The Associated Press reports that two California cities may soon be doing what many businesses have already done, change their pension system. The cities of San Diego and San Jose, CA had placed initiatives on the ballots for last week and the citizens overwhelmingly approved changes to the municipal pension plans. In San Jose, workers were given a choice; they could take a 16 percent cut in pay that would go in to the pension fund or they could receive a lower pension benefit and have to retire later in life. In San Diego, the voters froze the current employees pay for six years, which ultimately would determine their pension rate of pay. While the need for basic services such as police, fire protection and city services are necessary, can cities arbitrarily change agreements, made in good faith, between previous administrations and workers’ unions.
San Diego has a notorious history with how they treat their unions. In 2002, it was determined that they had underfunded the city’s worker pension fund by $177 million. The members of the pension board with the city council came up with a plan whereby the city would no longer fully fund their workers’ pensions in return for a higher benefit, thus eliminating the former deficit. The former city employees who had retired sued the city for the $177 million and their case was settled in July 2004. The city had to repay the San Diego City Employees Retirement System $3.2 billion for a pension plan that had not been funded since 1996 . Each year the city pays into this fund whose current deficit is $2.2 billion as of January with a $231.3 million payment due July 1.
In San Jose, retirement benefits are costing the city over $245 million a year. The benefits were negotiated over time since the 1990s. They represented an agreement that after 30 years of service the city would pay their police officers and fire fighters a pension of 90 percent of their final pay. The union offered the city to reduce the benefit to 75 percent of the pension, but the city would not take it and instead went with their own plan which went to the voters.
While lawyers have already started appealing this decision, the question is, can San Diego and San Jose fix their pension fund. Also by changing how existing employees’ pensions are calculated without grandfathering them, will the cities of San Diego and San Jose be held liable for the loss of those benefits? And lastly, because the cities of San Jose and San Diego reneged on promises to the unions, will the unions be able to unravel any concessions made through collective bargaining with the cities of San Diego and San Jose?