Orange County supervisors led by John Moorlach took on the legal issue of boosting pensions for years already served under a less generous plan. They lost when the state Supreme Court last week unanimously refused to hear their appeal.
An innovative part of the county lawsuit contended that a pension increase given deputy sheriffs in 2002 produced a pension debt or “unfunded liability” that exceeded a century-old debt limit in the state constitution.
After a stock market crash and deep economic recession punched big holes in pension investment funds, estimates of state and local government pension debts nationwide have reached a trillion dollars or more, helping make public pension costs a hot topic.
The Orange County pension suit, one of the first in the new political climate, drew legal briefs opposing the county position from the California Public Employees Retirement System and the state attorney general when Gov. Jerry Brown held the office.
A brief supporting the county position was filed by the conservative Pacific Legal Foundation, which blocked an attempt by former Gov. Arnold Schwarzenegger to issue a pension bond without approval by a vote of the people.
The high court let stand an appeals court ruling that said the Orange County pension unfunded liability is not subject to the debt limit because it’s not a fixed amount due immediately. It’s an estimate of future shortfalls based on a number of variables such as investment earnings.
The appeals court said, among other things, that an unfunded liability is not created at the time of a pension increase but occurs over years and could even be “avoided entirely” if, for example, investment earnings are better than expected.
A well-publicized part of the county lawsuit said the pension increase given deputy sheriffs, which extended retroactively to years already served under a less generous plan, violated a state constitution provision that prohibits “extra compensation” after service has been rendered.
The appeals court cited other rulings approving post-service compensation for overtime and holidays if needed to retain and recruit employees. The court also said the county failed to address a bill, SB 1696 in 2000, authorizing retroactive pension hikes.
The high court’s denial of an appeal was a blow to Moorlach. He said pursuing a lawsuit to curb the soaring cost of pension benefits was one reason he left the higher pay and “life-time security” of the elected county treasurer’s office to become a supervisor.
Now he is being criticized for running up about $2.3 million in county legal fees. Some think the cost could double if the courts order the county to pay the legal fees of the deputy sheriffs association.
Moorlach said the attempt to save the county hundreds of millions in the years ahead justifies the legal fees. He said the failure of the state Supreme Court to hear the appeal leaves the basic legal issues in the lawsuit unsettled.
“Someone else is going to have to try to clear it up,” Moorlach said. “It will be interesting to see how and when that happens.”
The increase approved by the board of supervisors in 2001 boosted deputy sheriff pensions by 50 percent. The formula was increased to 3 percent of final pay for each year served at age 50, up from 2 percent at 50.
In following years the supervisors voted three more times to renew the labor pact with the higher formula. Then as the economy weakened and budgets tightened, the supervisors voted in January 2008 to prohibit payment of the pension increase for years served before the new formula took effect.
Some pension reform advocates and lawyers say Orange County had a weak case. Instead of reducing pensions for years already served, they want a test of whether the courts will approve a reduction in current worker pensions for years served in the future.
Notably, the watchdog Little Hoover Commission issued a report in February warning that pensions will “crush” government. Retirement costs are expected to take a third of the operating budget in Los Angeles, San Francisco, San Diego and San Jose.
The commission said that the standard way of dealing with unaffordable pension costs (negotiating lower pensions for new hires and increasing employee pension contributions) will not cut soaring costs quickly enough.
“The state and local governments need the authority to restructure future, unearned retirement benefits for their employees,” the commission said, urging that legislation be enacted.
The commission acknowledged that legislation authorizing government agencies to reduce unearned pension benefits for current workers “may entail the courts having to revisit prior court decisions.”
A series of court decisions are widely believed to mean that once a worker is vested, the pension is a contract that can’t be cut unless offset by something of equal value. It’s the reason that cost-cutting lower pensions are for new hires, not current workers.
A lawyer who thinks that the court decisions allow cuts in the unearned pensions of current workers, Jeffrey Chang, has outlined his view on the website of his Folsom law firm.
He argues that some of the Orange County appeals court ruling bolsters his position, particularly a section on vested pension rights that mentions a decision cited by Chang.
The appeals court ruling quotes from a 1978 decision that said before retirement the employee does not have “any absolute right to fixed or specific benefits, but only to a ‘substantial or reasonable pension.'”
Chang said he is a consultant not a litigator. But among litigators, he said, there have been discussions about who wants to be the “guinea pig” and push the theory forward, knowing that it could go all the way to the U.S. Supreme Court.
“My feeling is it’s an important enough issue that frankly somebody needs to do it,” he said.
A pension reform group, the California Foundation for Fiscal Responsibility, has talked about an initiative that would test cutting unearned benefits. Several initiative proposals are on the group’s website, but no specific plan has been chosen.
Dan Pellissier, president of California Pension Reform, said his group currently is polling to see if there is support for an initiative that would cap pensions and switch new hires to a 401(k)-style individual investment plan, now common in the private sector.
A statewide poll by the Public Policy Institute of California last month found strong support for a proposal to switch new public employees to a 401(k) plan. Approval among likely voters was 74 percent and among public employees, 56 percent.
In Orange County, legislation authorizing a potential way to cut current worker pension costs took effect last year. New and current workers have the option of choosing a “hybrid plan” that combines a lower pension with a 401(k) plan.
The lower pension saves the county money and gives the worker more take-home pay. But the plan has been on hold as the county waits for Internal Revenue Service approval of pre-tax employee contributions to the 401(k) plan.
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/ Posted 22 Apr 11