Appeals court allows pension cuts, backs San Diego

In another ruling allowing pension cuts, an appeals court last week overturned a state labor board ruling that a voter-approved San Diego pension reform was invalid because the city declined to bargain the issue with labor unions.

The initiative approved by 66 percent of San Diego voters in 2012 gave all new city hires, except police, a 401(k)-style individual investment retirement plan instead of a pension and imposed a five-year freeze on pay used to calculate pensions.

The appellate court ruled the labor board erred when finding in 2015 that former San Diego Mayor Jerry Sanders and the city council committed an “unfair labor practice”

The state Public Employment Relations Board, whose post-election decision was overturned by a unanimous ruling of a three-member appellate panel, took the unprecedented step of trying to get a court to remove the San Diego initiative from the ballot before the vote.

Jan Goldsmith, former San Diego city attorney, told the San Diego Union-Tribune the city stood firm, would not be “bullied” by the labor board, and now the appellate ruling will “reverberate” across California.

“When governments fail to act on problems such as with pension liabilities, the people have a constitutional right to pursue a citizens’ initiative by obtaining signatures on a petition and presenting solutions directly to the voters, bypassing the legislative body,” Goldsmith said. “The court held that there is no requirement that citizens’ initiatives be negotiated with labor unions.”

The labor board ordered that city employees hired after the initiative passed, now about 3,000, be given retroactive pensions with 7 percent interest as a penalty, the Union-Tribune said. The estimated city cost was $20 million when there were only about 1,600 new hires.

Last week, the appellate court ruled the labor board erred when finding in 2015 that former San Diego Mayor Jerry Sanders and the city council committed an “unfair labor practice” by declining to “meet and confer” with labor unions before Proposition B was placed on the ballot.

Lacking the city council votes needed to place a pension reform on the ballot, Sanders and former City Councilman Carl DeMaio, the author of the reform, helped lead and support the initiative campaign.

DeMaio’s website said he has been working with former San Jose Mayor Chuck Reed on a state-wide Pension Reform Initiative.

The support of Sanders and other city officials for the the initiative’s development and campaign is “undisputed,” the court said. But the “meet and confer” obligation only applies to measures placed on the ballot by the governing body, not by citizens gathering voter signatures.

State law meet-and-confer obligations have “no application when a proposed charter amendment is placed on the ballot by citizen proponents through the initiative process,” the appellate court said.

DeMaio’s website said he “has been working with former San Jose Mayor Chuck Reed on a state-wide Pension Reform Initiative and this court victory only improves chances of reform statewide.”

Reed has said that San Jose, with an eye toward a 1984 Seal Beach court ruling requiring bargaining before placing a measure on the ballot, held extensive labor negotiations before the council placed his pension reform measure on the ballot.

But the state labor board agreed to hear a labor unfair practices complaint against Measure B, which was approved by 69 percent of San Jose voters in June 2012, the same election San Diego voters approved pension reform.

The protection of the California rule emerged from judges who chose to cite the precedent of a series of rulings, a key one in 1955 in Long Beach.

The board also agreed to hear a labor complaint about a pension reform approved by Pacific Grove voters in 2010. Courts overturned the Pacific Grove measure and a key part of the San Jose measure enabling the option of cutting pensions current workers earn in the future.

In each case, superior court judges cited what has become known as the “California rule.” The pension offered at hire becomes a vested right, protected by contract law, that can only be cut if offset by a comparable new benefit, erasing any savings.

The protection of the California rule emerged from judges who chose to cite the precedent of a series of rulings, a key one in 1955 in Long Beach. Different rulings were cited in an appeals court decision in a Marin County case last August that could overturn the California rule.

“While a public employee does have a ‘vested right’ to a pension, that right is only to a ‘reasonable’ pension — not an immutable entitlement to the most optimal formula of calculating the pension,” Justice James Richman wrote in a unanimous ruling of the First District Court of Appeal.

“And the Legislature may, prior to the employee’s retirement, alter the formula, thereby reducing the anticipated pension. So long as the Legislature’s modifications do not deprive the employee of a ‘reasonable’ pension, there is no constitutional violation.”

The Marin ruling came in a union challenge to parts of a 2012 pension reform, described in the ruling as a response to reports of a funding “crisis” that would force cuts in local government services and layoffs if not corrected.

Most of the main cuts in the reform (such as longer retirement ages and a requirement to pay half of “normal” pension costs excluding debt from previous years) observe the California rule and are limited to new hires, who have no vested rights.

A federal judge ruled against two state laws sponsored by CalPERS that were intended to make it difficult for local governments to leave the state system.

Exemptions for workers hired before the reform took effect on Jan. 1, 2013, are part of the reason the Public Employees Pension Reform Act is not expected to yield significant cost savings for decades, when most workers will be covered by the reform.

The Marin ruling upheld “spiking” reforms that prevent county workers hired before the reform from boosting pensions with unused vacation and leave, bonuses, terminal pay, an other things.

The state Supreme Court has agreed to hear an appeal of the Marin ruling. But the high court will wait until an appeals court rules on three similar spiking ban suits consolidated from Alameda, Contra Costa, and Merced counties.

Another appellate panel, referring to the Marin ruling, unanimously upheld a reform ban on purchasing up to five years of additional service credit to boost pensions, known as “air time.” The Supreme Court agreed last week to hear an appeal by state firefighters and others.

San Bernardino officials cited similar reasons for not cutting pensions while in bankruptcy.

Another pension protector, the California Public Employees Retirement System, had a setback in the Stockton bankruptcy. A federal judge ruled against two state laws sponsored by CalPERS that were intended to make it difficult for local governments to leave the state system.

One state law bars rejection of CalPERS contracts in bankruptcy. The other state law places a lien on the property of a local government that terminates its CalPERS contract in bankruptcy.

“CalPERS has bullied its way about in this case with an iron fist insisting that it and the municipal pensions it services are inviolable,” U.S. Bankruptcy Judge Christopher Klein wrote two years ago. “The bully may have an iron fist, but it also turns out to have a glass jaw.”

Stockton did not try to cut pensions, saying from the outset they are necessary to be competitive in the job market, particulary for police. San Bernardino officials cited similar reasons for not cutting pensions while in bankruptcy.

CalPERS did not appeal Judge Klein’s opinion. A spokesman, Brad Pacheco, said CalPERS regards the opinion that pensions can be cut in bankruptcy as “dicta,” a legal term meaning authoritative but not binding.
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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, where this story first appeared.