Gov. Brown’s pension reform legislation five years ago, sold in part as a way to assure voters a proposed tax increase would not be eaten up by rising pension costs, got little love from pension critics.
CalPERS estimated the reform would save $29 billion to $38 billion over 30 years, not a major dent in a shortfall or “unfunded liability” of $139 billion. Some said the debt was much larger, concealed by an optimistic forecast for pension fund investment earnings.
In the view of critics, Brown’s reform fell short because the main savings, a lower pension formula with other tweaks, was limited to employees who would be hired after the reform took effect on Jan. 1, 2013. Significant savings could take decades.
What’s needed, said the critics, is a cut in the cost of pensions for employees hired before the reform. Legislation allowing cuts in the pensions current workers earn in the future was recommended by an influential Little Hoover Commission report in 2011.
But under 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.
A study by legal scholar Amy Monahan, cited by critics, argued imposing the highly restrictive rule, without finding clear evidence of legislative intent to create a contract, broke with legal tradition and infringed on legislative power. Only a dozen states have the rule.
“California courts have held that even though the state can terminate a worker, lower her salary, or reduce her other benefits, the state cannot decrease the worker’s rate of pension accrual as long as she is employed,” said Monahan of the University of Minnesota Law School.
The California rule was cited as courts overturned three measures approved by voters: A Pacific Grove limit on contributions to CalPERS in 2010; a San Francisco end to supplemental pension payments in 2011, and a San Jose option for current workers in 2012.
The San Francisco measure, approved by 69 percent of voters and backed by all 11 supervisors and labor and business groups, was upheld by a superior court before being overturned by an appeals court. The state Supreme Court declined to hear an appeal.
“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 unanimous ruling by the Court of Appeals 1st District division five in San Francisco in 2015.
Then in a surprising turnabout last year, employee challenges to minor provisions in Brown’s reform resulted in two unanimous appellate court rulings that would undermine or overturn the California Rule.
The first and most-publicized ruling came in a Marin County employee suit arguing Brown reform “anti-spiking” provisions violated the California Rule. Employees hired before the reform were no longer allowed to use on-call duties and other add-ons to boost pensions.
As if replying to the ruling in the San Francisco case, division two of the same appeals court said in the Marin ruling: “There is no absolute requirement that elimination or reduction of an anticipated retirement benefit ‘must’ be counterbalanced by a ‘comparable new benefit.”
The Marin ruling begins with background on the “emergence of the unfunded pension liability crisis” that quotes several academic studies and takes a long look at the Little Hoover Commission report that warned pension costs will cut services and force layoffs.
“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,” Justice James Richman wrote in an often-quoted line in the Marin ruling.
“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 state Supreme Court agreed last December to hear an appeal of the Marin ruling, but not until an appeals court rules on a consolidated Alameda, Contra Costa, and Merced challenge to applying Brown anti-spiking provisions to pre-reform employees.
A superior court ruling on the consolidated cases in March 2014 adopted an argument from the state attorney general: Pre-reform workers cannot have a “vested right” to pension increases that violate the 1937 act covering the 20 independent county retirement systems.
Oral arguments in the consolidated county cases are scheduled to begin Dec. 12 in the Court of Appeals 1st District, division four. The long delay reportedly was caused by scheduling conflicts among the 37 attorneys listed for unions, county pension systems, and other parties.
In the second California Rule case on vested rights last year, the state firefighters union challenged the Brown reform ban on employee purchases of up to five years of additional service credit, called “airtime” because no work is performed.
Division three of the appellate court, referring to the Marin ruling several times, said: “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.”
The ruling in the firefighter case agreed with the Marin ruling argument that “should” have comparable new advantages in a key 1955 ruling on pension cuts (Allen v. City of Long Beach) somehow became a mandatory “must” in the series of California Rule cases.
When Cal Fire Local 2881 sued the California Public Employees Retirement System, it also was taking on the governor. Brown’s 12-point pension reform issued in 2011 called for a ban on “airtime” purchases allowed by legislation in 2003.
“Pensions are intended to provide retirement stability for time actually worked,” said point 10 of Brown’s plan. “Employers, and ultimately taxpayers, should not bear the burden of guaranteeing the additional employee investment risk that comes with airtime purchases.”
After the state Supreme Court agreed to hear an appeal of the firefighter ruling, CalPERS gave the high court a 10-page brief that did not address the California Rule. The brief said airtime purchases by pre-reform employees are prohibited by state law, the Brown reform.
A 55-page brief filed by the governor’s office last month said the state intervened at the governor’s request. The brief argues that airtime purchases are not a vested right, but even if they were they could be ended. The Marin ruling and Monahan’s paper are among the citations.
If the Supreme Court upholds the appellate Marin and firefighter rulings, a major cost-cutting change may be difficult. Legislation needed to give employees in CalPERS lower pensions likely would face opposition from politically powerful public employee unions.
Brown leaves office at the end of next year. Chuck Reed, a former San Jose mayor now with the Retirement Security Initiative, has been a leader of groups that filed statewide pension reform initiatives in the past.
Last week Reed, a lawyer, welcomed the governor’s intervention in the firefighter ruling appeal. He is working on a friend-of-the-court brief, which can be filed after the Jan. 12 deadline for reply briefs from parties in the suit.