Another ruling says pension set at hire can be cut

A second appeals court panel has unanimously ruled that the public pension offered at hire can be cut without an offsetting new benefit, broadening support for what pension reformers call a “game changer” if the state Supreme Court agrees.

The new ruling on Dec. 30 in a state firefighters suit on pension-boosting “airtime” purchases made several references to a groundbreaking ruling last summer in a Marin County pension “spiking” suit.

“The law is quite clear that they are entitled only to a ‘reasonable’ pension, not one providing fixed or definite benefits immune from modification or elimination by the governing body,” wrote Justice Martin Jenkins.

The two appeals court rulings are contrary to previous rulings known as the “California rule”: The pension offered at hire becomes a vested right, protected by contract law, that can only be cut if offset by a comparable new benefit, erasing any savings.

Most pension reforms are limited to new hires (who are not yet vested), taking decades to yield significant savings. To get major savings, some reformers want to cut the pensions of existing workers, protecting what’s already earned but reducing future pension earnings.

A key to the California rule is a 1955 Supreme Court ruling (Allen v. City of Long Beach) that “reasonable” pension changes should be related to the theory and “successful operation” of a pension system and any disadvantage “should be accompanied by comparable new advantages.”

The Marin appellate ruling argued in detail that “should” have comparable new advantages, which is only advisory, had somehow become a mandatory “must” have comparable new advantages in the series of California rule cases.

“We agree with this conclusion reached by our colleagues,” Jenkins wrote.

Justice Jenkins

Justice Jenkins


Unions argued in the Marin and firefighters suits that the California rule prevented the bans on “airtime” and “spiking” for existing workers in a pension reform enacted four years ago by Gov. Brown and the Legislature.

Cal Fire Local 2881 (formerly known as CDF Firefighters) sued the California Public Employees Retirement System to resume employee airtime purchases, citing CalPERS’ own publication saying vested pension rights begin when members start work.

“Public employees obtain a vested right to the provisions of the applicable retirement law that exists during the course of their public employment. Promised benefits may be increased during employment, but not decreased, absent the employees’ consent,” said the CalPERS publication.

Critics of the California rule argue that if the employee’s job and pay can be cut, why can’t the pension legally regarded as “deferred compensation” be cut? The brief 1955 Allen ruling gives no rationale for a “comparable new advantage.”

The CalPERS response to the firefighters said the pension system could not resume airtime purchases without a determination that the ban is unconstitutional. The trial court held airtime “was not a vested right,” said CalPERS, “and even if it were, the Legislature could eliminate it.”

Legislation sponsored by the California Professional Firefighters and the Service Employees International Union (AB 719 in 2003) allowed employees in CalPERS to increase their pensions by purchasing up to five years of additional service credit, the maximum allowed by federal tax law.

The program intended to have no cost to employers was informally called “airtime” because no work was performed for the service credit. Airtime yielded a lifetime monthly retirement payment, with no risk of investment losses, based on the earnings forecast assumed by CalPERS at the time of purchase.

The earnings forecast was 8.25 percent a year when the program began in 2003, but had dropped to 7.5 percent by the time the program ended in 2012. The CalPERS board acted last month to gradually drop the earnings forecast to 7 percent over the next eight years.

“It’s a tremendous investment,” Dan Pellissier, president of California Pension Reform, a former gubernatorial and legislative aide who purchased airtime, said in 2012. “I think all of the investment advisers say it’s a no-brainer.”

As it turned out, airtime was an even better deal than the purchasers thought. 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 study was not available from CalPERS last week. A CalPERS spokeswoman said about 61,217 members purchased airtime from Jan. 1, 2004, when the program began through Dec. 31, 2012, when it ended.

There was no significant increase or rush to purchase airtime between the passage of the reform legislation in October 2012 and when the ban took effect at the end of that year, the spokeswoman said. There were 363 airtime purchases in October, 376 in November and 386 in December.

CalPERS members could pay the full cost of airtime with a lump sum or select a payment plan of up to 15 years. Interest was charged on the unpaid balance at the current “crediting rate,” which was 6 percent compounded annually in 2003.

The elimination of airtime was part of Brown’s 12-point pension reform plan issued in 2011.

“Pensions are intended to provide retirement stability for time actually worked,” said Brown’s point No. 10. “Employers, and ultimately taxpayers, should not bear the burden of guaranteeing the additional employee investment risk that comes with airtime purchases.”

The ruling in the Marin suit allows the county, with no offsetting new benefit, to impose the spiking ban in the 2012 reform legislation that prevents existing workers from continuing to boost pensions with standby pay, call-back pay, and other things.

The state Supreme Court has agreed to hear an appeal of the Marin ruling. But the high court will wait until an appeals court rules on three similar spiking ban suits consolidated from Alameda, Contra Costa, and Merced counties.

Last month, yet another three-justice appeals court panel upheld a denial of a claim by San Joaquin County correctional officers that the 2012 pension reform prevented an end to county payments toward their cost-of-living adjustments until 2018.

This appeals court ruling included lengthy quotes from the Marin ruling about how the 2012 pension reform was a response to a pension funding “crisis” that will force cuts in local government services and layoffs if not corrected.

“We express no view about the Marin Assn. court’s interpretation of precedent regarding the validity of changes to retirement benefits,” said a footnote in the San Joaquin ruling. “We merely agree with its account of the historical backdrop animating recent pension reform legislation in California.”

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 9 Jan 17

15 Responses to “Another ruling says pension set at hire can be cut”

  1. C. T. Weber Says:

    When I signed on as a state employee it was with the understanding that I would receive a reduced salary in exchange for a retirement based on my average salary during the final three years of employment, the number of years worked and my age, so long as I worked a set number of years and reached a certain age. That deferred compensation seemed fair to me at the time and it still does. The final three years was eventually reduced to the final year. It is obvious that some local governments lack a rudimentary understanding of their monetary system and CalPERS should have the responsibility to oversee to what their contract agencies are agreeing. If governments can disregard their commitments, I would advise job seekers to look for jobs that pay more now knowing that a government entity may renage on future obligations.

  2. jackdean Says:

    A good overview.

    Finally, things are looking up.

    But as Yogi Berra would say, “It ain’t over till it’s over.”

  3. john moore Says:

    The California Rule was articulated in the related cases of Kern v. City of Long Beach and then Allen v. City of Long Beach.

    The court interpreted a Long Beach charter provision to grant a vested pension right based on the court’s interpretation of the Charter language. There was no finding of a vested contract right per se, legislative intent was/is mandatory and was articulated in the Long Beach cases.

    Next the court distinguished cases like the two Long Beach cases, where there was no claim by the city that its pension system was in financial peril, threatening its ability to pay full pensions. In such cases, reductions could not be made without comparable off-sets.

    The court discussed that in pension reduction cases where the Agency’s ability to pay pensions was imperiled, it could make reasonable reductions to protect the integrity of the pension system without off-sets. It cited several such cases where it had allowed reasonable pension reductions without off-sets(one case, reduced pensions from 2/3 of salary to 1/2 for current employees w/o off-set. Case cited by Marin court).

    The Allen court made a statement that off-sets were required, but analyst fail to note that the court was discussing a case where No financial difficulty or threat to the integrity of the pension system was involved and it made that point two times in its decision.

  4. Paul Says:

    “We agree with this conclusion reached by our colleagues,” Jenkins wrote.”

    And, that folks, was the sum total of the “analysis” done by this latest case. In other words, none.

    The last word will be the Supreme Court. Ed, as you put in your last blog on the Marin case, even critics of public pensions expect the decision to be reversed by the Supreme Court.

    “The Court of Appeal’s decision in Marin Ass’n of Public Employees, then, is in substantial tension with the California Supreme Court’s doctrine on the Contract Clause and the California Rule. Anything can happen on appeal, but it wouldn’t be surprising to see this decision reversed by the Supreme Court.” http://reason.org/news/show/1014640.html

  5. S Moderation Douglas Says:

    Does anyone have actual figures on how much “spiking” costs, as a percentage of all pension costs? Is it really a significant cost, or just really bad optics, when a small percentage of retirees receive inflated pensions?

    Eliminating spiking for new employees is legal and logical. Altering the pension rules for existing employees is questionable on both counts. Even if constitutional, the actual savings may not be worth the time and cost of litigation.

    Unless…

    The hope is that by not including pay for standby time in Marin County* will be a foot in the door to someday reducing pension formulae prospectively for legacy employees? That would be a mighty powerful foot.

    It is my understanding that standby time was negotiated as pensionable and employees contributed a percentage of pay to the pension system for that pay. If that is the case, for existing employees, it seems that pay should continue to count, or, at least, the employee should be reimbursed for all those contributions on said standby time. (plus interest.)

  6. Tough Love Says:

    Quoting SMD….. “Altering the pension rules for existing employees is questionable on both counts. ”

    Reducing or completely eliminating DB pension accruals for the FUTURE service of CURRENT employees is both legal and commonplace in Private Sector Plans, and with TAXPAYERS funding all but the 10% to 20% of total Plan costs actually paid for by Public Sector workers, there is ZERO justification for the SAME changes to NOT be allowed in Public Sector Plans.

    Public Sector workers/retirees are NOT “special” and deserving of greater Total Compensation via MUCH greater pensions & benefits (and FAR FAR FAR greater protections from change) than the Taxpayers who fund the vast majority of Public Sector pensions & benefits.

  7. CalPERSon Says:

    Did any city, county or the state ever expressly state in a labor contract or by ordinance that adding vacation conversion to salary (“spiking”) or “air time” are fully vested? I doubt it. If not, then these rulings are taking away non-vested compensation in accordance with PEPRA. No big deal.

    Now if a city, county or state want to go beyond PEPRA and cut the unearned core pension formulas for active employees, THAT will be the true game changer.

  8. S Moderation Douglas Says:

    Déjà pooh.

    The horse is dead. You can stop beating.

  9. Tough Love Says:

    NJ’s Public School Employee Union (the NJEA) BOUGHT their way to a “non-forfeitable right” provision for theri pensions back in 1997, but with the pension/benefit death spiral well ahead of that in CA we’ll see if that really means anything.

    If your interested in how the Public Sector Union parasites at the NJEA raped NJ’s taxpayers you can find it hear (and I doubt that it’s much different elsewhere):

    https://www.the74million.org/article/opinion-pensions-politics-and-the-new-jersey-education-association

  10. Tough Love Says:

    And Yes SMD, I know it’s “you’re”.

  11. Tough Love Says:

    And Yes SMD, I know it’s “here”.

  12. spension Says:

    Tough Love… the guy who thinks that famous frauds in the private sector are more honest than cops and prosecutors…

    “Tough Love Says:
    January 6, 2014 at 5:22 pm
    QuotingSpensions…..”Milken, Madoff, Boesky, Enron, etc show the level of ethics in your chosen profession, Tough Love. Why would anyone trust a single financial assertion by anyone in the private sector?”

    Oh please …….no matter how bad some wall street actors are, they don’t hold a candle to the art of thievery mastered by the Public Sector Union/politician cabal.”

  13. Tough Love Says:

    Two very specific quotes from spension … both lies:

    (1) When/where stated …..

    October 31, 2016 at 9:02 in this link …..

    https://calpensions.com/2016/10/24/how-pensions-pass-the-buck-to-future-generations/

    What spension stated ….

    “As you’ve said many times, the executives deserve to lift every dollar of their worker’s pension funds if they want, because, well capitalism.”

    (2) When/where stated …..

    January 9, 2017 at 12:20 am in this link …..

    https://calpensions.com/2017/01/02/calpers-reports-make-debt-cost-difficult-to-see/

    What was stated ……

    “Tough Love clearly said leaders of the private sector like Milken, Madoff, Boesky, Enron etc were better than police officers and prosecutors.”

    ————————————–
    Did I make the statement that spension quoted in his/her comment in THIS blog article, posted just above and time-stamped January 10, 2017 at 12:45 pm? Yes, and to have everything in one place for easy reference, I am pasting it here (in between the asterisks):
    ****************************
    “Tough Love Says:
    January 6, 2014 at 5:22 pm
    Quoting Spensions…..”Milken, Madoff, Boesky, Enron, etc show the level of ethics in your chosen profession, Tough Love. Why would anyone trust a single financial assertion by anyone in the private sector?”

    Oh please ……. no matter how bad some wall street actors are, they don’t hold a candle to the art of thievery mastered by the Public Sector Union/politician cabal.”
    ********************************
    It appears that spension believes that he/she can take that (rather benign “opinion”) and twist it into something false and derogatory, QUOTING me as the author or HIS/HER self-created statements.

    ——————————————-
    spension,

    You clearly have no ethics or moral compass.

    To be clear. I am calling you out as a liar. While I strongly advocate for Public Sector pension reform, I did not (nor would I ever) make such statements.

    If you can, prove me wrong by posting a clear link Site/Date/Time to those statements. Go right ahead, or crawl under a rock where other parasites reside.

    I will continue to post this comment until you admit that your above comments were false and that you lied by making them.

    ===============================
    ===============================

    To Ed Mendel, site administrator.

    I have pointed out spension’s lies several times in the past few days and you have not responded.

    I doubt that you feel that the posting of blatant defamatory lies is acceptable …. even in a blog-commentary setting.

    Are there no consequences?

  14. S Moderation Douglas Says:

    “Oh please ……. no matter how bad some wall street actors are, they don’t hold a candle to the art of thievery mastered by the Public Sector Union/politician cabal.”

    “Tough Love clearly said leaders of the private sector like Milken, Madoff, Boesky, Enron etc were better than police officers and prosecutors.”

    Close enough.

    Please, please, please don’t have me ostracized because I can’t find the direct quote, but several times when confronted with the huge pensions of some private sector executives, you said the difference was that those pensions were paid by stockholders (or customers of the business) and those customers had the choice of not patronizing that business, as opposed to taxpayers who have no recourse.

    (“because, well capitalism.”)

    Again, close enough.
    ………………………………………..
    1) Don’t have a cow, man.

    2) Many of those execs pensions (also lower level employees) ARE paid by taxpayers because they are government contractors.

    3) In many cases, the government (taxpayers) have paid extra over the original contract costs to reimburse the company for market losses in their pension plan. (“Federal Contractor Pensions Protected at Taxpayers’ Expense”, Citizens Against Government Waste, Jan. 30, 2012)

    4) Instead of banning people, maybe we could call this a no whinging zone and and everyone just put on their big boy pants. (Or big girl pan ties.)

    Also…

    5) Don’t have a cow, man.

  15. Tough Love Says:

    SMD,

    “Close enough”, really ?

    I’ll defer to unbiased readers and to Mr. Mendel to decide such, not you, a retired CA Public Sector worker riding this ludicrously generous taxpayer-betraying pension/benefit train wreck.
    =========================

    Mr. Mendel,

    Time to stand up for what right.

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