Will Brown pension reform lead to more reform?

Gov. Brown’s pension reform legislation five years ago, sold in part as a way to assure voters a proposed tax increase would not be eaten up by rising pension costs, got little love from pension critics.

CalPERS estimated the reform would save $29 billion to $38 billion over 30 years, not a major dent in a shortfall or “unfunded liability” of $139 billion. Some said the debt was much larger, concealed by an optimistic forecast for pension fund investment earnings.

In the view of critics, Brown’s reform fell short because the main savings, a lower pension formula with other tweaks, was limited to employees who would be hired after the reform took effect on Jan. 1, 2013. Significant savings could take decades.

What’s needed, said the critics, is a cut in the cost of pensions for employees hired before the reform. Legislation allowing cuts in the pensions current workers earn in the future was recommended by an influential Little Hoover Commission report in 2011.

But under a series of state court decisions known as the “California rule” the pension offered on the date of hire becomes a vested right, protected by contract law, that can only be cut if offset by a comparable new benefit, which could erase any savings.

A study by legal scholar Amy Monahan, cited by critics, argued imposing the highly restrictive rule, without finding clear evidence of legislative intent to create a contract, broke with legal tradition and infringed on legislative power. Only a dozen states have the rule.

“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,” said Monahan of the University of Minnesota Law School.

The California rule was cited as courts overturned three measures approved by voters: A Pacific Grove limit on contributions to CalPERS in 2010; a San Francisco end to supplemental pension payments in 2011, and a San Jose option for current workers in 2012.

The San Francisco measure, approved by 69 percent of voters and backed by all 11 supervisors and labor and business groups, was upheld by a superior court before being overturned by an appeals court. The state Supreme Court declined to hear an appeal.

“This diminution in the supplemental COLA cannot be sustained as reasonable because no comparable advantage was offered to pensioners or employees in return,” said the unanimous ruling by the Court of Appeals 1st District division five in San Francisco in 2015.

Then in a surprising turnabout last year, employee challenges to minor provisions in Brown’s reform resulted in two unanimous appellate court rulings that would undermine or overturn the California Rule.

The first and most-publicized ruling came in a Marin County employee suit arguing Brown reform “anti-spiking” provisions violated the California Rule. Employees hired before the reform were no longer allowed to use on-call duties and other add-ons to boost pensions.

As if replying to the ruling in the San Francisco case, division two of the same appeals court said in the Marin ruling: “There is no absolute requirement that elimination or reduction of an anticipated retirement benefit ‘must’ be counterbalanced by a ‘comparable new benefit.”

The Marin ruling begins with background on the “emergence of the unfunded pension liability crisis” that quotes several academic studies and takes a long look at the Little Hoover Commission report that warned pension costs will cut services and force layoffs.

“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,” Justice James Richman wrote in an often-quoted line in the Marin ruling.

“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.”

The state Supreme Court agreed last December to hear an appeal of the Marin ruling, but not until an appeals court rules on a consolidated Alameda, Contra Costa, and Merced challenge to applying Brown anti-spiking provisions to pre-reform employees.

A superior court ruling on the consolidated cases in March 2014 adopted an argument from the state attorney general: Pre-reform workers cannot have a “vested right” to pension increases that violate the 1937 act covering the 20 independent county retirement systems.

Oral arguments in the consolidated county cases are scheduled to begin Dec. 12 in the Court of Appeals 1st District, division four. The long delay reportedly was caused by scheduling conflicts among the 37 attorneys listed for unions, county pension systems, and other parties.­

In the second California Rule case on vested rights last year, the state firefighters union challenged the Brown reform ban on employee purchases of up to five years of additional service credit, called “airtime” because no work is performed.

Division three of the appellate court, referring to the Marin ruling several times, said: “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.”

The ruling in the firefighter case agreed with the Marin ruling argument that “should” have comparable new advantages in a key 1955 ruling on pension cuts (Allen v. City of Long Beach) somehow became a mandatory “must” in the series of California Rule cases.

When Cal Fire Local 2881 sued the California Public Employees Retirement System, it also was taking on the governor. Brown’s 12-point pension reform issued in 2011 called for a ban on “airtime” purchases allowed by legislation in 2003.

“Pensions are intended to provide retirement stability for time actually worked,” said point 10 of Brown’s plan. “Employers, and ultimately taxpayers, should not bear the burden of guaranteeing the additional employee investment risk that comes with airtime purchases.”

After the state Supreme Court agreed to hear an appeal of the firefighter ruling, CalPERS gave the high court a 10-page brief that did not address the California Rule. The brief said airtime purchases by pre-reform employees are prohibited by state law, the Brown reform.

A 55-page brief filed by the governor’s office last month said the state intervened at the governor’s request. The brief argues that airtime purchases are not a vested right, but even if they were they could be ended. The Marin ruling and Monahan’s paper are among the citations.

If the Supreme Court upholds the appellate Marin and firefighter rulings, a major cost-cutting change may be difficult. Legislation needed to give employees in CalPERS lower pensions likely would face opposition from politically powerful public employee unions.

Brown leaves office at the end of next year. Chuck Reed, a former San Jose mayor now with the Retirement Security Initiative, has been a leader of groups that filed statewide pension reform initiatives in the past.

Last week Reed, a lawyer, welcomed the governor’s intervention in the firefighter ruling appeal. He is working on a friend-of-the-court brief, which can be filed after the Jan. 12 deadline for reply briefs from parties in the suit.

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 4 Dec 17

13 Responses to “Will Brown pension reform lead to more reform?”

  1. John Moore Says:

    As set forth at page 37 of Gov. Brown’s brief in the Marin and related cases, the so-called Ca. Rule that requires off-setting benefits for a reduction in pension benefits explicitly never applied to pension systems that are financially under water. And that is what the Ca. supreme court said in both Kern and Allen v. City of Long Beach. As Gov. Brown noted, those cases were NOT cases where the pension systems were under water. But both cases said, and Kern cited cases, showing that had the systems been under water, reductions were allowed w/o off-setting benefits. The no reduction w/o off-setting benefits rule is a product of contributors to Pension Tsunami, except for my contributions on the subject through Union Watch. JMM

  2. HARRY HUNOLD Says:

    Los Angeles City LACERS & LAFPP retirement info.

  3. Tough Love Says:

    “Will Gov. Brown’s Pension Reform Lead to More Reform and the End of the ‘California Rule?'”

    CA’s younger/shorter-servcice workers better hope it does, because w/o a VERY material reduction in the future service accruals of all those still working but older/longer-service than they, there will be ZERO assets left to pay them anything, and if they think CA can support a Pay-Go pension Plan, I’ve got a Bridge to sell them.

  4. John Moore Says:

    Tough Love: The political issue is how big of a decline in the quality of family life will it take before reformers quit waiting for a “immaculate conception” reform(like grand jury reports and court decisions)and throw the crooked staff and legislators out of office and replace them with adult legislator’s who will control the pace of salaries until the crisis is controlled. JMM

  5. Robert Mitchell Says:

    So long as the California Rule is enforced in its current form, the only solution for local govts is to remove their expensive employees and replace them with new employees at a lower benefit rate. Honesty in cost determinations, as in GASB 67, have made the problem obvious, while pressure on CALPERS and CALSTRS actuaries to use realistic assumptions was even more powerful in highlighting the absurd promises made in the past.

  6. Tough Love Says:

    If the “California Rule” is overturned, there needs to be a rollback of the SB400 (and subsequent) formula/age increases for the FUTURE Service of all CURRENT employees, and if those impacted threaten to quit …..GOOD, encourage them to do so ….. at least their ALREADY ludicrous pensions will grow no greater.

  7. SeeSaw Says:

    This is about whether or not the decision of the Appeals Ct to approve PEPRA amendments to end certain spiking add-ons including airtime will be upheld or overturned. Most retirees do not have anything beyond the base salary, times years, times formula A decision to uphold the Appeals Ct. is going to do just that–it will not affect the normally calculated pensions. So, you can just keep on pounding sand, TL.

  8. CalPERSon Says:

    TL wrote: If the “California Rule” is overturned, there needs to be a rollback of the SB400 (and subsequent) formula/age increases for the FUTURE Service of all CURRENT employees

    It’s hard for me to admit it but I can see a future scenario where I would actually agree with Tough Love here. And that’s coming from a CalPERS retiree who believes in sustainable DB pensions for both private and public employees.

    The math on SB400’s level of benefits (especially for public safety) doesn’t work. That’s the hard truth and everyone knows it. OTOH the pre-SB400 level of benefits did work and were sustainable.

    It’s not hard to imagine that in a few years that increased employer contributions combined with a market downturn could result in several of California’s largest cities/counties in severe financial distress.

    The state government won’t tolerate several cities/counties going bankrupt all at once. Bankruptcy is also not desirable from either the employee’s or retiree’s point of view. It’s much better to have a uniform re-negotiation of pension benefits pre-bankruptcy than to leave it all up to a federal bankruptcy judge.

    While Brown’s arguments in his brief are limited in scope they can be easily extended to argue for a rollback on pension benefits not yet earned by existing employees. In a financial emergency the California rule will lose in court. If things get bad enough in a recession then the unions would be smart to agree to a SB400 rollback versus rolling the dice in bankruptcy court.

  9. Tough Love Says:

    CalPERSon. Oh how nice of you (being ALREADY retired) that …. certainly in part to help protect YOUR pension …. you now (finally) see the wisdom in reducing the ludicrously excessive pension formulas in place today, but only for actives.

    Why not a reduction for you (as a retiree) as well …….. were YOUR pension accruals any LESS ludicrous ?

  10. CalPERSon Says:

    Gee thanks TL. I’m being honest and in return I get accused of only looking out for myself. Actually I wasn’t thinking about me, I was thinking about the actives, that cutting back on unearned benefits might be the bitter pill they need to take to keep the benefits they have earned so far.

    I’m not naive. I know the risk of overturning the Calif Rule is where does it stop? If things got bad enough the retirees could conceivably be on the chopping block, but a lot of other dominoes have to fall first before we get there.

    It would take a deep, deep recession or depression to touch me. Be careful what you wish for TL because if I go down I’m dragging you down with me.

  11. Tough Love Says:

    CalPERSon,

    The “justification” for reducing active-worker pensions is no less applicable to the pensions of those already retired.

    Best course….. when the situation gets so bad that reductions MUST be implemented…….. that the actives make such a “stink” that those-in-power agree that fairness dictates that retirees should accept reductions no less in magnitude.

  12. CalPERSon Says:

    The “justification” for reducing active-worker pensions is no less applicable to the pensions of those already retired.

    Maybe, maybe not. The courts — in some future case, not the one at hand — could decide to leave a slimmed-down California Rule in place that protects earned benefits. It’s all speculation at this point.

    I’ll say it again: be careful what you wish for. I’m a canary in the coal mine. If I lose my benefits and end up in the soup line, so will everyone else.

  13. thecoxclan Says:

    Wall Street Journal Opinion piece today…”Jerry Brown’s Pension Epiphany”.

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