San Jose Mayor and pension reformer Chuck Reed, who spearheaded the successful passage of the city’s Measure B pension reforms with 69 percent of the vote in favor, is launching a statewide pension reform initiative along with four other California mayors. Reed, along with San Bernardino Mayor Pat Morris, Pacific Grove Mayor Bill Kampe, Anaheim Mayor Tom Tait, and Santa Ana Mayor Miguel Pulido—all of whom are Democrats except for Tait, who is a Republican—filed the measure, known as “The Pension Reform Act of 2014,” with the California Attorney General’s Office yesterday. The constitutional amendment would allow the state and local governments within California to reduce public employee’s pension benefits on a go-forward basis. Under the measure, all benefits earned by existing employees up until the enactment of the measure, if passed, would be protected, but future, unearned benefits could be reduced.
The measure asserts that such a reform is necessary because the California legislature has not adequately addressed the issue, and that public-sector pensions should operate under the same rules as private-sector pensions:
This voter-sponsored measure is necessary because attempts to reform the system through legislation and other initiatives have been inadequate. Even though the Little Hoover Commission has confirmed that California cannot solve its pension problems without making prospective changes going forward for current employees, the pension reforms passed by the Legislature in 2012 did not include such necessary changes. In addition, more substantial pension reforms adopted by local governments are at-risk of being overturned by the courts due to a lack of clarity in the law. While private sector pension plans are governed by federal laws that allow the plan sponsors to prospectively change employee benefits and provide for specific remedies when the plans become financially distressed, some argue that the language in some California judicial decisions hold that the same standard does not apply to public pensions. Finally, the citizens of California strongly support pension reform and believe the 2012 state legislation did not fix the problem.
Among the measure’s provisions are the following:
SEC. 12(a)(l) From the effective date of this Section, to the extent any government employer confers its current employees with vested contractual rights to pension or retiree healthcare benefits of any kind, such rights shall be earned and vested incrementally, only as the recipient employee actually performs work, and only in proportion to the work performed, subject to the vesting periods established by the applicable plan.
(2) Nothing in this subsection shall affect pension or retiree healthcare benefits earned and accrued for work already performed by emplo1ees or retirees.
(b) For any government employee hired after the effective date of this Section, to the extent any government employer confers these employees with vested contractual rights to pension or retiree healthcare benefits of any kind, such rights shall be earned and vested incrementally, only as the employee actually performs work, and only in proportion to the work performed, subject to the vesting periods established by the applicable plan.
[. . .]
(e) The terms of a pension or retiree healthcare benefit plan for work not yet performed may be amended through a labor agreement, an action by a legislative body, or an initiative, referendum or other ballot measure initiated by the voters or by a legislative body. Any such amendments to pension or retiree healthcare benefits made by a legislative body, whether by legislation or by placing a measure on the ballot, shall comply with applicable collective bargaining laws.
[. . .]
(h) The amount employees are required to pay for pension or retiree healthcare benefits is a component of an employee’s compensation package, and may be amended through a labor agreement, an action by a legislative body, or an initiative, referendum or other ballot measure initiated by the voters or by a legislative body.
(i)(1) If a government employer finds its pension or retiree healthcare plan is substantially underfunded and is at risk of not having sufficient funds to pay benefits to retirees or future retirees, or declares a fiscal emergency because the financial condition of the government employer impairs its ability to provide essential government services or to protect the vital interests of the community, the government employer, in addition to its current powers and the powers set out in this Section, shall have the authority to implement one or more of the following actions for all employees, within the limits of the United States Constitution:
(i) Reduce the rate of accrual for pension or retiree healthcare benefits to be earned in the future.
(ii) Reduce the rate of cost of living adjustments for pension or retiree healthcare benefits to be made in the future.
(iii) Increase the retirement age for payment of pension or retiree healthcare benefits to be earned in the future.
(iv) Require employees to pay a larger share of the cost of pension or retiree healthcare benefits.
(v) Other reductions or modifications of pension or retiree healthcare benefits agreed upon during collective bargaining.
[. . .]
(j)(1) For any pension or retiree healthcare plan with assets equaling less than 80 percent of the plan’s liabilities, as calculated by the plan’s actuary using generally accepted accounting principles, the government employer shall prepare a pension or retiree healthcare stabilization plan.
Speaking about the growing problem of public pension liabilities at the Hoover Institution’s California Pension Solutions Conference last week, Reed asserted, “The government can’t afford these benefits, and the employees can’t afford these benefits.”
A similar effort to curtail future, unearned pension benefits for current government employees was included in Reed’s Measure B reforms for San Jose, which are currently being tested in the courts. While many have argued that benefits for current government employees in California cannot be rolled back—even future benefits that have not yet been earned—San Jose contends that since it is a charter city, and thus has greater flexibility in determining its employee compensation levels, the changes made by the new pension law are perfectly legal.
” Read the full text of The Pension Reform Act of 2014 here.
” See this San Jose Mercury News article for more details on Mayor Chuck Reed’s statewide pension proposal.
” See here for more information on San Jose’s Measure B pension reforms.
Note: This article was updated to include the proper titles for mayors Morris, Kampe, Tait, and Pulido, and to make minor corrections to their names.
Stay in Touch with Our Pension Experts
Reason Foundation’s Pension Integrity Project has helped policymakers in states like Arizona, Colorado, Michigan, and Montana implement substantive pension reforms. Our monthly newsletter highlights the latest actuarial analysis and policy insights from our team.