For years, companies have been chipping away at workers' pensions. Now, two California cities may help pave the way for governments to follow suit.
Voters in San Diego and San Jose, the nation's eighth- and 10th-largest cities, overwhelmingly approved ballot measures last week to roll back municipal retirement benefits — and not just for future hires but for current employees.
From coast to coast, the pensions of current public employees have long been generally considered untouchable. But now, some politicians are saying those obligations are trumped by the need to provide for the public's health and safety.
The two California cases could put that argument to the test in a legal battle that could resonate in cash-strapped state capitols and city halls across the country. Lawsuits have already been filed in both cities.
"Other states are going to have to pay attention," said Amy Monahan, a law professor at University of Minnesota.
The court battles are playing out as lawmakers across the U.S. grapple with ballooning pension obligations that increasingly threaten schools, police, health clinics and other basic services.
State and local governments may have $3 trillion in unfunded pension liabilities, and seven states and six large cities will be unable to cover their obligations beyond 2020, Northwestern University finance professor Joshua Rauh estimated last year.
In San Jose, current employees face salary cuts of up to 16 percent to fund the city's pension plan. If they choose, they can instead accept a lower benefit and see the current retirement age of 55 raised to 57 for police officers and firefighters, and to 62 for other employees.
The voter-approved measure in San Diego imposes a six-year freeze on the pay levels used to determine pension benefits for current employees, a move that is expected to save nearly $1 billion over 30 years. Public employee unions have sued to block the measure, saying City Hall failed to negotiate the ballot's wording as required by state law.
Legal experts expect the cities to argue that their obligations to provide basic services such as police protection and garbage removal override promises made to employees.
In San Diego, the city's payments to its retirement fund soared from $43 million in 1999 to $231.2 million this year, equal to 20 percent of the operating budget. At the same time, the 1.3 million residents saw roads deteriorate and libraries cut hours. For a while, fire stations had to share engines and trucks. The city has cut its workforce 14 percent since 2005.
San Jose's pension payments jumped from $73 million in 2001 to $245 million this year, or 27 percent of its operating budget. Four libraries and a police station that were built over the past decade have never even opened because the city cannot afford to operate them. The city of 960,000 cut its workforce 27 percent over the past 10 years.
"It's a problem that threatens our ability to remain a city and provide services to our people," said Mayor Chuck Reed. "It's huge dollar amounts and has a huge impact on services."
Unions representing police officers and firefighters in San Jose claimed in lawsuits filed last week in state court that the measure violates their vested rights.
"What they've done in San Jose is patently unlawful under existing court precedent," said Steve Kreisberg, national collective bargaining director for the American Federation of State, County and Municipal Employees. "We know of no other places where this has survived legal scrutiny…. There is no justification for essentially seizing the property of employees."
Michael Lotito, a San Francisco labor lawyer who has represented governments, predicted that dire fiscal straits may carry weight with judges.
"It's a horrible, horrible story for the taxpayer. But worse off the city is, the more they have to lay off, the stronger legal argument they have," he said.
The cities are also expected to argue that they are not stripping workers of anything they already earned, only changing what they will earn in the future.
"You don't have a vested right to keep having your salary increased," said San Diego City Attorney Jan Goldsmith.
The University of Minnesota's Monahan said some state courts have recognized that distinction, but not in California, where she said the state courts have held since the 1940s that benefits granted on the first day of employment are protected.
Private companies, whose pensions are governed by federal law, have been whittling away at current employees' retirement benefits for years. Pensions for state and local government workers are covered by state laws, and those benefits have been left alone for the most part.
Rhode Island has gone further than any other state to cut pensions for current workers under legislation approved last year, and opponents have vowed to challenge it in court, said David Draine, senior researcher at the Pew Center on the States. Other states have fended off legal challenges to the relatively modest step of eliminating pension increases for inflation.
"This is an area that remains legally unsettled," Draine said.
City Councilman Carl DeMaio, a chief backer of the San Diego measure who is staking his mayoral bid on a pension overhaul, said he has fielded scores of calls from government officials nationwide interested in copycat measures. He predicted the legal challenges in San Diego will fail.
"We're showing the way," he said. "We're offering a model — at least one model."