Legal and Moral Grounds For Pension And OPEB Changes In California

Some legislators inquired about the legal and moral grounds for making the changes to pension and OPEB obligations I set out here.

Legal Grounds:

OPEB: As the City of Glendale illustrates and the University of California reports, OPEB is frequently modifiable. This will generally be true in school districts, transit agencies, local governments and the state government.

Pensions: I outlined three changes — eliminate automatic increases, temporarily suspend cost-of-living increases, and reduce benefits relating to future services by existing employees. Per the CalFire decision, the constitutionality of each change would be a function of whether the benefit is vested, either as deferred compensation or as a benefit the Legislature clearly intended to be permanent. While my own view is that none of the three benefits meet either test and that even if the benefit relating to future services is deemed deferred compensation it would be accorded less protection than deferred compensation resulting from services already performed, the Legislature should adopt the same approach it took in 2012 when it made changes to pension rules that later were challenged and then judged by the California Supreme Court. Questions asked by justices in the Alameda case argued last week indicate that, after laying down guidelines in CalFire, the court will evaluate each case on grounds relating to the specific benefit in question.

Moral Grounds:

OPEB:

  • Retired employees have access to five other subsidies (Medicare, Medi-Cal, Affordable Care Act, new state subsidies enacted into law last year, and corporate insurance in the case of retired employees who have taken new jobs) that should be fully utilized before school or other government budgets are accessed.
  • The vast majority of OPEB liability arises from employees who retire between the ages of 50 and 65 and often take new employment.
  • In some cases OPEB raises the cost of health insurance for current employees.
  • Means-testing (such as Glendale employs) can be used to protect lower-income retirees.

Pensions:

  • The changes would be permitted by pension plans governed by federal law (ERISA).
  • Many employees were granted a lifetime retroactive pension increase in 1999 that amounted to a ~$200 billion transfer of wealth to them from programs and taxpayers.
  • In part to keep employee contributions artificially low at that time, pension funds rejected recommendations in 2005 to require larger pension contributions that, had they been adopted then, would have prevented large pension deficits.
  • Wages and all other benefits are subject to bargaining; pension benefits relating to time not yet worked should be treated similarly, which would, e.g., allow employees to trade reduced pension costs for greater wage increases.

Both:

  • Pension and OPEB spending is forcing teacher layoffs (last-in, first-out) and crowding out spending on social services and other programs.
  • Especially in the wake of COVID-19, pension and OPEB costs that were already crowding out services will lead to an even greater reduction in the size of local government agencies and schools, more unemployment and a diminution in services.
  • Tax increases intended to enhance public services are being completely absorbed by increasing pension and OPEB costs.

The leaders of Rhode Island’s pension reform and Glendale’s OPEB reform were Democrats. In Sacramento it will take Democrats to reform retirement spending. They should lead the state in addressing self-inflicted financial wounds that are draining more than $25 billion per year from classrooms and other services and billions more from city and transit services.

Govern For California supports lawmakers who legislate in the general interest.

Lecturer at Stanford University and president of Govern For California