High hurdle for pension cuts in new court ruling

An appeals court yesterday ruled that the pensions of current employees can be cut without providing an offsetting new benefit, but only if there is “compelling evidence” that a reduction is needed for the successful operation of the retirement system.

The new ruling in three consolidated county cases is a much higher hurdle than an appellate ruling in a well-publicized Marin County case two years ago that said pensions can be cut if the employee is not deprived of a “reasonable” pension.

Unions are challenging “anti-spiking” rules in a pension reform pushed through the Legislature by Gov. Brown that were applied to current workers, not just to new employess hired after the reform took effect on Jan. 1, 2013.

In the fourth recent appellate ruling on pension cuts, the consolidated cases were sent back to the trial court to determine, in each county system, if the impact of the relatively minor pension cuts for workers hired before the reform is justified without offsetting new benefits.

Justice Reardon

The state Supreme Court agreed in December 2016 to hear an appeal of the Marin case — but not until an appeals court rules on the consolidated cases in Alameda, Contra Costa and Merced counties.

In January last year, the Supreme Court agreed to hear a firefighters union challenge to the Brown reform ban on employee purchases of up to five years of additional service credit, called “airtime” because no work is performed.

Brown’s attorney intervened in the firefighter case last November, replacing the state attorney general. Some think the high court may hear the firefighter case first. An appellate ruling in the county cases reportedly was delayed by scheduling conflicts among the 37 lawyers.

The main issue in the cases is 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.

As a result, most pension reforms are limited to new hires, like the main parts of the Brown reform that lower pension formulas. It can take decades to yield significant savings that lower costs for state and local governments.

To get immediate savings, an influential report by the Little Hoover Commission in 2011 recommended legislation allowing cuts in the pensions current workers earn in the future while protecting pensions already earned, a direct challenge to the California rule.

The California rule was cited when a superior court overturned a key part of a pension reform approved by San Jose voters in 2012, giving current workers the option of a lower pension or paying more for their current pension. The ruling was not appealed.

The California rule was cited in 2015 when an appeals court overturned a part of a pension reform approved by San Francisco voters in 2011 that eliminated supplemental cost-of-living adjustments.

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

Ruling in 2016 in the Marin case, Justice James Richman in division two of the same appeals court said: “There is no absolute requirement that elimination or reduction of an anticipated retirement benefit ‘must’ be counterbalanced by a ‘comparable new benefit.”

Richman’s ruling, mentioned several times in the firefighter case ruling by Justice Martin Jenkins of division three, could undermine or eliminate the California rule, if upheld by the Supreme Court.

“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,” Richman wrote.

“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 new ruling by Justice Timothy Reardon in division four of the appeals court in San Francisco, joined by two other justices for a unanimous panel as in the previous rulings, takes a long look at the Marin ruling.

“Much of Marin’s vested rights analysis — including its rejection of the absolute need for comparable new advantages when pension rights are eliminated or reduced — is not controversial, and we do not disagree with it,” Reardon wrote.

“However, we must respectfully part ways with our colleagues in Division Two when it comes to their application of the law to this specific dispute.”

Reardon said the “Marin court improperly relied on its general sense of what a reasonable pension might be, rather than acknowledging that the Supreme Court has expressly defined a reasonable pension as one which is subject only to reasonable modification.”

After finding that a key state court ruling (Allen v. Long Beach in 1955) said a pension cut “should” not “must” have a comparable new benefit, Reardon wrote, the Marin court acknowledged that “should” means “really ought to” rather than “don’t have to.”

“Thus when no comparative new advantages are given, the corresponding burden to justify any changes with respect to legacy members (hired before the reform) will be substantive,” said the ruling.

The Marin ruling cites growing pension debt and reports by the Little Hoover Commission and others on the need to cut growing pension costs that are crowding out funding for basic government services.

A “total pension system collapse” might meet the “substantive” standard for providing no new benefit to offset a pension cut, Reardon wrote. But the Marin ruling and the consolidated county ruling did not determine the local impact of the pension cuts.

Since there is no new advantage, Reardon told the trial court, “application of the detrimental changes to legacy members can only be justified by compelling evidence establishing that the required changes ‘bear a material relation to the the theory . . . of a pension system,’ and its successful operation.”

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 18

32 Responses to “High hurdle for pension cuts in new court ruling”

  1. Tough Love Says:

    Why should Private Sector Taxpayers agree to abide by a system STRUCTURED to cheat them ?

    Under ERISA (and subsequent laws/Regs) that govern Private Sector DB pensions, the employer reserves FULL & COMPLETE right ….. as it relates to the FUTURE Service of all CURRENT workers ….. to reduce or end further pension accruals.

    With Taxpayer contributions (including the investment returns thereon) now typically responsible for 80% to 90% of the Total Cost of Public Sector DB Plans that are ROUTINELY 3, 4 (even 6 times for Safety workers) greater in “value upon retirement” than those typically granted Private Sector workers who retire at the SAME age, with the SAME wages, and the SAME years of service, there is ZERO (yes ZERO) justification for this EXTRAORDINARY level of protection from reductions in FUTURE service accruals.

    And yes, we (Private Sector Taxpayers) are very cognizant of the fact that the judges making these decisions are protecting their OWN pensions.

    What DOESN’T end in bankruptcy Court with end via a tax revolt.

  2. S Moderation Douglas Says:

    I was pretty much dismissing everything you wrote until I got to… “(yes ZERO)”, then I figured , dang, this MUST BE SERIOUS !!!

    Do you have anything new or constructive to say that doesn’t just look like a rant?

  3. Mark Collins Says:

    Sounds like someone has some pension envy. Maybe get a job in the public sector so you can reap those awesome benefits that everyone in the private sector is trying to take away. Because the private sector didn’t protect itself and lost their pensions to bad decisions made by their employers isn’t reason to take away the benefits from public servants.

  4. moore Says:

    This case follows both Kern and Allen v City of Long Beach. In both cases, the court noted that the City had no claim that the financial integrity of their pension system was in jeopardy and that in such cases there could be no reduction w/o off-setting benefits. They cited several cases that had allowed reductions w/o new advantages because the particular pension system was in peril.

    PEPRA set forth compelling evidence that the government pension systems were under water, justifying reductions w/o off-sets and so did the Marin courts.

    Obviously, any pension system that is less than 85% funded is in financial peril, justifying substantial cuts w/o new advantages.

  5. S and P 500 Says:

    There is a hilarious article in the Philadelphia Inquirer “A two year wait for retirement pay? Philly schools have a backlog of millions”. At the present time, there is no system for states to declare bankruptcy, but on the other hand the checks may be a little late. Pension envy? Yes, I’m envious of the people in Loyalton and “LA Works” in East San Gabriel who lost half of their CalPERS pensions.

  6. T B Says:

    Move everyone to Social Security

    Here’s my solution:

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

    Thoughts?

  7. SeeSaw Says:

    TB, Have you finished wall-papering your house with all your copies of the same post?

  8. SeeSaw Says:

    TL, If you are going to lead a tax revolt, do it in NJ and leave us alone in CA to settle our own affairs.

  9. T B Says:

    You know what they say SeeSaw – exposure, exposure, exposure…of ideas!

    Just curious, have you read it? If so, do you think an idea like this would be considered if a stock market correction causes most, if not all public pension funds to fall below a 50% funding ratio?

  10. Jasbo Says:

    Mark Collins, the issue isn’t “pension envy”, the issue is that many in the private sector resent the related unjust taxes and poor government service levels, both of which are being directly driven by public employee union cronyism.

    https://www.city-journal.org/html/pension-fund-ate-california-13528.html

    http://www.latimes.com/projects/la-me-pension-crisis-davis-deal/

  11. SeeSaw Says:

    TB, SS alone is not enough to sustain anybody–and you surely know that if left to their own resources, people will not save enough on their own–in fact it would be really hard to save a minimum of one million dollars in a personal DC plan, which would only keep a person surviving for 20 years, taking care of basic needs. I have a better idea – how about repealing the WEP and GPO SS offsets–then we could all sustain better. The officials in CA were very wise to set up the first DB pension plans for public employees, a hundred years ago. It is the private sector that has ruined things for the populace in general.

  12. T B Says:

    Well SeeSaw, that’s a thought, but I still don’t see any solution in your answer to what happens when these public DB plans become insolvent. Most experts agree it’s not if, but when they fail. Just one element of these plans is telling us this right now, with a record stock market run over the last decade, unfunded liabilities continue to rise! What on Earth do you think is going to happen when there is a correction?

    So if nothing is done, these public employees and retirees will end up getting mere pennies-on-the-dollar of what they were promised. At least with my proposal, they would be able to count on Social Security as a supplement to their personal savings. And the longevity of Social Security would increase with the infusion of six trillion dollars from the current assets of all public pension funds.

  13. SeeSaw Says:

    I would say that the 2008 global financial collapse was quite a correction–CalPERS lost 40% of its portfolio and has been trying to dig out ever since. There are plenty ways for the, respective, entities to reform their own plans. One example is the article in the Sac Bee related to the outgoing CalPERS Board member, who is a public employee, having thousands of unused vacation hours on the books. That could never happen where I worked. We were capped. My maximum was 400 hours–that amount requiring 20 years continuous service. All of the funds in the public defined benefit pension plans are never going to be turned over to the SS Administration–you can count on that.

  14. Max Conrad Says:

    The bill for all those promises/lies made by Democrat politicians to secure votes is about to be presented and guess what? They lied to you, took your money to feather their nest and proceeded to spend it all on illegal aliens.

    Welcome to California, totally owned by the Democrats that bankrupted it.

  15. john Says:

    Retirees can lose their COLAs , the amount added to their original pension amount every year after retirement. Notice that the COLA amount is shown separately on your check stub. That whole COLA amount can be taken away.

  16. T B Says:

    Never say never…

  17. SeeSaw Says:

    John, the retiree does not become qualified to receive a COLA until the second year of retirement. The amount of the COLA can be zero up to the contracted benefit. It is administered according to CA Retirement Law using the federal CPI. I have received zero and less than the 2% contracted amount in the majority of years I have been retired. Of course the COLA could be lost if the CA Legislature abolished such. That will not happen if we keep the Legislature “blue” in CA.

  18. S Moderation Honestly Says:

    TB,

    Never

  19. Tough Love Says:

    T.B.,

    I strongly advocate for very MATERIAL Public Sector pension reform (including material reductions in the now ludicrously excessive level of promised pensions & benefits …. and where necessary, even for those ALREADY retired), but I too agree that the assets in State & Local DB Plans will NEVER be turned over to SS.

    Yes, radical changes have a high probability be being the future for many Public Sector Plans ……… but assuredly NOT that.

  20. SeeSaw Says:

    John, to clarify: The COLA amount on the check has already been granted over the retiree’s years of retirement and is being paid monthly to the retiree. It could be frozen, going forward, statutorily, but what has already been granted is not going to be taken away, unless the sponsoring entity stops paying the plan like Loyalton and the Joint Powers Consortium. Those two entities should take responsibility for their retirees.

  21. CalPERSon Says:

    @john: Retirees can lose their COLAs

    How? Reardon just ruled that there can be no cuts to any pension benefits unless there is “compelling evidence” the pension system as a whole is under severe financial stress. Meanwhile, CalPERS’ total assets are sharply up to $356 billion…

  22. acc Says:

    @SeeSaw Many JPA consortia specifically create non-profit agencies (e.g. LA Works) in order to shield themselves from debts, liabilities, etc. that the non-profit assumes.
    https://www.bbknowledge.com/general/the-ins-and-outs-of-joint-powers-authorities-in-california/
    So, the East San Gabriel Human Services Consortium did not, and does not, HAVE to pay the retiree benefits of the LA Works employees. LA Works was responsible for this as part of its OWN contract with CalPERS. Sadly, the non-profit was mismanaged, lost its contract with LA county, and subsequently shut its doors. Game over for the non-profit and its employees (i.e. into the TAP they go). And the JPA consortium walks.

  23. SeeSaw Says:

    That is true, evidently, but I do not consider it proper, and I hope its not the final chapter to the story. That would have happened in Vallejo, Stockton and SB if those cities had not done the right thing–the alternative was to be sued by CalPERS. Same thing should apply with the Consortium. In the mid-nighties, Orange County had the biggest bankruptcy in its history–noboty lost their pension–Orange County is properous today. Where I worked, there were employees who were paid through separate grant funding. Their benefits were paid by the employer, the same as those that covered the regularly funded employees. They never had to worry about losing those benefits, once vested. That is the way it should be. I will continue to hold hope for the Consortium retirees–I don’t think those cities have been sued yet.

  24. Tough Love Says:

    Quoting SeeSaw …………..

    “That would have happened in Vallejo, Stockton and SB if those cities had not done the right thing–the alternative was to be sued by CalPERS. ”

    No SeeSaw, given their ONGOING financial distress, the “right thing” would have been to either end the DB pension Plans (replacing them with DC Plans comparable in generosity to what Private Sector Taxpayers typically get from their employers), to to VERY materially reduced the DB Plan generosity by at least 50% for the future service of all CURRENT workers.

    And CLEARLY, because these were handled in Federal Bankruptcy Court, there would be nothing the CalPERS could do about it ….. the Bankruptcy Judge made that eminently clear.

    Very unfortunately (for the Cities’ taxpayers) they passed up a one-time opportunity to REALLY fix their financial problems.

  25. acc Says:

    @SeeSaw I like the thought of the LA Works employees getting their benefits back, but they won’t. And they have no recourse. And how very sad indeed this happened to them at this particular time in the life of the CalPERS investment pool. Parenthetically, Costigan and company are now looking for one of their sheep in Sacramento to sponsor a change to PERL in such a way as to eliminate a provision that ACTUALLY ALLOWS CalPERS, if it so chooses, to fully fund retirees that are placed in the TAP. Curiouser and curiouser. Why on earth eliminate that option? Actuarial soundness is the go-to answer. Yet the TAP is over-funded by 213% as of 6/30/16. I think of the four employees from Loyalton in particular. CalPERS could have elected to fully, or more substantively, funded their retirements. Now, if you eliminate that provision, and all future retirees are placed in the TAP with whatever reductions may apply, then technically any over-funded amount in the TAP would NEVER be threatened. That excess revenue would be there for the taking. Is that the end game? My Magic 8 Ball just said ‘YES’.

  26. S Moderation Honestly Says:

    I just watched an interview (about two years old) with a CalPERS spokesperson. The interviewer hinted that cutting pensions for Loyalton retirees was “sending a message” to other cities not to mess with CalPERS. CalPERS denied that (rightly, I think) and said that they could not legally or morally continue to pay full benefits, as it would necessarily be subsidized by other cities.

    There is no doubt, though, that if they had somehow continued (it’s just a drop in the bucket of CalPERS $530 billion fund), it would have been a precedent that other faltering cities would try to gain for themselves.

  27. acc Says:

    @S Moderation Honestly Yet CalPERS has at its disposal in PERL – and is now actively looking to do away with – the option to fund the Loyalton retirees. That’s who they serve, yes?! I think you’re right, CalPERS took the action they did for reasons protective. They have no choice. They’re in numerous crosshairs for the mess they have created. But I also think there is no doubt Loyalton made the decision THEY did because they genuinely can’t afford to keep writing bigger and bigger checks to CalPERS (to get them out of the mess they have created). CalPERS … talk about a beleaguered brand and wayward ship.

  28. S Moderation Honestly Says:

    As I understand, the city agreed to and has been paying the retirees from general funds to offset the CalPERS reductions.

    As it should be. The city had a contract with it’s employees/retirees to pay the agreed upon pension. CalPERS is just an agent to handle the contributions/investments/ dispersals. The City is ultimately responsible for the debt.

    LA Works is different in that the entity no longer exists, and cannot subsidize it’s retirees pensions. Hopefully, as SeeSaw said, the cities involved can be “persuaded” to make the pensions good.

  29. It Could Happen to You Says:

    It Could Happen to You
    Employees of JPA’s have no idea what arrangements are made by cities who form JPA’s, many being over 40 years in existence. JPA Cities were allowed (or maybe CalPERS was anxious for more members in their pyramid scheme pension plan) to join CalPERS without CalPERS administration researching and confirming there was a means for those JPA’s to carry on their pension responsibilities in perpetuity. You say that is the employees fault? That is why LA Works employees have been devastated with a 63% cut in their hard earned pensions. In LA Works case, the JPA member Cities wrote into the JPA an opt-out clause for any liabilities. They took advantage of all the LA Works services to their voting citizens for over 38 years, and then threw the employees to the wolves when it came to doing the right thing and splitting the JPA pension debt 4 ways (4 founding Cities) and providing the employees with their hard earned pensions. Don’t think it can’t happen to you. So before you go to work for any CalPERS agency, be sure you ask the HR Director and the City Manager/JPA Manager with all the documentation regarding any JPA’s and their potential “threat analysis” regarding your pension. When they tell you not to let “the door hit you on the way out”, then you can claim they fired you because they would divulge public information. Seriously???!!!!
    CalPERS never should have signed agreements with entities that couldn’t fund pensions through a taxing base. That is the LA Works employees fault, you say? Wow. These people worked, many for over 30 years for this agency, which was a stellar performing agency for 37 of its 38 years. BTW…it was closed due to a political assassination, and if you look at the final record, the audit was never pursued, because the auditors didn’t have the documentation to substantiate the claim- but by the time of the appeal over a year later, the agency’s funding had been cut due to the unsubstantiated claims and the doors had to close. So get your facts straight…reading fake news again, as usual.
    There were many ESGVC/LA Works employees (as with the other public employees whose pensions are in peril) who paid well over 30 years into their pension plans. Now there has been an across the board cut to their plans, with the PERS Actuary basing the 63% cuts on an “average” of the debts, including counting even past unvested terminated employees potential pension costs, claiming these individuals “might” return to the CalPERS system.
    If you all only knew the facts of how the 63% was arrived at….you might think a little differently. Including all the “contrived” debt they added to the “true” pensioners debt, made the overall debt escalate exponentially and created an extremely inflated debt load for all LA Works pensioners to share equally, regardless of some pensioners have paid well over 30 years into the plan. The longer you were employed the greater your contributions were used to level the LA Works debt load. Does that make sense to all of you?
    As I’ve said, I wouldn’t wish this situation on anyone, but don’t believe for a minute that this couldn’t happen to you.

  30. SeeSaw Says:

    I go back to my original opinion. The four cities that formed this consortium need to step to the plate–they have played a part in cheating these workers, and they better start meeting around the table and figuring out what to do! If they continue to bury their heads in the sand, I hope they have their socks sued off!

  31. acc Says:

    @SeeSaw It Could Happen to You is spot on and represents perhaps the most cogent voice out there in defense of the LA Works employees. ESGV leveraged California JPA law to walk away from all debts, liabilities and obligations of LA Works – the agency ESGV established. And I have no doubt that those LA Works employees were told when they were hired that they are in CalPERS…that they are set. AND NOW … CalPERS wants to permanently do away with a provision that currently exists that would have allowed CalPERS to help the Loyalton and LA Works retirees.

    See page 3, third bulleted item:

    https://www.calpers.ca.gov/docs/board-agendas/201711/financeadmin/item-7a-00.pdf

    CalPERS can no longer afford to “be there” for all of its members. It continues to circle its wagons. A confluence of events – including such obscenities as SB400 and all that it wrought, “air time” at 40 cents on the dollar – leave CalPERS with no choice but to start sorting the wheat from the chaff.

    Translated, the only “good” CalPERS agency is one that is ready, willing and able to levy higher taxes and fees in perpetuity. That way there will be enough money for J.J.’s eighteen MONTHS (excuse me?!) of accrued vacation.

  32. acc Says:

    @It Could Happen To You We’re in the same EXACT situation. And we’re in the SGV.

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