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 […] Read More

California Rule Does Not Protect “Airtime”

Earlier this week the California Supreme Court ruled in the case CalFire vs CalPERS. The case challenged one of the provisions of California’s 2014 pension reform legislation (PEPRA) which had eliminated the purchase of “Airtime.”

This was the practice whereby retiring public employees could purchase “service credits” that would lengthen the number of years they worked, which would increase the amount of their pensions, even though they hadn’t actually worked those additional years. While the amount these retirees would pay was always estimated to cover how much they’d eventually get back, with interest, in their pensions, in practice these estimates were always too low.

The plaintiffs in the case argued that airtime was protected by the “California Rule,” which, the argued, prevents pension benefits from being reduced unless some other benefit of equal value is offered in return. But the court found that the California Rule wasn’t applicable in this case, setting an interesting precedent for other pending cases.

According to attorney and pension law expert Jonathan Holtzman, this ruling is a breakthrough.

“This is the first case in which, ever, where the court has attempted to define a principled basis for vesting doctrine – to analyze in a rigorous manner the legal basis of the vesting doctrine,” Holtzman said, “Although it does not resolve the issue, the case leaves wide open the question whether vesting protects prospective benefits of current employees. It takes a narrow view of what constitutes […] Read More