CA cities gain tool to chop retirement benefits

07 May, 2014 by Chris Reed

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A cliche in government circles is that there is no “magic bullet” available to address many big, difficult problems. But thanks to a recent action by the California Supreme Court, many local governments now do have a “magic bullet” to reduce their unfunded retirement benefits.

On April 30, the court chose not to hear an appeal of an appellate court ruling upholding the city of San Diego’s 2011 deal rolling back retirement health benefits for city workers. San Diego City Attorney Jan Goldsmith had argued that while pension benefits for public employees are constitutionally protected, retirement health benefits could be reduced or rescinded because they amounted to a bequest from an employer to an employee.

As Goldsmith noted, the state Supreme Court’s action locks in the appellate court’s decision as a precedent for California. The decision found that retirement health care amounted to “additional benefits that are provided at the option of the City.” It held that existing law “does not mandate that these benefits be included in the City’s retirement system.”

Retirement health care benefits can be provided to workers using language that makes them a vested (guaranteed) right. Last September, a Los Angeles Superior Court judge rejected a freeze on retirement health benefits for Los Angeles city attorneys. Doug Rose, president of the California State Association of County Retirement Systems, told Governing.com that the benefit was found to be vested “because of the way it was written. It stated the premium subsidy [OPEB benefit] ‘will’ be provided. So it was unequivocal.”

Most retiree health benefits can be reduced or rescinded

But in general, the retiree health benefits provided by local governments are of the sort adopted by San Diego, provided by the employer after collective bargaining without any explicit or implied promise of permanence.

San Diego’s 2011 deal is forecast to save the city $714 million over 25 years; it reduces but doesn’t end health care benefits for current city employees when they retire. Since virtually every local government doesn’t prefund retiree health benefits, all that have the typical contracts with their unions could reduce their unfunded liabilities with a San Diego-type deal or by dropping health care as a retirement benefit entirely.

Gov. Jerry Brown’s 2011 statement of his goals for what would become his 2012 pension reform legislation included a provision on retiree health benefits that appears to encourage the more drastic approach — including for the state government.

“Contrary to current practice, rules requiring all [state] retirees to look to Medicare to the fullest extent possible when they become eligible will be fully enforced,” Brown wrote. “Local governments should make similar changes.”

It’s unclear if the rules for state retirees are enforced more now than in 2011. The website for the California State Retirees organization gives no indication of significant change.

Still, it’s noteworthy that the Democratic governor doesn’t give any credence to the argument from public employee unions that ending or reducing their retiree health benefits is part of a greater scheme to harm government employees.