Chuck Reed's Pension Attack Fails to Make the Ballot for a Third Time

Earlier today, former San Jose Mayor Chuck Reed admitted defeat for his third attempt to attack public employees' retirement security.  Accordingly to the Sacramento Bee, the move appears to be motivated by poor polling for the initiative and Reed's inability to raise enough money to pay people to gather signatures in support of the measure.

Reed's campaign for a statewide attack on retirement security follows his failed attempt to attack pensions in San Jose.  Despite his repeated failures of this issue, Reed said he and his partners planned to bring the issue up again in 2018.  He said in a press release that he planned to "re-file at least one of our pension reform measures later this year for the November 2018 ballot."

Reed is joined in his effort by Pacific Grove Mayor Bill Kampe and San Diego politician Carl DeMaio.  Pacific Grove's attack on pensions was ruled unconstitutional in 2013.

PERB Invalidiates San Diego’s Attempt to Bypass Bargaining Over Pensions by Voter Initiative

On December 29, 2015, the Public Employment Relations Board (PERB)ruled in City of SanDiego (2015) PERB Decision No. 2464-M, that the City violated the Meyers-Milias-Brown Act by slashing its plans through ballot initiative rather than bargaining. The three-member Board panel was unanimous in its decision, and ordered the City pay back employees for lost benefits plus interest. The City Attorney has already announced his intent to appeal the decision to the courts, since the value of the benefits the City stripped from its employees is likely in the hundreds of millions.

In 2010, then-Mayor Jerry Sanders began campaigning to “reform” employee pensions. This included a proposal to get rid of City employee pensions and replace them with much cheaper 401(k)-style benefits. In 2011, Sanders and his political allies created the Comprehensive Pension Reform Initiative, later known to City voters as Prop B. Though the Mayor is the Chief Executive of the City—and therefore the chief negotiator for the City in bargaining with employee unions—Sanders did not present his plan as a bargaining proposal to unions, and refused to negotiate when asked. 

The MMBA requires local agencies to meet and confer in good faith with employee organizations over wages, hours, and other terms and conditions of employment. Retirement benefits are unquestionably part of that duty to bargain. Under Seal Beach, public entities have long been required to satisfy bargaining obligations prior to seeking charter changes to employee compensation.  The courts and PERB recognized that if employers could bypass bargaining through legislative or voter enactments, the MMBA could be easily circumvented.  Thus, public entities must bargain over charter changes they wish to submit to a public vote if they impact compensation.

The City attempted to avoid its legal requirements under Seal Beach by miscasting the Mayor's Prop B as the action of private citizens, not public officials, and therefore argued it did not have to bargain with the unions. Sanders himself claimed during the campaign and in the PERB hearing that he was acting as a private citizen, not as the Mayor. PERB saw through the ruse, due to overwhelming testimony proving that Sanders worked on the proposal extensively in his capacity as Mayor, included his staff in the process, and made the Council aware of his intent. This was just a scheme to get around the City’s duty to bargain.

Though the fight isn’t quite over, PERB's ruling vindicates the long standing holding of Seal Beach and represents an important win for public sector collective bargaining rights in California.  PERB’s decision will likely next be heard by the Fourth District Court of Appeal.

CalPERS Pension Benefits Generate Over $30 Billion in Economic Activity

The California Public Employees' Retirement System (CalPERS) released a study today demonstrating retirement benefits paid out by CalPERS generated $30.9 billion in economic activity across the State. For every one dollar of public funds invested in CalPERS, the fund returns $9.64 of economic activity throughout the state. CalPERS benefits paid directly to members have large impacts in the housing, restaurant, and health care industries. CalPERS also invests $25.7 billion dollars in California businesses, supporting millions of jobs across the state. The report breaks down the economic impact by state congressional district so tax payers can see how CalPERS benefits their local economy.

For eight decades, CalPERS has built retirement and health security for State, school, and public agency members who invest their lifework in public service. CalPERS serves more than 1.7 million members and administers benefits for more than 1.4 million members and their families in the health program. CalPERS is the largest defined-benefit public pension in the United States. The current market value of the CalPERS general fund is approximately $304 billion dollars.

California Attorney General Releases Title and Summary for Pension Busting Initiative

On August 11, 2015, the Office of the Attorney General released its title and summary for former San Jose Mayor Chuck Reed's pension busting initiative. The highly divisive initiative would strip pensions from public employees and allow voters to modify compensation packages at will. Fortunately, the Office of the Attorney General's title and summary highlight the problems with this initiative.

 

All ballot initiatives must be submitted to the Office of the Attorney General prior to being placed on the ballot. The Office of the Attorney General creates a title and summary of the initiative to appear on the actual ballot. 

 

The title the Office of the Attorney General gave Reed's initiative is "Public Employees. Pension and Retiree Healthcare Benefits. Initiative and Constitutional Amendment." The summary aptly states the initiative, "[e]liminates constitutional protections for vested pension and retiree healthcare benefits for current public employees." This language demonstrates how drastic this reform is and how it will prejudice California's public employees. The summary also notes the long term effects of the initiative are unknown and "depend heavily on future decisions made by voters, governmental employers, and the courts."

 

Mastagni Holstedt, APC has used the Contracts Clause in California’s Constitution to protect vested employee benefits in several high profile court battles: Stockton (fiscal emergency declaration does not authorize City to renegotiate a closed labor contract), Los Angeles (fiscal emergency declaration does not permit freezing retiree medical benefits or imposing furloughs), Pacific Grove (Ballot measure capping PERS pension contributions unconstitutional).  Similar rulings were obtained by the police and fire unions in San Jose invalidating in substantial measure Reed’s San Jose pension impairments.

 

This pension "reform" effort is led by Democrat Chuck Reed and his lawyers. As we blogged previously, the initiative amends the California Constitution to allow voters to impair employment contracts. While Reed claims his measure will not impair current employees' pensions, even Daniel Borenstein of the Contra Costa Times has acknowledged "the initiative would amend the state Constitution to give voters the right through an initiative or referendum to reduce the future pension accrual rate for current employees…Reed and DeMaio should be honest about it, or abandon the measure."

 

Additionally, the Constitutional amendment would abolish pensions for employees hired after January 1, 2019 and replace them with a "defined-contribution" system unless changes to benefits are approved in an election.  In a defined-contribution system, employees have to pay in a fixed amount with no guarantee of what their retirement income would be.  As a result, this approach shifts the risk and could prevent thousands of public employees from retiring.

 

The proposal is not limited to retirement benefits.  It provides, "Voters have the right to use the power of initiative or referendum... to determine the amount of and manner in which compensation and retirement benefits are provided to employees of a government employer."  As a result, the Constitutional Amendment would likely be used to pursue local voter initiatives to bypass collective bargaining to reduce public safety compensation or due process rights.

 

The proposal also seriously jeopardizes death and disability benefits for public safety employees. The new proposal states it shall not be “interpreted to modify or limit any disability benefits provided for government employees or death benefits for families.” But death and disability benefits are often an integral part of a pension plan. As noted by the Legislative Analyst's Office, death and disability benefits are usually prefunded through a pension plan's normal cost. If voters can modify, or even eliminate, pensions for public employees, this necessarily means the funding for death and disability benefits will be cut.  The measure does not provide any means of securing those benefits.

 

The proposal also seeks to insulate future measures from legal challenge by eliminating the jurisdiction of the Public Employment Relations Board to hear unfair practice charges regarding future measures which impair vested rights or collective bargaining agreements. 

 

Now that the initiative has a summary, the proponents must furnish the required number of signatures in order to make the November 2016 ballot. You can help stop this initiative by educating your family, friends, and community members about the drastic and detrimental effects of this initiative and encourage them not to sign any petition supporting the initiative. You can help stop future attempts to impair retirement benefits by opposing all candidates who endorse this imitative.

Mastagni Holstedt, APC Protects Retirement Rights in the Court of Appeal

Mastagni Holstedt, APC filed an amicus brief with the California Second Appellate District, Division One. At issue are adjustable retirement health subsidies under the City of Los Angeles’ retirement system. In 2006, the City of Los Angeles passed an ordinance which allowed the Board of the Los Angeles Fire and Police Pension System to provide an adjustable retirement health subsidy. This adjustable rate would allow the City to increase contributions as costs increased over time.

However, in 2011, the City of Los Angeles passed an ordinance freezing future increases to the subsidy. Los Angeles employee organizations brought suit alleging this violated their vested right to a variable subsidy. The trial court agreed and ordered the City to increase the subsidy pursuant to the 2006 ordinance.

The City appealed the decision arguing it had plenary authority to modify the pension subsidy as it was a type of “employee compensation.” In its brief, Mastagni Holstedt, APC argues a pension subsidy is not salary, but is instead a vested benefit. The California courts have already held on numerous occasions a pension benefit, once vested, cannot be revoked. The California Constitution’s Contracts Clause prohibits such an action. Thus, the City cannot arbitrarily revoke a benefit by reforming it as “employee compensation.”

Mastagni Holstedt, APC thanks the employee organizations who joined the firm in fighting back against the destruction of employee benefits.  Mastagni Holstedt attorneys David E. Mastagni, Isaac S. Stevens, and Ian B. Sangster represent the amici in the matter.

Chuck Reed Tries New Tactic in Pension Assault

Chuck Reed announced a new strategy to attack pensions in California today.  The text of new proposal has several features designed to take away employees retirement benefits.

It would abolish pensions for employees hired after January 1, 2019 and replace them with a "defined-contribution" system unless changes to benefits are approved in an election.  In a defined-contribution system, employees have to pay in a fixed amount with no guarantee of what their retirement income would be.  As a result, this approach shifts the risk and could result in thousands of public employees unable to retire.

The proposal is not limited to retirement benefits.  It provides, "Voters have the right to use the power of initiative or referendum... to determine the amount of and manner in which compensation and retirement benefits are provided to employees of a government employer."  As a result, the measure could be read to allow voter initiatives to eliminate or change MOUs, severely limiting collective bargaining in California.

The proposal also seeks to prevent the Public Employment Relations Board from hearing unfair practice cases involving ballot measures to strip employees of bargained-for compensation.

Chuck Reed Provides a Preview of His Threatened Assault on the California Constitution

On April 10, 2015, the Reason Foundation held their third annual Pension Summit. The Summit focused on a recent report by the Foundation which concluded the 2012 Public Employees' Pension Reform Act failed to fix California's pension problems. The keynote speaker for the event was former San Jose Mayor Chuck Reed. Reed presented his 2016 ballot initiative aimed at dismantling California pensions at the event. IAFF Local 522, along with other public employee organizations, picketed the event, letting Reed know his pension busting efforts are not welcome in Sacramento.

Pat Cook, in blue,
Local 522
Secretary-Treasurer

After a string of court losses invalidating local governments' efforts to break their contractual obligations, Reed seeks to undermine Californians' constitutional rights by eliminating or altering the Contracts Clause in California’s Constitution. Currently, both the United States' Constitution and California’s Constitution include a Contracts Clause barring public entities from taking actions impairing contracts. The courts have construed the Contracts Clause as requiring the state, counties, and cities to provide promised pension benefits. In Allen v. City of Long Beach the California Supreme Court held an employee has a vested (i.e. contractual) right to receive the pension benefits his public employer promised him.

Mike Feyh, in green, Local 522 Director of Membership Services

The Contracts Clause prevents public entities from walking away from all their contractual obligations, not just pension obligations. The Contracts Clause protects all Californians from legislation that impairs contracts with public entities, such as bond repayment obligations and commercial contracts. Without it, public entities would likely not even be able to borrow from the bond market, because financial institutions would not be able to rely on agencies' promises to repay their debts. While Reed's goal is to attack public employees' property rights in their pension, his efforts could undermine governments' contracts with private citizens, vendors, businesses, and lenders.

In recent years, California courts have rejected local governments’ attempts to impair employees’ vested benefits to address supposed “fiscal emergencies.” Our office vindicated both the U.S. and California Contracts Clauses in several high profile court battles: Stockton (fiscal emergency declaration does not authorize City to renegotiate a closed labor contract), Los Angeles (fiscal emergency declaration does not permit freezing retiree medical benefits or imposing furloughs), Pacific Grove (Ballot measure capping PERS pension contributions unconstitutional).  Similar rulings were obtained by the police and fire unions in San Jose invalidating in substantial measure Reed’s San Jose pension impairments.

To circumvent these Constitutional protections, Reed's initiative would grant public entities Chapter 9 Bankruptcy type powers to unilaterally modify their contractual obligations, but without the creditor protections and judicial oversight of bankruptcy proceedings. Reed abandoned a similar initiative on the ballot for the 2014 election after unsuccessfully suing Attorney General Kamala Harris over the title and summary her office assigned to it.



Chris Andrew, Local 522
 City Vice President

Reed’s initiative would modify the Contracts Clause to allow public entities to impair their contractual obligations by majority vote of their governing body. Reed’s new initiative would likely accomplish this by repealing the California Contracts Clause altogether or singling out public employees for elimination of their Constitutional rights. Either approach is repugnant. Excluding public employees’ contracts from the Contracts Clause would allow governments to redirect money promised to public safety employees for politicians' personal spending priorities (politicians rarely return savings to the tax payers). Eliminating the Contracts Clause altogether would threaten everyone's contracts with the government.

 
 

Reed’s new initiative also fails to account for the Contracts Clause of the U.S.  Constitution which provides the same protection against impairments of contract. Even if Reed succeeds in altering the California Constitution, future attacks on vested pension benefits will likely remain unconstitutional under the U.S. Constitution.  California courts have held that the California and United States Contracts Clauses are construed the same. (See for example San Bernardino Public Employees Assn. v. City of Fontana and Kern v. City of Long Beach.) In the last 47 years, no court in the Ninth Circuit has upheld a public agency’s attempt to impair its own contractual obligations. (See So. Cal. Gas Co. v. Santa Ana.) Thus, damaging the California Constitution will not insulate Mr. Reed’s agenda from Constitutional protection.

Public employees are already working to expose Reed’s new initiative for what it is: an attempt to use the ballot box to accomplish what the courts already prohibited governments from doing. Keep an eye on this blog for continuing updates on Reed’s efforts to rewrite our Constitution.



Court of Appeal: No Vested Rights in Post-Retirement Pension Benefit Enhancements

On March 27, 2015, the California Court of Appeal held employees who retired before certain pension benefit enhancements went into effect did not have vested rights to those benefits. The court's decision in Protect Our Benefits v. City and County of San Francisco held retirees' post-retirement benefit enhancements were exposed to legislative impairment.

Beginning in 1996, retired employees of the City and County of San Francisco ("City") received supplemental cost of living allowances ("supplemental COLA") for their pension benefits when the retirement fund's earnings from the previous year exceeded projected earnings. But in November 2011, voters passed an initiative conditioning payment of the supplemental COLA on the retirement fund being "fully funded."

The court held the initiative improperly impaired vested contractual rights for current City employees and those who retired after the 1996 supplemental COLA went into effect. However, the court upheld the November 2011 initiative for City employees who retired before the 1996 supplemental COLA went into effect because they had no vested rights in the supplemental COLA. Vested pension rights are created at the time the employee provides services for the employer. The pre-1996 retirees' vested rights were limited to the pension benefits in effect at retirement, and they had no vested rights in the post-retirement supplemental COLA enhancements.

California Court of Appeal Strikes Blow to Employee Pension Rights

On January 22, 2015 the California Court of Appeal changed how the Legislature can change pension benefits under a contract.  The Legislature may change current contractual pension benefit formulas for new employees. But, the Legislature may not alter pension contribution requirements under a current contract.

In DeputySheriff’s Association of San Diego County v. County of San Diego the County and Deputy Sherriff's Association had a memorandum of understanding. The contract contained provisions related to pension benefits. The contract's pension formula for members was 3 percent at 55. The contract also required the employer to pay a percentage of the employee’s pension contribution.
 

The California Public Employees’ Pension Reform Act of 2013 went into effect on January 1, 2013. The Act required that new safety members receive less than 3 percent at 55. PEPRA also limits employer contributions. Employers may not cover an employee's required contributions. The DSA argued PEPRA unconstitutionally impaired the contract terms. If a contract is in place then the Legislature cannot alter it until it expires. 
 

The Court of Appeal did not agree with the DSA.  The Court said a benefit vests when the employee begins working under the terms of the contract. Future employees cannot claim a vested benefit until they begin working. Thus, the Legislature could alter the pension benefits for new members.
 

The Court of Appeal also found an impairment of the contributions under the contract. PEPRA's contributions provisions cannot conflict with current contract terms. PEPRA as applied here would change the terms of the agreement.  Therefore, PEPRA would not apply until the agreement expired on June 26, 2014.

Judge Approves Stockton Bankruptcy Plan - Saves CalPERS Investment

In a decisive win for public employees, Judge Christopher M. Klein today ruled in favor of Stockton's bankruptcy plan of adjustment, preserving the city's contract with CalPERS. The judge noted that the bankruptcy cuts had already reduced compensation below market. Hopefully this ruling will help stabilize police recruitment and retention in Stockton which has been unable to fill vacant police positions and has experienced a loss of nearly half its veteran officers over the last 3 years.

Earlier this month, Judge Klein had ruled that bankruptcy law preempted state law barring the impairment of CalPERS pensions in bankruptcy. City officials acknowledged that if the pensions were impaired they would experience a further exodus of police officers and city employees, who would have to obtain employment in another CalPERS or reciprocal agency within six months to retain their classic employee pension status under PEPRA. Judge Klein noted that re-doing the entire pension system would be no simple task. To even compete in the labor market, the City would also have to establish a new similar pension system that might be more expensive than CalPERS.

Judge Klein also held that PERS is not the creditor that would suffer the impairment. He found that the employees would receive the pension cuts, not PERS, and that employee compensation must be considered as a whole, including pension obligations. Many Stockton employees, including the police department, had made considerable sacrifices to keep the city afloat. These sacrifices included eliminating retiree health care completely, cutting salaries for current employees by 20-30%, reducing pensions for new hires, and requiring employees to contribute to their pensions. The Judge held that these changes were the result of long, difficult negotiations between labor organizations and the city. Judge Klein held that labor agreements cannot easily be set aside and recognized the importance of those negotiations and post-bankruptcy labor agreements.

Judge Klein concluded his ruling by issuing a stern warning to other public entities considering Chapter 9 bankruptcy. As the City's attorneys fees alone totaled nearly $14 million, Judge Klein stated that the high costs exceeded expectations and present a sobering lesson why municipalities should not file for bankruptcy. The objecting creditor, Franklin Templeton's, attorney told Judge Klein:  "Obviously, we're disappointed by your ruling. We will evaluate our next steps."

Stockton Bankruptcy Ruling May Not Have Practical Affect on Employee Pensions

During Stockton bankruptcy proceedings on Wednesday, October 1, 2014, Judge Klein stated the City could reject the CalPERS contract under the bankruptcy code. Pension reform supporters overstate Judge Klein's oral ruling as a major blow to public employee pensions. In reality, this ruling may not affect Stockton employee pensions.

Judge Klein heard oral arguments from the City and its creditors about whether the contract between CalPERS and the City could be rejected in bankruptcy. The City's proposed bankruptcy plan maintains the City's CalPERS obligations and preserves employee pensions. One of the City's creditors, Franklin Templeton Investments, argued it was unfair for the City to maintain its contract with CalPERS at the expense of other creditors. State law provides that CalPERS contracts may not be impaired in bankruptcy. However, the state law contradicts the bankruptcy code, which allows impairment of contracts that have not been fully performed. Judge Klein ruled the City could cut ties with CalPERS under the bankruptcy code and impair employee pensions to allow more money for other creditors.

While this ruling suggests pensions may be vulnerable during municipal bankruptcies in the future, it is unlikely to affect pensions in this case. Judge Klein's oral ruling is not yet binding. He is scheduled to rule on the City's proposed plan on October 30, 2014. If he confirms the plan, this issue is avoided altogether because the current plan does not impair the CalPERS contract.

Even if the City has the option to reject the CalPERS contract, the City recognizes doing so would be highly impractical. The costs of losing the CalPERS contract greatly outweigh any potential benefits. This would force Stockton to join another retirement system, such as the San Joaquin County Employee Retirement Association, or create its own retirement system. Both options would likely cost at least as much as maintaining its CalPERS contract. 

If the City lost its contract with CalPERS, it may not be able to offer pensions to employees. The City estimated it could only recover 60% of the money necessary to fund its employees' pensions if CalPERS terminated its contract. Losing employee pensions would make the City unfit to compete in the labor market. This would inevitably cause a mass exodus of employees from the City and make it extremely difficult to attract new employees. Under PEPRA, Stockton employees would have to start working for another CalPERS contracting agency within six months after CalPERS terminates its contract with the City to avoid being treated as "new employees" and subjected to significantly worse pension formulae and cost-sharing rules.

Terminating the CalPERS contract would also throw the entire bankruptcy proceeding back into chaos. It would breach most, if not all, labor agreements as well as the settlement the City negotiated for retiree medical. The City would be forced to revise its current plan and reallocate the available funds. Additionally, it would give CalPERS a claim in the bankruptcy worth well over $1 billion.

In short, while the ruling is disconcerting, there is a significant chance this will not have any practical affect on Stockton employee pensions.

Ventura County Pension Initiative Barred from November Ballot

On August 4, 2014, Ventura County Superior Court Judge Kent Kellegrew tentatively decided to issue an injunction barring the initiative to phase out Ventura County's pension system from appearing on the November 2014 ballot. The ruling has significant statewide implications for counties that participate in CERL.

The initiative seeks to withdraw Ventura's participation in the County Employees Retirement Act of 1937. This would put future Ventura County employees into a 401(k)-type retirement savings plan rather than the benefit plan covering current employees. The court held Ventura county cannot 'opt out' or terminate its participation in the Act based on a countywide voter initiative.

When the Legislature enacted the Act, it permitted individual counties to choose to participate. When Ventura County chose to participate in the Act, it agreed to follow the rules established by the Legislature. The Legislature only allows a county to terminate participation in the Act using the procedures set forth in Government Code sections 31564 and 31564.2. These procedures do not allow a county to opt out of the Act using a countywide voter initiative.

The court held allowing this measure to be considered on the November ballot would only result in wasted public resources. Even if the voters adopted the initiative, the measure could not be implemented because the initiative did not comply with Government Code sections 31564 and 31564.2.

In addition, the initiative fails on other grounds. The court held the initiative violates the single subject requirement imposed by the California Constitution.

On Wednesday, August 6, 2014, the Ventura County Taxpayers Association said it will not appeal Judge Kellegrew's August 4 ruling. This ruling marks a significant victory in preserving pension rights for county employees.

The ruling is unique as a pre-election challenge victory. After the superior court denied a pre-election challenge to a retirement-related Menlo Park initiative, most victories, such as those in San Jose and Pacific Grove successfully challenged initiatives after the election. This win helps establish that even highly unusual pre-election challenges can thwart attacks on retirement security.

Illinois Supreme Court: Pensions Protected By State Constitution

In Kanerva v. Weems (July 3, 2014), the Illinois Supreme Court ruled health-insurances subsidies for retired state workers are protected under the Illinois Constitution. The ruling poses a challenge to Illinois’ recent pension reform legislation and may force the State to consider raising revenue rather than cutting benefits.

Recently, the State attempted to reform the pension system by imposing healthcare insurance premiums on its retired workers, reducing cost-of-living increases for pensions, raising retirement ages, and limiting the salaries on which pensions are based. Retirees challenged a recent amendment to the State Employees Group Insurance Act, arguing it violated pension protection clause of the Illinois Constitution. The high court agreed, finding the pension protection clause applies to an Illinois public employer’s obligation to contribute to the cost of health care benefits for employees covered by one of the state retirement systems.

In a similar case, David E. Mastagni and Isaac S. Stevens, obtained a decision in the Los Angeles County Superior Court for the Los Angeles City Attorneys’ Association (LACAA). They argued the City of Los Angeles’ freeze ordinance, which capped retiree medical premiums at $1,190 with no increases, unconstitutionally impaired a contractual obligation to LACAA’s members because a maximum medical plan premium subsidy is a vested right. The court agreed, finding the freeze ordinance was an impairment of a vested right to a substantial or reasonable benefit and issued a writ of mandate directing the City to compute and provide the health insurance premium to LACAA’s members without regard to the City’s freeze ordinance.

CalPERS Fights for Retirement Security in Detroit

The California Public Employees' Retirement System ("CalPERS") filed an amicus brief in the United States Court of Appeals to support the Committee Retirees of the City of Detroit and others in appealing the bankruptcy court's determination that Detroit is eligible for bankruptcy.  Specifically, CalPERS seeks to reverse the bankruptcy court's ruling that, once a state authorizes a city to file for Chapter 9 bankruptcy, state laws and constitutions no longer control the city's actions.  The bankruptcy court's decision holds that a city can impair the rights of a public pension system in bankruptcy despite state laws prohibiting such impairment. 

In the amicus brief, CalPERS argues the bankruptcy court erred by providing an improper advisory opinion.  The bankruptcy court advised that retirement pensions may be impaired in a manner consistent with the 10th Amendment.  CalPERS argued the bankruptcy court should not have ruled on the constitutional issue when it was unnecessary to the court determining whether Detroit was eligible for bankruptcy.  CalPERS asserted the constitutional issue was not "ripe" for review, meaning it was not ready for the court's consideration.  Federal courts may not enter into a controversy before it has solidified, or before all other available remedies have been exhausted.

CalPERS also argues the bankruptcy court's decision nullifies Bankruptcy Code section 903, which expressly preserves state laws governing municipalities during bankruptcy.  Lastly, CalPERS argued the court's analysis was problematic because the court improperly created a presumption in favor of eligibility in interpreting the good faith filing requirement.  CalPERS seized the opportunity to weigh in on these critical issues affecting the retirement security of more than 1.7 million CalPERS members.

9th Circuit: Pooling Premiums Not a Vested Contract Right

On February 13, 2014, the Ninth Circuit issued an opinion in Retired Employees Association of Orange County, Inc. v. County of Orange (2/13/2014) 9th Cir. 12-56706. The Retired Employees Association of Orange County (“REAOC”) filed a lawsuit against the County of Orange when the County decided to stop pooling retired and active employee health insurance premiums.

From 1985 to 2007, the County pooled health insurance premium rates for retired and active employees. Pooling the premiums balanced active and retiree rates and helped lower premium costs for retirees.  But on January 1, 2008, the County and various labor unions reached an agreement to reform the County’s health care program. The agreement split the insurance rate pool so active employee health benefit premiums were separate from those of retired employees.  REAOC sued, arguing the County’s longstanding practice of pooling premiums, and the County’s representations to employees regarding that practice, created an implied contract right for employees who retired prior to January 1, 2008.

California law states where a County intended to create a contractual obligation by resolution or ordinance, the contract may include implied terms derived from experience and practice. The California Supreme Court stated vested health benefits can be implied under certain circumstances from a county ordinance or resolution.

REAOC contended the County established a vested right for retirees to have their health benefit premiums pooled in the future by adopting the pooling scheme year after year. However, the Ninth Circuit held the resolutions supported enrollment in County health plans at a specific rate for a given year, but did not create a vested right to have benefit premiums pooled in the future. In other words, the Board’s approval of health premium pooling in years prior, by itself, did not create an ongoing contractual right.

Court: Key Parts of San Jose Measure B Unconsitutional

On December 20, 2013, the Santa Clara County Superior Court overturned the heart of Measure B, San Jose's attack on employees' pensions.  In doing so, the court followed the Monterey and Los Angeles superior court which have overturned similar attacks on employees' vested rights.

The court overturned part of Measure B that shifted financial responsibility for unfunded liabilities from the City to employees.  That section would have dramatically increased employees' contributions into the system.  The court found that employees had a vested right to have the City pay that portion.  As a result, Measure B unconstitutionally impaired their vested rights.

The court also overturned a provision that allowed the City council to suspend retirement Cost-Of-Living-Adjustments (COLAs) by "declaring a fiscal emergency."  COLAs are not always vested rights, but the court found that retirees in this system had a vested right to COLAs.  The court overturned this section, noting it is not enough for a city council to declare an emergency.  Instead, there has to really be an emergency.  Further, an impairment to a vested right on emergency grounds has to be temporary.  Since this section did not require a real emergency and impaired vested rights in a permanent way, the court ruled it was unconstitutional.

The court upheld other portions of Measure B related to disability retirement, supplemental payments to retirees, retiree medical, and wage cuts.  The court also found "that the Measure B sections at issue in this case can proceed as to new employees."

Trust Counsel: California Pensions More Secure Than Detroit's

After a Michigan bankruptcy judge opened the door to cutting public employees' pensions as part of the City of Detroit's bankruptcy, some observers suggested the ruling opens the door to similar tactics in California. But as Harvey Leiderman, the well-regarded trust counsel to CalPERS and other retirement systems, recently explained, California's pensions are very different from - and more secure than - Detroit's.

Leiderman explained Michigan's pension system hinges on a contractual relationship between two groups: retirees and employers, making it more vulnerable to impairment in bankruptcy.  That's because bankruptcy courts (unlike employers themselves) have special powers to impair contracts.  California's system, however, has three groups: retirees, employers, and pension trusts, such as CalPERS.

Leiderman explains that California's system includes legal duties between employers and pensions trusts on the one hand, and pension trusts and retirees on the other.  These duties are the product of state laws, not contracts.  He used this chart to illustrate the relationship:

Thus, even without contracts, California public employers have a duty to pay CalPERS and CalPERS has a duty to pay retirees.  Read the full article here.

Poll Shows Californians Oppose Reed Initiative

A recently survey conducted December 5-9, 2013 shows Californians coming out against the Reed Initiative by a margin of 49% to 35%.  The poll shows an overwhelming majority of Californians oppose efforts to eliminate public servants' pensions.  Specifically, the poll noted that 54% of California strongly oppose "Eliminating Police, Firefighters, and Other Public Employees Vested Pension Benefits."  Read the report on the new poll here.

British Firefighters Poised to Strike Over Retirement Age Increase

Firefighters in England and Wales announced today they plan a 4-hour strike to protest a proposal to raise their retirement age to 60 because raising the retirement age jeopardizes public safety.  The firefighters' labor union, the Fire Brigades Union, explained "It is ludicrous to expect firefighters to fight fires and rescue families in their late 50s - the lives of the general public and firefighters themselves will be endangered. None of us want a strike, but we cannot compromise on public and firefighter safety.” It will be the first nationwide strike of firefighters in that country in a decade.

Judge: Unconstitutional for Detroit to Go After Pensions in Bankruptcy

On Friday, a Michigan trial court judge ruled it violates Michigan's state constitution for Detroit to go after vested pension rights in bankruptcy.  The ruling follows Detroit's rush to bankruptcy court which may affect up to 21,000 retirees.  The Court ruled Detroit violated state law because the state constitution prohibits the government from doing anything to impair pensions.

Article IX, section 24 of the state constitution of Michigan reads, "The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby."  The judge explained "The Governor is prohibited... from authorizing an emergency a manager ... to proceed under Chapter 9 in a manner which threatens to diminish or impair accrued pension benefits."  Accordingly, the judge ordered Detroit's emergency manager to withdraw Detroit's bankruptcy petition.  Read the Court's ruling here.

Some advocates for bankruptcy in Detroit claimed the City must go after pensions to declare bankruptcy and address other forms of long-term debt.  However, in a related case, the U.S. Bankruptcy Court for the Eastern District of California ruled the City of Stockton does not have to go after pensions to be eligible for bankruptcy.