San Jose vote may derail pension ‘rights’ ruling

An appeal of a San Jose pension reform ruling that could cause the state Supreme Court to revisit “vested rights” may be halted by a settlement with unions, if candidates aligned with the policies of Mayor Chuck Reed are defeated next month.

Labor unions opposed to the pension reform are backing a candidate for mayor to replace Reed (barred by term limits from seeking a third four-year term) and three candidates for open city council seats, more than enough to shift the power balance.

Pension amounts already earned by current workers would be protected, but the pensions they earn in the future could be reduced.

Reed has been operating with a thin margin of support, at times just one vote, in a weak mayor system that has 10 council members in addition to the mayor. He helped one ally, Rose Herrera, win re-election two years ago despite heavy union opposition.

A Reed-backed measure approved by 69 percent of San Jose voters two years ago has a provision that does what critics of “unsustainable” pensions, such as the watchdog Little Hoover Commission, think is the key to controlling runaway employer costs.

Pension amounts already earned by current workers would be protected, but the pensions they earn in the future could be reduced. Cuts of this kind are allowed for private-sector pensions.

She ruled that making employees pay the unfunded liability by increasing their pension contribution rate was a violation of vested rights.

In California, state court rulings, a key one in 1955, are believed to mean the pension offered state and local government workers when hired becomes a “vested right,” protected by contract law, that can only be cut if offset by a comparable new benefit.

So most pension reforms are limited to new hires, which can take years or decades to produce significant cost savings for employers, depending on the rate of employee turnover.

The San Jose pension reform challenged the conventional view that the pensions of current California government workers cannot be cut, relying in part on a city charter provision that reserves the right to change pensions.

Measure B gives current workers an option: Pay much more to cover the pension “unfunded liability” or debt and keep earning the old pension amount, or avoid the big contribution rate hike (about 16 percent of pay) by earning a lower pension.

Last December Superior Court Judge Patricia Lucas upheld 12 of the 15 provisions in Measure B. She ruled that making employees pay the unfunded liability by increasing their pension contribution rate was a violation of vested rights.

The judge upheld a fallback provision allowing the unfunded liability, if the employee rate hike is not allowed by the courts, to be paid by employees through a similar cut in their pay.

Reed said last week the city council has agreed not to attempt a pay cut until next July and has instructed staff to negotiate an extension, while awaiting an appeal of the judge’s ruling. He is optimistic the city would win an appeal.

“It’s been a long time since the California Supreme Court had a clear shot at the issues on vested rights,” Reed said. “Lawyers will disagree, so we will have to wait and see.”

Reed and others have cited a lengthy analysis by Amy Monahan of the University of Minnesota Law School that looks at the origin of the “California Rule” said to prevent cuts in pensions offered at hire, arguing that it’s an error.

A 17-page California Public Employees Retirement System legal brief issued three years ago on member vested rights said “Rule 1” is that the pension benefits of current workers can go up, but not down without their consent.

If elected, the labor-backed candidate for mayor, Dave Cortese, a county supervisor and former city councilman, is expected to push for a settlement of union suits against Measure B, including the current-worker option and lower pensions for new hires.

The other candidate for mayor, Sam Liccardo, a councilman, worked with Reed on Measure B. Liccardo is endorsed by Reed and three former San Jose mayors. Cortese is endorsed by four former San Jose police chiefs.

A key issue is whether the Measure B pension reforms endanger public safety, further reducing the police force and curbing recruitment. A San Jose police force that once was 1,400 has been reduced to about 900.

Reed said rising retirement costs and budget cuts reduced the police officers to 1,100 before Measure B passed. Since then injuries, vacancies and other factors have dropped the number to about 900 “street-ready” officers.

Police agreed to a 10 percent pay cut to avoid 150 layoffs, Reed said, but now a new contract is restoring the pay cut. He said the city council wants an additional 250 police officers and has added a third training academy.

The police union contends that most of the first new training graduates this fall will leave, due to low pay and pensions. And the police union president, Jim Unland, predicts that 200 officers may leave if Liccardo is elected.

Savings from Measure B are expected to help pay for more police. Reed said more than $50 million will be saved over two fiscal years by eliminating a “13th check” pension bonus for retirees and a change in the lowest-cost retiree health care plan providing full coverage.

At a city council meeting last week, Reed said, staff said the lower pensions authorized by Measure B for new police and firefighters will save the city $65,000 a year per person, compared to current pensions, and $35,000 a year per person for other employees.

In the October issue of the police union magazine, “Vanguard,” Unland said the city should have negotiated with the unions on the “13th check” and retiree health care to find a solution that would have avoided a court battle.

Lower pensions for new hires are part of the reason for an “en masse departure” of new recruits who receive training costing an average of $170,000, he said, which means “this failed experiment has in fact cost the city, dearly.”

Unland said a pension plan for new hires developed by the union with the aid of the city would save the city $300 million over the next 15 years. But the proposal was “scuttled” by Liccardo and other Measure B supporters on the city council.

In the courts, the trial record of the Measure B ruling has not yet been prepared and delivered to the court of appeal. The city also awaits IRS approval of the current-worker option, along with a similar Orange County plan negotiated in 2009.

“It’s in their work plan,” said Reed, who has made several trips in the last six months to urge IRS approval of the option. “There is a great deal of resistance by the national unions who are lobbying against anything that might give employees a choice.”

Last October Reed and four other mayors filed an initiative for a state constitutional amendment giving state and local governments the authority to lower the pensions current workers earn in the future, while protecting pensions already earned.

Reed and the mayors dropped the initiative when state Attorney General Kamala gave the proposal an “inaccurate and misleading” title and ballot summary. After a superior court declined to order a change, the mayors filed an appeal in August.
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Ed’s Note: 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.