California Mayors Propose Game-Changing Pension Reform: The Act Will Permit Public Employers to Modify Benefits of Current Employees for Future Years of Service


In October, five California mayors proposed a statewide initiative – The Pension Reform Act of 2014 (Act) – which, if approved, will amend the California Constitution. The Act was amended last month for the principal purpose of eliminating the provision which entitled its proponents to legal fees if forced to defend the Act. If approved, the Act will give employers greater flexibility to modify benefits offered to current employees on a going forward basis.

The Act is a response to the burgeoning costs associated with pension and retiree health benefits, and proposes a variety of changes, including reforming the vested rights doctrine to allow prospective changes to current employees’ benefits. Since it was proposed, the Act has drawn criticism from 19 mayors, two vice mayors, five council members, the presidents of two county board of supervisors, various unions, CalPERS and CalSTRS.

The vested rights doctrine provides that while employed, public employees have the right to earn the pension benefits they were promised at the time they were hired. Under this doctrine, changes that reduce pension benefits (e.g., reduced retirement formula), including benefits attributable to future service, unless replaced with comparable benefits, are viewed as an impairment of a contract and, therefore, unconstitutional. Recent case law suggests that retiree health benefits enjoy the same protection if it can be shown that the public employer intended to create a vested right to such benefits.

The Act seeks to recalibrate the vested rights doctrine so that it no longer shields pension and retiree health benefits attributable to future service of current employees from modification. The Act generally provides that, to the extent that a public employer provides vested contractual rights to pension or retiree health benefits, such rights only vest as the employee performs work, in proportion to the work that is performed, and subject to the vesting standards established by the applicable plan.

Further, if a pension or retiree health benefit trust has assets equal to less than 80% of its liabilities, the Act requires that the public employer prepare a stabilization report designed to achieve 100% funding within 15 years. However, a public employer is not required to adopt or implement any actions specified in the stabilization report and, so, it lacks any bite. The Act also gives public employers the authority to take certain actions, such as reducing the rate of accrual for future benefits and increasing employee contributions, in the event that a pension or retiree health benefit trust is substantially underfunded and at risk of not having sufficient funds to pay benefits to future or existing retirees. The November amendment to the Act makes it clear that such actions cannot be taken without compliance with applicable collective bargaining obligations.  

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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