Archive for the ‘California rule’ Category

High hurdle for pension cuts in new court ruling

January 9, 2018

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


%d bloggers like this: