Monday, July 25, 2011

Are the Pensions of Current Government Workers Really "Vested"?

That's the question Ed Mendel is asking today at Calpensions. We've been following Mayor Chuck Reed's plan to put a rollback of pension benefits before the voters in San Jose since the spring. At the same time, a group called California Pension Reform announced it was preparing an initiative capping agency contributions to public pensions while phasing out defined-benefit plans; they're hoping to have the proposal on a ballot by November 2012. More recently, the Santa Barbara-based California Center for Public Policy field three pension reform initiatives of its own: these would abolish collective bargaining in California, raise minimum retirement ages for public workers, and steeply tax more lucrative pensions. Each would attempt to avert a fiscal nightmare by cutting payments to current workers. Yet many believe the benefits promised to workers are "vested", and cannot be clawed back as such.

While most hold that contract law vests public employees' rights to benefits offered at the outset of their service, both the San Jose effort and the California Pension Reform plan have found openings that, at the least, are not clarified in the law. In the case of the San Jose proposal, Mayor Chuck Reed is essentially arguing that the declaration of a fiscal emergency allows the city to modify vested rights. According to CalPERS, such a declaration by a California government would have to meet a tough standard of need, appropriateness, and "society's best interests," and even then would only be temporary. Of course, where pension liabilities are concerned, "temporary" is an loose term. Reed is hoping to use the emergency declaration to raise retirement ages and cut the rate of salary going to pensions for current workers. The California Pension Reform proposal would curtail pensions to current public employees by capping future agency contributions at 6% of salary. According to the group's leader, Dan Pellissier, CalPERS' own analysis supports his contention that employer contribution rates aren't vested, and can thus be capped.

Both plans promise to be vigorously challenged by CalPERS if they go anywhere, but one thing should be very obvious for anyone not expecting to collect one of these pensions one day: pension reforms targeting only future beneficiaries won't be enough to get this problem under control. As the Little Hoover Commission put it, "Government agencies cannot generate the needed large-scale savings by reducing benefits only for new hires. It will take years if not decades to turn over the workforce, and the government is hardly in hiring mode today."

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