Your pension rights are under attack again by a familiar foe, with a familiar proposal. After decimating the City of San Jose’s workforce, former Mayor Chuck Reed wants to take his toxic brand statewide by amending the California Constitution to open public employee pensions to collateral attacks from anti-public employee groups. In 2013, Reed made a similar attempt but, after losing a battle with Attorney General Kamala Harris over the ballot title and summary, he folded with the promise to return.

Last week, he and his allies made good on that promise and filed an initiative which, if sufficient signatures are collected, would appear on the November 2016 presidential ballot. Although ambiguous in some areas, his proposal appears designed to fundamentally change California law on vested pension rights. Reed has long championed giving employers the right to change retirement benefits prospectively for current employees. We believe that this is Reed’s ultimate goal. Beyond pensions, the initiative also seeks to undermine collective bargaining, by giving voters authority to determine compensation levels overturning decades-old California Supreme Court precedent.

WHAT WE KNOW

  • No Increase to Pension Benefits Without Voter Approval: The initiative forbids any pension benefit increase, no matter how insignificant, without voter approval. We think this would effectively close the pension systems for all current employees because the transaction costs associated with running a ballot measure and the public appetite for public employee pension benefit increases is too high of a hurdle to clear.
  • Effectively Eliminates Defined Benefit Pension Plans for Public Employees Hired After January 1, 2019: The initiative also contains several provisions that are aimed at eliminating defined benefit plans entirely for employees hired on or after January 1, 2019. The initiative would prohibit government employers from offering employees hired on or after January 1, 2019 a defined benefit pension plan without voter approval. And, in the event voters approve a defined benefit plan, the initiative mandates that the employers not pay more than 50% of the total cost of the retirement plan, including unfunded liability. Again, we think the practical impact of this would be to eliminate defined benefit pension plans for government employees all together because of the transaction costs and public appetite for such benefits. It is also unclear how this would be implemented. For example, would voter approval be required for each employee, each class of employees, or something else?
  • Forbids Penalties For Government Employers Who Stop Offering Defined Benefit Plans: Further evincing Chuck Reed’s true goal to end public sector pension plans entirely, the initiative prohibits retirement boards from penalizing jurisdictions that stop offering defined benefit plans to its employees.
  • Cannot Negotiate Around the Initiative: Although the initiative will not negate collective bargaining agreements in effect at the time the initiative passed, it supersedes any successor labor agreement, renewal or extension entered into after the effective date of the initiative. In other words, parties will not be able to negotiate around this.

WHAT WE BELIEVE REED IS ULTIMATELY TRYING TO DO

  • Allows the Reduction of Accrual Rates Going Forward: Reed’s proposal has already generated significant debate about what it does and what it does not do. Section 3(j) states: “Nothing in this section shall be interpreted to reduce the retirement benefits earned by government employees for work performed.” This could be interpreted as only applying to future employees; however, given Reed’s longstanding philosophy, our experiences with his ballot measure in San Jose, and the fact that sections 3(c), (d) and (g) specifically apply to “new government employees” only, the initiative’s failure to so limit the application of section 3(j) might indicate an intention to apply it to current employees as well. This would mean that decreased accrual rates, increased retirement age, decreased COLAs, elimination of defined pensions going forward could all be realities if the initiative is approved by the voters. We note, however, that even if this is the true intent of the drafters, we believe such changes to vested rights of current employees is unconstitutional under the law as it stands today.
  • Not Limited to Pension Rights: Puts Compensation Changes to the Voters Too: Although not state explicitly, the initiative does not appear to be limited to an attack on pension benefits. It specifically, and repeatedly, states that voters have the right to determine the “amount of and manner in which compensation and retirement benefits” are provided. If any compensation and pension benefits can be determined unilaterally via the initiative/referendum process, it could change the collective bargaining system as we know it. We can imagine any number of ways this could be interpreted to supplant the collective bargaining process. For example, voters could approve an initiative that precludes any compensation increases absent voter approval, require voter approval on all collectively-bargained compensation changes no matter how insignificant, or even dictate the compensation ceilings and/or forbid compensation increases entirely. Any of these alternatives would effectively negate the purpose and the benefit of collective bargaining.