By Ed Mendel
Monday, April 11, 2012

Two California cities attracting national attention for big pension-reform votes look like they are on the same path — court filings last week to speed up legal decisions, and city council meetings this week to consider plans for new hires.

But the public pension reforms approved by 66.25 percent of voters in San Diego, the state’s second largest city, and by 69.58 percent of voters in San Jose, the third largest, are not the same and face different problems.

The San Diego plan is more radical for new hires, placing them in a 401(k)-style investment plan. The San Jose new-hire plan set limits (employees pay half, employers no more than 9 percent of pay, later retirement ages) but could be a smaller pension.

Many private-sector employers switched from pensions to 401(k) plans and make fixed payments to an employee’s tax-deferred investment plan, avoiding risky long-term pension debt. Some doubt that most 401(k)s provide adequate retirement security.

The San Jose plan is more radical for current workers, allowing them to switch to a lower pension or pay more to keep their existing pension. The San Diego plan directs the city to bargain with unions for a six-year freeze on pay used to calculate pensions.

Both plans allow current workers to keep pension amounts already earned, only reducing future amounts. The nonpartisan Little Hoover Commission argues that cutting current pensions is the only way to give struggling governments significant savings now.

Some unions agree to reduce soaring government pension costs (others holdout) by giving new hires lower pensions and increasing contributions from current workers. But lower pensions for new hires can take decades to yield sizable savings.

When employees contribute more of their pay toward pensions, government employers can lower their contributions by a similar amount. But the government savings are limited and often temporary, offset by an equal benefit such as a delayed pay raise.

Unions take the widely held view that the courts have ruled that pensions promised government employees on the date of hire are a “vested right,” protected by contract law, that can be cut only if a benefit of equal value is provided.

In San Jose, this issue was tackled head on by the measure placed on the ballot by a council led by Mayor Chuck Reed. The city asked a federal court last week for an expedited ruling on whether Measure B violates vested rights and due process guarantees.

The employee contribution option does not take effect until June 23 next year, a “grace period” to allow time for a court decision. The city filing said a decision is urgent because soaring pension costs are diverting money from essential services.

Retirement costs were $107 million in fiscal 2009-10, will soar to $245 million next fiscal year and are projected to be $319 million in 2014-15, about 24 percent of the general fund.

The city argued that Measure B does not violate employee vested rights because San Jose is a charter city with “plenary authority” and has reserved the right to amend city retirement plans, particularly to cover unfunded liabilities.

“City practices confirm this authority,” said the city filing. “For these reasons, the City has retained the right for the City’s voters to make changes to employee contribution rates and to make the other changes in Measure B.”

The police union and several firefighters, who are in one of the two San Jose city retirement systems, filed separate suits last week asking a superior court to overturn Measure B.

Going beyond contract law and due process, the San Jose Police Officers Association suit adds several other violations.

The measure allows workers to keep their current pensions by increasing their contributions by up to 16 percent of pay or until half the unfunded liability is covered. But if this provision is overturned, the measure calls for an equivalent pay cut.

The police suit calls this a “poison pill” and a violation of the right to free speech and to petition the courts.

“Despite serving in the capital of Silicon Valley, San Jose Police Officers are among the lowest paid Police Officers in the Bay Area,” the suit said. The union agreed to a 10 percent pay cut last year.

The suit argues that Measure B violates Proposition 162, a constitutional amendment backed by labor in 1992 after former Gov. Pete Wilson “raided” CalPERS funds, cut state worker pensions and gave lawmakers control of the CalPERS actuary.

While giving public pensions total control of their funds and rate-setting actuaries, the initiative also gave pension boards the “fiduciary” duty of placing the interests of current and future retirees above the interests of taxpayers, which previously were equal.

To read entire column, click here.