The battle over pension promises and payments now raging across the country is nowhere better exemplified than in California, where rosy predictions of a golden future are forever baked into our collective psyche. Over the past two decades, California public servants have enjoyed the bounty of an expanding economy and competitive compensation, including a broad safety net of post-employment benefits. Today, however, this rosy picture is in danger of fading with the sunset, the victim of fiscal and political imprudence.
Across the nation, leaders of state and local governments are blaming the collective bargaining process for getting them into their financial fixes, and promoting the idea that by corralling the collective power of their employees, they can force the runaway cost of benefits back into the barn. States also are attempting to rein in promised benefits unilaterally, without seeking the consent of those to whom the promises were made. Polarization, demoralization and litigation are the natural consequences of these actions, whatever their eventual success.
In California, public employee retirement benefits are premised on two equally important public policies: the sanctity of contract and the sanctity of collective bargaining.
For over 65 years, the state’s courts have blessed retirement benefits with constitutional reverence -- benefits are earned throughout a career in public service, become vested on day one, and can only improve over time. Once improved, they can never be reduced without the employee’s consent, without trading the employee some “comparable new advantage” in return -- even in times of emergency. The value of the contract ratchets up but never down -- through employment, retirement and beyond.
As a result, legislative leaders are frustrated by reform recommendations that can only be triggered for new hires -- those with no vested “contract rights” yet, but who will not reach retirement age for another generation to come. Savings thirty years hence will not avert budgetary calamity today if current employees’ contracts are off the table.
The parallel policy -- collective bargaining -- may have opened the barn door to unbridled benefits, but may also be the one to close it again. Collective bargaining in California is both time-tested and time-honored, responsible for decades of labor peace and rising workplace standards. The Legislature long ago invested the state’s collective bargaining laws with omnipotent reign over public labor relations. Under those laws, everything is on the table and everything is negotiable: “The scope of representation shall include all matters relating to the employment conditions and employer-employee relations, including...wages, hours, and other terms and conditions of employment.” Representative unions have the exclusive right to bargain for and bind their members, by majority consent.
And so they have. In California alone, hundreds of thousands of public servants bind themselves every three or so years to a new mix of wages, benefits and working conditions, negotiated on their behalf by their union representatives and consented to by the majority vote of their peers. This is how we came to have some of the finest retirement and health care benefits in the nation.
New mixes of wages, benefits and working conditions are now required. Not waiting for contractual consent, public employers have unilaterally imposed layoffs, furloughs and salary freezes, actions that have already “impaired” employees’ prospective retirement benefits. Like it or not, job security has now become Job One.
A state appellate court wrote in 2007, “The pension of a member who loses his job will be dramatically affected by the job loss. Thus, a member’s interest as an employee is clearly related to his interest as a pension beneficiary.” Today’s economic reality provides the stark trade-off: as the state’s Little Hoover Commission bluntly put it last month, “a pension is worthless without a job to back it.”
Layoffs and wage freezes should be on the table along with every other aspect of the employment relationship. Through their collective consent, today’s public employees may well be willing to trade some reductions in their future benefits, or increases in their pension contributions and retirement ages, or health care co-pays, for “comparable new advantages” during employment, such as job security and wage increases.
California law recognizes that no unconstitutional “impairment of a vested right” occurs if the holder of the right consents to the change. California public labor law authorizes representative labor organizations to bind their members through majority consent to changes in all aspects of their employment contract, including compromises of their “vested rights.” For example, state and local employees who are members of CalPERS have a vested right by statute to pay only a fixed 6% of pay towards their retirement benefits -- unless a different rate is agreed to through collective bargaining. And in recent arguments before the state Supreme Court in a case involving retiree health premium subsidies, proponents of the “vested contract rights” policy acknowledged that the state’s Public Employee Relations Board “has repeatedly held that because active employees’ future retirement health benefits are contractually-protected elements of deferred compensation, they cannot be reduced or eliminated except through the collective bargaining process.”
Within a few weeks before leaving office, former Governor Arnold Schwarzenegger and six statewide public employee unions came to the table to compromise current job conditions and pension rights. Orange County, California, no hotbed of liberal activism, recently negotiated a substitute hybrid retirement plan with its largest employee union. Responsible players on both sides of the table can come together and make positive changes, and labor has demonstrated that it understands that a promised pension is not worth much if there is no career over which to earn it.
Rather than seeking to constrain collective bargaining, governments might instead consider how to harness it to reach constructive, consensual solutions. The horse may come back to the barn if it finds shelter and security there.
Harvey Leiderman is a fiduciary partner at Reed Smith. He represents pension fund trustees, public companies, financial institutions, and private investors in resolving complex disputes involving fiduciary responsibilities.
