Pension Reform Waits for California Supreme Court

With markets fitfully advancing after a nearly two year pause, the need for pension reform again fades from public discussion. And it’s easy for pension reformers to forget that even when funds are obviously imperiled, with growing unfunded liabilities and continuously increasing demands from the pension funds, hardly anyone understands what’s going on. Unless you are sitting on a city council and facing a 10 percent budget deficit at the same time as your required pension contribution is increasing (again) by 20 percent, pension finance is eye-glazing arcana that is best ignored.

But when your local government has reached the point where it’s spending nearly as much on pensions as it spends on base salaries, and pension finance commands your attention, you still can’t do much. Pension reforms were approved by voters in San Jose and San Diego, among other places, but their impact was significantly reduced because of court challenges. Similarly, a moderate statewide pension reform passed by California’s legislature and signed by Governor Brown in 2013 has been repeatedly challenged in court.

The primary legal dispute is over what is referred to as the “California Rule.” According to this interpretation of California contract law, pension benefit accruals – the amount of additional pension benefit an employee earns each year – cannot be reduced, even for future work. Reformers find this appallingly unfair, based on the fact that when California’s public employee pension benefit accruals were enhanced, the enhancement was applied retroactively. Suddenly increasing a pension benefit by 50 percent or more, not only for future work, but for decades of work already performed, is a big part of why California’s pension funds are in the precarious shape they’re in today.

While pension benefits can be changed for new employees, there are over a million state and local government employees in California who are already working and whose pension benefit formulas – even for future work – cannot be changed unless the California Rule is struck down. Several active court cases are challenging the California Rule, and because of the decisive impact the eventual rulings in these cases may have, pension reformers have largely put their efforts on hold. So what’s the latest?

Earlier this year, in the case Cal Fire Local 2881 v. CalPERS, the California Supreme Court struck down one of the challenges to the state’s 2013 pension reform act. The plaintiffs argued that the ability of retirees to purchase so-called “airtime”was a constitutionally protected vested benefit that could not be taken away. Purchasing “airtime” was a common practice whereby upon retirement, a pension recipient could make a payment and in exchange have more years of service added to their pension formula, increasing their annual pension for the rest of their life. This was however a narrow ruling, only stopping purchases of airtime. The ruling did not address the larger issue of the constitutionality of the California Rule.

Additional cases pending before the California Supreme Court that could be decided next year are coming with lower court opinions of great interest to reformers. In the case Marin Association of Public Employees v. Marin County Employees’ Retirement Association, the appellate court opinion included the following: “While a public employer does have a ‘vested right’ to a pension that right is to a ‘reasonable’ pension – not an immutable entitlement to the most optional formula of calculating the pension. The legislature may prior to the employee’s retirement, alter the formula, thereby reducing the anticipated pension.” If the California Supreme Court embraces that opinion in a broad ruling, it is possible the California Rule could be the casualty.

For two decades now in California, when it comes to pensions, “reasonable” has become a contentious word. Back in 1999, pension benefit formulas were still reasonable and financially sustainable. But starting in 1999, in most state and local government agencies, pension benefits were increased by roughly 50 percent, at the same time as the age of eligibility was lowered. Also beginning around this time, pension “spiking” became more common, where not only could “airtime” be purchased, but overtime pay, on-call pay, call-back pay, vacation and sick leave sold back, and recruitment bonuses could all be added to the base salary when calculating retirement pensions. These many changes are the reason California’s state and local public employee pension funds are financially stressed and demanding increasing payments that government agencies cannot afford.

The following information, recently compiled by Retirement Security Initiative, provides details on the recently settled Cal Fire Local 2881 v CalPERS case, along with four active cases before the California Supreme Court. Depending on how they are decided, options for pension reformers in the coming years could be greatly expanded.

California Pension Cases before the State Supreme Court

SUMMARY STATUS – DECIDED:

Cal Fire Local 2881 v. CalPERS
In March 2019, the California Supreme Court upheld one of Governor Brown’s (modest) changes to retirement benefits in PEPRA for public employees: eliminating the opportunity to purchase “airtime.” The court determined that this perk was different than the core pension benefit and therefore able to be modified.

PENDING:

Alameda County Deputy Sheriff’s Association, et al. v. Alameda County Employee’s Retirement Association
The Deputy Sherriff’s Association (and others) are challenging the elimination of overtime pay, on-call pay, call-back pay, vacation and sick leave sold back, recruitment bonuses, and other items from pension calculations. The appellate court upheld most of the modifications under the same reasoning of Marin. Both sides have asked for the Supreme Court to review.

Marin Association of Public Employees v. Marin County Employees’ Retirement Association
Four local unions challenged the elimination of callback and standby pay from their pension calculations. In a departure from California Rule, appellate court ruled the modifications were legal and employees only have a right to a reasonable pension. Court of Appeal sided against the unions. It is currently pending in the California Supreme Court.

Hipsher v. Los Angeles County Employees Retirement Association
The PEPRA law allows the modification of public pension benefits for public employees who are convicted of a felony for behavior while performing official duties. The court of appeals upheld the ability to alter the benefits in these narrow circumstances but requires due process for public employees. It is now awaiting review from the California Supreme Court.

McGlynn v. State of California
Six trial judges petitioned for retirement benefits for when they were elected in 2012, rather than when they took office in January 2013, which was after PEPRA changes. All courts have sided with the state. It is now pending review from the California Supreme Court.

DETAILED STATUS – DECIDED:

Cal Fire Local 2881 v. CalPERS
Supreme Court Case: S23995

Summary:  This case presented the following issues: (1) Was the option to purchase additional service credits pursuant to Government Code section 20909 (known as “airtime service credits”) a vested pension benefit of public employees enrolled in CalPERS? (2) If so, did the Legislature’s withdrawal of this right through the enactment of the Public Employees’ Pension Reform Act of 2013 (PEPRA) (Gov. Code, §§ 7522.46, 20909, subd. (g)), violate the contracts clauses of the federal and state Constitutions?

The Supreme Court’s decision in March 2019:  “We therefore affirm the decisions of the trial court and the Court of Appeal, which concluded that PEPRA’s elimination of the opportunity to purchase ARS credit did not violate the Constitution.”

Notable quotes from the Supreme Court’s opinion:  “We conclude that the opportunity to purchase ARS credit was not a right protected by the contract clause. There is no indication in the statute conferring the opportunity to purchase ARS credit that the Legislature intended to create contractual rights. Further, unlike core pension rights, the opportunity to purchase ARS credit was not granted to public employees as deferred compensation for their work, and here we find no other basis for concluding that the opportunity to purchase ARS credit is protected by the contract clause. In the absence of constitutional protection, the opportunity to purchase ARS credit could be altered or eliminated at the discretion of the Legislature.” (page 3)

“In this regard, plaintiffs argue that a contractual right with respect to the opportunity to purchase ARS credit should be found because public employees reasonably expected that the opportunity would continue to be made available for the duration of their employment. The only cited basis for those “reasonable expectations,” however, is the belief that the opportunity to purchase ARS credit would continue to exist in the future because it “was in effect for ten years.” The argument proves too much. We have never held that statutory terms and conditions of public employment gain constitutional protection merely from the fact of their existence, even if they have persisted for a decade. Such a rationale would directly contradict the general principle that such terms and conditions are not a matter of contract and are generally subject to legislative change.” (page 35)

“Because we conclude that California’s public employees have never had a contractual right to the continued availability of the opportunity to purchase ARS credit, the question of whether PEPRA worked an unconstitutional impairment of protected rights does not arise.” (page 45)

Undecided Questions:  Two major issues remain open, perhaps to be decided in the other pending cases:
1) The degree of protection for unearned benefits for future work by current employees.
2) The circumstance under which vested benefits can be changed once vested and whether a “comparable” benefit must be provided.

DETAILED STATUS – PENDING:

Alameda County Deputy Sheriff’s Association, et al. v. Alameda County Employee’s Retirement Association
Supreme Court Case: S247095
19 Cal. App. 5th 61 (1st Dist. 2018), review granted, 413 P.3d 1132 (Cal. Mar. 28, 2018).

Summary:  This case includes the following issue: Did statutory amendments to the County Employees’ Retirement Law (Gov. Code, § 31450 et seq.) made by the Public Employees’ Pension Reform Act of 2013 (Gov. Code, § 7522 et seq.) reduce the scope of the pre-existing definition of pensionable compensation and thereby impair employees’ vested rights protected by the contract clauses of the state and federal Constitutions?

In the courts below:  Deputy Sheriff’s union and others sued challenging the elimination of overtime pay, on-call pay, call-back pay, vacation and sick leave sold back, recruitment bonuses, and other items from pension calculations. The appellate court upheld most of the modifications under the same reasoning of Marin, but held some of the changes were illegal and would send others back to the trial court for further review. Both sides of this case asked the State Supreme Court for review.

Status:  Briefing in Progress. Supplemental Briefs in response to friends of the court briefs. As of October 17, 2019, the most recent document was filed May 29, 2019.

Marin Association of Public Employees v. Marin County Employees’ Retirement Association
Supreme Court Case: S237460
2 Cal. App. 5th 674 (1st Dist. 2016), review granted, 383 P.3d 1105 (Cal. Nov. 22, 2016).

Petition for review after the Court of Appeal affirmed the judgment in an action for writ of administrative mandate. The court ordered briefing deferred pending the decision of the Court of Appeal, First Appellate District, Division Four, in Alameda County Deputy Sheriff’s Assn. v. Alameda County Employees’ Retirement Assn., A141913[, or further order of the court].

Four local unions challenged the elimination of callback and standby pay from their pension calculations. In a departure from California Rule, appellate court ruled the modifications were legal and employees only have a right to a reasonable pension.

Court of Appeal conclusion:  “As will be shown, while a public employer does have a “vested right” to a pension that right is to a “reasonable” pension – not an immutable entitlement to the most optional formula of calculating the pension. The legislature may prior to the employee’s retirement, alter the formula, thereby reducing the anticipated pension.” Marin Ass’n. of Pub. Emps. v. Marin Cnty. Employees’ Ret. Ass’n, 206 Cal. Rptr. 3d 365, 380 (Cal. Ct. App. 2016), appeal pending in California Supreme Court, 383 P.3 1105 (2016).

Hipsher v. Los Angeles County Employees Retirement Association
Supreme Court Case: S250244

Petition for review after the Court of Appeal modified and affirmed the judgment in an action for writ of administrative mandate. The court ordered briefing deferred pending decision in Alameda County Deputy Sheriff’s Assn. v. Alameda County Employees’ Retirement Assn., S247095, which includes the following issue: Did statutory amendments to the County Employees’ Retirement Law (Gov. Code, § 31450 et seq.) made by the Public Employees’ Pension Reform Act of 2013 (Gov. Code, § 7522 et seq.) reduce the scope of the pre-existing definition of pensionable compensation and thereby impair employees’ vested rights protected by the contracts clauses of the state and federal Constitutions?

The California Rule is described in Hipsher v. Los Angeles County Employees Retirement Assn., 24 Cal.App.5th 740, 754-754 (2018) “… with respect to active employees any modification of vested rights must be (1) reasonable, (2) bear material relation to the theory and successful operation of a pension system and (3) be accompanied by a ‘comparable new advantage,’” but that court noted that, after the Marin decision, there is no “must” related to a modification of a comparable new advantage and a modification need not be so accompanied. Id. At 754.

McGlynn v. State of California
Supreme Court Case: S248513

Petition for review after the Court of Appeal affirmed the judgment in an action for writ of administrative mandate. The court ordered briefing deferred pending decision in Alameda County Deputy Sheriff’s Assn. v. Alameda County Employees’ Retirement Assn., S247095, which includes the following issue: Did statutory amendments to the County Employees’ Retirement Law (Gov. Code, § 31450 et seq.) made by the Public Employees’ Pension Reform Act of 2013 (Gov. Code, § 7522 et seq.) reduce the scope of the pre-existing definition of pensionable compensation and thereby impair employees’ vested rights protected by the contracts clauses of the state and federal Constitutions?

Six judges who were elected to the superior court in mid-term elections in 2012, but who did not take office until January 7, 2013, maintain they are entitled to benefits under the Judges’ Retirement System II (JRS II), which were effect at the time they were elected, rather than at the time they assumed office.

Court of Appeal conclusion:  “We conclude, as did the trial court, that the judges did not obtain a vested right in JRS II benefits as judges-elect, but rather obtained a vested right to retirement benefits only upon taking office, after PEPRA went into effect. We also conclude PEPRA’s provisions pertaining to fluctuating pension contributions do not violate the non-diminution clause of the California Constitution (Cal. Const., art. III, § 4), nor do they impermissibly delegate legislative authority over judicial compensation (Cal. Const., art. VI, § 19).” (pages 1-2)

ADDITIONAL REFERENCES

CalPERS Annual Valuation Reports – main search page

Moody’s Cross Sector Rating Methodology – Adjustments to US State and Local Government Reported Pension Data (version in effect 2018)

California Pension Tracker (Stanford Institute for Economic Policy Research – California Pension Tracker

Transparent California – main search page

The State Controller’s Government Compensation in California – main search page

The State Controller’s Government Compensation in California – raw data downloads

California Policy Center – How much will YOUR city pay CalPERS in a down economy?

California Policy Center – California Rule Does Not Protect “Airtime”

California Policy Center – Resources for Pension Reformers (dozens of links)

California Policy Center – Will the California Supreme Court Reform the “California Rule?”

This article originally appeared on the website California Globe.

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