The Ugly Truth about Pension Reform

Any pension reform proposal that hopes to make a meaningful positive impact on a public employer’s budget must address the cost of pensions for current employees. Since the main reason for the current problem is the excessive benefits, the most logical solution is to modify and reduce those benefits. To be clear, to reduce earned benefits for work already performed is unfair to employees. What we support is a reduction in unearned benefits for current employees to a sustainable level.

Most proposals that have been floated, including those by Governor Brown and Sonoma County, focus on establishing a second tier for new employees with lower benefits and higher retirement ages. It’s widely understood that these proposals, even if enacted, will not have much effect on the cost that public employers bear for years maybe even decades. Still a second tier plan should be adopted as soon as possible to stop the destructive practice of promising unsustainable payments to newly hired employees. Likewise, proposals to terminate the abusive practices referred to as “spiking” should also be implemented.

The main problem in addressing the unearned benefits for present employees is the widely held belief, especially among the public employer and employee community, that current employees are “vested” in the present level of benefits and this cannot be changed without giving some other benefit in exchange for a reduction. That’s why in the introduction to Brown’s proposal he refers to reducing benefits for all workers to the extent legal. (Emphasis added.) We take this to mean he views changing benefits for present employees to be illegal and he is trying to make his plan sound better than he knows it to be.

Those who hold this view are relying on a series of court decisions which involved unique circumstances. It’s our view this conclusion may be erroneous and subject to a different conclusion from future litigation, and therefore should not be the final word on the topic of vesting. The right to a pension benefit for present employees is viewed as a contract right. To suggest that a contract cannot be renegotiated is an odd conclusion, since contracts are renegotiated and modified all the time. Further, to suggest that employees have any right to a benefit they have not yet earned makes no logical sense. To the best of our knowledge, the legal definition of vested benefits is altogether different in the private sector, where only earned benefits are considered inviolate and cannot be changed. There is a school of thought that the present interpretation would change were a suitable test case to find its way to the court.


There are several approaches public agencies can take to address the cost related to unearned benefits for current employees. Below we outline these alternatives

Negotiate lower benefit formula for current workers

It’s our view that local agencies should take active steps to support or to engage directly in a process that could lead to a more logical and reasonable interpretation of what vesting means related to public employee pensions. No other alternative addresses as directly the heart of the problem, which is that benefits are too high to be affordable on a sustained basis.

Increase the share of the cost borne by employees.

This approach for Sonoma County has some logic and equity behind it in as much as the intent when benefits were increased in the +/- 2000 time frame, was that the cost would be borne equally. As the cost has exploded, and employee contributions have not kept pace, the employer is bearing the lion’s share now.

In Sonoma County where employees already contribute +/- 10% of their pay toward pensions, an increase in what the employee pays toward pensions could severely impact an employee’s take home pay, and may be seen as undesirable for many employees. We think it’s very likely many employees, given a choice between reduced current compensation to fund very generous pensions, and lower but adequate pension benefits combined with greater take home pay would opt for the latter. If lower pension benefits cannot be negotiated and found legal, increasing employee contributions may be one of the few remaining alternatives.

Freeze or roll back salaries.

This alternative works for two reasons. Because pensions are part of overall compensation, even if pension costs are rapidly increasing, that growing cost can be partially offset by reducing current compensation in the form of salary reductions, or at least a sustained freeze until the total compensation cost gets back into line with competitive realties for qualified employees. Secondly, because pensions are based on the underlying compensation, by keeping base salaries under control, pension costs can be indirectly controlled to some extent.

It should be noted that this alternative suffers from some of the same problems indentified above when talking about increasing employees’ contributions. Current compensation is reduced in favor of future benefits, which may not be the preferred choice of employees.

Outsourcing County work to private contractors.

In the event no solution to the vesting question can be found, and if employee unions are so intractable as to not be partners in some other solution, the County could outsource many tasks now performed by County employees to private firms under contract to provide the specified services. Because these private contractors would not be burdened by the same obstacles to reform as the County, outsourcing would mitigate the County’s crushing burden of present pension plans. No doubt some might see this as extreme, however the circumstances are such that extreme solutions may be required if other reasonable solutions described above are closed off.

Jack Atkin

President, Sonoma County Taxpayers’ Association

November 16, 2011

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