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California court battle with unions sets stage for pension reform showdown

By Jim Christie

SAN FRANCISCO (Reuters) - California's third-largest city, San Jose, and its employee unions faced off in court on Monday over public pension reforms in a case that has major implications for other local governments across the state trying to rein in the costs of retirement benefits.

The lawsuit, led by San Jose's police union, shows how difficult it is for local governments to break benefit promises to current and past employees even when other public services are being cut to pay for them.

San Jose's pension overhaul was promoted by Democratic Mayor Chuck Reed and approved by nearly 70 percent of voters in 2012 but city unions argue the move violates the rights of its members and is in breach of the California constitution. They want the court to block the measure from going into effect and to maintain the current pension plan.

"If the unions prevail it will give local leaders elsewhere reason to pause. If Mayor Reed prevails, they may get even more ambitious in finding new ways to reduce pension outlays," said Larry Gerston, a political science professor at San Jose State University.

In opening remarks in court on Monday, Arthur Hartinger, a lawyer for the city of San Jose, said that the pension measure was necessary given the city's strained finances. "Retirement cost increases have gone through the roof," he said.

But Gregg Adam, a lawyer for San Jose's police officers, countered that employees' vested rights are at issue, adding that they can't be legislated away. "Decades of California law says 'No'".

The trial is expected to run through Friday. Santa Clara County Superior Court Judge Patricia Lucas will have up to 90 days to make a ruling on the trial's central issue of whether the city's pension overhaul of current employee's benefits is at odds with state law. Analysts say her ruling will be appealed.

Reed told Reuters outside the courtroom the city is ready for a long legal fight regardless of Lucas' ruling. He said the city would appeal all the way to the California Supreme Court if necessary.

PENSIONS COME AT A COST

In recent decades, municipalities across the country have provided their workers with higher retirement benefits, both pensions and health coverage, often in lieu of pay increases. But this has often created a future burden for budgets, made worse in some cases by skipping payments into pension funds.

Two other California cities, Stockton and San Bernardino, last year filed for bankruptcy due to deep financial problems that include spiking pension costs.

Detroit's decision to file for bankruptcy on Thursday, the largest U.S. municipal bankruptcy filing ever, was also partly related to the cost of pension and other post-retirement benefits for city employees.

San Jose's pension reform, which has not yet been adopted because of the lawsuit, does not reduce benefits already earned by employees, but would require them to either pay higher contributions to maintain current benefits or receive lower benefits.

It also requires new city employees to split pension contributions evenly with the city. San Jose, which has two pension funds, currently pays $8 toward pension benefits for every $3 contributed by its employees, according to Dave Low, a spokesman for the mayor.

Reed made tackling San Jose's pension spending, which rose to $245 million last year from $73 million in 2001, a priority. San Jose has had to slash other spending to help cover the costs and balance its budgets.

San Jose, Silicon Valley's biggest city, is starting to see its revenue pick up as its economy and real estate market strengthen, but Reed says city services could be back on the chopping block without the projected savings from the pension reform.

Savings from the measure will help balance San Jose's books in future years and restore services cut over the past decade in response to budget shortfalls, said Low.

A FLAWED MEASURE, UNIONS SAY

Unions for public employees don't see it that way.

"The mayor's initiative was flawed from the get-go because it pulls the rug out from employees who have worked hard, played by the rules and expected the city to keep its promise," said Steven Maviglio, a spokesman for Californians for Retirement Security, a coalition representing more than 1 million public employees.

"The foundation of California's public pension system for nearly a century is that pensions are a legally protected promise," Maviglio added.

The court hearing San Jose's case consolidated five lawsuits brought by two unions, individual employees and retirees.

The unions argue that any change in employee benefits needs to be negotiated and cannot just be imposed by the city.

Public sector unions in California say the law shields their pension benefits from changes as they are the property of employees tied to their compensation.

San Jose's public pensions are generous in comparison to others in California, which are already well above the country's average.

The average San Jose police officer and firefighter who retired in the past decade, and worked for 26 years, gets an annual pension of $100,000, while the average civilian city employee who retired in the past decade, and worked for 20 years, has an annual pension of $45,000, according to proponents of the city's pension reform measure.

The average yearly pension benefit for a member of the California Public Employees' Retirement System, the pension system for state workers and scores of local government across the state, was around $29,000 in April.

The case is in Santa Clara County Superior Court, No. 1-12-CV-225926.

(Editing by Tiziana Barghini, Martin Howell, Eric Walsh and Lisa Shumaker)

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