Public Unions Push Back on Pension Reforms: What Will Courts Say

Public Unions Push Back on Pension Reforms: What Will Courts Say

 by Lou Cannon

Public employee unions and their allies are flexing their muscle in California, where a sweeping pension reform initiative that once seemed destined for the November ballot will instead take a legal detour that will delay it.
 
San Jose Mayor Chuck Reed, the initiative's author, said he will mount a legal challenge to the wording of the ballot proposition by fellow Democrat Attorney General Kamala Harris. Reed contends that the wording is biased and pro-union, which Harris through a spokesperson denies. Public unions contributed heavily to the campaigns of the attorney general. 
 
This twist in the California pension wars comes against the backdrop of a stark warning from Gov. Jerry Brown (D) to CalPERS, the nation's largest public pension union. Brown called upon the pension fund to address increased life expectancy of public employees, saying longer-lived retirees will add $1.2 billion annually to pension costs. In a letter to Rob Feckner, president of the CalPERS board, Brown said that a recommendation by the board's staff to postpone action until 2016 was "unacceptable." 
 
"Since CalPERS last faced this issue in 2010, there have been dramatic increases in life expectancy: by 2028 men retiring at age 55 are projected to live an average of 2.1 years longer and women 1.6 years longer," Brown wrote. "For the state, these changes mean that pension costs will be much greater than previously thought and state costs will increase...about 32 percent greater than today." 
 
It's unclear what Brown can do if CalPERS ignores his entreaty. The California Constitution gives pension recipients the upper hand, and unions have made the most of it. 
 
In 2012 Mayor Reed proposed giving the San Jose city government the authority to reduce pension benefits and also salaries, if needed to balance the budget. Seventy percent of the city's voters approved the plan, but a state judge in December 2013 invalidated the pension cuts. Superior Court Judge Patricia Lucas cited a provision of the state constitution that prohibits any reduction in pensions once they have been agreed upon. 
 
The judge threw a bone to Reed and the voters, ruling that salaries could be cut to pay for pension costs. But that may be politically difficult to accomplish. The ink was hardly dry on Lucas's opinion before the union representing San Jose police officers warned it would sue if the city tried to reduce salaries outside the collective bargaining process. San Jose, California's third largest city, spends about one-fifth of its $1.1 billion general fund on pensions or retiree costs. Pension costs have played a role in the bankruptcies of Stockton, San Bernardino and other California cities. 
 
Eight states have provisions in their laws or constitutions similar to California's prohibiting pension reductions. One of the eight is Illinois, where a coalition of labor unions last month filed suit against Gov. Pat Quinn (D) and the legislature, which recently approved changes in the retirement system. The new law would affect pensions of an estimated 621,000 teachers, state workers, lawmakers and university employees. It would reduce annual cost-of-living increases and raise the retirement age for those 45 or younger. 
 
Ultimately, the issue of state prohibitions on changes in the pension system could reach the Supreme Court. It's always risky to predict what the high court might do, but a federal judge in the Detroit bankruptcy case sent shudders through union ranks in December when he found that the city's obligations to pay pensions in full are not untouchable. Judge Steven V. Rhodes ruled that pension benefits were "a contractual right" that were unprotected in a federal bankruptcy even though the Michigan state constitution expressly protects them. The decision is under appeal. 
 
As for the California initiative that Mayor Reed is pushing, one doesn't have to agree with its goals to have reservations about the wording used by Attorney General Harris. The ballot summary's first sentence declares that the measure "eliminates constitutional protections for vested and retiree healthcare benefits for current public employees, including teachers, nurses and peace officers, for future work performed." This is grammatically suspect. If written in plain English the words "for future work performed" would follow "constitutional protections." On first reading in a long and complicated ballot, voters might conclude that existing constitutional protections were being eliminated, not just future ones. And why single out "teachers, nurses, and peace officers?" The ballot measure could just as well say "assessors, tax collectors and prison guards." It really shouldn't specify any particular kinds of public employees since it would apply to all of them. 
 
Reed says the killer word is "eliminate." He alleges that this word and most others in the ballot measure's wording seem to have been lifted from a memo that a Washington-based polling firm, Garin-Hart-Research Group, wrote to its public employee clients opposing a measure. On this point, Harris would be justified in saying, "So what?" What matters is not whether the wording was used elsewhere but whether it fairly describes the ballot measure. In this case it doesn't. Whether or not one agrees with the initiative, it should be decided by a vote of the people, not a partisan public official. 
 
That said, the cause of pension reform is ill served by bashing public employee unions. As Donald Boyd and Peter Kiernan observe in a Rockefeller Institute of Government report, public pensions are a societal value worth preserving. That's getting harder to do in a country where private pensions are all but disappearing and unfunded pension liabilities for the states have soared above an unimaginable $4 trillion. To some degree these liabilities occur because politicians in state and city governments made promises they could never have honored. But the nub of the problem as explained by Boyd and Kiernan is that pension funds have based their solvency on gauzy estimates of future earnings without valuing the liabilities by the risk they will not be paid. 
 
This problem has existed for decades but has become steadily more acute. In the mid-1950s there were seven active employees for every beneficiary. Now there are two. As the ratio of employees to beneficiaries declined, pension-fund managers took increasing risks with the assets entrusted to them and plunged into the stock market. In 1980 only 23 percent of pension-fund assets were in equities; it's now 67 percent. Putting most of the pension eggs in the equities basket may have seemed a nifty idea in 2013 when stocks were setting records. But the markets have come back to earth, as they usually do, in what The Economist calls the "wobbly" world economy of 2014. 
 
Mark Funkhouser, ably summarizing the Rockefeller Institute report in the January issue of Governing magazine, "calls it a wake-up call for states and localities to take seriously the issues being raised and deal with them forthrightly and effectively." His article and the report itself are available on line. They are must reading for anyone serious about pension reform. 
 
It's unclear who will ultimately prevail in California over the ballot wording of Reed's proposed pension reform. Even if Reed succeeds in getting the wording changed, he won't have time to gather the signatures necessary to put it on the November ballot, which means waiting until the next election. It's also unclear who will prevail in the ongoing lawsuits in Illinois and Michigan. But even a casual reading of the data in the Rockefeller Institute report suggests that time is running out for pension reform.

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