-biggest U.S. public pension contending with a $70 billion unfunded liability.

The proposal “threatens the retirement security of existing and future educators, who have provided many years of service to California’s students,” Jack Ehnes, the teacher pension’s chief executive officer, said in a statement.

Reed said cities can continue to cut services and raise taxes, make employees pay more, cut benefit payments to retirees or cut benefits for current employees.

“None of those is fair, so it is better to talk about changing expectations of future accruals for future work,” Reed said.

CalPERS, Oakland Mayor Against Reed’s Plan

It’s not yet official, but Oakland is as bankrupt as bankrupt can be. Why its mayor would not want to back Reed’s initiative has three possibilities: reelection motives, sheer stupidity, or to preserve her own ill-gotten pension.

Rights of Dinosaurs vs. “Right Thing” 

Dave Low, executive director of the California School Employees Association and chairman of Californians for Retirement Security, a coalition of public employees and retirees, whines “It’s a vested right“.

Low can whine all he wants, but bankruptcy is a “right” as well. And rights in bankruptcy overrule alleged rights of unions.

Speaking of which, those alleged rights were primarily obtained via a process of coercion, threats, bribery, and back-room deals with crooked politicians willing to give unions what unions want so the politicians can get elected.

What’s “right” about that?

From a taxpayer perspective, the “right thing” to do is end collective bargaining of all public unions, after-which public unions, like dinosaurs, will become rightfully extinct.

About the Author:  Mike Shedlock is the editor of the top-rated global economics blog Mish’s Global Economic Trend Analysis, offering insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education.

California Pension Reformers Plan New State Ballot Initiative

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 atsteven.greenhut@franklincenterhq.org. This article originally appeared in City Journal on July 17, 2013, entitled “Tackling the Pension Problem,” and is republished here with permission.