Local Government
Another Ruling Says Pension Set at Hire Can Be Cut

Another Ruling Says Pension Set at Hire Can Be Cut

A second appeals court panel has unanimously ruled that the public pension offered at hire can be cut without an offsetting new benefit, broadening support for what pension reformers call a “game changer” if the state Supreme Court agrees.

The new ruling on Dec. 30 in a state firefighters suit on pension-boosting “airtime” purchases made several references to a groundbreaking ruling last summer in a Marin County pension “spiking” suit.

“The law is quite clear that they are entitled only to a ‘reasonable’ pension, not one providing fixed or definite benefits immune from modification or elimination by the governing body,” wrote Justice Martin Jenkins.

The two appeals court rulings are contrary to previous rulings known as the “California rule”: The pension offered at hire becomes a vested right, protected by contract law, that can only be cut if offset by a comparable new benefit, erasing any savings.

Most pension reforms are limited to new hires (who are not yet vested), taking decades to yield significant savings. To get major savings, some reformers want to cut the pensions of existing workers, protecting what’s already earned but reducing future pension earnings.

A key to the California rule is a 1955 Supreme Court ruling (Allen v. City of Long Beach) that “reasonable” pension changes should be related to the theory and “successful operation” of a pension system and any disadvantage “should be accompanied by comparable new advantages.”

The Marin appellate ruling argued in detail that “should” have comparable new advantages, which is only advisory, had somehow become a mandatory “must” have comparable new advantages in the series of California rule cases.

“We agree with this conclusion reached by our colleagues,” Jenkins wrote.

Cal Fire Local 2881 (formerly known as CDF Firefighters) sued the California Public Employees Retirement System to resume employee airtime purchases, citing CalPERS’ own publication saying vested pension rights begin when members start work.

Unions argued in the Marin and firefighters suits that the California rule prevented the bans on “airtime” and “spiking” for existing workers in a pension reform enacted four years ago by Gov. Brown and the Legislature.

“Public employees obtain a vested right to the provisions of the applicable retirement law that exists during the course of their public employment. Promised benefits may be increased during employment, but not decreased, absent the employees’ consent,” said the CalPERS publication.

Critics of the California rule argue that if the employee’s job and pay can be cut, why can’t the pension legally regarded as “deferred compensation” be cut? The brief 1955 Allen ruling gives no rationale for a “comparable new advantage.”

The CalPERS response to the firefighters said the pension system could not resume airtime purchases without a determination that the ban is unconstitutional. The trial court held airtime “was not a vested right,” said CalPERS, “and even if it were, the Legislature could eliminate it.”

Legislation sponsored by the California Professional Firefighters and the Service Employees International Union (AB 719 in 2003) allowed employees in CalPERS to increase their pensions by purchasing up to five years of additional service credit, the maximum allowed by federal tax law.

The program intended to have no cost to employers was informally called “airtime” because no work was performed for the service credit. Airtime yielded a lifetime monthly retirement payment, with no risk of investment losses, based on the earnings forecast assumed by CalPERS at the time of purchase.

The earnings forecast was 8.25 percent a year when the program began in 2003, but had dropped to 7.5 percent by the time the program ended in 2012. The CalPERS board acted last month to gradually drop the earnings forecast to 7 percent over the next eight years.

“It’s a tremendous investment,” Dan Pellissier, president of California Pension Reform, a former gubernatorial and legislative aide who purchased airtime, said in 2012. “I think all of the investment advisers say it’s a no-brainer.”

As it turned out, airtime was an even better deal than the purchasers thought. 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 study was not available from CalPERS last week. A CalPERS spokeswoman said about 61,217 members purchased airtime from Jan. 1, 2004, when the program began through Dec. 31, 2012, when it ended.

There was no significant increase or rush to purchase airtime between the passage of the reform legislation in October 2012 and when the ban took effect at the end of that year, the spokeswoman said. There were 363 airtime purchases in October, 376 in November and 386 in December.

CalPERS members could pay the full cost of airtime with a lump sum or select a payment plan of up to 15 years. Interest was charged on the unpaid balance at the current “crediting rate,” which was 6 percent compounded annually in 2003.

The elimination of airtime was part of Brown’s 12-point pension reform plan issued in 2011.

“Pensions are intended to provide retirement stability for time actually worked,” said Brown’s point No. 10. “Employers, and ultimately taxpayers, should not bear the burden of guaranteeing the additional employee investment risk that comes with airtime purchases.”

The ruling in the Marin suit allows the county, with no offsetting new benefit, to impose the spiking ban in the 2012 reform legislation that prevents existing workers from continuing to boost pensions with standby pay, call-back pay, and other things.

The state Supreme Court has agreed to hear an appeal of the Marin ruling. But the high court will wait until an appeals court rules on three similar spiking ban suits consolidated from Alameda, Contra Costa, and Merced counties.

Last month, yet another three-justice appeals court panel upheld a denial of a claim by San Joaquin County correctional officers that the 2012 pension reform prevented an end to county payments toward their cost-of-living adjustments until 2018.

This appeals court ruling included lengthy quotes from the Marin ruling about how the 2012 pension reform was a response to a pension funding “crisis” that will force cuts in local government services and layoffs if not corrected.

“We express no view about the Marin Assn. court’s interpretation of precedent regarding the validity of changes to retirement benefits,” said a footnote in the San Joaquin ruling. “We merely agree with its account of the historical backdrop animating recent pension reform legislation in California.”

Originally posted at Cal Pensions.

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