The state Supreme Court agreed last December to hear an appellate court decision in a Marin County case allowing major cuts in public pensions — but not until the appeals court rules on a slow-moving consolidation of three similar county suits.
Now a pension reform group is watching a second appellate court decision that, citing the Marin ruling, allows pension cuts. The Supreme Court has asked parties in the state firefighters union suit against CalPERS to submit briefs by June 30.
An early Supreme Court decision upholding the appellate rulings might allow time for reformers to consider putting an initative on the state ballot next year. A favorable ruling also might prompt local action or labor bargaining to curb budget-squeezing pension costs.
The four county suits and the state firefighters suit all challenge minor parts of Gov. Brown’s pension reform that apply to employees hired before the reform took effect on Jan. 1, 2013.
A unanimous Marin County ruling last August began with a look at the “emergence of the unfunded pension liability crisis” after pension investment funds, expected to pay nearly two-thirds of future pensions, had huge losses during a stock market crash a decade ago.
The California Public Employees Retirement System, recently only 65 percent funded, has raised employer rates to an all-time high. Rate increases are expected to continue until 2024, further shrinking public services amid fear some cities may be pushed into bankruptcy.
Attempts to curb pension costs mainly have been limited to new hires, taking decades to yield significant savings. That’s because of a series of court decisions, a key one in 1955, known as the “California rule”:
The pension offered on the date of hire becomes a “vested right,” protected by contract law, that cannot be cut unless offset by a comparable new benefit, which erases any savings for employers.
Citing a different series of court decisions, and arguing that the 1955 decision says “should” have a comparable new benefit not “must,” the Marin County ruling weakens or even overturns the California rule.
“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 the Marin County 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 ruling took a long look at a Little Hoover Commission report in 2011 that warned pension costs will cut services and force layoffs. The report recommended allowing cuts in pensions current workers earn in the future, which could quickly yield significant savings.
The Marin County case is a union challenge to “anti-spiking” provisions in Brown’s reform that prevent the pensions of workers hired before the reform from being boosted by stand-by duty, in-kind health care and other things.
A consolidated case for similar suits in Alameda, Contra Costa, and Merced counties has been briefed. But oral arguments have not been set by the appeals court, reportedly due to scheduling conflicts among the attorneys for unions and retirement systems in each county.
The state firefighters union, Cal Fire Local 2881, sued CalPERS to lift the Brown reform ban on boosting pensions by purchasing up to five years of additional service credit, called “airtime” because work is not performed to earn the credit.
A second three-justice appeals court panel upheld the airtime ban in December, making several references to the groundbreaking ruling in the Marin County case.
“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,” Justice Martin Jenkins wrote in the unanimous firefighters decision
CalPERS had not filed a brief in the Cal Fire case as of late last week. Chuck Reed, a former San Jose mayor now with the Retirement Security Initiative, thinks CalPERS or the state may ask for an extension of the June 30 deadline for filing briefs.
“I’m cautiously optimistic that the court will have an oral argument by the end of the year,” Reed said.
If the appellate court ruling is upheld by early next year, there would be little time to place a pension reform initiative on the ballot next November. An initiative would have to be prepared to reflect the initiative, funds raised and voter signatures gathered.
Another hurdle could be a legal battle with the state attorney general over the ballot title and summary of the initiative. Pension reformers dropped initiatives aimed at the 2012 and 2014 ballots, saying the ballot labels would repel voters.
A bipartisan group led by Reed and former San Diego Councilman Carl DeMaio filed two initiatives in 2015. One would cap spending on retirement benefits. The other would likely give new hires a 401(k)-style plan, unless voters approved a pension.
This time, the reform group did not complain about the titles and summaries issued by former Attorney General Kamala Harris. But time and money were short, and there was no attempt to put either proposal on the 2016 ballot.
Assemblyman Bill Brough, R-Dana Point, introduced a constitutional amendment (ACA 15) in May similar to the Reed-DeMaio measure requiring voter approval of new-hire pensions. The proposal faces stiff opposition from the Democratic majority and may not get a hearing.
Some local action might be possible if the Supreme Court weakens or overturns the California rule. Reed and DeMaio led drives in 2012 for pension reform measures that received strong voter approval.
Measure B in San Jose, placed on the ballot by the city council, received 69 percent of the vote. Proposition B in San Diego, an initiative placed on the ballot by voter signatures, received 66 percent of the vote.
A statewide Public Policy Institute of California poll issued in January 2014 found that 85 percent of likely voters think the amount of money spent on public pensions is somewhat of a problem and 73 percent support switching new hires to a 401(k) plan.
Only a half dozen of the largest cities, like San Jose and San Diego, have their own pension systems. The 20 county retirement systems operating under a 1937 act apparently are tightly controlled by legislation.
A local initiative switching new Ventura County employees to a 401(k)-style plan was removed from the 2014 November ballot. A court ruled that legislation or a statewide ballot measure is needed to make the switch for 1937 act county systems.
Cities and other local governments in CalPERS would face a large termination fee if they switch new hires to 401(k)-style plans or another retirement system. The judge in the Stockton bankruptcy called the fee a “poison pill” for attempts to leave CalPERS.
Reed mentioned the possibility of switching current workers to the lowest pension formula available, perhaps avoiding a termination fee and the need for legislation.
An attorney who has been following the appeals court cases, James Touchstone of Jones & Mayer, said even if the Supreme Court opens the door and there is the political will to make pension changes, additional litigation seems likely.
“Nothing is going to happen quickly on any of this,” he said.