Another court ruling on vested rights to pensions

An appeals court ruled last week that six judges have no vested right to pensions uncut by a reform, even though they were elected a half year before the reform took effect on Jan. 1, 2013.

An appellate panel unanimously ruled the judges elected to superior courts in June and July of 2012 did not obtain a vested right to a pension until Jan. 7, 2013, when they took office and began drawing a state salary.

There was a question of fairness. Judges elected in 2012 who had been members of a public pension system receive the pre-reform pension. Judges appointed by the governor in 2012 receive the pre-reform pension because they were sworn in by the end of the year.

The six judges said state personnel told them they would receive the pre-reform pension. And they paid the lower pre-reform contribution rate for more than a year, before being shifted to the post-reform pension in March 2014.

In a big bite from take-home pay, their pension contribution jumped from 8 percent of pay to 15.25 percent, an annual increase of $12,690. At retirement, their pension will be based not on the pre-reform final one year of pay, but on a presumably lower three-year average.

Legislation to allow the six judges to receive pre-reform pensions, AB 837 in 2014, passed both houses with little opposition: Assembly 69-6, Senate 31-2. But Gov. Brown vetoed the bill creating an exemption to the pension reform he pushed through the Legislature.

“I am unwilling to begin chipping away at these reforms,” said his veto message.

The state Supreme Court has agreed to review two previous appeals court rulings also arising from vested-rights challenges to the reform, which some think could result in a high court ruling that weakens or eliminates the “California rule.”

A series of state court rulings, a key one in 1955, are widely believed to mean the pension offered at hire becomes a vested right, protected by contract law, that can’t be cut unless offset by a comparable new benefit, erasing any cost savings.

Because of the California rule most pension reforms, including Brown’s Public Employees Pension Reform Act, are mainly limited to new hires that do not yet have vested rights, taking years to yield significant cost savings.

A change in the California rule that would allow cuts in pensions current employees earn in the future, while protecting amounts already earned, has been urged by the Little Hoover Commission and some reformers.

The two previous rulings the high court agreed to hear say current workers have a vested right to a “reasonable” pension, not the one offered at hire. The new ruling on when elected judges vest does not appear to be a similar direct challenge to the California rule.

But the new ruling’s “equal protection” discussion of lower post-reform pensions does cite at length one of the previous ruling’s view that a “pension crisis” needs urgent action to reduce the growing drain on basic government services.

Justice Banke

“There is simply no question that the difference in treatment is justified by a compelling state interest — namely, the urgency of implementing public pension reform as quickly as possible and the necessity of drawing a clear line as to when these reforms would become operative, giving due regard to the “vested rights” doctrine uniquely applicable to public employment,” Justice Kathleen Banke wrote in the new ruling. “PEPRA was designed to address the critical issue of unfunded public pension liabilities.”

When the state Supreme Court takes up the two cases challenging the California rule, judges will move from ruling on the pensions of their judicial colleagues to ruling on their own pensions.

In California, judges have seldom if ever been excused or “recused” from ruling on cases that affect their own pensions. A change in the California rule could, for example, reduce pensions Supreme Court justices earn in the future.

A jury heard a major Rhode Island pension reform after the judge, who refused to recuse herself, received complaints from attorneys in the case that she and three members of her family would be affected by the decision.

Lower-court judges who would not be affected helped the Arizona Supreme court make the ruling on an employee pension-contribution case, after four justices on the high court there recused themselves.

Federal judges have made rulings on several California local government retiree health care reform cases. In an Orange County case, a federal court made a request that may or may not suggest how the California Supreme Court will view the California rule challenges.

The federal court asked: “Whether, as a matter of California law, a California county and its employees can form an implied contract that confers vested rights to health benefits on retired county employees.”

In a unanimous reply in November 2011, the state Supreme Court said: “A vested right to health benefits for retired county employees can be implied under certain circumstances from a county ordinance or resolution.”

A federal district court, following the new state guidelines on implied contracts, ruled that under the circumstances in this case Orange County could cut the health benefit of retirees. A federal 9th circuit panel upheld the ruling in 2014.

Four of the seven Supreme Court justices who made the ruling that a contract can be formed under California law, without a formal legal agreement specifying the terms, are still on the court.

Gov. Brown, who has appointed three of the current Supreme Court justices, will make a fourth appointment to replace former Justice Kathryn Werdegar, who retired in August after giving notice a year ago.

“It’s not something I want to do too quickly,” Brown said in January as he also expressed a “hunch” the California rule will be modified. He said his fourth appointment, making his appointees a majority, could be “very decisive.”

Democratic appointees will be a majority on the Supreme Court for the first time since 1986, when voters ousted three appointees Brown made in his first terms (Chief Justice Rose Bird, Cruz Reynoso, and Joseph Grodin) after a campaign focused on death penalty reversals.

The state constitution protects the independence of judges with provisions preventing manipulation of their pay. An issue in the appellate ruling last week was whether the safeguards are violated by the reform requirement that employees pay half of the pension “normal cost.”

The normal cost presumably covers the pension earned during a year, excluding the often much larger debt or “unfunded liability” from previous years. Paying half the normal cost is the reason the contributions of the six judges jumped from 8 percent of pay to 15.25 percent.

Justice Banke and two colleagues ruled that requiring payment of half the normal cost does not violate the “nondiminution” clause of the constitution or “impermissibly delegate legislative authority over judicial compensation.”

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 26 Mar 18

7 Responses to “Another court ruling on vested rights to pensions”

  1. moore Says:

    The Key 1955 case cited by Ed for the proposition that the pension granted at the beginning of employment may not be cut except with off setting benefits is Allen v, City of Long Beach.

    In that case, the court had previously found that the city charter had granted employee’s “vested” pension rights(Kern). In both Kern and Allen the court found that the city pension plan was not financially stressed to the point that it may not be able to meet its obligations and because of that, any reduction required off-sets. Several supreme court cases were cited where pensions had been legally reduced w/o off sets.

    State Employees and Teachers in STRS have vested pension rights, so pensions may only be reduced w/o off sets if the pension plan is in financial distress.

    Whether a city or county in PERS or CERCLA have vested pension rights depends on whether the agency voters or the legislative body granted “vested” pension rights.

    The distinction of whether a pension plan is distressed or not, will be a big issue in the supreme courts decision. In the PEPRA cases, PEPRA set forth a strong foundation that existing PERS and CERCLA pension plans were under water. In non-PEPRA cases it is critical to lay that foundation as a pre-condition to reducing pensions w/o off sets, a fact that is not well understood.

  2. legalnerd Says:

    In the CAL FIRE case, the threshold question is whether pre-PEPRA current employees have a vested right to purchase “airtime”?

    The legislature never expressly provided for that right when it created or amended the “airtime” statutes. So, the question is whether or not there is an “implied” vested right to make that purchase?

    But, as Ed notes, the California Supreme Court treats “implied” rights differently than “express” rights: In order for the court to hold that an “implied” vested right (to purchase “airtime”) exists, there must be unmistakable evidence that the legislature intended that result. That evidence simply does not exist.

    Therefore, the court will hold that there was no vested right to purchase “airtime” when PEPRA was enacted and the elimination of that right (by PEPRA) can constitutionally be applied to pre-PEPRA current employees.

    The court will not, therefore, have to address the continued validity of the California Rule in the CAL FIRE case.

    The court may address the California Rule in the Marin case (Review has been granted. But briefing has not started) or in the Alameda case (Review has not been granted yet.)

    Bottom Line: It will quite some time before the court may have to address the constitutional merits of the California Rule. And that certainly won’t take place before a new justice is seated.

  3. spension Says:

    Bond coupon and principal payments by cities, counties, and the State of California also cause financial distress on those entities… can the payment terms on bonds also be renegotiated?

    Of course financial experts will explain that bond debts are somehow senior to mere pension obligations. Translate: it is wealthy people (mostly male investment bankers) who own or manage bond debt, and they have powerful enough attorneys to get their pound of flesh. But middle-class teachers, mostly female… the men in the courts of the US will find an excuse to welch on debt to them.

  4. moore Says:

    If a city or county files a chapter 9 in bankruptcy, bond holders get slaughtered. Per Judge Klein, cities and counties may get out of CaLPERS w/o penalty in a chap 9 and may reduce pension benefits.

  5. spension Says:

    Is that true for insured bonds, moore? And if “reasonable” reductions in future pensions can be made by cities and counties *without* bankruptcy, moore, can “reasonable” reductions in bond coupons and principal repayments be performed by the same standard?

    And how about the State of California, moore? How does bankruptcy for the State work? There have been 20 or so State sovereign defaults, most in the 19th century, a few in the 1930’s… odd how people here have thought those things happened so long ago that they are irrelevant… but… most of the US Constitution is older than those State defauts.

  6. SeeSaw Says:

    I agree with legalnerd. I guess he/she is a lawyer –he/she gives thoughtful opinion–not rhetoric filled with disdain and hatrid for public employees that permeates most of the public forums. I commend Mr Mendel for the contol he keeps of this forum, compared to others Before PEPRA was enacted, the proposed abolishment of “air time” was given notice and those who wanted it had to purchase it before the deadline. Fair enough. The situation is different with the other cases because that spiking was in those contracts, pre-PEPRA, and the Classic employees should be able to calculate their pensions on the basis of what was in those contracts. I don’t think pensions should have spiking and a reasonable pension is one that is calculated on the formula that said employee was given while employed–but downgrading such should never be allowed.. It was legal to upgrade formulas and enact them retroactively–according to Governor Brown such had always been standard procedure. He was a big supporter of the Orange County Deputy Sheriffs when Moorlach et al tried to renege on the upgraded formula that had been given in 2001–when AG he filed an Amicus Brief in favor of the public employee. Now, his turnaround is puzzling. I don’t understand the thinking that the problem of sustianability rests on the shoulders of the cities. Why doesn’t the state take any responsibility for capping excess fringe benefits? My city capped accrued vacation hours years ago and reformed its own pension formulas for new hires years before PEPRA. It is up to each individual entity to sit down at the table and determine what is must do to meet its pension obligations. Cutting pension formulas for existing employees going forward is not negotiable!

  7. legalnerd Says:

    Ed, review has been granted in Alameda.

    Seesaw, yes. For the last 35 years. And, yes, I try to avoid rhetoric because when it comes to the law (especially an emotionally’charged subject like pension reform) it serves no purpose other than to inflame passions.

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