Latest Pension Ruling Likely To Create Future Uncertainty

CourtFor the second time in two years, the California Supreme Court has released a ruling on a large state issue that analysts say creates new uncertainty going forward.

Last week, the court issued its long-awaited decision in a court case involving a Sacramento local firefighters union that alleged a provision of the 2012 pension reform measure approved by the Legislature and signed by then-Gov. Jerry Brown was illegal under the “California Rule.” That’s the legal concept stemming from a 1955 state Supreme Court ruling that holds the terms of a public employee’s pension benefit cannot be reduced for years not yet worked, only kept the same or increased.

Cal Fire Local 2881 said that the pension reform’s ban on “air time” – the purchase of service credits to enhance pensions – violated the California Rule. But a unanimous state Supreme Court said “air time” was not a comprehensively bargained or legislatively approved vested right.

Yet in the lead opinion, Chief Justice Tani Cantil-Sakauye (pictured) explicitly said she was not taking a position on the California Rule question of whether pension terms could be changed going forward for years not worked.

This mixed message produced media confusion. Some news bulletins declared the justices had approved allowing a rollback of local benefits. Others suggested the California Rule had dodged a bullet.

Was ‘California Rule’ weakened or untouched?

Interest groups were similarly split.

Officials with the League of California Cities saw the court’s willingness to change the terms of pensions on a relatively minor issue as a sign it was open to a significant weakening of the California Rule. The league and many like groups hope for a state Supreme Court ruling that echoes a lower court’s ruling that pensions are not “immutable.” They were heartened by Cantil-Sakauye specifically noting the state had raised the retirement age from 67 to 70 for current as well as prospective employees.

But the Californians for Retirement Security, which represents 1.6 million public employees and former public employees, declared victory after noting that Cantil-Sakauye had specifically said “air time” was changeable because it was not a vested right – unlike basic pension formulas basing retirement checks on years worked times a percent of late-career salary.

The group and others also cited a concurring opinion written by Justice Leondra Kruger and joined by Justice Goodwin Liu that held that government employers could not “withdraw” from the pension terms established upon initial employment by “an implied unilateral contract.”

The state Supreme Court is expected to eventually take up at least two more cases involving union objections to the 2012 pension reform, so the sanctity and extent of the California Rule is likely to remain in the news. In his final year in office, Gov. Jerry Brown repeatedly urged the court to give governments the option to change future pension terms as pension costs have crowded out local, county and school programs and services. Brown’s office defended the 2012 reform law before the high court because of concern that state Attorney General Xavier Becerra was not eager to defend it.

Like 2017 case, ruling seen as murky, not clarifying

But in the meantime, last week’s ruling seems as murky as the court’s decision in the 2017 California Cannabis Coalition v. City of Upland case. Previously, Proposition 218, approved by voters in 1996, had been understood to require that any tax whose revenue would go to a special purpose – building a sports arena, adding libraries, etc. – had to be approved by a two-thirds vote.

Upending decades of precedent, the state Supreme Court held in a 5-2 decision that the two-thirds threshold applied only to ballot measures initiated by local governments. Because they were not local government measures, those qualified by citizen initiatives only needed simple majority support to be enacted.

In dissent, Justice Kruger took square aim at the idea that this interpretation was what voters expected in 1996 when they made it harder for local governments to raise taxes.

Kruger wrote, “A tax passed by voter initiative, no less than a tax passed by vote of the city council, is a tax of the local government, to be collected by the local government, to raise revenue for the local government. None of this could have been lost on the electorate that, also by initiative, amended the California Constitution to set ground rules for voter approval of local taxes.”

This article was originally published by CalWatchdog.com

What Recent Pension Ruling Means for California’s Taxpayers

pension-2Last week, the California Supreme Court issued a ruling in Cal Fire Local 2881 v. CalPERS, a case involving public employee pensions. For taxpayers, the decision was a mixed bag. On the plus side, the court refused to find a contractual right to retain an option to purchase “air time,” a perk that allowed employees with at least five years of service to purchase up to five years of additional credits before they retire. Under this plan, a 20-year employee could receive a pension based on 25 years of contributions.

On the negative side, the high court left intact, for now, the so-called California Rule, which has been interpreted as an impediment to government entities seeking to reduce their pension costs. The rule, unique to California, provides that no pension benefit provided to public employees via a statute can be withdrawn without replacement of a “comparable” benefit, even as deferred compensation for services not yet provided.

The unanimous 54-page opinion by the Supreme Court resulted in a wide variance of headlines and social media posts. The Associated Press read “California’s Supreme Court upholds pension rollback.” Ironically, a conservative reform group sharply criticized the decision for failing to repeal the California rule outright while another conservative policy organization called it a “victory for taxpayers.”

So what was it?

To read the entire column, please click here.

Decision on ‘California rule’ will impact who rules California

SACRAMENTO, CA - JULY 21: A sign stands in front of California Public Employees' Retirement System building July 21, 2009 in Sacramento, California. CalPERS, the state's public employees retirement fund, reported a loss of 23.4%, its largest annual loss. (Photo by Max Whittaker/Getty Images)

On its surface, the case heard last Wednesday by the California Supreme Court in CalFire Local 2881 vs. CalPERS doesn’t seem that important. At issue is the so-called “California Rule,” an obscure legal doctrine relating to public employee pensions. But for California’s beleaguered taxpayers, the case is one of extraordinary importance because its outcome will determine the extent to which the local governments will look to taxpayers to shore up failing pension plans even more than they already do.

Labor interests have argued that under the “California Rule,” no pension benefit provided to public employees by statute can ever be withdrawn without replacement with some “comparable” benefit, even if it’s deferred compensation for services not yet provided, and even if the Legislature determines that citizens who are not public employees are unfairly suffering as a result of prior legislatures’ mistakes.

More than a decade ago, California politicians, seeking to curry favor with public-sector labor, began enacting laws to significantly increase public employee compensation. Among these enhanced benefits were a series of laws which allowed public employees to spike their pensions. For example, a 2004 state law allowed employees with at least five years of service to purchase up to five years of additional credits — commonly labeled “airtime” — before they retire. Under this plan, a 20-year employee could receive a pension based on 25 years of contributions.

To read the entire column, please click here.

Will the California Supreme Court Reform the “California Rule?”

California Supreme CourtMost pension experts believe that without additional reform, pension payments are destined to put an unsustainable burden on California’s state and local governments. Even if pension fund investments meet their performance objectives over the next several years, California’s major pension funds have already announced that payments required from participating agencies are going to roughly double in the next six years. This is a best-case scenario, and it is already more than many cities and counties are going to be able to afford.

California’s first major statewide attempt to reform pensions was the PEPRA (Public Employee Pension Reform Act) legislation, which took effect on January 1st, 2013. This legislation reduced pension benefit formulas and increased required employee contributions, but for the most part only affected employees hired after January 1st, 2013.

The reason PEPRA didn’t significantly affect current employees was due to the so-called “California Rule,” a legal argument that interprets state and federal constitutional law to, in effect, prohibit changes to pension benefits for employees already working. The legal precedent for what is now called the California Rule was set in 1955, when the California Supreme Court ruled on a challenge to a 1951 city charter amendment in Allen v. City of of Long Beach. The operative language in that ruling was the following: “changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages.

To learn more about the origin of the California Rule, how it has set a legal precedent not only in California but in dozens of other states, two authoritative sources are “Overprotecting Public Employee Pensions: The Contract Clause and the California Rule,” written by Alexander Volokh in 2014 for the Reason Foundation, and “Statutes as Contracts? The ‘California Rule’ and Its Impact on Public Pension Reform,” written by Amy B. Monahan, a professor at the University of Minnesota Law School, published in the Iowa Law Review in 2012.

Pension benefits, most simply stated, are based on a formula: Years worked times a “multiplier,” times final salary. Thus for each year a public employee works, the eventual pension they will earn upon retirement gets bigger. Starting back in 1999, California’s public sector employee unions successfully negotiated to increase their multiplier, which greatly increased the value of their pensions. In the case of the California Highway Patrol, for example, the multiplier went from 2% to 3%. But in nearly all cases, these increases to the multiplier didn’t simply apply to years of employment going forward. Instead, they were applied retroactively. For example, in a typical hypothetical case, an employee who had been employed for 29 years and was to retire one year hence would not get a pension equivalent to [ 29 x 2% + 1 x 3% ] x final salary. Instead, now they would get a pension equivalent to 30 x 3% x final salary.

Needless to say this significantly changed the size of the future pension liability. For years the impact of this change was smoothed over using creative accounting. But now it has come back to haunt California’s cities and counties.

Amazingly, the California rule doesn’t just prevent retroactive reductions to the pension multiplier. Reducing the multiplier retroactively might seem to be reasonable, since the multiplier was increased retroactively. But the California rule, as it is interpreted by public employee unions, also prevents reductions to the multiplier from now on. And on that question the California Supreme Court has an opportunity, this year, to make history.

Ironically, the active cases currently pending at the California Supreme Court were initiated by the unions themselves. In particular, they have challenged the PEPRA reform that prohibits what is known as “pension spiking,” where at the end of a public employee’s career they take steps to increase their pension. Spiking can take the form of increasing final pension eligible salary – which can be accomplished in various ways including a final year promotion or transfer that results in a much higher final salary. Another form of spiking is to increase the total number of pension eligible years worked, and the most common way to accomplish this is through the purchase of what is called “air time.”

Based on fuzzy math, the pension systems have offered retiring employees the opportunity to pay a lump sum into the pension system in exchange for more “service credits.” Someone with, say, ten years of service, upon retirement could pay (often the payment that would be financed, requiring no actual payment) to acquire five additional years of service credits. This would increase the amount of their pension by 50%, since their pension would now be based on fifteen years x 3% x final salary, instead of 10 years x 3% x final salary. To say this is a prized perk would be an understatement. How it became standard operating procedure, much less how the payments made were calculated to somehow justify such a major increase to pension benefits, is inexplicable. But when PEPRA included in its reform package an end to spiking, even for veteran employees, the unions went to court.

The spiking case that has wound its way to the California Supreme Court with the most disruptive potential started in Alameda County, then was appealed to California’s First Appellate Court District Three. The original parties to the lawsuit were the plaintiffs, Cal Fire Local 2881, vs CalPERS (Appellate Court case). On December 30, 2016, the appellate court ruled that PEPRA’s ban on pension spiking via purchases of airtime would stand. The union then appealed to the California Supreme Court.

An excellent compilation of the ongoing chronology of the California Supreme Court case Cal Fire Local 2881 v. CalPERS (CA Supreme Court case) can be found on the website of the law firm Messing, Adam and Jasmine. It will show that by February 2017 the unions filed a petition for review by the California Supreme Court, and that the court granted review in April 2017. In November 2017, Governor Brown got involved in the case, citing a compelling state interest in the outcome. Apparently not trusting his attorney general nor CalPERS to adequately defend PEPRA, the Governor’s office joined the case as an “intervener” in opposition to Cal Fire Local 2881. For nearly a year, both petitioners and respondents to the case have been filing briefs.

This case, which informed observers believe could be ruled on by the end of 2018, is not just about airtime. Because whether or not purchasing airtime is protected by the California Rule requires clarification of the California Rule. The ruling could be narrow, simply affirming or rejecting the ability of public employees to purchase airtime. Or the ruling could be quite broad, asserting that the California Rule does not entitle public employees to irreducible pension benefits, of any kind, to apply for work not yet performed.

One of many reviews of the legal issues confronting the California Supreme Court in this case is found in the amicus brief prepared by the California Business Roundtable in support of the respondents. A summary of the points raised in the California Business Roundtable’s amicus brief is available on the website of the Retirement Security Initiative, an advocacy organization focused on protecting and ensuring the fairness and sustainability of public sector retirement plans. An excerpt from that summary:

“The Roundtable brief asserts the California Rule has numerous legal flaws:

(1) It violates the bedrock principle that statutes create contractual rights only when the Legislature clearly intended to do so.

(2) It violates black-letter contract law by creating contractual rights that violate the reasonable expectations of the parties.

(3) It violates longstanding constitutional law by assuming that every contractual impairment automatically violates the California and Federal Contract Clauses.

(4) It lacks persuasive or precedential value. The Rule was initially adopted without anything resembling a full consideration of the relevant issues.

(5) It has been almost uniformly rejected by federal and state courts—including by several courts that previously accepted it.

(6) It has had—and will continue to have—devastating economic consequences on California’s public employers.”

Pension reform, and pension reformers, have often been characterized as “right-wing puppets of billionaires” by the people and organizations that disagree. The fact that one of the most liberal governors in the nation, Jerry Brown, actively intervened in this case in support of the respondent and in opposition to the unions, should put that characterization to rest.

If the California Supreme Court does dramatically clarify the California Rule, enabling pension benefit formulas to be altered for future work, it will only adjust the legal parameters in the fight over pensions in favor of reformers. After such a ruling there would still be a need for follow on legislation or ballot initiatives to actually make those changes.

What California’s elected officials and union leadership, for the most part, are belatedly realizing, is that without more pension reform, the entire institution of defined benefit pensions is imperiled. Hopefully California’s Supreme Court will soon make it easier for them all to make hard choices, to prevent such a dire outcome.

Edward Ring co-founded the California Policy Center in 2010 and served as its president through 2016. He is a prolific writer on the topics of political reform and sustainable economic development.

REFERENCES

California Government Pension Contributions Required to Double by 2024 – Best Case
– California Policy Center

California Public Employees’ Pension Reform Act (PEPRA): Summary And Comment
– Employee Benefits Law Group

Allen v. City of of Long Beach
– Stanford University Law Library

Overprotecting Public Employee Pensions: The Contract Clause and the California Rule
– Alexander Volokh, Reason Foundation

Statutes as Contracts? The ‘California Rule’ and Its Impact on Public Pension Reform
– Amy Monahan, Iowa Law Review

Did CalPERS Use Accounting “Gimmicks” to Enable Financially Unsustainable Pensions?
– California Policy Center

Cal Fire Local 2881, vs CalPERS (Appellate Court case)
– JUSTIA US Law Archive

Cal Fire Local 2881 v. CalPERS, California Supreme Court, Case No. S239958 – Case Review
– Messing, Adams and Jasmine

Intervener and Respondent State of California’s Answer Brief on the Merits
– Amicus Brief, Governor’s Office, State of California

Amicus Brief of the California Business Roundtable in Support of Respondents
– Amicus Brief, California Business Roundtable (CBR)

RSI Supports California Business Roundtable Amicus Brief
– Summary of CBR Amicus Brief by Retirement Security Initiative

Resources for California’s Pension Reformers
– California Policy Center

Will Local Officials Finally Get the Tools They Need to Prevent Pension Tsunami?

pensionSACRAMENTO – A decision by four Marin County public-employee associations to appeal a pension-related case to the California Supreme Court could ultimately determine whether localities have the tools needed to rein in escalating pension debt. At issue is how far officials can go to reduce some benefits for current employees after a state appeals court has chipped away at a legal “rule” long favored by the state’s unions.

In August, a California appeals court ruled against the Marin County Employees’ Association in its case challenging a 2012 state law reining in pension-spiking abuses – i.e., those various end-of-career enhancements (unused leave, bonuses, etc.) that public employees use to gin up their final salary and their lifetime retirement pay.

One of the few areas of widespread agreement at the Capitol on public-employee pensions involves spiking. Gov. Jerry Brown signed into law the Public Employees’ Pension Reform Act of 2013, known as PEPRA, to reduce escalating pension liabilities. Most of its provisions applied to new hires only. The governor also signed related legislation, Assembly Bill 187. Its goal was to “exclude from the definition of compensation earnable any compensation determined … to have been paid to enhance a member’s retirement benefit.”

This limitation on pension spiking was implemented by the Marin County Employees’ Retirement Association to help the county reduce its pension debt. As the court explained, “Reaction to the change in policy was almost immediate.” Five public-employee associations filed suit, claiming that a ban on these spiking conditions reduced promised levels of pay to their members. They argued this was an impairment of their “vested rights.” Vesting confers ownership rights.

Even though the dollars at issue are relatively minimal, the case has become a major flashpoint. California courts have long abided by something known as the “California Rule.” It’s not a law or even a rule, actually. It refers to a series of court rulings concluding that once a pension benefit is granted to public employees by a legislative body (board of supervisors, city council, state legislature), it can never be reduced – even going forward.

In the private sector, for instance, courts allow employers to reduce pension benefits, starting tomorrow. Employees could be paid everything promised to the point of the benefit change, but they can have certain benefits removed or reduced in the future. That’s seen as reasonable given they haven’t earned them yet. It’s different in the public sector.

In California (and a number of other states that follow a similar rule), these benefits can never be reduced. The problem, from a public-finance point of view, is that reducing benefits for new hires only won’t address the bulk of the debt problem until those employees start retiring in 25 or 30 years. Fixing the current debt problem requires dealing with current employees.

Ironically, almost all of the benefit increases public agencies have granted to union members since the 1999 passage of Senate Bill 400 have been done “retroactively.” In other words, the courts have allowed public agencies to give a boost in pensions to public employees for years they previously have worked – but they won’t allow those same agencies to reduce future benefits for years that have yet to be worked. This is politically controversial, but there’s little debate that such a rule has been followed by the courts.

“Public employees earn a vested right to their pension benefits immediately upon acceptance of employment and … such benefits cannot be reduced without a comparable advantage being provided,” according to the plaintiffs, as quoted in the appeals court decision. “A corollary of this approach is that public employees are also entitled to any increase in benefits conferred during their employment, beyond the benefit in place when they began.” In this view, compensation is a one-way ratchet.

This understanding has largely undermined every major reform proposed in California. For instance, the courts gutted the city of San Jose’s voter-approved 2012 pension-reform initiative because it rolled back future benefits for current employees. And the“California Rule” has been the obstacle that has stopped reformers from coming up with other similar approaches.

In this case, Justice James Richman ruled, “(W)hile 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 that pension. 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. Here, the Legislature did not forbid the employer from providing the specified items to an employee as compensation, only the purely prospective inclusion of those items in the computation of the employee’s pension.”

The judge pointed to conclusions from California’s watchdog agency, the Little Hoover Commission, pointing to uncontrollable unfunded pension liabilities. As the commission explained, “To provide immediate savings of the scope needed, state and local governments must have the flexibility to alter future, unaccrued retirement benefits for current workers.” The commission pointed to spiking as a particular problem. This report, he wrote, is part of what motivated the state Legislature and governor to implement reform.

Furthermore, the judge pointed to previous cases acknowledging that government entities have the right to “make reasonable modifications and changes in the pensions system ‘to permit adjustments in accord with changing conditions and at the same time maintain the integrity of the system and carry out its beneficent policy.’” This echoes what myriad pension reformers have argued: agencies are not stuck watching their systems go over the cliff. They have the right and duty to make adjustments to assure their future solvency.

If the California Supreme Court sides with the unions, then local governments will have fewer options left to gain control of their pension debts. If the court agrees with Judge Richman, then pension reform could be a brand new ballgame – although it’s unclear whether the court might toss the California Rule entirely or simply allow localities to change some of the benefits within the framework of that rule.

The court has 60 days to decide whether to consider the matter, according to reports. Unions and reformers will no doubt be watching the court’s decision closely.

Steven Greenhut is Western region director for the R Street Institute. Write to him at [email protected].

This piece was originally published by CalWatchdog.com