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The Blue Mayor Who May Solve Our Pension Crisis


The man who may pave the way for solving America’s pension crisis is a Democratic mayor from California. San Jose’s Chuck Reed is mounting a campaign to roll back a ludicrous legal precedent, set by the California Supreme Court, which maintains that state and local pensions constitute a contract between worker and employer that cannot be reformed. Federal standards for the private sector hold that unearned employee retirement benefits can be changed, but nearly half of America’s states have decided that those benefits in the public sector, as part of a “contract”, are set in stone.

Up against the united front and deep pockets of public employee unions in California, Reed wants a voter ballot initiative to reform the state constitution so public pension plans can be revised. Steven Malanga has an excellent op-ed at Bloomberg with the details:

California courts have not only applied this precedent to pensions, but they also have recently been expanding it to other benefits. In 2011, the state Supreme Court ruled that retiree health-care benefits are, like pensions, a vested contractual right that can’t be changed. In September, a Los Angeles judge used that precedent to rule that the city couldn’t freeze retiree health-care benefits.

Reed’s proposed ballot initiative to change the state constitution would specifically eliminate the notion that employee benefits are a contractual right that bars all future changes. He is pushing for the amendment because workers are challenging a San Jose pension measure approved by 70 percent of the city’s voters last November. Reed, a Democrat, promoted that local initiative to lower pension costs, because he said the change was essential to preserving the city’s fiscal future and public services. Annual payments by San Jose to fund government pensions have risen to $245 million in 2012 from $73 million in 2002.

Read the whole thing to get a sense of the steep hill Mayor Reed has to climb, and the world of possibility that awaits at the top. If California voters ratify his initiative, public officials in Illinois, New York and elsewhere may yet build up the courage to try to amend their own systems to help solve one of America’s biggest domestic challenges.

[Chuck Reed photo courtesy of Getty Images]

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  • MWFlorida

    Here’s what I don’t get: If pensions can never be changed, doesn’t that also mean they can’t be changed to be more favorable for the employee? If they can’t be changed for the worse, doesn’t fairness dictate they also can’t be changed for the better?

    If this logic is correct, new retirees today should receive the benefits that were in place on their date of hire. I suspect these are a lot less lucrative than what they are getting. This approach could save states a lot of money and help restore their pension plans to solvency.

    • Corlyss

      “If they can’t be changed for the worse, doesn’t fairness dictate they also can’t be changed for the better?”

      VM’s use of sloppy language accounts for the confusion. The principle is the state cannot unilaterally take away that which has built up and expectation and reliance in the recipient, any more than the pensioner could unilaterally raise his benefit without the concurrence of the state. It’s a contract concept. Contracts just do not afford one party the right to make unilateral changes to the detriment of the other party. [Now perhaps it’s easier to understand why contracts, the right of contract, and the disposition of contracts is a cornerstone of a free society, a society of laws rather than men – contracts have much more to do with establishing freedom and universal suffrage than one would think just looking at it as a facilitation for the exchange of goods and services].

  • Corlyss

    “ludicrous legal precedent, set by the California Supreme Court, which maintains that state and local pensions constitute a contract between worker and employer that cannot be reformed.”

    I don’t know what’s ludicrous about it. The pensions are contract terms. Generally speaking in contract law, material changes to contracts, including employment contracts, require the approval of both parties to the contract. The feds treat pensions the same way, i.e., as inviolable by one side alone. If the terms are going to be renegotiated, fine. But one party can’t make the changes by itself. Frankly reduction of pension benefits constitute a material change to the contract terms. Not only that but payment of pensions at the current levels has built up an expectation and reliance in the recipient for which the state will answer in equity if it tries to unilaterally reduce pensions, esp. absent bankruptcy.

    The only real answer is to leave the existing pensions alone and attack the problem from the pre-retirement side, i.e., reduce future outlays thru renegotiations with union officials.

    But, you know, the last 5 years have been the rule by the lawless, so who knows how the confrontation will end up? Take all those “volunteer” contributions by foundations and state governments to keep their precious national tourist attractions open to paying customers. In federal fiscal law, such are called “augmentations of appropriations” and illegal. I’m waiting for someone to notice and say something. The people who made them and the agencies that accepted them are in deep kimchee unless someone in Congress thinks to ratify the contributions and pay back the donors.

    • Boritz

      *** a contract between worker and employer that cannot be reformed***

      Yes. In other words: a contract

  • Jane the Actuary

    The point that the blogger doesn’t make clear is that in the private sector, your pension rights, as they relate to accruals you’ve built up due to past service, are fully guaranteed, but employers are not locked into continuing that same formula as long as you work at the company. In state constitutions, there is generally the provision that state employees are guaranteed their level of accrual and ancillary benefits (early retirement goodies) for as long as they are employed, that is, for future service as well as past service.

    I’m glad to see that someone is taking some action on this front — though I wish I’d get the credit (that is, this is an idea I’ve had for a long time, but being a small-time blogger rather than a mayor, am not going to get traction on anytime soon!).

  • Rick Caird

    The fundamental problem for the courts is they can decree it is a contract, but if the money is not there, there is nothing that can be done.

    Detroit learned that continuing to raise taxes creates a death spiral and no government can be forced to stop providing normal government services such as police, fire, and garbage in order to pay pensions. That would create another death spiral.

    In the end, the courts will just force the cities into federal bankruptcy court where the pension obligations will be terminated. These courts are creating a false patina of comfort.

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