One of California’s leading advocates for pension reform, San Jose Mayor Chuck Reed, has begun an uphill campaign to amend his state’s constitution so that governments there can make changes to employee retirement plans. If he succeeds with his voter initiative plan, his effort may spur movements to loosen pension protections in other states.
Reed’s effort might also bring clarity to one of the most confusing parts of the pension debate – namely, constitutional limitations on changing government-employee retirement systems.
In the private sector, pensions are governed by the federal Employee Retirement Income Security Act. Although a private employer may not cut benefits that a worker has already earned, ERISA allows a business to change the rate at which a worker accrues future benefits.
ERISA, however, doesn’t apply to government-employee pensions. Instead, in the states, local laws and court decisions govern how public-worker retirement systems are treated, and in many cases the states depart, sometimes radically, from the standard set by the law. In more than two dozen states, including California and New York, courts have blocked government employers from making substantial changes to pension plans even with respect to work that an employee has yet to do. That means that once a cop or firefighter or teacher or sanitation worker becomes vested in a pension system, he or she has the right to earn benefits at the same rate for an entire career. Because this restriction confines retirement-plan changes to new workers, it severely reduces the savings of pension reform.
Led by the California Supreme Court, state courts have stretched the limits of contract law to protect pensions. In a series of decisions dating back decades, the California court has ruled that state pension legislation creates a contract for government workers that is formed on the first day of a worker’s employment, “and is of open duration, thereby protecting both past and future pension accruals,” according to a 2012 Iowa Law Review article by Amy Monahan, a professor at the University of Minnesota Law School.
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.
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