Shown the way by San Jose

If you just looked at the headlines, you might conclude that the recent decision by a Santa Clara County Superior Court judge striking down portions of San Jose’s Measure B represented a triumph for the unions in their fight against the pension reform efforts of San Jose Mayor Chuck Reed.

That’s how the decision was played in the popular press, and, of course, it is also how it was spun by the unions themselves. “We’re happy about the ruling,” said Sgt. Jim Unland of the San Jose Police Officers’ Association. “We’ve been saying for two years that cutting pensions was illegal, and now we have a judge saying that.”

But if you take a closer look at the opinion, you might conclude it is not quite so one-sided.  Rather than killing off efforts at pension reform, the decision actually may show the path that a city – or its citizens — can take to rein in retiree benefit costs without running afoul of the state constitution.

Passed by 70% of San Jose voters, Measure B was Mayor Reed’s response to the fiscal crisis caused by the skyrocketing costs of providing pensions and retiree health care for public employees.  By 2012, spending on retiree benefits consumed close to a quarter of San Jose’s general fund budget, and the city’s unfunded liabilities for pensions and retiree health care had reached $2.9 billion.  (“Unfunded liabilities” represent the amount by which the cost of providing benefits in the future exceeds the amount of funds set aside to pay for them).  Unless retiree benefit costs and liabilities were brought under control, already diminished municipal services might disintegrate altogether.

Among other things, Measure B sought to get current public employees to help pick up the tab for providing retirement benefits.  Current employees could opt for a new pension plan with less generous benefits; otherwise, they would be required to contribute up to 16% of their salary to pay off half of the existing plan’s unfunded liabilities.  Similarly, current employees, who already were sharing part of retiree health care costs, would be required to pay a minimum of 50% of those costs, “including both normal cost and unfunded liabilities.”

The public employee unions sued.  After holding a trial, Judge Patricia Lucas issued her tentative decision on December 20.  She struck down as unconstitutional the provision in Measure B requiring employee contributions toward unfunded pension liabilities.  But, after striking down the 50% minimum, she upheld the provision requiring employees to contribute toward unfunded retiree health care liabilities.

The pundits might score this result as one for the unions, one for the city.  But more important than the result is the reasoning the judge used to reach it.  And it is from such reasoning that the path to reform emerges.

As the Merry-Go-Round previously has discussed, the legal basis for challenging pension reform is Article I, section 9 of the State Constitution, which prohibits laws “impairing the obligation of contracts.”  A pension (or retiree health care) plan is a contract between a city and its employees.  Thus, once a city has agreed to provide retirement benefits, eliminating such benefits altogether would violate the state constitution.  But this does not mean that every term in a pension or retiree health care plan is inviolable.  Instead, only “vested” benefits – defined by the California Supreme Court as benefits the parties intended to be “irrevocable” — are protected by the state constitution.

When a pension reform measure is attacked as unconstitutional, the task for the judge is to determine whether the reform impairs “vested” rights.  For Judge Lucas, this meant analyzing each section of Measure B separately and comparing it to previously enacted ordinances.  (Since San Jose is not a member of CalPERS, the City Council, not the State Legislature, makes the rules governing the city’s retirement plans).  Where the initiative conflicted with a right or obligation established by prior legislation, it was invalid.  But where it did not, it was not.

Through such an analysis Judge Lucas came to her different conclusions about requiring employees to contribute toward unfunded liabilities for pensions and retiree health benefits.

For the pension plans, the city previously had enacted ordinances taking on itself the entire burden of paying off the unfunded liabilities and, indeed, the municipal code prohibited employee contribution rates from including anything for that purpose.  These ordinances, the court held, created a “vested right to have the City pay [unfunded liabilities]” for pensions.  The section of Measure B requiring current employees to contribute toward unfunded pension liabilities thus was invalid.

By contrast, there was no similar ordinance requiring the city to bear the entire burden of paying off unfunded liabilities for retiree health benefits or “grant[ing] employees protection against contributions to unfunded liabilities relating to healthcare benefits.”  There was thus no “vested” right not to contribute toward unfunded retiree health care liabilities, and the section of Measure B providing for such contributions was valid.

So now let’s apply Judge Lucas’s reasoning to Alameda.  We’ll skip over pensions, since, unlike San Jose, Alameda is a member of CalPERS, and its ability to set the terms for its own pension plans is limited by state law.  But, like San Jose, Alameda is the master of its own retiree health plan.  At last count, the city’s unfunded liabilities for retiree health benefits stood at $86.1 million.  And neither the city nor its employees is contributing anything at all toward paying off those unfunded liabilities.

There are some who see this as a problem.  But to the current City Council it is not their problem.  Indeed, when staff presented Council last July with a list of options for reducing unfunded liabilities for retiree health benefits (aka “OPEB”), Council’s “solution” was to instruct staff to set up a trust fund that could be used for that purpose when, as, and if the city received any unexpected “windfalls.”  (So far, if the trust fund has been created at all, it remains empty).

But now suppose the politicians actually wanted to do something about the problem they won’t admit exists.  They could pass an ordinance requiring Alameda public employees, like their counterparts in San Jose, to start making contributions toward unfunded liabilities for retiree health benefits.  Would such an ordinance be constitutional?  Under Judge Lucas’s analysis, the answer is, Yes.

There is no ordinance on the books in Alameda that obligates the city to shoulder the entire burden of paying off unfunded liabilities for retiree health benefits.  Nor do any of the contracts between the city and the public employee unions prohibit employee contributions for that purpose.  Absent a statutory obligation or a contractual prohibition, it would be difficult for public employees to show that they have a “vested right” not to contribute toward unfunded retiree health care liabilities.  Under the reasoning employed by Judge Lucas, an ordinance requiring such contributions thus would pass constitutional muster.

Of course, it’s never going to happen.  The ordinary citizen might think it only fair that public employees should help pay off the liabilities generated by giving them retiree health benefits for life.  But the public employee unions surely would disagree, and any politician who supported such an ordinance not only would lose the backing of the unions but also would incite their enmity.  It’s one thing to give up the prospect of the firefighters’ union spending $10,000 in the last week of the campaign to blanket the Island with literature commending your candidacy.  It’s quite another to give the union an incentive to spend the same amount to send out flyers condemning your character.  Councilman Chen, meet former Vice Mayor deHaan.

So why bring it up at all?  Just to show that, based on the constitutional analysis in the San Jose pension reform case, it is possible to enact real pension reform without violating the state constitution.  The next time you hear someone proclaim from the dais at City Hall that the city’s hands are tied, remember that it’s not state law that supplies the binding, but the politicians themselves.


Measure B: San Jose Measure B

Tentative Decision: Santa Clara Superior Court tentative decision

About Robert Sullwold

Partner, Sullwold & Hughes Specializes in investment litigation
This entry was posted in Budget, City Hall, Firefighters, Pensions and tagged , , , , , , , . Bookmark the permalink.

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