Judge Finds No “Vested Right” to Spiked Pensions

Originally posted at CalPensions.
By Ed Mendel.

A superior court judge last week said he plans to uphold a key part of a new state law that curbs ‘spiking’ in county retirement systems, notorious for giving retirees pensions that are much higher than the salaries they earned on the job.

The pensions ballooned mainly because some county systems allowed unused vacation and sick leave from previous years to be cashed out and counted as the final pay on which pensions are based.

A turning point in union lawsuits challenging the new law, labor attorneys said, was the intervention of state Attorney General Kamala Harris’ deputies with the argument adopted by Contra Costa Superior Court Judge David Flinn in a tentative ruling:

Current workers cannot have a “vested right” to pension increases that violate the 1937 act covering the 20 independent county retirement systems.

If the ruling is upheld on appeal, labor attorneys said they will seek a refund of employee contributions and employer contributions, negotiated in lieu of pay, that actuaries imposed to cover pensions boosted by cashing out leave time.

The lead labor attorney, Peter Saltzman, said the retirement boards haven’t provided the data, but based on average salary and maximum terminal pay the judge’s ruling “would be for many people a loss of up to 10 percent of their pensions.”

In Martinez, Flinn is hearing a consolidation of suits filed by labor unions in Contra Costa, Merced and Alameda counties. A similar dispute in Marin County is a separate lawsuit.

The judge took comment Friday from attorneys (15 lawyers filled the attorney tables and the jury box) on a modification of a tentative ruling in December, then set a schedule for working with the attorneys on a final ruling for a hearing April 25.

“There will be no substantive changes, I don’t think,” said Flinn, who plans to retire on April 30. “I’m going to change some wording to clarify.”

Spiking in the county systems drew national attention in 2009 when a Contra Costa Times columnist, Daniel Borenstein, reported that two fire chiefs retired at ages 50 and 51 with pensions much larger than their salaries.

“People point to me as a poster child for pension spiking, but I did not make these rules,” a Moraga Orinda fire chief, Peter Nowicki,told the Wall Street Journal.

His final salary was $185,000 and his pension $241,000. After retirement he stayed on at the fire district as a consultant, receiving $176,000 in pay on top of his $241,000 pension.

A former Merced Sheriff, Mark Pazin, had a salary of $163,093 and is receiving a $199,578 county pension after retiring last December, the Merced Sun-Star reported. He now heads the governor’s Office of Emergency Services Law Enforcement Branch.

Anti-spiking legislation introduced after the Contra Costa fire chiefs report stalled. The attempted crackdown became part of a broad pension reform, AB 340, that Gov. Brown pushed through the legislation two years ago.

After the legislation surfaced late in the session, Borenstein wrote a column pointing out that a loophole could legalize spiking in all 20 county systems, prompting a companion reform bill, AB 197, now being contested in the lawsuits.

An attorney for the Contra Costa County Deputy Sheriffs Association, Rocky Lucia, told the court that AB 340, the Public Employees Pension Reform Act, applies to new hires.

“What we are talking about is a retroactive application of AB 197 to current employees who we argue have vested rights,” said Lucia.

A series of state court rulings, the main one in 1955, are widely believed to mean that the public pension offered on the first day on the job becomes a vested right, protected by contract law, that can only be cut if offset by a comparable new benefit.

The “California Rule,” adopted by a dozen states, prevents what some think is the solution if government pensions become unaffordable: Cut pensions current workers earn in the future, while protecting pensions already earned.

An initiative aimed at giving state and local governments that option, filed last October by San Jose Mayor Chuck Reed and several other mayors, is unlikely to make the November ballot this year.

The Contra Costa county pension board said the AB 197 anti-spiking provisions clearly apply to current workers, not just new hires. Deputy sheriff and firefighter unions sued the board, contending the pension boosts were vested rights.

When the Contra Costa pension board said it had no position on whether current workers had vested rights to the pension boosts, the judge sought an adversary by giving notice to “interested parties,” and the attorney general intervened.

“It is significant that both in 1997 and in 2009 counsel for the Contra Costa County Retirement Board specifically opined to their said client that leave time not earned in the final compensation period could not be included,” Flinn said in the tentative ruling.

The 20 county system boards are dominated by county pension recipients. Of the nine voting members, four are employees or retirees, one is the county treasurer, and four are appointed by county supervisors, who in Contra Costa receive county pensions.

Lucia, the labor attorney, told the court last week that not being able to vest in a benefit disallowed by law was a “new issue” raised by the attorney general that was not “plead before you.” Flinn said he may have arrived at that position on his own.

Calling it a fairness issue, the judge softened his tentative ruling by allowing some current employees to boost pensions by cashing out leave time from previous years, if under the old rules they could do that during their final year on the job, not at termination.

“It’s our understanding that very few would benefit, and that those who would benefit are virtually all management employees,” Saltzman, the labor attorney, told the court.

Overtime has not been counted toward pensions. Under AB 197, other pay for “services rendered outside of normal working hours” cannot be counted in the final pay that, with age and time on the job, determines pension amounts.

But Flinn suggested in the tentative ruling that including required “stand by” or “on call” time in the final pay may be a vested right, depending on individual facts and circumstances.

In 1997, a landmark state Supreme Court decision in a Ventura County deputy sheriffs suit, which later became retroactive, greatly expanded final pay in the county systems, adding unused vacation time and some say more than 60 other items.

Lawsuits in many counties on Ventura-related issues were consolidated in an appellate ruling in 2003. But Contra Costa, Alameda and Merced counties settled separately.

In 1993, the giant California Public Employees Retirement System sponsored anti-spiking legislation for its members, SB 53, that limits the use of supplemental pay and created a screening unit.

Similar legislation for the 20 county systems, SB 2003, failed to pass the following year.

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