I imagine the mayor of San Jose must have felt a restrained happiness on June 5 when his proposal to revamp public employee pensions passed with 69 percent of the vote. He publicly anticipated the lawsuits that were filed in the days and weeks following the election. In fact, on Election Day, the city filed its own lawsuit in federal court seeking a declaration that the measure is legal.
Current retirees are not likely to be affected significantly by San Jose’s legislation. Skimpier pension provisions for newly hired employees are not in effect yet, but may be activated soon. The title fight is over new requirements that force current employees to make increased contributions for the same benefits or accept a less-generous plan.
As an initial matter, public pensions are not governed by federal laws covering employee benefits, as are private plans, so California contract and constitutional law govern San Jose’s measure. The jurisprudence in this area is out-of-date and contradictory, so the rules are in flux. This makes current legal challenges to pension measures both difficult to predict and highly important — as they will set the parameters of reform for future generations.
Public employee unions in San Jose have filed complaints alleging a slew of problems with the new pension law, but their central argument is that current employees have a contract with the city that mandates certain levels of pension contribution and benefit.
According to the unions, requiring current employees to contribute more for the same benefits — up to an additional 16 percent of their wages over four years — is a breach of that contract. Of course, the city of San Jose disagrees.
Unlike San Francisco, where retirement benefits are set in stone in the City Charter, San Jose argues that its charter reserves the right for the city government to set the compensation for its employees and to change some aspects of benefits.
Unsurprisingly, unions argue that the right is to increase benefits only, not decrease them. And the city will argue that even if employees have a right to certain pension benefits, they do not have a right to certain contribution rates.
Further, there are at least two possible ways to change a contract with current employees. The first is to claim that the change is “reasonable and necessary to achieve an important public purpose.” The other is to accompany those changes with a “comparable new advantage.” Case law suggests that keeping a retirement plan solvent is both a “public purpose” and an “advantage” sufficient to change the contracts.
Whatever the outcome of the legal challenges to San Jose’s law, other cities will be watching closely, grateful that San Jose dared get into the ring.
Footdragging in Sacramento
Republicans in the state senate attempted in vain the past week to pull the governor’s pension reform proposal from the pension reform committee where it has languished since March 1. The governor’s bill is a California constitutional amendment that needs to be voted on by Thursday, else it will not be on the November ballot. Sen.
Doug LaMalfa, R-Shasta, noted that the Legislature is slated to recess in a few weeks and at that time, representatives will have to go back to their home districts where people will be asking questions about pensions. And there had better be reform lined up for the ballot, “otherwise … well you see our approval ratings.”