Former San Jose Mayor Chuck Reed, San Diego City Councilman Carl DeMaio, and their out-of-state billionaire cohorts have unveiled their latest assault on the men and women in public service. Artfully devised to play on voter emotions, the deceptively titled “Voter Empowerment Act of 2016” is garnering much fanfare and national attention for publicity-starved politicians. The proposed initiative represents another misguided attempt to drag California’s state and local governments into the quagmire created by Reed’s disastrous Measure B in San Jose and DeMaio’s equally ill-conceived Proposition B in San Diego.
The proposed initiative will need the signatures of roughly 585,000 registered voters to qualify for the ballot in the next general election. The measure has far reaching effects that will impact all current and future public employees at all levels of government in California. It is a wholesale amendment of the California Constitution to permanently implement vast restrictions and prohibitions relating to public employee compensation, pension benefits and other post-employment (retiree health) benefits. This article will highlight five of the most significant impacts of this proposed Constitutional amendment and discuss briefly the ramifications of its enactment.
Abandoning Defined Pensions.
At its core, the measure provides that all new employees hired after January 1, 2019 will be placed in a 401(k) style defined contribution retirement plan, rather than the current defined benefit system, unless voters in a jurisdiction specifically elect to implement a defined benefits plan. Strikingly, the proposed initiative defines the term “new employee” to include any person hired in a jurisdiction after January 1, 2019, regardless of whether that person was in the same or a reciprocal retirement system immediately prior to their latest appointment. If implemented, this provision of the proposed initiative would effectively kill all lateral movement for public employees, as virtually no current employees will willingly give up their defined benefits retirement plan to move to another agency and be placed in a defined contribution plan.
Strips Away Collective Bargaining Rights and Freezes Out Elected Representatives.
The measure also strips away at employees’ and employers’ collective bargaining rights to negotiate over enhanced pension benefits relating to defined benefit plans by requiring all such enhancements to be enacted only by voters of the jurisdiction. This includes any provision that enhances the value of an employee’s pension benefit, such as increasing a benefit formula, increasing the rate of cost of living adjustments and expanding the categories of pay included in pension calculations.
For decades elected politicians have had the prerogative to negotiate enhancements, or reductions, to defined benefit plans based on their local finances, desires to be competitive in recruitment and retention of employees and other community priorities of their constituents. This initiative would, in effect, strip all local elected officials of their ability to determine benefits for their own labor force. Instead, this bill would place these critical issues before voters who are likely unfamiliar with the complexity of local finances, impact of industry standards on recruitment and retention of employees, and generally do not have access to reports, studies and advice from professionals who advise elected officials. Moreover, it would mean having to run costly and confusing local initiative measures each time a public agency employer sought to implement an enhancement to a defined benefit pension plan or effect any other change that provided an economic enhancement for employees.
The proposal also requires voter approval to reduce a vesting period, lower the eligible retirement age, or otherwise provide an economic advantage for government employees in a defined benefit plan. Such issues, however, are frequently within the authority and control of the pension system, not the local agency participants. For participants in CalPERS, for example, there is a system-wide minimum vesting period and minimum retirement ages. Exactly how Reed, DeMaio and crew expect to reconcile these issues is unclear.
“Taxation Without Representation.”
The proposal would prohibit any government employer from paying for more than 50% of the total cost of retirement benefits for new employees, unless approved by voters in an election. The prohibition also applies to retiree health insurance costs and other forms of deferred compensation. PEPRA succeeded in requiring that “new members” equally share the normal cost of a pension benefit, but this initiative would also require all “new government employee[s]”to pay 50% of the normal cost as well as the unfunded liabilities. The proposal defines “new government employee” to include anyone hired by a government employer after January 1, 2019 regardless of their prior public employment or participation in any existing pension plan. Each employer will have varying pension costs, but to some employees, this aspect of the proposal will result in a mandatory contribution in excess of 20 to 30%. While the average citizen might assume this represents a fair and reasonable compromise, the idyllic sounding principle fails to account for the reality that an individual employee has no control over the factors that impact unfunded liabilities.
The governing body of each pension system, however, unilaterally sets their assumed rates of return, mortality assumptions, amortization periods, smoothing mechanisms, and other factors that directly impact their actuarially determined funded status. Consequently, the governmental employers negotiate pension benefits and therefore bear the risk of lower than expected market returns or unfavorable experience, as well as derive the benefits of greater than expected earnings and favorable experience. Public employees will pay the “tax” of 50% of the pension bill but have no proportionate say in how the costs are determined.
Eliminating Constitutional Rights.
Most significantly for all public employees, the proposal appears to eradicate both the long-standing constitutionally protected vested nature of retirement benefits, as well as the sanctity of collectively bargained contracts. The proposal strikes at the heart of the contracts clause of the Constitution. Specifically, the proposal will amend Article XVI of the California State Constitution, as follows:
- Sec. 23. Notwithstanding any other provision of this Constitution or any other law:
- a) Voters have the right to use the power of initiative or referendum provided in Article II, to determine the amount of and manner in which compensation and retirement benefits are provided to employees of a government employer.
- e) Government agencies and retirement boards must fully and faithfully implement voter approved initiatives that affect government employee compensation and retirement benefits approved by voters, whether placed on the ballot by a government agency or by voters.
- j) Nothing in this section shall be interpreted to reduce the retirement benefits earned by government employees for work performed.
The effect of these new subsections, is to permit voters, through initiative or referendum, to determine employee compensation and retirement benefits, seemingly regardless of the existence of collectively bargained agreements. Most importantly, it directly challenges the existing constitutional principle that an employee’s retirement benefits vest upon hire and generally cannot be reduced during the term of employment. By amending the State Constitution, Reed is taking another run at limiting employees’ benefits prospectively, which is presently forbidden. Of lesser significance but nonetheless poorly conceived, is that these provisions allow political activists to hijack the public sector bargaining process (such as Reed and his constituents) to politicize – and ultimately eliminate– any contract involving employee compensation or retirement benefits.
Finally, the proposal prohibits a retirement system from imposing any fees, requiring accelerated debt payments or placing other financial conditions on a public employer seeking to close a defined benefits plan. Currently, pension systems are permitted to, and do, require accelerated repayment of liabilities when a public agency terminates a plan. This permits the system to ensure there is adequate funds to meet the obligations to vested current and future annuitants. Thus, the short-term costs to a public agency of terminating participation in, for example, CalPERS, can be significant. By eliminating the ability to obtain accelerated payments to protect future vested benefits, Reed and his disciples hope to encourage agencies to not only abandon defined benefits plans but, in the process, to jeopardize the promises of guaranteed benefits to both active and retired employees.
A New Reality for Public Employees?
While it remains to be seen whether this proposed initiative will gather enough signatures to be placed on a ballot (remember moneyed interests with deep pockets can legally buy signatures) or is approved by the electorate, clearly it will face multiple legal challenges. Public employees, however, are best advised to educate themselves on the devastating effects this measure could have on their financial futures and their ability to effectively deliver public services. We encourage active and retired public employees to seek out the organizations working to fight against this measure and protect their interests. It is incumbent on individuals and all organized labor to educate the citizens of California on the deceptive title of the initiative and to actively oppose its harmful impact on the government’s ability to attract and retain qualified people into public service.