Negotiating Permissive Pension Changes

City of Glendale (2012) PERB Dec. No. 2251-M (Issued on 04/18/12)

This case involves an unfair practice charge for bad faith bargaining filed by the Glendale City Employees Association (Association) against the City Glendale (City). The charge alleged two theories of bad faith bargaining. The one that caught my attention was the allegation that the City negotiated to impasse on a permissive subject of bargaining.

The specific issue was a pension cost-sharing proposal by the City.  The parties had previously agreed to a cost-sharing model to deal with increases in PERS pension costs.  The cost-sharing model provided that the City would pay the full amount of the PERS employer rates between 0 and 7%.  If the employer rate exceeded 7%, a 50/50 cost sharing arrangement would apply until a cap.  For example, if the PERS employer rate increased to 8%, the City would pay 7.5%, and the employee would pay 0.5% of the employer rate.  In addition, the employees paid the full employee rate.

As part of bargaining for a new contract, the City proposed the following:

PERS Retirement Cost Sharing: Increase current costsharing provisions for the employer portion of the PERS contribution from 0.5% to 2.0%.  In the event that this Last, Best and Final proposal does not result in a ratified agreement, the City shall seek implementation of a 1.5% base salary decrease in lieu of the increased PERS cost-sharing, and this alternate proposal shall be considered incorporated into the City’s written proposal of July 19, 2010.

The Association alleged that the cost-sharing proposal was a permissive subject of bargaining and that the City committed an unfair practice by insisting to impasse on it.  In dismissing the charge, the Board held that even if the cost-sharing proposal was a permissive subject of bargaining, the Association failed to raise any objection to it during bargaining.  Further, the Board found that the City did not insist to impasse on the cost-sharing proposal but offered a salary reduction in lieu of the cost-sharing proposal prior to declaring impasse.  Accordingly, the Board dismissed the unfair practice charge.

Comments:

  1. This case provides a great example of how savvy employers are attempting to bargain changes to defined benefit pension plans in an effort to rein in costs.
  2. Some readers may be wondering, “Why is a proposal on pension costs a permissive subject of bargaining?  Aren’t pensions a mandatory subject of bargaining?”  This decision does not directly address these questions but rather assumes the City’s proposal is a permissive subject.  However, I think it was wise of the City to assume the proposal is permissive.  Here’s why.  In general, pensions for current employees are a mandatory subject of bargaining.  The wrinkle here is that the City was providing its pensions through a PERS contract.  Under PERS—as with most defined benefit plans—there is a set percentage of the pension cost allocated to the employee.  The rest of the cost of the pension (and the risk) is borne by the employer.   The “conventional wisdom” is that employees have a “vested” right to continue to accrue pension benefits under the pension formula in place on their date of hire.  If the employer could force the employee to pay all or part of the employer’s share, arguably the employee’s “vested” right would be eviscerated.  So while employees can voluntarily agree to pay a portion of the employer’s PERS cost, it is legally questionable whether employees can be forced to pay any portion of the employer’s share as part of a last, best, final offer imposed upon impasse.  A savvy employer that realizes this will have a contingency plan in place, which typically is an equivalent salary reduction.
  3. Why would a union agree to voluntarily pay part of the employer’s pension costs as opposed to taking a salary reduction?  For one, taxes.  The additional payment by employees towards an employer’s pension costs can be designed to be taken pre-tax.  Thus, it has less of a financial hit on employees than an equivalent salary reduction.  Also, if the justification for the concessions are pension costs, employees have more assurance that concessions are being used to address pensions costs by directly paying a portion of the employer’s share as opposed to just taking a salary reduction.
  4. In addition to the “vested” rights issue, depending on the governing statutes, some pension plan changes require agreement from affected employee unions.  This is another reason an employer may not be able to impose certain pension changes upon impasse and why a equivalent salary reduction may be a better option.
  5. Finally, I use the term “convention wisdom” to describe the concept that employees have a vested right to accrue benefits under the pension formula in existence at the time of hire because it’s not clear to me that that is in fact the law.  In the private sector, employers can “freeze” pension benefit accruals going forward.  So while you can’t take away what an employee has already earned, a private employer can move an employee into a less generous pension formula going forward.  I believe there is an argument that public employers may have this same right in certain situations.  But that’s a post for another day…
This entry was posted in PERB Decision. Bookmark the permalink.

Comments are closed.