High court may not go big on first pension case

December 6, 2018

The state Supreme Court, with four similar cases on the backburner, gave few signs during oral arguments on a labor-union challenge to Gov. Brown’s pension reform yesterday that it’s ready to take on the “California Rule” preventing pension cuts.

An attorney for Brown, Rei Onishi, argued that contrary to the California Rule, a series of state court rulings, the pension offered public employees at hire is not a “vested right” that can only be cut if offset by a “comparable new benefit” that erases any savings.

The California Rule was cited by courts that overturned a key part of a cost-cutting pension reform approved by voters in San Jose in 2012 and other reforms approved by voters in San Francisco in 2011 and Pacific Grove in 2010.

Now as employer pension rates continue to climb, the League of California Cities and other groups say funds for other programs are being squeezed. Unions are arguing that Brown’s pension reform will help ease the problem.

Cal Fire Local 2881 is challenging a part of Brown’s pension reform six years ago that prohibits boosting pensions by buying up to five years of service credit, called “airtime” because the employee does no work during the period.

As in the other four cases, the issue in the firefighter suit is that Brown’s reform applied the airtime ban not just to new hires with no vested rights, but also to workers hired before the reform took effect on Jan. 1, 2013, who are protected by the California Rule.

The airtime law enacted in 2003 was intended to have no additional cost to employers, who must pay higher rates to cover higher costs from investment losses. Airtime purchasers do not have investment risk.

Investment earnings are difficult to predict. The trial court ruling in the firefighters suit said CalPERS discovered some time after April 2010 that it had been charging purchasers less than the actual cost of airtime.

The CalPERS “Review of Additional Retirement Service Credits” study said in effect “that in selling Airtime to state employees CalPERS was selling $1.00 worth of benefits for between $0.72 and $0.89,” wrote Alameda County Superior Court Judge Evelio Grillo.

The California Public Employees Retirement System said about 61,217 members purchased airtime from Jan. 1, 2004, when the program began through Dec. 31, 2012, when it ended.

Onishi argued that whether a pension benefit is a vested right depends on the intent of the Legislature, which is a “heavy burden” in this case because the law does not say the airtime benefit is irrevocable.

The firefighter attorney, Gregg Adam, countered: “Then the Legislature should not have said that you can purchase it any time prior to retirement.”

Brown’s attorney also argued that setting a deadline, in the case of airtime about 12 weeks to make a purchase before the ban took effect, has never been regarded as an impairment of a pension benefit.

Several justices referred to a state Supreme Court ruling, Miller v. State of California (1977) that upheld a reduction in the mandatory retirement age from age 70 to age 67 as an example of a cut in the pension the worker could have earned by staying on the job.

Adam said it was a tenure case, not a pension case. He said it’s the one exception to a benefit change affecting pensions not being vested. But the shorter tenure did not affect the value of the pension earned on the job.

The firefighter attorney argued that some workers rely on the purchase of airtime to get an adequate pension, after taking leave for family and other reasons. And for some, airtime is an incentive to remain on the job.

Several justices said the protection urged by the firefighters is so broad that it could be applied to other benefits such as lower-cost insurance, health care, vacation accrual, and transit subsidies.

Adam argued that the pension protection advocated by Brown’s attorney, a “reasonable and sustainable” pension, is so broad and ill-defined that it could lead to “chaos.”

“We are at a period of full employment when we want to retain the best employees we can for the state, and yet the state is arguing for a non-standard, ‘reasonable and sustainable,'” Adam said.

He said the California Rule is “a clear rule that has existed at least 60 years since Allen,” a reference to Allen v. City of Long Beach (1955) that established the rule that “a comparable new advantage” is needed to offset a pension cut.

Temporary Justice Laurie Zelon, an appellate justice filling an empty seat, asked Brown’s attorney why airtime is not vested as an implied contract, which the Supreme Court ruled in an Orange County case can be created.

Onishi said it goes back to intent on the part of the Legislature. He said a firefighter brief said they have never argued that airtime was deferred compensation, a key issue in previous cases of this kind.

The bipartisan Little Hoover Commission, a state watchdog agency, and others have urged a modification of the California Rule to allow cuts in pension amounts earned by workers in the future, while protecting amounts already earned.

Onishi told Justice Goodwin Liu that pensions can be cut, for example, from 2 percent of pay to 1.75 percent of pay, even after 20 years of service. Are there any limits on “what the Legislature can do to change expectations going forward?” Liu asked.

“I don’t think so, your honor,” Onishi said, “not in the absence of clear and unequivocal legislative intent that would tie the hands of future Legislatures and in the absence of a deferred compensation scenario in which somebody has earned compensation through their labor.”

Onishi told Justice Leondra Kruger he thinks rulings in Legislature v. Eu (1991) and other cases mean employees have a right to a “substantial and reasonable” pension as soon as they begin employment.

An appellate court ruling in 2016 in a Marin County case challenging “anti-spiking” provisions in the Brown reform aimed at preventing improper pension boosts also concluded that employees only have a right to a “substantial and reasonable” pension.

Another appellate court ruling last January in an Alameda County “anti-spiking” case, with a more limited view of allowed pension cuts, has been made the lead for the Marin and two other appellate rulings. Their briefing has been halted until the court rules on the Alameda case.

“We know we have to draw lines and we have to think about this language of a substantial, reasonable pension that occurs in our case law and is the subject of other issues not presently pending before this court,” Chief Justice Tani Cantile-Sakauye told Onishi.

“Your argument seems to be that this particular repeal of this statute is not a vested right, and therefore we don’t theoretically get to pension benefits only except to answer the argument by Cal Fire that this is a pension benefit.”

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Excerpt from Allen v. City of Long Beach (1955), boldface added
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[1] An employee’s vested contractual pension rights may be modified prior to retirement for the purpose of keeping a pension system flexible to permit adjustments in accord with changing conditions and at the same time maintain the integrity of the system. (Wallace v. City of Fresno, 42 Cal.2d 180, 184 [265 P.2d 884]; Packer v. Board of Retirement, 35 Cal.2d 212, 214 [217 P.2d 660]; Kern v. City of Long Beach, 29 Cal.2d 848, 854-855 [179 P.2d 799].) [2] Such modifications must be reasonable, and it is for the courts to determine upon the facts of each case what constitutes a permissible change. [3] To be sustained as reasonable, alterations of employees’ pension rights must bear some material relation to the theory of a pension system and its successful operation, and changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages. (Wallace v. City of Fresno, 42 Cal.2d 180, 185 [265 P.2d 884]; see Packer v. Board of Retirement, 35 Cal.2d 212, 214, 218-219 [217 P.2d 660].) In the present case it appears that section 187.2 substantially decreases plaintiffs’ pension rights without offering any commensurate advantages, and there is no evidence or claim that the changes enacted bear any material relation to the integrity or successful operation of the pension system established by section 187 of the charter.
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Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com. Posted 6 Dec 18


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