January 6, 2009
n s Pursuant to Elections Code Section 9005, we have reviewed the
proposed constitutional measure related to public employee pensions
(A.G. File No. 08‑0018, Amdt. #1-S).
Background
Public Employee Pension Benefits.
The State Constitution and statutes authorize the establishment of
systems to provide pension benefits to retired public (government)
employees, as well as public employees retiring with certain
disabilities and survivors of some public employees. Currently, about
4.1 million Californians—about 11 percent of the population—are members
of one or more of the state’s 134 public retirement systems, including
around one million who currently receive benefit payments. Most state
and local government employees are eligible to receive a pension after
retiring that is based on the employee’s age at retirement, years of
service, salary, and type of work assignment. Public employee pension
plans also generally provide annual cost-of-living increases to limit
how much the effects of inflation erode the purchasing power of these
pension benefits.
Government Contributions to Pension
Systems. Governments typically contribute funds to pension
systems each year during an employee’s working years. These funds—along
with contributions from employees—are invested by pension systems so
that all or most of the costs of paying for a person’s pension benefits
are paid for by the time of his or her retirement. In California, public
employee pensions typically involve a defined benefit—that is, a benefit
amount that must be paid regardless of whether the government sets aside
enough funds to pay the benefit during an employee’s career. If pension
systems do not have enough funds to cover the costs of an employee’s
pension benefits, governments typically must contribute more to the
pension system to address what is known as an “unfunded liability.”
Currently, California governments contribute around $13 billion per year
to the state’s public retirement systems for pension benefits, including
several billion dollars per year to retire existing unfunded pension
liabilities. This amount probably will increase by several billion
dollars per year in the near future due to unfunded liabilities
resulting from investment losses for public pension systems during 2008.
Pension Contracts. In many cases,
pension benefits for current or former employees or a government’s
promised contributions to cover the costs of these benefits constitute a
contract with these employees. In particular, California courts have
ruled that public employee pensions constitute an element of an
employee’s compensation, and a contractual right to these pensions
accrues upon acceptance of employment. The U.S. Constitution and the
State Constitution each contain a “contract clause.” The contract
clauses limit the power of the state to modify its own contracts with
other parties, as well as contracts between other parties. Accordingly,
the ability of public entities to modify pension benefits for current or
past employees is limited.
Collective Bargaining for Public Employees.
Currently, state and local governmental entities in California spend
around $100 billion per year on salaries and wages for their employees,
not including the cost of pension, health, and other benefits. Under
California law, most current public employees are represented by unions
or employee organizations, which negotiate with public entities
concerning wages, as well as other terms and conditions of employment.
(Retirees generally are not formally represented in such negotiations.)
In some cases, retirement benefits are discussed in connection with
these negotiations. Negotiated reductions in retirement benefits,
however, are uncommon.
Proposal
Amend State Constitution’s Contract Clause.
This proposal would amend the State Constitution’s contract clause to
allow certain measures that impair public employee pension contracts.
Specifically, the proposal would allow governments to negotiate
with employees, retirees, and/or their representatives to reduce vested
pension benefits for existing and future public-sector retirees. Savings
resulting from such renegotiations would have to be applied to the
provision of education, fire, police, prison, public health,
transportation, energy, and climate change mitigation services. This
proposal would not require governmental entities to negotiate
such changes.
Fiscal Effects
Uncertainties Concerning State and Local
Savings. We are uncertain whether state and local governmental
entities would achieve substantial reductions in pension costs under
this measure. First, there is uncertainty about whether many additional
governments would choose to seek pension savings through negotiations
(compared to the number of governmental entities that already could be
expected to seek such savings through negotiations or other means under
existing law). Second, legal challenges to such changes could result,
given the protections that would remain for pension contracts under the
U.S. Constitution.
Pension Savings Probably Would Be Offset by
Other Cost Increases. If governments achieve significant savings
in pension costs under this measure, employees, retirees, and/or their
representatives probably would seek to negotiate offsetting increases in
other governmental expenditures, such as employee salaries and wages.
These increases would likely offset all or most of the pension cost
savings achieved under this measure.
Fiscal Summary
The measure would have the following major fiscal
effects on the state and local governments:
-
Possible reduction in pension costs for state
and local governments, depending on future actions by state and
local governments and courts. Any such reduction likely would be
largely or entirely offset by negotiated increases in other costs,
such as employee salaries and wages.
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