Public Employee Pensions:
No State Pension Changes Yet; Locals Worry That State May Try to Undo Local Reforms

Governor Jerry Brown and the Legislature have yet to reach an agreement on pension reform, and their disagreements are expected to delay any pension changes until August at the earliest. Meanwhile, local governments that have enacted their own money-saving reforms are expressing concern that the Legislature and governor may attempt to pass a pension law that would undo the local reforms.

Last year, the governor presented a 12-point pension reform plan to the Legislature (see CalTaxletter of November 4, 2011). Among other things, the plan proposed: requiring that all new and current employees transition to a contribution level of at least 50 percent of the annual cost of their pension benefits; implementing a "hybrid" pension plan that will include a reduced defined benefit component and a defined contribution component that will be managed professionally to reduce the risk of employee investment loss; raising the retirement age so that, for most new employees, it will be equivalent to the Social Security retirement age, which is 67;requiring that final compensation be defined, as it is now for new state employees, as the highest average annual compensation over a three-year period; and defining compensation as the normal rate of base pay, excluding special bonuses, unplanned overtime, payouts for unused vacation or sick leave, and other pay perks.

Republican lawmakers introduced the governor's plan as legislation, using the exact language from legislative proposals prepared by the Governor's Office, but Democratic legislators have not given the legislation the support it needs to pass.

Rather than taking up the governor's plan, Democratic leaders have been negotiating with the governor behind closed doors. On July 3, the governor's spokesman indicated that the talks have not been fruitful. In a statement, Press Secretary Gil Duran said the governor "could not agree to some of the changes in the pension counterproposal shared by the Legislature on Sunday."

Senate President Pro Tem Darrell Steinberg said Democratic legislators and the governor remain at odds over the "hybrid" concept, how to increase the retirement age, and how to increase contribution requirements for existing employees.

Dave Low, who leads a labor union coalition that opposes most pension reforms, said he opposes the proposals put forward by the governor and the Democratic legislative leaders. He said changes in pensions should be negotiated as part of union contracts, not placed into law by Californians' representatives in the Legislature.

Aaron McLear, spokesman for a coalition opposing the governor's November tax initiative, said, "Taxpayers are not going to want to send more money to Sacramento when Democrats can't come together on modest, minimal pension reform."

Meanwhile, San Diego Mayor Jerry Sanders, who pushed a pension reform on his city's June ballot (Proposition B, approved with 66 percent of the vote), is opposing an apparent attempt by Democratic legislators to look for ways to override that vote and similar pension reform votes in other local jurisdictions. In a letter to Assembly Speaker John Pérez, Mayor Sanders wrote: "As a charter city, it is our right and our duty to ensure that our fiscal house is in order. Any statewide effort to undo the reform passed by an overwhelming majority of San Diegans violates the tenet of charter cities and usurps the will of the people of our city. … Any attempt to nullify their vote would be a slap in their face and an outright insult to the (d)emocratic process."

San Jose Mayor Chuck Reed, a Democrat, sent a similar message to the Legislature. "I ask that you respect the will of our voters and allow us to implement their will," Mayor Reed said in a letter. He warned that undermining the city could lead to insolvency or bankruptcy and said it would be "a violation of the voters' constitutional rights."

Senator Steinberg acknowledged early in the week that "the so-called pre-emption issue" is "open for discussion," but said later in the week that it is all a misunderstanding, and that the Legislature has no intention of changing the local pension reforms.

"But lawmakers are keeping secret the draft pension plan they presented to Gov. Jerry Brown," the Los Angeles Times reported. "Officials with the Brown administration, which opposes any rollback of the pension changes made by the two cities, will not confirm or deny that Democratic lawmakers have been pushing to do so behind closed doors and refused to release the plan." (Sources: The Sacramento Bee, July 4; San Diego Union-Tribune, July 3; Los Angeles Times, July 5.)

In other pension reform news:

Court Upholds San Diego's 2005 Pension Reform. The Fourth District Court of Appeal ruled June 29, in a published decision, that city of San Diego acted lawfully when it retroactively amended its retirement system to eliminate a special perk for employees hired after July 1, 2005.

At issue were four ancillary retirement benefits including a "13th check" payable whenever "excess earnings" are available in the retirement system at the end of the year, and the right to purchase up to five years of additional service credits to boost pension checks. In 2005, the city told prospective workers that anyone hired after July 1 of that year would be ineligible to receive the ancillary benefits, but it was not until January 17, 2007, that the city passed an ordinance to that effect. The ordinance took effect February 16, 2007.

A group of city employees hired between July 1, 2005, and February 16, 2007, filed suit, claiming that retroactive application of the ordinance is unconstitutional because it deprived them of vested retirement benefits. A trial court threw out the suit, and the Court of Appeal said the lower court was right to do so.

The appellate court noted that a memorandum of understanding negotiated by the city and labor unions stated that the ancillary benefits would not be available for employees hired after July 1, 2005. "Because the City and New Employees agreed to exclude the Four Benefits from the employees' employment contracts, those obligations cannot be said to 'vest," the court wrote.

The case is City of San Diego v. Richard Haas, et al.

July 6, 2012
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