Court rejects retro pension cut, what’s next?

Orange County supervisors led by John Moorlach took on the legal issue of boosting pensions for years already served under a less generous plan. They lost when the state Supreme Court last week unanimously refused to hear their appeal.

An innovative part of the county lawsuit contended that a pension increase given deputy sheriffs in 2002 produced a pension debt or “unfunded liability” that exceeded a century-old debt limit in the state constitution.

After a stock market crash and deep economic recession punched big holes in pension investment funds, estimates of state and local government pension debts nationwide have reached a trillion dollars or more, helping make public pension costs a hot topic.

The Orange County pension suit, one of the first in the new political climate, drew legal briefs opposing the county position from the California Public Employees Retirement System and the state attorney general when Gov. Jerry Brown held the office.

A brief supporting the county position was filed by the conservative Pacific Legal Foundation, which blocked an attempt by former Gov. Arnold Schwarzenegger to issue a pension bond without approval by a vote of the people.

The high court let stand an appeals court ruling that said the Orange County pension unfunded liability is not subject to the debt limit because it’s not a fixed amount due immediately. It’s an estimate of future shortfalls based on a number of variables such as investment earnings.

The appeals court said, among other things, that an unfunded liability is not created at the time of a pension increase but occurs over years and could even be “avoided entirely” if, for example, investment earnings are better than expected.

A well-publicized part of the county lawsuit said the pension increase given deputy sheriffs, which extended retroactively to years already served under a less generous plan, violated a state constitution provision that prohibits “extra compensation” after service has been rendered.

The appeals court cited other rulings approving post-service compensation for overtime and holidays if needed to retain and recruit employees. The court also said the county failed to address a bill, SB 1696 in 2000, authorizing retroactive pension hikes.

The high court’s denial of an appeal was a blow to Moorlach. He said pursuing a lawsuit to curb the soaring cost of pension benefits was one reason he left the higher pay and “life-time security” of the elected county treasurer’s office to become a supervisor.

Now he is being criticized for running up about $2.3 million in county legal fees. Some think the cost could double if the courts order the county to pay the legal fees of the deputy sheriffs association.

Moorlach said the attempt to save the county hundreds of millions in the years ahead justifies the legal fees. He said the failure of the state Supreme Court to hear the appeal leaves the basic legal issues in the lawsuit unsettled.

“Someone else is going to have to try to clear it up,” Moorlach said. “It will be interesting to see how and when that happens.”

The increase approved by the board of supervisors in 2001 boosted deputy sheriff pensions by 50 percent. The formula was increased to 3 percent of final pay for each year served at age 50, up from 2 percent at 50.

In following years the supervisors voted three more times to renew the labor pact with the higher formula. Then as the economy weakened and budgets tightened, the supervisors voted in January 2008 to prohibit payment of the pension increase for years served before the new formula took effect.

Some pension reform advocates and lawyers say Orange County had a weak case. Instead of reducing pensions for years already served, they want a test of whether the courts will approve a reduction in current worker pensions for years served in the future.

Notably, the watchdog Little Hoover Commission issued a report in February warning that pensions will “crush” government. Retirement costs are expected to take a third of the operating budget in Los Angeles, San Francisco, San Diego and San Jose.

The commission said that the standard way of dealing with unaffordable pension costs (negotiating lower pensions for new hires and increasing employee pension contributions) will not cut soaring costs quickly enough.

“The state and local governments need the authority to restructure future, unearned retirement benefits for their employees,” the commission said, urging that legislation be enacted.

The commission acknowledged that legislation authorizing government agencies to reduce unearned pension benefits for current workers “may entail the courts having to revisit prior court decisions.”

A series of court decisions are widely believed to mean that once a worker is vested, the pension is a contract that can’t be cut unless offset by something of equal value. It’s the reason that cost-cutting lower pensions are for new hires, not current workers.

A lawyer who thinks that the court decisions allow cuts in the unearned pensions of current workers, Jeffrey Chang, has outlined his view on the website of his Folsom law firm.

He argues that some of the Orange County appeals court ruling bolsters his position, particularly a section on vested pension rights that mentions a decision cited by Chang.

The appeals court ruling quotes from a 1978 decision that said before retirement the employee does not have “any absolute right to fixed or specific benefits, but only to a ‘substantial or reasonable pension.’”

Chang said he is a consultant not a litigator. But among litigators, he said, there have been discussions about who wants to be the “guinea pig” and push the theory forward, knowing that it could go all the way to the U.S. Supreme Court.

“My feeling is it’s an important enough issue that frankly somebody needs to do it,” he said.

A pension reform group, the California Foundation for Fiscal Responsibility, has talked about an initiative that would test cutting unearned benefits. Several initiative proposals are on the group’s website, but no specific plan has been chosen.

Dan Pellissier, president of California Pension Reform, said his group currently is polling to see if there is support for an initiative that would cap pensions and switch new hires to a 401(k)-style individual investment plan, now common in the private sector.

A statewide poll by the Public Policy Institute of California last month found strong support for a proposal to switch new public employees to a 401(k) plan. Approval among likely voters was 74 percent and among public employees, 56 percent.

In Orange County, legislation authorizing a potential way to cut current worker pension costs took effect last year. New and current workers have the option of choosing a “hybrid plan” that combines a lower pension with a 401(k) plan.

The lower pension saves the county money and gives the worker more take-home pay. But the plan has been on hold as the county waits for Internal Revenue Service approval of pre-tax employee contributions to the 401(k) plan.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 22 Apr 11

14 Responses to “Court rejects retro pension cut, what’s next?”

  1. Matt Says:

    Ed,

    Your readers should know before Orange County filed their lawsuit, two different firms they approached told them they had no case. Marino Mainero, a lawyer and then Chief of Staff for Moorlach, convinced Oragne County they had a case and should file suit. Orange County lost on summary was dismissed on summary judgment in the trial court–meaning their was no merit to the lawsuit.

    Maninero then convinced Orange County to appeal—and the Appeals Court affirmed dismissal of the case in no uncertain terms. Hired at $75 per hour, Mainero then convinced Orange County to appeal to the Supreme Court—denied!

    No doubt Mr. Chang has been talking to the same “litigators” as Mainero. those would be the type always willing to take a case, however unmeritorious, if they get paid. Look at Orange County, which just enriched a law firm with $2.5 million of taxpayers dollars on a friviolous suit.

    Here is the first clue for Chang and his followers—the vested rights are per Califoria case law and the California Constitution. So, taking it to the “US Supreme Court” is idiotic, because the US Supreme Court doesn’t rule on state constitutions, it defers to the rulings of the the State Supreme Court on issues involving state constitutions.

    Finally, as to Moorlach, ” the “basic legal issues” in the case were decided–agianst you! Maybe Moorlach, Chang and Mainero can sit down in a room with real lawyers who can explain those concepts to them.

  2. Reilleyfam Says:

    “He said the failure of the state Supreme Court to hear the appeal leaves the basic legal issues in the lawsuit unsettled.”

    No, I don’t think it leaves it unsettled. The refusal of the CA Supremes to take this case, pretty much indicates what they think of attempts to cut pensions for existing employees – it’s sending a message. Judges get pensions too, do you really think they are ultimately going to rule against themselves allowing their own pensions to be at risk or cut?

    Finally, this issuse is a State Constitutional issue. There is no Federal issue; not jurisdiction, not funding, not a single nexus between the Feds and CA pensions at all. The Feds will not hear CA pension cases and it will end with the CA State Courts squashing any attempts to cut existing employee pensions.

    You’d be better off sticking with what you know you can get results with for a lot less time/money & opposition; and that’s gutting new hire benefits and jacking up as much as possible contributiions for both pension and healthcare from existing employees.

  3. Tough Love Says:

    It will be interesting to revisit and discuss the judges decision (with these judges) perhaps 5 or 10 years from now when the Plans they refuse to financially address (rationally) run out of money.

  4. Rex The Wonder Dog! Says:

    Now it is time for the local muni’s-and the taxpayers-to sue CalTRDS for fraud over their fraudulent claism in SB400. They withheld vital, material information-namely the downside- while claiming it would “pay for itself”, to INDUCE the legislature and local muni’s and taxpayers to accept it.

    Classic fraud. Time to sue.

  5. Rex The Wonder Dog! Says:

    Finally, this issuse is a State Constitutional issue. There is no Federal issue; not jurisdiction, not funding, not a single nexus between the Feds and CA pensions at all.
    =================
    Wrong. They could have raised-but did not- substantive due process issues. That would have given federal jurisdiction to the SCOTUS.

  6. Rex The Wonder Dog! Says:

    Here is the first clue for Chang and his followers—the vested rights are per Califoria case law and the California Constitution.
    ============
    They’re not “vested” if they were the result of fraud, which they were.

    So that argument-like all your others- is just hot air.

  7. john moore Says:

    Every city that is buried because of 3@50 should leave Calpers. Calpers would then send them a bill for the cities unfunded liability and the safety unions would sue claiming that even god can’t reduce a govt. pension. Those cities should then simultaneously file for Chap 9 in bankruptcy and petition the California legislature to put the city in a receivership (like they do for school districts).How would it work out? I don’t know,but that is the path for most 3@50 cities. It’s just a matter of time,the deficits are compounding at 7.75% and in the near future,the weakest cities won’t be able to pay its’ 3@50 retirees.The size of each citys’ pension deficit is directly proportional to the incompetence of its’ years 2000-2011 city managers and city attorneys.Chap. 9 and receivership will not be a matter of choice. It will be so unfair to the retirees.

  8. SkippingDog Says:

    I just love watching Rex and the boys pontificate and fume about their recent court administered pounding, and then present wild-assed crazy “solutions” like the “let’s everybody go bankrupt” school of thought.

    Reillyfam is correct about the options.

  9. SeeSaw Says:

    You commenters, who are so anxious to see CA go into the ditch, are a real exasperation, to me. The retroractivity of the pensions was not ruled unconstitutional, therefore it was not fraud. The former AG’s Amicus Brief explained that such practice has been legislated and accepted in CA, for the entire span of the DB pensions in CA–97 years. Rex, I don’t think you will have to worry about any more future, pension enhancements, in CA, being granted retroactively. You and your cohorts have effectively whined and complained enough to move the Governor in the direction you want him to go, on that issue.

    John Moore, you have said before that you are personally, financially stable. And, you live in the beatiful location of PG. So, why not enjoy your good fortune, instead of wishing the worst on every other city and citizen. Have you ever considered the possibility that there will be very few public employees retiring at the age of 50, giving CalPERS longer to build up those funds for the retirees to come? As long as I have a breath, my City would never be allowed to withdraw from CalPERS. PG already learned that it would cost them 20 to 25 million, to clear up all its CalPERS liabilities, in order to clear its CalPERS slate. That would sure make a lot of sense to do that, and encourage other citites to do the same, wouldn’t it.

    In defense of CalPERS, Rex, no one knew the depth of the crisis that was going to hit. In hindsight, yes, they should have explained things better. We are where we are.

    Now, what are we going to do about jobs for the private sector.

  10. john moore Says:

    Seesaw: Unfortunately for Ca. the facts interfere with your hopes.Stick to the facts and something can be done. This is not a personality contest: In Pacific Grove,Calpers and our city managers and city attys have created a 51 million deficit in a 100 million dollar pension plan.. The deficit has doubled twice. If it doubles just one more time,we will have a 102 million dollar deficit in a 100 million dollar pension plan. And the stock market has fully rebounded! The deficit grows at 7.75% per annum,compounded(the investment rate)If every city that has an unfunded deficit of 33 per cent of its’ pension plan total,or more, left Calpers and simultaneously filed for Chap. 9,it would give our children and grandchildren some hope.

  11. Tough Love Says:

    John, There’s plenty of hope for our children … just NOT in CA, or the dozen or so States with similar Problems. In 10 or so years the only taxpayers in CA will be Civil Servants and retirees (assuming they can tax pensions send to out of State residents) and welfare recipients.

    In fact, I thing we’ll soon see population shifts to the few best-managed States.

  12. SkippingDog Says:

    Sorry, TL. The old “source tax” that California and other states tried to use to collect income taxes from pensioners living outside of the state was reversed by the US Supreme Court in 1994.

    Your domicile is your domicile, and that’s the only place that can tax you.

  13. Jojojo99 Says:

    The PEOPLE want a reasonale solution. Not bankrupcy, not continuing unaffordable pensions, not increasing taxes. PEOPLE want:
    1. Make good on all already vested pensions. Get caught up a little each year.
    2. New hires not direct police or firefighters get defined contribution only, no more liabilities that pop up years from now.
    3. Extend the retirement age for current employees to 65 for non safety employees. Extend the retirement age for safety employees also.
    4. Reduce the earnings rate per year or vest current DB pensions and make future benefits defined contribution only for all employees except police and fire.
    5. Reduce investment earning assumptions.

  14. Cortland Smythe Says:

    My God Moorlack is an idiot—- EVERYone told him this would happen…..sad that such a dunce is still employed.

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