Pension Reforms Go to the Courts

What's next after California's recent landslide elections?
by | June 21, 2012

Voters in San Diego and San Jose recently handed union officials their worst defeats ever, on the pension reform battleground. By 2-to-1 majorities, electors in both conservative San Diego and liberal San Jose said that enough is enough, approving ballot measures that have now begun their journey to the California Supreme Court. Both proposals contained legally unsettled provisions to "move the cheese" of incumbent public employees with regard to their future accruals of pension benefits. Both measures pit constitutionally protected "home rule" powers of charter cities against the supposed rights of government employees to never see a change in their retirement plan -- even for work to be performed in the future.

Meanwhile, the California legislature continues to dither over Gov. Jerry Brown's sensible 12-point proposal to reform statewide pension laws, clearly ignoring the current mood of electors. We'll know by June 28 whether the Democrat-controlled legislature will put a constitutional pension-reform proposal before voters this November, or whether they will instead patch something together as a statute that can be reversed by a simple majority in the future -- or worse, do nothing. Unions are being urged from several corners to put something -- anything -- on the ballot this fall and title it pension reform, in hopes that if voters approve something this year, that will vent the mounting pressure to make even more radical changes in the next statewide election. The thinking there is that voters will eventually tire of the pension reform topic, and unions can thereafter claim they "solved that problem in 2012." Needless to say, the taxpayer groups are unlikely to put down their tomahawks if the Governor's proposal is watered down too much, so the sufficiency of any dilutive legislative package will be debated fiercely.

Returning to the local legal issues heading into the courts, the cities will argue that as home-rule charter cities, they have plenary powers to set their own compensation plans. Unions will argue that all public employees regardless of the employer have contractual rights (implied in this case) to continue to earn benefits at an unreduced rate for their future service. I've never been a big fan of the idea that employees obtain a vested right to the lifetime continuation of their benefits formula from the minute they walk in the door, and these two cases will clearly give the California courts an opportunity to settle that issue. If the "vested implied contractual right to continuation" argument is upheld to be a contract right under California jurisprudence, then both cities will have to return to the drawing boards for some but not all of their pension reforms.

Legal expert Amy Monahan has weighed in with her summary of the issues and some high-level views, which are well worth reading. Her new article contains a link to a précis on California pension-contract law that is especially noteworthy in today's context.

In San Diego, the vested-rights claim won't trump the right of voters to institute a 401(k)-style defined contribution plan for new hires, although there might be a legal issue over whether that needs to be negotiated with the unions first. The key issue in San Diego is whether the city can freeze the pension-eligible component of pay regardless of the actual salaries paid. If the city simply freezes the workers' salaries through collective bargaining, then the issue becomes moot, so there might be a chance yet for a compromise through a creative solution that sidesteps the pension formula. Given the 2011 experience with a negotiated settlement for the city's retirement medical (OPEB) benefits, I wouldn't rule out that outcome.

In San Jose, the most controversial feature of the city's pension reform plan is the requirement for incumbent employees to pay up to 16 percent more of their pay hereafter if they wish to continue accruing pension benefits under the current formula. Otherwise, they have to accept the new, lower benefits level that will be installed for new hires. Thus, the key issue here is whether an employer can impose a radically higher contribution rate on existing employees. The California teachers have obtained a private legal opinion that such action in their realm would violate the state's contract law, but that remains a theory not a decision. Thus, the San Jose litigation will have broad implications statewide. Unions will also argue that this increase in contributions is not trivial, that a 16 percent of pay increase in mandatory contributions is tantamount to reducing the benefit unilaterally, in violation of collective bargaining law as well as the state constitution's contract clause. Again, it is possible that the city and its unions could cut a deal at a lower level of increased contributions that would satisfy the collective bargaining statute and avoid a state Supreme Court showdown, but that would require the unions to blink or the city to offer something of value to the affected employees.

Thus, it is conceivable that union leaders in both cities could still find a compromise with their public employers that avoids testing their legal theories against charter cities -- home-rule employers that may have greater legal powers than the state and its general-law public employers such as the school districts. If I were head of the teachers' union, for example, I'd urge my municipal counterparts to settle their cases out of court through a negotiated compromise, to avoid losing a really big court case on the issue of implied contractual rights to benefits-continuation in a home-rule city. As Monahan points out, that legal concept is clearly out of step with the rest of American pension law (with a handful of exceptions). In the private sector, the federal pension law (ERISA) clearly sets a sensible legal standard for employers that permits benefits plans to be modified prospectively, while protecting the vested accrued benefits of retirees and incumbent employees. Nobody will argue with an anti-cutback rule, but this nonsense about a lifetime of unmovable cheese prices is bad public policy.

Meanwhile, I expect these two elections in the state's second- and third-largest cities to embolden pension hawks in other municipalities -- and to humble several public safety union bosses who thought their members were invincible at the polls in the aftermath of 9/11. The first-responders' halos have been tarnished by a deluge of newspaper stories of outlandish pension spiking, disability pension abuses, and $100,000 lifetime pensions for 50-year-olds. Right now the risk facing the public-sector unions is that a "San-D/San-J" proposal containing aggressive reform features from both cities could carry voter approval statewide if constructed in a way that complies with upcoming court decisions. In the wake of the Wisconsin election, I would not be surprised to see other measures to cut back public workers' benefits gather momentum -- such as a separate rollback of legally vulnerable retirement medical benefits along with cuts in government employers' contributions for health care down to the statewide average level that prevails in the private sector. There's more than one way to skin a cat, and somebody is going to get creative and ultra-parsimonious if unions stall pension reform.

Taking a page from Machiavelli's playbook written centuries ago, enlightened union leaders and their political surrogates should now see that it's time to offer up enough reforms to placate the voters and avoid judicial decisions that take them back to the 1950s. They risk irreversible losses in all-out wars on multiple fronts. And the Governor's proposed tax increase will likely be dead on arrival this November without pension reform, even if it means more draconian cuts in state spending and public education.

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