New pension-cut rulings begin with little change

Voter-approved pension cuts were the first wave of court cases after public pension investment funds had huge losses in a stock market crash a decade ago, creating the need for big bites out of government budgets to pay alarming debt.

Ballot measures in cities large and small were overturned by the courts, from a blunt-force cap on annual payments to CalPERS in Pacific Grove to a stark choice for employees in San Jose: pay more for pensions earned in the future or begin earning a smaller pension.

The local measures ran afoul of the “California Rule,” a series of state court rulings believed to mean the pension offered at hire becomes a vested right, protected by constitutional contract law, that can only be cut if offset by a comparable new benfit, erasing any savings.

A unanimous appeals court panel ruling in 2015 that overturned a San Francisco ballot measure cutting a supplemental cost-of-living adjustment for city pensions was based on one of the key California Rule issues.

“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 ruling in the San Francisco case.

Then a year later in a Marin County case another unanimous appeals court ruling, like the San Francisco ruling citing more than a dozen previous rulings, followed its presumably logical legal path to an opposite conclusion.

“There is no absolute requirement that elimination or reduction of an anticipated retirement benefit ‘must’ be counterbalanced by a ‘comparable new benefit,’” said the Marin ruling.

The Marin case is part of a new wave of court challenges to pension cuts, this time to fringe parts of the Public Employees Pension Reform Act (PEPRA) pushed through the Legislature by former Gov. Jerry Brown that took effect on Jan. 1, 2013.

Main cost-cutting parts of the reform, such as working longer to earn the equivalent of a pre-reform pension, are limited to employees hired after the reform who do not yet have vested rights, thus avoiding a clash with the California Rule.

The state Supreme Court has agreed to hear at least five cases challenging the governor’s reform. An issue in most of the cases is whether pension cuts applied to vested employees hired before the reform, not just new hires, violate the California Rule.

Last week the high court ruled on the first of the five cases, unanimously upholding the reform ban on boosting pensions by buying up to five years of additional service credit. It’s called “air time” because the employee does no work to get credit for the years.

In two steps mentioned in a court summary before the ruling, the court first found air time was not a vested right and then did not, as the state and others urged, consider the California Rule because air time was found to be unprotected by constitutional contract law.

“For that reason, we have no occasion in this decision to address, let alone to alter, the continued application of the California Rule,” the Supreme Court said.

The ruling was a rare pension court loss for unions, led by Cal Fire Local 2881. While awaiting the next case, lawyers are analyzing the 45-page ruling written by Chief Justice Tani Cantil-Sakauye for any hint of clarifying or reshaping the California Rule.

Among the main points in the ruling is that public employment is ordinarily statutory, rather than contractual, and can be modified by the governing body. But constitutional protection can arise in two ways:

When statutes creating an employment benefit “clearly evince an intent by the relevant legislative body to create contractual rights,” or when “contractual rights are implied as a result of the nature of the employment benefit, as is the case with pension rights.”

The ruling said the air time legislation did not show intent to create contractual rights. “Further, unlike core pension rights, the opportunity to purchase ARS (additional retirement service) credit was not granted to public employees as deferred compensation for their work.”

The California Rule got its name in part because it has not been widely adopted elsewhere. The ruling said a research paper by Amy Monahan notes that “of the twelve states to adopt the rule, three have since modified it.”

The next California Rule case heard by the high court may be the “Alameda” case, a consolidation of union challenges in three county retirement systems to Brown reform “anti-spiking” provisions, which curb improper boosting of the final pay that sets pension amounts.

The court put three other pension reform cases on hold, pending a decision on the Alameda County case (combined with similar cases in the Contra Costa and Merced county systems) about spiking curbs applied to vested pre-reform employees, not just new hires.

On the long list of items banned from final pay by the reform and the counties are, for example, one-time pay for performance and bonuses, cashing out unused vacation and sick leave, on-call and call-back pay, and terminal pay not earned in the final compensation period.

The three reform cases put on hold are a Los Angeles firefighter whose pension was cut after a felony conviction, six judges elected before the reform but who took office after the reform and must pay high new-hire pension rates, and the Marin case.

Like Alameda, the Marin County case is about the reform anti-spiking provisions. But the Marin appellate ruling was issued in August 2016, long before the unanimous appellate ruling in the Alameda case in January last year.

So, why did the high court make the lead case Alameda, which sets a high hurdle for pension cuts, and put the Marin case that contradicts the California Rule on hold, pending a decision on the Alameda case?

An attorney for the firefighters in the air time and Marin cases, Gregg Adam, has said he thinks the likely explanation is that the Marin trial court ruled on a “demurrer” requiring no evidence, unlike the Alameda trial court evidentiary hearing that produced a well-developed file.

“Courts usually prefer to work off a voluminous, well-run trial court record rather than the Marin case, which basically is nothing,” Adam said.

Former San Jose Mayor Chuck Reed, whose ballot measure lost a key provision under the California Rule, said last week the court also may think the complicated Alameda case has more parts from which to choose to make rulings than the Marin decision.

Although he is confident the high court will provide some guidance, Reed, a lawyer, said it’s not unusual for a big issue to go in and out of the courts several times before final clarification after a decade or so.

Brown said early last year he has a “hunch” the courts will modify the California Rule, so “when the next recession comes around the governors will have the option of considering pension cutbacks for the first time.”

His legal office replaced the state attorney general in the defense of the Air Time ban. An attorney for Brown, Rei Onishi, made the oral argument for the Air Time ban and also intervened in the Alameda case last year on behalf of the govenor’s reform.

Gov. Newsom reportedly told a firefighter group during his campaign last year that he supports the California Rule. His media office did not respond to a question last week about whether Onishi will continue to intervene in the Alameda case in defense of the pension reform.

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 11 Mar 2019

9 Responses to “New pension-cut rulings begin with little change”

  1. larrylittlefield Says:

    The problem with the California rule is that it’s one way. Unions can cut deals with politicians to retroactively increase benefits, lying about the consequences, and those benefit increases have the same standing as the pensions originally promised in exchange for someone taking a public service career.

    The solution proposed by reformers — keep vested benefits, but change things going forward, is the “screw Gen X” scenario.

    Generation Greed, already retired after self-dealing retroactive pension increases, gives back nothing.

    If new workers are put in a 401K, they get those defined contributions from their first day on the job.

    But most of the value of a defined benefit pension is accrued in the last few years on the job. By stopping accruals, mid- and late-career workers are left with vastly less than either those who received defined benefit accruals their entire career, or what they would have received in defined contributions over an entire career.

    No one talks about that. It’s a desperate attempt by Generation Greed to find someone to cheat and not feel bad about it by lying.

  2. SeeSaww Says:

    It was the legislature and CalPERS who added new formulas to the pension plans, because they did not know that Wall Street was going to bring down the whole world’s financial system. So, the employers that adopted the new formulas were allowed to do so retroactively. The practice has ceased going forward with the adoption of PEPRA 2013. There is now a cap on pensionable income for those hired after 2013.

    There is no union involved with miscellaneous employees at my former public-sector workplace. Collective bargaining is allowed in-house and that is how it is done there. If you hate unions so, though, there are several right-to-work states where you can reside if you want to work for an employer who decides what your pay will be, whether it is sustainable or not.

    Thank you to Mr. Mendel for a well-researched article. I hope you are paid accordingly.

  3. CalPERSon Says:

    I find the Court’s use of the phrase “core pension” intriguing. That could be a hint that this is where the court is headed — upholding the California Rule for the basic pension benefit and upholding PEPRA’s prohibitions against using vacation, uniform allowances, etc. as pensionable salary.

    To me that would be a fair and just ruling. On day one at the job you are promised X% of pay after working Y years when you retire. It’s deferred compensation. If there’s a recession the government has other tools to cut costs like layoffs, furloughs and pay cuts. There’s no need to break the pension contract.

  4. John M. Moore Says:

    Ed, you say that the court relied on The Ca. Rule in the Pacific Grove pension case. Actually the city threw the case by failing to disclose to the judge that Pacific Grove required a vote of the people to grant a vested contract pension right. No election has ever been held on the vested right/contract right issue.
    Had the judge known that the city charter required a vote to grant a vested contract right, the Judge would have ruled differently. The term Ca. rule or vested contract right never appeared in the case briefs or in the judges decision.
    The judge ruled in favor of the unions because he found that they had been verbally informed of their pension rights at the time of hire(based on the testimony of only one witness). The charter prevented city obligations without an ordinance and there was none. Prior judges in the case had already ruled that the MOU’s and the PERS contract had NOT created a vested contract right. Appeal? City Atty advised the city council that an appeal was hopeless.?????
    IMO, the city attorney’s treason was/is typical of such cases, particularly in Marin and Sonoma County and the city of San Jose.
    In the San Jose case, the charter specifically provide that the council could reduce and modify pension benefits. All employees were “new hires” compared to the date of the charter, so Ca. Rule should not have applied in any event. Lefty judge gave a wild, incongrous ruling. No appeal by council. The heck with the voters.

  5. SeeSaw Says:

    @CalPERSon–When I was active, that was what I expected to get in the final pension calculation–number of year’s credit, x formula pertinent to age at the time, x salary. I think that is what everyone else expected. That IMO is the core pension and “reasonable”.

    The 37 ACT County plans did allow for the spiking that CalPERS does not allow. I think that practice was immoral, but I would side with them on legal grounds because they were on their employers’ rosters prior to 2013. I assume they will lose in this next round of decisions, just like the airtime case. It is a little unfair for those workers

    The retroactivity of pension enhancements was allowed, across the board, throughout the history of CalPERS, and I was fortunate enough to receive two formula enhancements going forward which were retroactive during my working tenure. The employers always had the right to reform back to the old formulas for new hires if necessary and my employer did that too. Now, with PEPRA, there is no more retroactivity; no more enhancements going forward, and no airtime. Thankfully, the core is still intact.

  6. CalPERSon Says:

    @SeeSaw — Quick googling shows that the original 1937 County Act limited pensionable income to wages earned. My guess is that would undermine any argument that the Legislature intended to make vacation time, uniform pay, etc. vested and pensionable.

  7. SeeSaw Says:

    @CalPERson I think the county plans are subject to PEPRA 2013. Would such not invalidate the original 1937 County Act? I think that those plans are the only ones that allowed the addition of those spiking numbers to the pension calculation.

  8. SeeSaw Says:

    Correction: CalPERSon, I thought you were telling me to quit googling. I think we are in agreement.

  9. CalPERSon Says:

    SeeSaw, LOL, by all means keep on googling 🙂

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