SACRAMENTO -- California's top government analyst dealt a blow to Gov. Jerry Brown's proposed pension reforms Tuesday, suggesting that making substantial changes to the benefits of current workers is almost certainly illegal.

If the state's Legislative Analyst's Office is correct, it leaves Brown in a difficult bind as he seeks to contain a rapidly escalating expense blamed for many of the state's budget woes. Once pension benefits are granted, the LAO said, workers and their unions cannot lose them unless they agree to give them up.

Many of Brown's proposed rollbacks would affect only new employees. The new benefits would combine a modest pension with a 401(k)-style savings plan and Social Security. The governor also wants to raise the retirement age to 67 from 55 for all new public employees who are not public-safety workers.

But the most controversial part of his plan is to eventually require both current and new employees to pay for half the cost of their pensions.

The LAO credited Brown for proposing a "bold, excellent starting point" to overhauling the state's pension system.

But the LAO, whose findings are influential with lawmakers, said that there are many unresolved questions that could be better left to collective bargaining.

The report was immediately embraced by labor groups, which have argued that exact point for months.

"The LAO's mixed assessment of the governor's pension proposals hits the nail on the head when it says that the Legislature should move forward in a deliberate and reasoned fashion to craft solutions to California's complex pension systems," said Dave Low, chairman of Californians for Retirement Security, a coalition representing 1.5 million public employees in California.


A key hurdle to Brown's 12-point proposal is the "legal and collective bargaining minefield" likely to emerge, particularly over his plans to raise the contribution levels of current workers, the LAO said.

"Our reading of California's pension case law is that it will be very difficult -- perhaps impossible -- for the Legislature, local governments, or voters to mandate such changes for many current public workers and retirees," said Deputy Legislative Analyst Jason Sisney, the author of the report.

"What that means is that it will be very difficult to get much short-term cost savings as the governor seems to want to achieve," Sisney said. "Instead, we think the Legislature will probably be advised to think over the long term and how costs can be brought into a more manageable framework over that time frame.
"And that will mean pursuing solutions that deal primarily with future workers."

Low agreed. "Those proposals that impair the negotiated benefits of current employees are a legal dead end," he said. "As the report points out, these are matters that should be settled at the bargaining table, not in courtrooms."

Low promised to work with the Legislature to achieve the "spirit" of the governor's reforms "without taking a wrecking ball to the retirement security of California's teachers, firefighters, police officers and other public workers."

The governor's office chose to focus on the positive aspects of the report.

"Today, the LAO joined a growing group of local government officials, business leaders, editorial boards and legislators on both sides of the aisle who believe the governor's plan is a 'bold starting point,' " said Evan Westrup, a spokeswoman for Brown. "We welcome the LAO's analysis as we move forward to achieve these critical reforms."

Proponents of a pair of initiatives to roll back pension benefits criticized the LAO's report, saying it hadn't gone far enough in taking Brown's proposal to task.

"It is disappointing that the LAO omits the most critical flaw of the governor's proposal: By his own admission his plan only solves $4 to $11 billion of what is at least a $240 billion unfunded liability," said Mike Genest, a finance director under former Gov. Arnold Schwarzenegger and a chief figure for California Pension Reform.

"While the governor's plan has merits, it solves less than 5 percent of our problem," Genest said. "We need bold, comprehensive reform now and cannot continue to wait as politicians debate the issue and tinker around the edges."

The pension reform group has said it will decide in January whether it will begin gathering signatures for a proposal for a hybrid system or a 401(k)-style plan.

Some analysts have said the Legislature could take the wind out of the sails of the initiative drive if it approves some significant pension reforms.

Many government leaders and pension reform advocates have asserted that while court decisions make it difficult to lower pension benefits for current public workers, they leave openings to increase the employees' share of the cost. Labor lawyers, however, have noted that that depends on the extent to which cost-sharing is defined in existing labor contracts or statutes.

San Jose Mayor Chuck Reed has proposed a March ballot measure that would increase contributions from employees who don't switch to a reduced benefit.

Despite some misgivings over Brown's plan, the LAO said his proposal to raise retirement ages and require new public employees to accept hybrid 401(k)-style pension plans would lessen the liabilities facing the state.
"His proposals would shift more of the financial risk for public pensions -- now borne largely by public employers -- to employees and retirees," Sisney said.

"These proposals would substantially ameliorate this key area of long-term financial risk."