High court may not go big on first pension case

The state Supreme Court, with four similar cases on the backburner, gave few signs during oral arguments on a labor-union challenge to Gov. Brown’s pension reform yesterday that it’s ready to take on the “California Rule” preventing pension cuts.

An attorney for Brown, Rei Onishi, argued that contrary to the California Rule, a series of state court rulings, the pension offered public employees at hire is not a “vested right” that can only be cut if offset by a “comparable new benefit” that erases any savings.

The California Rule was cited by courts that overturned a key part of a cost-cutting pension reform approved by voters in San Jose in 2012 and other reforms approved by voters in San Francisco in 2011 and Pacific Grove in 2010.

Now as employer pension rates continue to climb, the League of California Cities and other groups say funds for other programs are being squeezed. Unions are arguing that Brown’s pension reform will help ease the problem.

Cal Fire Local 2881 is challenging a part of Brown’s pension reform six years ago that prohibits boosting pensions by buying up to five years of service credit, called “airtime” because the employee does no work during the period.

As in the other four cases, the issue in the firefighter suit is that Brown’s reform applied the airtime ban not just to new hires with no vested rights, but also to workers hired before the reform took effect on Jan. 1, 2013, who are protected by the California Rule.

The airtime law enacted in 2003 was intended to have no additional cost to employers, who must pay higher rates to cover higher costs from investment losses. Airtime purchasers do not have investment risk.

Investment earnings are difficult to predict. 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 California Public Employees Retirement System said about 61,217 members purchased airtime from Jan. 1, 2004, when the program began through Dec. 31, 2012, when it ended.

Onishi argued that whether a pension benefit is a vested right depends on the intent of the Legislature, which is a “heavy burden” in this case because the law does not say the airtime benefit is irrevocable.

The firefighter attorney, Gregg Adam, countered: “Then the Legislature should not have said that you can purchase it any time prior to retirement.”

Brown’s attorney also argued that setting a deadline, in the case of airtime about 12 weeks to make a purchase before the ban took effect, has never been regarded as an impairment of a pension benefit.

Several justices referred to a state Supreme Court ruling, Miller v. State of California (1977) that upheld a reduction in the mandatory retirement age from age 70 to age 67 as an example of a cut in the pension the worker could have earned by staying on the job.

Adam said it was a tenure case, not a pension case. He said it’s the one exception to a benefit change affecting pensions not being vested. But the shorter tenure did not affect the value of the pension earned on the job.

The firefighter attorney argued that some workers rely on the purchase of airtime to get an adequate pension, after taking leave for family and other reasons. And for some, airtime is an incentive to remain on the job.

Several justices said the protection urged by the firefighters is so broad that it could be applied to other benefits such as lower-cost insurance, health care, vacation accrual, and transit subsidies.

Adam argued that the pension protection advocated by Brown’s attorney, a “reasonable and sustainable” pension, is so broad and ill-defined that it could lead to “chaos.”

“We are at a period of full employment when we want to retain the best employees we can for the state, and yet the state is arguing for a non-standard, ‘reasonable and sustainable,'” Adam said.

He said the California Rule is “a clear rule that has existed at least 60 years since Allen,” a reference to Allen v. City of Long Beach (1955) that established the rule that “a comparable new advantage” is needed to offset a pension cut.

Temporary Justice Laurie Zelon, an appellate justice filling an empty seat, asked Brown’s attorney why airtime is not vested as an implied contract, which the Supreme Court ruled in an Orange County case can be created.

Onishi said it goes back to intent on the part of the Legislature. He said a firefighter brief said they have never argued that airtime was deferred compensation, a key issue in previous cases of this kind.

The bipartisan Little Hoover Commission, a state watchdog agency, and others have urged a modification of the California Rule to allow cuts in pension amounts earned by workers in the future, while protecting amounts already earned.

Onishi told Justice Goodwin Liu that pensions can be cut, for example, from 2 percent of pay to 1.75 percent of pay, even after 20 years of service. Are there any limits on “what the Legislature can do to change expectations going forward?” Liu asked.

“I don’t think so, your honor,” Onishi said, “not in the absence of clear and unequivocal legislative intent that would tie the hands of future Legislatures and in the absence of a deferred compensation scenario in which somebody has earned compensation through their labor.”

Onishi told Justice Leondra Kruger he thinks rulings in Legislature v. Eu (1991) and other cases mean employees have a right to a “substantial and reasonable” pension as soon as they begin employment.

An appellate court ruling in 2016 in a Marin County case challenging “anti-spiking” provisions in the Brown reform aimed at preventing improper pension boosts also concluded that employees only have a right to a “substantial and reasonable” pension.

Another appellate court ruling last January in an Alameda County “anti-spiking” case, with a more limited view of allowed pension cuts, has been made the lead for the Marin and two other appellate rulings. Their briefing has been halted until the court rules on the Alameda case.

“We know we have to draw lines and we have to think about this language of a substantial, reasonable pension that occurs in our case law and is the subject of other issues not presently pending before this court,” Chief Justice Tani Cantile-Sakauye told Onishi.

“Your argument seems to be that this particular repeal of this statute is not a vested right, and therefore we don’t theoretically get to pension benefits only except to answer the argument by Cal Fire that this is a pension benefit.”


Excerpt from Allen v. City of Long Beach (1955), boldface added

[1] An employee’s vested contractual pension rights may be modified prior to retirement for the purpose of keeping a pension system flexible to permit adjustments in accord with changing conditions and at the same time maintain the integrity of the system. (Wallace v. City of Fresno, 42 Cal.2d 180, 184 [265 P.2d 884]; Packer v. Board of Retirement, 35 Cal.2d 212, 214 [217 P.2d 660]; Kern v. City of Long Beach, 29 Cal.2d 848, 854-855 [179 P.2d 799].) [2] Such modifications must be reasonable, and it is for the courts to determine upon the facts of each case what constitutes a permissible change. [3] To be sustained as reasonable, alterations of employees’ pension rights must bear some material relation to the theory of a pension system and its successful operation, and changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages. (Wallace v. City of Fresno, 42 Cal.2d 180, 185 [265 P.2d 884]; see Packer v. Board of Retirement, 35 Cal.2d 212, 214, 218-219 [217 P.2d 660].) In the present case it appears that section 187.2 substantially decreases plaintiffs’ pension rights without offering any commensurate advantages, and there is no evidence or claim that the changes enacted bear any material relation to the integrity or successful operation of the pension system established by section 187 of the charter.

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 6 Dec 18

14 Responses to “High court may not go big on first pension case”

  1. Michael Carlton Genest Says:

    Air time is a big issue, but it pales in comparison to some of the other pension issues. It would be easily “fixed” however, if they simply changed the formula for calculating its costs by using a more realistic discount rate, e.g., 30-year T-bill. Of course, that would be inconsistent with the discount rate used for calculating the liabilities and with the rate of return rate used to calculate the future earnings of the funds.

  2. Ken Churchill Says:

    I don’t know where the word substantial comes from. The Marin ruling only stated that employees were only required to receive a “reasonable” pension.

    Also, how can Greg Adam argue that air time is an incentive to stay on the job when the opposite is true. A fire fighter with 25 years of service and 5 years of air time will retire earlier because they just maxed out their pension, but would have to work 5 more years without the air time to max it out. .

    Finally, the cost for air time in Sonoma County resulted in a 25% annual return on the cost the employee paid for it. So I have a hard time believing their numbers that the employee paid 75% of the cost. That would probably assume a return on investment that has not been achieved by CalPERS. It would be good to know Ed how the cost of air time was calculated and if it was adjusted upward after all the retroactive increases were enacted.

  3. john moore Says:

    See Kern v. City of Long Beach and section 4b of the Allen v. Long Beach case, where the court noted that the city was making NO claim that the changes were necessary to protect the integrity of the pension system. As set forth clearly in Kern, when a system becomes financially unsustainable reasonable modifications and reductions may be made without off-sets. See cases cited in Kern upholding reductions w/o off sets. As the Allen court duly noted, the Long Beach plan was not made unsustainable by the reductions and because Kern had found that the city employee’s had vested rights granted by the City Charter, the reductions were disallowed.

    If the city has claimed and produced evidence that w/o the reductions the pension plan would be unsustainable, then, according to The Ca. Rule, reasonable reductions could be made w/o off sets.

  4. john moore Says:

    The Brown team amassed considerable evidence that the State pension system was unsustainable w/o the PEPRA reductions, but it sounds to me like the court was more interested in whether air time was a “vested right.”

    If not a vested right, it will not get to the issue about whether off-sets could be made w/o comparable advantages.

    In Marin, all of the parties assumed that the employee’s had vested rights, w/o any showing(evidence) that the reduced benefits had been adopted in a manner that established a vested right. If the Brown team had raised the vested rights issue in the Marin case, I believe that the evidence would have shown that a vested right had never been granted

  5. jskdn Says:

    There’s nothing “reasonable about the extreme pension privilege of government employees at the expense of mostly pension impoverished taxpayers. It seems illogical to suggest that modifying towards actually being reasonable be hamstrung by an equal value exchange that makes that impossible. Both in airtime and SB400, the legislature was told that the changes would be cost-less to taxpayers. When that assertion was belied by the facts, greedy government employees claim that taxpayers should never the less still be obligated to pay for their continuation.

  6. jskdn Says:

    A “no risk” guarantee for an airtime purchaser means someone else assumes the risk, and the party assuming a risk rightly expects a return for that. I fail to see why a government pension system should be in the business of selling below-market price annuities, or for that matter, any at all. Imagine if participants in the retirement system were made to absorb the loss. They would scream unfairness, even as they are silent on that unfairness being foisted upon taxpayers. I know 100k+ government retirees who took advantage of this foolish giveaway precisely because they recognized it as a much better investment than they could get in private markets, where they were also invested. It’s hard not to think of politicians as either stupid and/or corrupt.

  7. SeeSaww Says:

    Jskdn, surely you know there was a world-wide economic collapse in 2008. It was not caused by CalPERS or by public employees. Do you think it necessary to refer to government workers as “greedy” for expecting to receive what they were promised at the time of hire? Do you think that since private employers sold their employees down the river regarding pensions, public employers should do the same? Did you refer to all the private sector employees as “greedy” because they were upset that they did not get the pensions they had planned on?

  8. moore Says:

    SeeSaw. Until the last two decades all citizens shared the pain of a financial collapse, but Ca. Govt. workers have granted themselves huge raises and hence huger pensions since 2008. If you believe that an agency should pay 100% or more of annual salary for pensions, then you are in fact a swindler. The promises you cite were obtained by fraud, which means they are not valid promises. You realize that in ten years. annual pension costs will be 200-300% of salary and every agency will be cash insolvent. BTW, it was CaLPERS duty to utilize an underwriting formula that accounted for financial crashes. There is a crash going on right now, today, and the Underwriting does not have check(reduction of pensions) to account for it. You want us to believe that you are a just and reasonable person, but you have a Maddoff streak.

  9. CalPERSon Says:

    Hopefully the court will rule that airtime is not vested but leave the rest of the California Rule alone. Airtime is simply a privelege where the employee is given an option to pay an actuarially neutral sum in exchange for service credits. The government should be able to revoke that privelege while leaving the core pension system unharmed.

  10. Stephen Douglas Says:

    Is that the way it works, John? Maybe a pension actuary can explain it. If annual pension costs will be 200-300% of salary, wouldn’t it be cheaper to just go to pay-as-you-go?

    New York State, as I understand, has pay and benefits at least as generous as California, but is paying much less for pensions.

    “Calpensions.com reports that New York’s policies are so effective its system has employees and employers contribute significantly less toward pensions in normal years than California’s system does.”

    “One thing New York does far better than California? Pensions”

    The San Diego Union-Tribune, May 2, 2017

  11. SeeSaww Says:

    Mr. Moore, I really take umbrage at your comparison of me to Madoff. I am just a normal citizen/resident of CA and I paid my dues as a public sector worker for 41 years. Maybe I should compare you to Scrooge

  12. MikeB Says:

    We have lots of Scrooges and hate-filled people among the regular commenters here. PERS and other pension organizations, also, have done their share of stupid moves, which provides plenty of ammunition. Bottom line, we are where we are.

    As for airtime, there are two forms of it: replacement of service time lost for good reason, which has been around for a long time, and outright purchase of extra service credit, which is more recent. As I see it, neither should be considered a “vested right” – the right is to a pension based on time worked and salary, period. That’s certainly what it was for me before the changes of the late 1990s, and that’s what I got when I did retire after 35 with the state and more elsewhere. No airtime, no disability, no spiked pension.

    Any extras like airtime are options that should be fully paid for by the employee, and a lower discount rate would in fact be appropriate since the extra time should not be covered by any employer investment. Airtime for time lost during employment for good reason (sickness, military service, etc.) might be cut some slack for compassionate purposes. Might. But straight airtime (buy 5 years so retirement at 25 years instead of 30 makes sense, for instance, or so the final benefit is higher than the usual cap) is a personal investment, and has no business being a vested right under any circumstances. If airtime were not available, what would have to be invested in the state 401K with conservative (though not necessarily 30-year treasuries) investments to make up the difference? That’s the value of the airtime, and the employee, not the employer, should be responsible for it.

  13. Ken Churchill Says:

    What I have seen is a lot of abuse not by employees but by the people running the system so I have lost any trust in them pricing things like this. For example in CERL counties they can buy service credits and get an annual return of 25 to 30% on the cost.

    If the employee wants to buy airtime and is required to pay the full price why can’t they just buy an annuity outside of the system with their own money?

  14. Philip Pittman Says:

    So if I bought air time to boost my pension because I did not have the service years, will the money I paid minus the benefits received be reimbursed to me? I believe I paid about $86K for my five years which was back in 2012. Given the market has increased by 250+% since then, will I be reimbursed based on the potential earnings minus what was paid to date? I see this all as a quagmire and I can see the state just “encumbering” my funds without really addressing the ramifications of this legal issue.

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