Legal questions trail pension ruling

A superior court ruling announced last week overturned key parts of a voter-approved San Jose pension reform: an attempt to cut employer costs for pensions earned by current workers in the future.

As the city struggled with large deficits during the last decade, the court was told, annual retirement costs more than tripled to $245 million while basic services were cut and the number of police and firefighters dropped.

Mayor Chuck Reed and other Measure B backers argued that cutting the cost of pensions earned by current workers in the future, while protecting amounts already earned, is needed to get significant savings.

“The legal question is whether and to what extent Measure B violates vested rights,” Lucas said of the union lawsuits challenging the measure approved by 70 percent of San Jose voters in June last year.

But a series of state court rulings are widely believed to mean that the pension offered current workers on the date of hire becomes a vested right, protected by contract law, that can only be cut if offset by a new benefit of comparable value.

Santa Clara County Superior Court Judge Patricia Lucas said in her ruling the question before her court is “one of law, not of policy,” referring to a state Supreme Court response to city and county briefs on an Orange County attempt to cut retirement costs.

“The legal question is whether and to what extent Measure B violates vested rights,” Lucas said of the union lawsuits challenging the measure approved by 70 percent of San Jose voters in June last year.

San Jose attorneys argued that two provisions in the city charter, which allow the city to “amend” or “repeal” retirement plans at any time, prevent the creation of vested rights for employees in the two city-run pension systems.The city cited language in an appellate court ruling in support of its position. The judge cited contrary language in a state Supreme Court ruling and a footnote in the appellate court ruling saying it should be limited to the peculiar facts of that case.

“Accordingly, this court concludes that a reservation of rights (to amend or repeal the pension plans) does not of itself preclude the creation of vested rights,” Judge Lucas ruled.

A lower pension, avoiding a contribution increase, was similarly rejected with a mention that the plan lacks IRS approval. Orange County has been waiting since 2009 for IRS approval of a lower pension-higher contribution option negotiated with unions.

The key part of Measure B gave current workers an option: 1) Increased pension contributions of up to 16 percent of pay, but no more than half the cost of paying for the “unfunded liability” debt. 2) A much lower pension for future service.

Lucas rejected city arguments that workers have no vested right to city payment of all of the unfunded liability and that, at times, unions have regarded pension contributions as compensation, which the city can regulate.

A lower pension, avoiding a contribution increase, was similarly rejected with a mention that the plan lacks IRS approval. Orange County has been waiting since 2009 for IRS approval of a lower pension-higher contribution option negotiated with unions.

And a cut of San Jose retiree pension cost-of-living adjustments for up to five years, if the city council declares a fiscal emergency, was overturned by Lucas as a violation of vested rights.

After a five-day trial in July and some follow-up action, the judge ruled on a consolidation of six suits filed by public employee unions and retirees challenging 10 of the 15 sections of Measure B, with 11 different causes of action.

Among the parts of the measure upheld by Lucas is the authorization of pay cuts to get equivalent city savings if the lower pension-higher contribution option is ruled invalid.

The city and unions have agreed to delay pay cuts until at least next July 1. Major savings from pay cuts reportedly could be difficult and are likely to face a legal challenge from police, one of the biggest city costs.

“The City Council earlier this month approved 10 percent pay raises for cops, after police officers began fleeing the department for better-paying cities,” the San Jose Mercury-News said last week. “The cop exodus has coincided with a huge increase in crime, above the California and national averages, while arrests have dropped in half in recent years.”

Reed and others are proposing an initiative to put a constitutional amendment on the ballot that would give state and local governments the option of cutting pensions current workers earn in the future, while protecting pension amounts already earned.

The judge also upheld tighter eligibility for disability retirement and an elimination of the “13th check” bonus payment to retirees when investment earnings exceed the forecast. A mixed ruling on retiree health care allowed some cuts and rejected others.

Mayor Reed said the ruling protects $20 million in current budget savings from elimination of the bonus check and retiree health care changes. But the invalidation of parts of Measure B “highlights” the lack of flexibility in controlling retirement costs.

“That’s why I believe that we need a constitutional amendment that will empower government leaders to tackle their massive pension problems and negotiate fair and reasonable changes to employees’ future pension benefits,” he said in a news release.

Reed and others are proposing an initiative to put a constitutional amendment on the ballot that would give state and local governments the option of cutting pensions current workers earn in the future, while protecting pension amounts already earned.

A title and summary for the proposed initiative, based on a cost analysis by the nonpartisan Legislative Analyst’s Office, is being written by the office of state Attorney General Kamala Harris.

“Breaking the promise by eliminating the vested benefit rights of police officers and other public employees is a non-starter in the courts and with the public,” Dave Low, chairman of Californians for Retirement Security, said in a news release.

For current workers the initiative called for a five-year freeze on pay used to calculate pensions. Unions agreed to the freeze, expected to reduce the $275 million city pension payment this year by $25 million, U-T San Diego reported.

The leader of the labor coalition said the “more than $3 million in taxpayer dollars” spent on the Measure B legal battle will be the “tip of the iceberg of the legal costs” if the proposed initiative moves forward.

Low said Reed should join “nearly 400 leaders across the state” in negotiating cost-cutting agreements with unions. Reformers say not enough savings result from the typical agreement, higher worker pension contributions and lower pensions for new hires.

Warning that pension costs could “crush” government, the bipartisan Little Hoover Commission said in a 2011 report: “The Legislature should give state and local governments the authority to alter the future, unaccrued retirement benefits for current public employees.”

A pension reform approved by San Diego voters last year, Proposition B, was designed to bypass the vested rights issue. All new hires, except police, were switched from pensions to 401(k)-style individual investment plans.

For current workers the initiative called for a five-year freeze on pay used to calculate pensions. Unions agreed to the freeze, expected to reduce the $275 million city pension payment this year by $25 million, U-T San Diego reported.

But the city pension board declined to immediately include the freeze in cost projections, so current year savings were lost. The city retirement system has projected that Proposition B will save $949.5 million over 30 years.

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.