June 09, 2012 2:15 PM EDT
SAN DIEGO (AP) — For years, companies have been chipping away at workers’ pensions.
Now, two California cities may help pave the way for governments to follow suit.
Voters in San Diego and San Jose, the nation’s eighth- and 10th-largest cities, overwhelmingly approved ballot measures last week to roll back municipal retirement benefits — and not just for future hires but for current employees.
From coast to coast, the pensions of current public employees have long been generally considered untouchable.
But now, some politicians are saying those obligations are trumped by the need to provide for the public’s health and safety.
The two California cases could put that argument to the test in a legal battle that could resonate in cash-strapped state capitols and city halls across the country. Lawsuits have already been filed in both cities.
“Other states are going to have to pay attention,” said Amy Monahan, a law professor at University of Minnesota.
The court battles are playing out as lawmakers across the U.S. grapple with ballooning pension obligations that increasingly threaten schools, police, health clinics and other basic services.
State and local governments may have $3 trillion in unfunded pension liabilities, and seven states and six large cities will be unable to cover their obligations beyond 2020, Northwestern University finance professor Joshua Rauh estimated last year.
In San Jose, current employees face salary cuts of up to 16 percent to fund the city’s pension plan. If they choose, they can instead accept a lower benefit and see the current retirement age of 55 raised to 57 for police officers and firefighters, and to 62 for other employees.
The voter-approved measure in San Diego imposes a six-year freeze on the pay levels used to determine pension benefits for current employees, a move that is expected to save nearly $1 billion over 30 years. Public employee unions have sued to block the measure, saying City Hall failed to negotiate the ballot’s wording as required by state law.
Legal experts expect the cities to argue that their obligations to provide basic services such as police protection and garbage removal override promises made to employees.
In San Diego, the city’s payments to its retirement fund soared from $43 million in 1999 to $231.2 million this year, equal to 20 percent of the operating budget. At the same time, the 1.3 million residents saw roads deteriorate and libraries cut hours. For a while, fire stations had to share engines and trucks. The city has cut its workforce 14 percent since 2005.
San Jose’s pension payments jumped from $73 million in 2001 to $245 million this year, or 27 percent of its operating budget. Four libraries and a police station that were built over the past decade have never even opened because the city cannot afford to operate them. The city of 960,000 cut its workforce 27 percent over the past 10 years.
“It’s a problem that threatens our ability to remain a city and provide services to our people,” said Mayor Chuck Reed. “It’s huge dollar amounts and has a huge impact on services.”
Unions representing police officers and firefighters in San Jose claimed in lawsuits filed last week in state court that the measure violates their vested rights.
“What they’ve done in San Jose is patently unlawful under existing court precedent,” said Steve Kreisberg, national collective bargaining director for the American Federation of State, County and Municipal Employees. “We know of no other places where this has survived legal scrutiny. … There is no justification for essentially seizing the property of employees.”
Michael Lotito, a San Francisco labor lawyer who has represented governments, predicted that dire fiscal straits may carry weight with judges.
“It’s a horrible, horrible story for the taxpayer. But worse off the city is, the more they have to lay off, the stronger legal argument they have,” he said.
The cities are also expected to argue that they are not stripping workers of anything they already earned, only changing what they will earn in the future.
“You don’t have a vested right to keep having your salary increased,” said San Diego City Attorney Jan Goldsmith.
The University of Minnesota’s Monahan said some state courts have recognized that distinction, but not in California, where she said the state courts have held since the 1940s that benefits granted on the first day of employment are protected.
Private companies, whose pensions are governed by federal law, have been whittling away at current employees’ retirement benefits for years. Pensions for state and local government workers are covered by state laws, and those benefits have been left alone for the most part.
<a href=”http://ad.doubleclick.net/jump/news.earthlink.dart/news_300x250_bottom;abr=!ie;sz=300×250;ptile=5;ord=87698636?”><img style=”float:right;margin-left:5px” src=”http://ad.doubleclick.net/ad/news.earthlink.dart/news_300x250_bottom;abr=!ie;sz=300×250;ptile=5;ord=87698636?” border=0 height=”250″ width=”300″></a>Rhode Island has gone further than any other state to cut pensions for current workers under legislation approved last year, and opponents have vowed to challenge it in court, said David Draine, senior researcher at the Pew Center on the States.
Other states have fended off legal challenges to the relatively modest step of eliminating pension increases for inflation.
“This is an area that remains legally unsettled,” Draine said.
City Councilman Carl DeMaio, a chief backer of the San Diego measure who is staking his mayoral bid on a pension overhaul, said he has fielded scores of calls from government officials nationwide interested in copycat measures. He predicted the legal challenges in San Diego will fail.
“We’re showing the way,” he said. “We’re offering a model — at least one model.”
As I have noted before, keep an eye on the trends that develop in the US, we in Canada are often only separated by small distance and ” timing “.
I have never understood why Public Sector salaries and pensions are so generous and not somehow pegged to REALITY.Is it simply because THEY CAN ??
( As I have stated before, it was once an unwritten rule of trade – offs of Public Sector versus Public Sector….Public Sector would be secure employment ie lifetime jobs BUT less pay than the Private Sector ……and vice – versa ).
What I submit has happened is the Private Sector was relatively prosperous and was too busy to pay proper attention. Also , Gov’t has always had the attitude that the Golden Goose ” taxpayer” could forever be plucked for funding .
As many of you may or may not know….many of those in the Public Sector can retire with full pension at AGE 55. The Pension is often based on their best (5) earning years, and if not mistaken it is approx 70% of what they earned while working. For example, if one earned $50,000 per year at retirement, the pension would be $35,000 annually and usually fully indexed.
Recently, the Gov’t stated people will not receive CPP till age 67. Obviously they have noticed an actuarial problem…aka unfunded liability insofar as the vast majority of citizen – taxpayers..
The Taxpayer is not a charity, not a Golden Goose, that was then…. this is NOW and the Future. We are talking about Western Cultures that used to have base of approx.(10 ) working people PER retired citizen/pensioner. Now, the ratio is slowly inching to a 1:1 ratio.
WHEN, not IF the cuts have to be made, the Gov’t had best begin the weaning process towards the Public Sector. When more and more of the Public Sector retire….Gov’t will be crapping its pants . Gov’t will be caught between a rock and a hard place. Gov’t will be caught between (i) a group of citizens in the Public Service with inbred career -long ” feelings of entitlement” , VERSUS (ii) the vast majority of OVERtaxed OVERworked citizens who will never EVER see such generous pay and pensions and will increasingly resent it.
In other words, the Gov’t will only have one choice when it tries to honour all these Public Sector Pensions, and that is to ramp up taxes on the rest of us..aka trying to get blood out of a stone..
So, is the Gov’t going to cater to a minority????, or do what it is supposed to do and work for the BEST and BETTER interests of the majority, and not be bullied by a minority.
Clearly, we, the General Public will be primed for revolt if this is not dealt with, it is INevitable.
If they don’t like it, then they can quit and join the Private Sector. The Gravy Train has not only left the station, it should have been de-railed and addressed long ago.
If we are sing the term “sustainability”..this is certainly simply not sustainable.
Let’s start right here , in the Public Sector , ASAP.