California's Public Pension Disaster

Why is the California Supreme Court inventing new rights for state retirees?


As the pension and health-care benefit crisis sweeps across the nation, some states are seriously dealing with these multibillion-dollar problems that threaten public services and treasuries. And other states remain in deep denial. California, to no one's surprise, is moving stridently in the wrong direction.

The tiny state of Rhode Island, for instance, faced enormous pension liabilities. Its state system was about 40 percent funded and on the brink of collapse. The Legislature and governor last month reformed the pension system by shifting to a hybrid pension plan (rather than a pure defined-benefit plan), suspended cost-of-living raises for retirees and boosted the retirement age. The reforms reduced benefits for current employees.

Sweeping reform was passed in a union-dominated state, where Democrats control even bigger legislative majorities than in California. Time magazine called Rhode Island "The Little State That Could."

By contrast, California is "The Big State That Can't." Or maybe the right word is "won't" given that there is no real reason that California leaders can't adopt similar reforms if they had the desire to do so. California politicians' childish refusal to deal seriously with this massive problem has long been evident in the union-controlled Legislature, where even no-brainer proposals to, say, strip pensions from convicted felons, go nowhere. Gov. Jerry Brown at least pretends to offer pension reform even though he refuses to use any political capital to push it ahead. And now the judicial branch has gone one better and actually expanded the cost of benefits to California agencies.

Just as Rhode Island is reducing benefits for current public employees and retirees, the California Supreme Court is inventing new rights for state retirees found deep within the penumbras of the state constitution. In a unanimous decision last month, the state high court has made it virtually impossible for municipal governments to reduce "non-vested" health-care benefits for retired government workers.

There are "vested" benefits and "non-vested" ones. Vested benefits are guaranteed by contract. Under California law, they must be paid no matter what. They cannot be reduced unless the employees and their unions agree to such reductions. That has put California in a bind with regard to pensions. Governments can't afford them. The economic assumptions upon which they were based had more to do with politics than economic reality, but the courts treat these pension contracts as if they were etched in stone and brought down from the mountain by Moses.

Law is different in other states, and Rhode Island is an example where legislators believe that they will be able to limit vested benefits and pass court muster, although the unions there will almost certainly challenge the latest reform.

But even in California, it has long been accepted that non-vested benefits, which are non-contractual and not guaranteed, can be changed. There's no long-term promise inherent in such benefits. Typically, government retiree medical benefits fit into this category. Virtually no retiree in the private sector gets these deluxe health-care freebies because they are so expensive they would eventually destroy any company stupid enough to grant them.

These health-care promises may impose an even bigger potential financial problem on governments than their overly generous pension promises. As reporter Ed Mendel of the CalPensions Web site reported, "Unlike pensions, which are usually a fixed cost with some adjustment for inflation, retiree health care can be an open-ended promise to pay for services, whatever the cost. Again unlike pensions, retiree health care is usually 'pay as you go.' Most government employers are not setting aside money to invest, presumably paying for much if not all of the retiree health care promised current workers in the future."

Faced with this retiree medical issue, Orange County supervisors in 2007 came up with a reform that reduced the county's liabilities. It received the support of the Orange County Employees Association, which championed the reform as proof of its willingness to be cooperative in cost-reduction efforts.

Essentially, the retirees and the existing county workers were placed in the same risk pool for medical benefits. Because retirees are older, the health-care costs for them are higher. So the county was subsidizing them. This was never an obligation, but was something the county as an employer provided as a benefit. After the reform was passed, retirees had to pay an extra 200 or 300 bucks a month, but they still receive a Cadillac health-care plan at an extremely modest cost.

The retiree association sued. The case made it to the state Supreme Court, which went beyond the wildest dreams of even the most devoted union official: it found that even non-vested benefits might have the weight of vested benefits. "We conclude that a county may be bound by an implied contract," the court ruled. This is the equivalent of finding a right that no one ever saw before. Another court will have to decide whether such an implied contract exists in the Orange County case, but the precedent is set—unions will have a powerful new weapon to stop any possible reduction of benefits anywhere in California.

Orange County Supervisor John Moorlach told me he was shocked to find the court display "such a bias in favor of public employees" and so unwilling to help resolve the state's "financial conundrum." The ruling leaves only more drastic options, such as ending retiree medical plans in their entirety, or slashing the size of the government work force or reducing salaries for public employees. As the money runs out, the options only become grim.

Wouldn't it be nice if California's legislators, governor, and courts rolled up their sleeves and behaved like their counterparts in Rhode Island? Then again that would take a level of political maturity not seen in this state for a long time.

Steven Greenhut is editor of CalWatchDog.com.