Court pension decision weakens ‘California rule’

The one thing some pension reformers say is needed to cut the cost of unaffordable public pensions: give current workers a less costly retirement benefit for work done in the future, while protecting pension amounts already earned.

It’s allowed in the remaining private-sector pensions. But California is one of about a dozen states that have what has become known as the “California rule,” which is based on a series of state court decisions, a key one in 1955.

The pension offered at hire becomes a “vested right,” protected by contract law, that cannot be cut, unless offset by a new benefit of comparable value. The pension can be increased, however, even retroactively for past work as happened for state workers under landmark legislation, SB 400 in 1999.

Last week, an appeals court issued a ruling in a Marin County case that is a “game changer” if upheld by the state Supreme Court, said a news release from former San Jose Mayor Chuck Reed, who wants to put a pension reform initiative on the 2018 ballot.

Justice James Richman of the First District Court of Appeal wrote that “while a public employee does have a ‘vested right’ to a pension, that right is only to a ‘reasonable’ pension — not an immutable entitlement to the most optimal formula of calculating the pension.

“And the Legislature may, prior to the employee’s retirement, alter the formula, thereby reducing the anticipated pension. So long as the Legislature’s modifications do not deprive the employee of a ‘reasonable’ pension, there is no constitutional violation.”

Justice Richman

Justice Richman

The ruling came in a suit by Marin County employee unions contending their vested rights were violated by a pension reform enacted in 2012 that prevents pension boosts from unused vacation and leave, bonuses, terminal pay and other things.

These “anti-spiking” provisions apply to current workers. The major part of the reform legislation, including lower pension formulas and a cap, only apply to new employees hired after Jan. 1, 2013, who have not yet attained vested rights.

The California Public Employees Retirement System expects the reform pushed through the Legislature by Gov. Brown to save $29 billion to $38 billion over 30 years, not a major impact on a current CalPERS shortfall or “unfunded liability” of $139 billion.

Similarly, legislation two years ago will increase the rate paid to school districts to the California State Teachers Retirement System from 8.25 percent of pay to 19.1 percent, while the rate paid by teachers increases from 8 percent of pay to 10.25 percent.

The limited teacher rate increase followed the California rule. The new benefit offsetting the 2.5 percent rate hike vests a routine annual 2 percent cost-of-living adjustment, which previously could have been suspended, though that rarely if ever happened.

While mayor of San Jose four years ago, Reed got approval from 69 percent of voters for a broad reform to cut retirement costs that were taking 20 percent of the city general fund. A superior court approved a number of the measure’s provisions.

But a plan to cut the cost of pensions current workers earn in the future by giving them an option (contribute up to an additional 16 percent of pay to continue the current pension or switch to a lower pension) was rejected by the court, citing the California rule.

In a settlement of union lawsuits, Reed’s successor locked in some retirement savings but dropped an appeal of the option. Reed, a lawyer, thinks the California rule is ill-founded and likely to be overturned if revisited by the state supreme court.

He has pointed to the work of a legal scholar, Amy Monahan, who argued that by imposing a restrictive rule without finding clear evidence of legislative intent to create a contract, California courts broke with traditional contract analysis and infringed on legislative power.

“California courts have held that even though the state can terminate a worker, lower her salary, or reduce her other benefits, the state cannot decrease the worker’s rate of pension accrual as long as she is employed,” Monahan wrote.

In the ruling last week, Justice Richman describes the setting for the reform legislation: soaring pension debt after the financial crisis in 2008-09 and a Little Hoover Commission report in 2011 urging cuts in pensions current workers earn in the future.

He cites several court rulings in the past that conclude cuts in pensions earned by current workers are allowed to give the pension system the flexibility needed to adjust to changing conditions and preserve “reasonable” pensions in the future.

Some of the court rulings cited allowed changes in retirement ages, reductions of maximum possible pensions, repeals of cost-of-living adjustments, changes in required service years, pensions reduced from two-thirds to one-half of salary, and a reasonable increase in pension contributions.

“Thus,” Richman wrote, “short of actual abolition, a radical reduction of benefits, or a fiscally unjustifiable increase in employee contributions, the guiding principle is still the one identified by Miller in 1977: ‘the governing body may make reasonable modifications and changes before the pension becomes payable and that until that time the employee does not have a right to any fixed or definite benefits but only to a substantial or reasonable pension.’”

Richman’s ruling makes several references to a unanimous state Supreme Court decision in 1977 in Miller v. State of California. He said the foundation of the unions’ constitutional appeal is a “onetime variation” in one word in another ruling.

“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,” the state Supreme Court said in Allen v. City of Long Beach (1955).

Richman said a 1983 state Supreme Court decision (Allen v. Board of Administration) changed “should” have a comparable new advantage to “must,” citing two other State Supreme Court decisions that said “should” and an appeals court decision that said “must.”

In a decision a month later, he said, the Supreme Court used “should” while referring to a comparable new benefit and has continued to use “should” in all rulings since then.

“It thus appears unlikely that the Supreme Court’s use of ‘must’ in the 1983 Allen decision was intended to herald a fundamental doctrinal shift,” Richman said, citing two rulings that “should” is advisory or a recommendation not compulsory.

The 39-page decision written by Richman and concurred in by Justices J. Anthony Kline and Maria Miller makes other points in its rejection of a rigid view of the California rule and pension vested rights.

“The big question for pension reformers is whether or not the California Supreme Court will agree,” Reed said in a news release from the Retirement Security Initiative. “If it does, the legal door will be open for Californians to begin to take reasonable actions to save pension systems and local governments from fiscal disaster.”

There was no immediate word from the Marin Association of Public Employees and other county employee unions last week about whether the appeals court decision will be appealed to the Supreme Court.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Posted 22 Aug 16

16 Responses to “Court pension decision weakens ‘California rule’”

  1. Michael Genest Says:

    Isn’t it amazing that there is any question at all about the government’s ability to enact anti-spiking rules for current employees? If the Supremes overturn this decision they’re caving in to an extremist view of what constitutes vested rights. Vested rights to cheat the government? Let’s hope not.

  2. john m. moore Says:

    As usual, Ed totally mis-states the California Rule. It only applies “IF” the legislative body granted a “vested pension right by Charter, statute or contract.”(See, State Bar Seminar on “Vested Pension and Other OPEB Rights). In Kern and Allen, a Charter provision granted a vested pension right. Then, as the court noted there could only be a reduction in pensions “if” the pension system was in jeopardy(going broke)and that assertion had not been made. In both cases(still the law on the Ca. Rule), the court noted that if a pension system was in financial jeopardy, pension reductions could be made w/o off-set.It cited several cases allowing pension reductions w/o off-sets. Granted the Allen decision was sloppy, but the distinction between failing and non-failing pension systems was made in both cases.

    In The Marin case, the court did not analyse whether MRCERA members had a vested pension right, because all of the lawyers went into the tank on that issue by intentionally not raising it. There is no Ca. case that has held that PERL(37 ACT) members have a vested pension right. State employees and STRS members yes, but not members controlled by local legislative bodies like cities and counties(only they could grant a vested pension right in the first instance, so each Agency requires an independent analysis).

    Having made my points, the Marin opinion is a valuable tool for real pension reformers. if there are any out there, to bring pension costs and debt back to reality. But a financial foundation is required by Kern and Allen, so don’t screw it up.

  3. Tough Love Says:

    Ed, Yes indeed, and that is another thing I have been calling for for the past decade …… to reduce the pension accrual rate (and increase the age at which you can begin to collect an unreduced pension) for the future service of all CURRENT workers.

    But that reduction needs to be done FULLY and IMMEDIATELY ….. and ALL THE WAY down to a level such that Taxpayer contributions towards Public Sector worker pensions are no greater than the contributions that Private Sector workers typically get from their employers …. usually NO MORE than an annual 3% of pay “match” into a 401K Plan.

    Public Sector workers are not “special” and deserving of a better deal ….on the Taxpayers’ dime.

  4. Tough Love Says:

    Responding to Michael Genest’s comment …………. It’s not “Vested rights to cheat the government?”, it’s Vested rights to cheat TAXPAYERS.

    And CHEAT they do …… not only in CA but in MANY MANY Plans throughout the USA. I just read about Dallas Tx failing Police pension Plan. Is there any wonder when it contains DROP provisions that GUARANTEE an 8%-10% annual return (in the current 1%-2% interest environment) without ANY limitation on how long they can keep the money in that Plan …. even AFTER They retire.

    There are few things MORE GREEDY than Public Sector Unions/workers. Witness the basis for THIS court decision ……. fighting to CONTINUE to be able to “spike” one’s pensions.

    As Taxpayers become more and more “educated” as to the enormity of the ripoff being perpetrated upon them by their insatiably greedy Public Sector workers, the call to simply renege on all of these grossly excessive Public Sector pension/benefit “promises” will grow loud and clear.

  5. Mike B Says:

    Vested rights to pensions do not cheat the government. They are not, however, as the court said, immutable. And this was a particularly stupid case.

    Pension formulae and funding systems to cover them are based on the standard salary. Spiking is not part of the standard formula which guides funding, so it leads to underfunding if done too aggressively. Pension are based on work. If the contract or law requires it, spiffs that are payable as work time (vacation and sick leave can be taken as regular time while still on the books) might be acceptable – for service credit, as the state does it. But not if they were one-time (like bonuses and severance), or if they were granted other than by a legitimate promotion or overall (all employees) salary increase during or just before the 1 or 3 years averaging time for final salary.

    One thing that would be worth funding is vacation (and sick leave) buyback. Many state employees (local government too, probably) have huge vacation and sick leave balances. Often, that’s planned. Stuff happens, often late in a career, and it’s more cost-effective to use those huge balances than to buy extra disability insurance. But if somebody is generally healthy and doesn’t take trips to Europe every year, or as is common at mid-levels is the only one carrying out a function so long vacations are not approved, that often results in a large balance at retirement. Why not fund periodic buyback during work, pointing out that for government employees they probably have a lower tax rate while working than they will once getting a pension? In my 40-year career, I can recall that being done for non-managers (with severe limits on the amount of buyback) only once.

  6. Tough Love Says:

    Mike B.,………….. I see that you used the word “fund” many many times, clearly calling for fully funding all that is currently promised.

    I’m not surprised, as your 40 years seems to be in the Public Sector, and I’m sure you believe that all of the “promises” made to you were “justified” and “earned”.

    As a Taxpayer, what I seen is a decades-long collusion between the Public Sector Unions/workers and our Elected Officials, with the former BUYING the favorable votes (on pay, pensions, and benefits) of the latter with campaign contributions and election support, and consider your pensions & benefits grossly excessive (by ANY reasonable measure when compared to those granted comparable Private Sector workers) and neither “justified” nor “earned”.

    Taxpayers have far more than sufficient “justification” to renege on ALL promised Public Sector pensions & benefits with a value greater than what THEY get from their employers.

    As I stated above ……………. Public Sector workers are not “special” and deserving of a better deal ….on the Taxpayers’ dime.

  7. S Moderation Douglas Says:

    “clearly calling for fully funding all that is currently promised.”

    You see something that isn’t there.

    He is talking about spiking.

  8. Tough Love Says:

    S Moderation Douglas,

    I’ve got a better idea. Instead of “funding” unused sick leave payout, how about just ending it …… as it’s a VERY rare Private Sector employer that allows ANY unused sick leave payout.

    And taking sick leave when not really “sicK” is career-hindering in the Private Sector. In the Public Sector, it’s business-as-usual……. sucker the Taxpayer at every turn.

  9. john m. moore Says:

    Several readers have asked that I make my case that Allen, like Kern allowed reasonable reductions in pension benefits w/o offset if the reductions enacted are necessary to the integrity or successful operation of the pension system.

    In Allen , pg 2, para (4) the court said: “In the present case it appears that section 187.2(the reduction)substantially decreases plaintiff’s 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.'(emphasis mine).” This is consistent with Kern which more clearly designated the difference in cases where the ability to make reduction w/o offset was set forth more clearly.

    Again, at p2, para (4b) the Allen court said:”The city does not claim that any of the provisions contained in section 187.2 was necessary to preserve or protect the pension program….and there is no indication that the city would have difficulty in meeting its obligations(w/o the reductions)..”

    Also note that in Kern and Allen, the court found that the Long Beach charter had granted a vested pension right. In the Marin case, the court erroneously stated that all government workers have a vested right, but that was crazily incorrect(See June 2015 academically researched Ca. state bar seminar”vested Pension and OPEB rights”). State employees and public teachers have vested pension rights by way of a judicial determination, but there is no such determination for a generic finding that all CERL or PERL agencies have vested pension rights. There is no requirement that counties or cities must provide a PERL or CERL pension, that decision was made by city councils and Bds. of Supervisors and those enactments must be examined one by one to determine whether a “vested right” was granted.

    If no vested pension right was granted the agency may reduce pensions as a matter of legislative power.

  10. CalPERSon Says:

    Reed is overreaching if he thinks this court ruling opens the door to extinguishing the California rule. All this court ruling did was say that anti-spiking measures are constitutional — which makes sense to me as the underlying core pension remained untouched.

    Now if the legislature or a ballot measure tries to unilaterally reduce, say a 3% at 50 to 2% at 50 unearned going forward, that’s a whole nuther barrel of fish and this ruling didn’t address that. Which is why this ruling is no game-changer.

  11. john m. moore Says:

    Calperson. See footnote 18 at page 22 of the Marin court opinion.It referred to the Kern court’s approval of the case of Casserly v. City of Oakland(1936) 6Cal 2d 64 where the court upheld a reduction of pensions prior to retirement from 2/3 to 1/2 of the employee’s salary without off-set. So it is not a “nuther” barrel of fish, it is one already decided. Several similar cases in the same footnote, some in reliance on Casserly(which is still good law).

  12. CalPERSon Says:

    @john m. moore: See page 37: “We emphasize the limited nature of our holding…” That limited holding is that PEPRA’s anti-spiking measures are not “an ‘unreasonable’ change” nor a “’substantial’
    impairment.” to the pension contract. That’s all this ruling addressed, nothing more, nothing less.

  13. john m. moore Says:

    If you had legal training, you would understand that every case only stands for its limited holding. Casserly v. City of Oakland held that a reduction in pensions for current workers from 2/3 to 1/2 of final salary w/o offset, was a reasonable reduction. That’s all the ruling addressed, nothing more, nothing less. But the Marin court cited Casserly favorably as a precedent for its limited ruling.

  14. S Moderation Douglas Says:

    “These “anti-spiking” provisions apply to current workers. The major part of the reform legislation, including lower pension formulas and a cap, only apply to new employees hired after Jan. 1, 2013, who have not yet attained vested rights.”

    “Equal sharing” seems very straightforward:

    “7522.30. (a) This section shall apply to all public employers and to all new members. Equal sharing of normal costs between public employers and public employees shall be the standard. The standard shall be that employees pay at least 50 percent of normal costs and that employers not pay any of the required employee contribution.”
    “Anti- spiking”?

    7522.34. (a) “Pensionable compensation” of a new member of any public retirement system means the normal monthly rate of pay or base pay of the member paid in cash to similarly situated members of the same group or class of employment for services rendered on a full-time basis during normal working hours, pursuant to publicly available pay schedules.

    (c) “Pensionable compensation” does not include the following:

    (1) Any compensation determined by the board to have been paid to increase a member’s retirement benefit under that system.

    dot, dot, dot

    (3) Any one-time or ad hoc payments made to a member.

    dot, dot, dot

    (5) Payments for unused vacation, annual leave, personal leave, sick leave, or compensatory time off, however denominated, whether paid in a lump sum or otherwise, regardless of when reported or paid.

    dot, dot, dot

    (8) Compensation for overtime work, other than as defined in Section 207(k) of Title 29 of the United States Code.

    etc., etc., etc.

    Looks for all the world like , according to PEPRA, applies only to new members.

    “Pensionable compensation” of a new member of any public retirement system ”

    What gives?

  15. S Moderation Douglas Says:

    Disregard that previous post. After reading the court decision, I learned the pertinent law was AB 197,. sect 13461which does prohibit spiking for all employees.

  16. Tom Barns retired calpers living in California Says:

    California needs to fight the law and win so we can make calpers pensions and others pay California state taxes on their pensions when they move out of state. That would help a bit.

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