New ruling called ‘existential threat’ to pensions

The views of two CalSTRS attorneys show how an appellate court ruling weakening the “California rule,” which prevents changes in the pension promised at the date of hire, has alarmed and perplexed public pension officials.

Reformers hailed the decision in a Marin County case last month as a long-sought way, if upheld by the state Supreme Court, to control runaway costs by cutting pension amounts current workers earn in the future, while protecting pension amounts already earned.

But last week, the CalSTRS board was given a broader interpretation of the ruling by its fiduciary counsel, Harvey Leiderman. He seemed to suggest the ruling might open the door for cuts in pension amounts already earned.

“This ruling in my opinion poses an existential threat to the defined benefit (pension) plan,” Leiderman said.

The CalSTRS general counsel, Brian Bartow, outlined a case-by-case rebuttal of the appellate court ruling, calling it an “abomination,” a biased “result-oriented opinion,” and a view of 61 years of California jurisprudence through “a fun-house mirror.”

Bartow said the appellate court ruling that a comparable new benefit is not needed to offset reasonable cuts in pensions “undermines the entire theory of pensions” and is causing confusion.

“People like me, and even other lawyers who are more steeped in vested rights jurisprudence, are shocked, don’t know what to do,” he said. “It comes out of left field.”

Bartow said the ruling by a three-justice appellate court panel can only be appealed to the state Supreme Court by the parties in the case, the Marin County pension system and several unions. He said the deadline for an appeal is Sept. 26.

Meanwhile, Bartow said, the appellate court ruling has been “published,” which means lower courts can cite it as a precedent. He said anyone can ask the state Supreme Court to “depublish” the decision before the deadline on Oct. 16.

Leiderman said the CalSTRS board should watch the case carefully and possibly take legal action on behalf of the members. He said there is a CalSTRS precedent for similar action.

Bartow said he thinks the only correct role for CalSTRS would be to avoid taking sides in the local dispute and seek “depublishing,” leaving the court decision in force in Marin County but not as a legal precedent for pension systems throughout the state.

After a suggestion from Leiderman, the California State Teachers Retirement System board went into closed-door session to further discuss possible legal strategies and impacts on the pension system.

CalSTRS attorneys Harvey Leiderman, left, and Brian Bartow

CalSTRS attorneys Harvey Leiderman, left, and Brian Bartow

Leiderman told the CalSTRS board that the ruling in the Marin County cases is an “existential threat” to public pensions because it has the effect of taking the word “defined” out of the phrase “defined benefit.”

For example, he said, the pension formula covering a teacher for nearly 30 years might, in the year before retirement, be changed to a lower formula if the Legislature thinks it’s is a reasonable benefit.

“That means COLAs are at stake, that means formulas are at stake, that means the entire defined part of a defined benefit would no longer be valid,” Leiderman said. “So this is a threat to the entire membership’s benefit structure, if this case were to become final or if the Supreme Court were to uphold it.”

(Pensions are a “defined benefit” guaranteeing a monthly payment for life. A “defined contribution,” like the 401(k) plan common in the private sector, is a payment into a worker’s retirement investment fund that, depending on the market, can gain or lose money.)

Grant Boyken, state Treasurer John Chiang’s board representative, asked for a clarification of Leiderman’s suggestion that pensions already earned might be cut. He said the Marin case was about “prospective” pension amounts to be earned in the future.

“I think the court went out of its way in the language in the decision to limit its holding to prospective changes for existing members,” said Bartow. Leiderman did not reply to Boyken’s question in open session.

Under a series of court decisions known as the “California rule,” a key one in 1955, the pension promised at hire is widely believed to become a “vested right,” protected by contract law, that cannot be cut unless offset by a comparrable new benefit.

So, most cost-cutting pension reforms only apply to new hires, who have not yet attained vested rights. That can take decades to yield significant saving for employers, which is why reformers want to cut pensions earned by current workers in the future.

Marin unions contended the vested rights of current workers were violated when the Marin County Employees Retirement Association imposed state legislation enacted in 2012 to prevent “spiking” pension boosts from stand-by duty, in-kind health care, and other things.

Three similar union suits filed against the Contra Costa, Alameda, and Merced county pension systems were consolidated. Leiderman, also an attorney for the Contra Cost and Alameda systems, said arguments are scheduled to begin soon.

Bartow speculated that if the Marin ruling is appealed, as he expects, the state Supreme Court may await the outcome of the three consolidated suits in the appellate court before acting on the issue.

CalSTRS followed the “California rule” in legislation two years ago that will raise the rate school districts pay to CalSTRS from 8.25 percent of pay to 19.1 percent by 2020, while the rate for teachers was limited to an increase from 8 percent of pay to 10.25 percent.

The comparable new benefit offsetting the 2.5 percent rate hike for current teachers vested a routine annual 2 percent cost-of-living adjustment, which previously could have been suspended, though that rarely if ever happened.

Part of the Marin appellate court ruling is that a key 1955 state Supreme Court decision said pension cuts “should” be accompanied by a comparable new benefit, which is advisory, and only one high court ruling since then has used the mandatory word “must.”

Bartow argued that in several of the cases where the Supreme Court said “should,” the pension cuts were overturned because there was no comparable new advantage. He said the Marin ruling ignores the “actual and complete analysis in each of those cases.”

In what Bartow said he would “describe as a face-palm inducing aside,” the Marin ruling said that if reasonable cuts are made in pensions, the comparable new advantage or benefit is more money in paychecks because the lower pension results in lower employee rates.

Leiderman said a different panel of justices in the same appellate court cited the same cases as the Marin ruling, but made the opposite decision about vested rights in a case about cost-of-living adjustments in San Francisco pensions.

“That was last year — same appellate court, 180 degrees different view of vested rights,” Leiderman told the CalSTRS board. “The Supreme Court didn’t accept the petition (to review the appellate court decision). It’s hard to know.”

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 19 Sept 16

18 Responses to “New ruling called ‘existential threat’ to pensions”

  1. joellfrank Says:

    The New York State Constitution (Article V Section 7) has long been interpreted to mean that the formula in place on the date of hire is to be applied during one’s entire active membership in the pension system. Result: Six pension “tiers”

    JOEL L. FRANK
    Pension Columnist
    The Chief-Civil Service Leader
    277 Broadway
    NYC 10007
    rollover@optonline.net

  2. john m. moore Says:

    The 1955 decision relied on by Mr. Bartow(Allen v, Long Beach) distinguished pension systems like Long Beach that were not in financial peril and systems in financial peril. In the latter cases, reductions to pensions could be made for current workers, without off-sets, to protect the ability to pay reasonable pensions. In Kern v Long Beach, a companion earlier case, the court was very clear(Allen was sloppy, but made the distinction), citing Casserrley, where a reduction from 2/3 to 1/2 of final salary was allowed w/o offset.

    The confusion has resulted from propaganda not just by union and CaLPERS, but sloppy work by scholars, taking one statement from Allen out of context and repeated over and over on Pension Tsunami by sloppy, lazy commentators.

    The misstatement of the California Rule has been the major impediment to pension reform, but it has been clarified in the recent Marin case.

  3. Tough Love Says:

    Quoting ……

    “The CalSTRS general counsel, Brian Bartow, outlined a case-by-case rebuttal of the appellate court ruling, calling it an “abomination,” a biased “result-oriented opinion,” and a view of 61 years of California jurisprudence through “a fun-house mirror.””

    ———————-

    At first I thought that Mr. Bartow was simply delusional, but upon reflection, I realized it’s just that he knows that to keep his job he need to re-establish the depth of his Pubic Sector Union butt-licking.

  4. Tough Love Says:

    Quoting ………

    ” Grant Boyken, state Treasurer John Chiang’s board representative, asked for a clarification of Leiderman’s suggestion that pensions already earned might be cut. He said the Marin case was about “prospective” pension amounts to be earned in the future.

    “I think the court went out of its way in the language in the decision to limit its holding to prospective changes for existing members,” said Bartow. Leiderman did not reply to Boyken’s question in open session.”

    ————————————————–

    Would it really be unfair if PUBLIC Sector workers only had the SAME pension protections that have been in place for DECADES for PRIVATE Sector workers ………. wherein while protecting PAST service accruals, the pension accrual rate can be (and very often IS) reduced for the FUTURE service of CURRENT workers.?

    What makes Public Sector workers so “special” that they deserve greater pensions, better benefits, AND almost impenetrable protections from reduction …… and all on the Taxpayers’ dime ?

  5. larrylittlefield Says:

    “Leiderman told the CalSTRS board that the ruling in the Marin County cases is an “existential threat” to public pensions because it has the effect of taking the word “defined” out of the phrase “defined benefit.”

    If defined benefits were defined, then they couldn’t be retroactively increased, and perhaps CALSTRS would not be a bad off as it is.

  6. Tough Luck Says:

    It is not a matter of fairness, which in itself is a term open to wide interpretation. It is a matter of law, which at this point seems quite muddled in California.

  7. Tough Love Says:

    Tough Luck (nice spin on my handle),

    With CA’s Public Sector pensions undeniably grossly excessive (by any and every reasonable metric), and CLEARLY only having been granted via collusion between the Public Sector Unions and CA’s Elected Officials (with the former BUYING the favorable votes of the latter with campaign contributions and election support) it’s called fraud, racketeering, bribery (take your pick).

    Taxpayers will never stand for the increases necessary to fully fund these grossly excessive and fraudulently granted pension/benefit promises …… and the Courts cannot “create” the money necessary to do so.

    I suggest you develop a “Plan B” for your retirement needs.

  8. S Moderation Douglas Says:

    There you go a gain. Spinning on your handle.

    CA public pensions CLEARLY are not undeniably grossly excessive (by any and every reasonable metric).

    Like every other state, some public workers in California have pensions which, when combined with their salary and other benefits, gives them a total compensation greater than equivalent private workers. Others have a salary disadvantage such that, even with the higher pensions, they earn less in total compensation than their private section peers. And some, of course, are “just right”. Their higher benefits roughly balance out the lower salaries.

    And “fraud, racketeering, bribery (take your pick).” is clearly libelous and defamatory. Campaign contributions and election support are not illegal in any state. Not illegal and there is no public sector advantage:

    “The broadest classification of political donors separates them into business, labor, or ideological interests. Whatever slice you look at, business interests dominate, with an overall advantage over organized labor of about 15-to-1.”

  9. TB Says:

    More and more people are beginning to realize that Defined Benefit plans like public pensions are not sustainable, including the private sector which has more or less done away with them. Here is my solution to this looming crisis that is only going to get worse without any correction of course:

    https://drive.google.com/file/d/0B90sU3A85q46OE9BZHJFSWEzbGM/view?usp=drivesdk

    Please help spread the word…

  10. Tough Love Says:

    Quoting S Moderation Douglas …..

    “CA public pensions CLEARLY are not undeniably grossly excessive (by any and every reasonable metric). ”

    They sure ARE, because “reasonable” rightfully must EXCLUDE comparison to other similarly grossly excessive PUBLIC Sector Plans….. where their grossly excessive pensions are BOUGHT from our Elected Official with Public Sector Union campaign contributions and election support.

    With Taxpayer contributions (and the investment earnings thereon ….. earnings that would have stayed in the Taxpayers pockets, perhaps to help fund their much SMALLER retirements, in the absence of need to fund these absurdly generous PUBLIC Sector pension promises) responsible for 80% to 90% of total Plan costs, the only “reasonable” plans to which Public Sector Plans should be compared are the Plans afforded similarly situated PRIVATE Sector workers.

    And under THAT comparison, indeed …… CA public pensions clearly ARE undeniably grossly excessive (by any and every reasonable metric).
    ——————————————————-
    Oh ……. and that tiny percentage of all workers with PHD’s and in genuine “professions” (Doctors, Lawyers, CPAs, etc.) which some studies say make less in the Public Sector, FAR from sways the overall PUBLIC Sector “Total Compensation” (pay + pensions + benefits) advantage ….. and it’s the OVERALL PUBLIC Sector *Total Compensation” advantahge from ALL worker combined that UNJUSTLY impacts Taxpayers.

  11. SeeSaw Says:

    This court case was about differences in interpreting the anti-spiking provisions in PEPRA 2013–pure and simple. Currently vested pensions are not in danger. I have a 457B government 401K-type plan. It has gained and lost thousands of dollars over the years. Anybody who held a 401K-only pension plan in 2009 suffered dramatically. That is why such plans are not preferential to standard DB plans. The DB plans have existed in CA for 100 years and nobody is going to abolish them in favor of DC plans!

  12. Tough Love Says:

    SeeSaw,

    Per the Court, everything beyond “reasonable” is in play……….

    E.g., CA’s Safety worker pensions of 90% of final pay after 30 years, and most often collecting it in their early 50s fail the “reasonable” test by a mile.

    And most non-safety-worker pensions (ROUTINELY 3 to 4 times greater in “value at retirement” than those of similarly situated Private Sector workers) fail the “reasonable” test by half a mile.

  13. SeeSaw Says:

    Balderdash–I worked at a municipality for 40 years and I can attest there are not many retirees getting 30-year retirements in their early 50’s. I never knew one myself.

    You can’t just bring a court case because you don’t think something is reasonable–the only thing that counts is what is in the law! I don’t think there is provision in the law stating what is “reasonable”–this court case was about interpretation of a provision that is in the law.

  14. Tough Love Says:

    SeeSaw,

    That’s an interesting, but incorrect reading of the Judge’s ruling.

  15. S Moderation Douglas Says:

    Mea culpa!

    I didn’t see the caps lock in “They sure ARE,”

    Who could argue with the logical authority of caps lock?

    LOL

    1) Still trying to compare pensions outside the context of total compensation.

    2) It’s much more than ” that tiny percentage “.

    3) It’s not “some studies say make less in the Public Sector”; It’s all studies.

    4) Most studies, all but one, say the public sector total compensation is roughly equal to, or less than, similar private compensation.

    On average.

    5) To the extent they are not equal, making them so would require taking the pensions from the lowest skilled, lowest paid workers and redistributing that money to the (Doctors, Lawyers, CPAs, etc.) and Mike Genest, of course.

    Good luck with that.

  16. Tough Love Says:

    Definitely required reading …………..

    http://spectator.org/suddenly-a-shifting-pension-paradigm/

  17. Diane Levin Says:

    It’s not enough teachers don’t get paid higher wages, do not have the proper support from administration, but now you want to alter our pension.
    I want any of you, if you have not been in a classroom, to teach a class. We asked that of our Board at LACOE, they all declined.
    When are you going to value the most important job in the United States and world.
    Stop messing with us and ask “not what we can do for you, but you can do for us.” Familiar?
    Retired teacher
    LACOE
    Juvenile Court Schools

  18. Tough Luck Says:

    As I understand it those who throw out the term “fairness” or “unfair” when describing public pensions as compared to what is provided in much (perhaps most?) of the private sector see the achievement of fairness being to move public sector employers into the defined contribution/401(k) model. Given that, this recent Forbes article might be of interest http://www.forbes.com/sites/jamiehopkins/2016/10/06/401k-plan-shortcomings-failing-as-retirement-income-program/#3266bc79316d

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