Cases Before the California Supreme Court Could Upend 70 Years of Pension Precedent
By Isabel Safie, Best Best & Krieger LLP
It’s a big litigation year for California pensions.
The California Supreme Court ruled last month that San Diego’s landmark pension cutback legislation, Proposition B, was illegally placed on the 2012 ballot because city officials failed to meet and confer with labor unions before pursuing the measure’s changes.
The Court did not rule, however, on the legality of Proposition B’s actual pension changes that terminated pensions for most new city employees and opted instead for a 401(k)-style program.
The legality of pension changes is at the heart of four other cases currently before the Court.
Due to the “California Rule,” or vested-rights doctrine, agencies statewide have long been tied to hefty pension obligations with little-to-no ability to make changes to the accrual of future pension benefits of current employee without having to provide an equal or greater level of benefit in lieu of such changes.
The doctrine, built on 70 years of case law protecting California’s public-employee pension benefits, could soon be weakened by the state Supreme Court, allowing agencies to cut ballooning pension liabilities by modifying the future accrual of retirement benefits of active employees.
With split opinions regarding the scope and application of the California Rule to evaluate the permissibility of reducing future accruals of pension benefits of current employees in cases from Marin and Alameda counties, the California Supreme Court agreed to hear appeals of both cases.
These two cases, and another pending before the Court involving Cal Fire, center on changes made by Assembly Bills 340 and 197 — the state’s retirement-benefit overhaul known as the Public Employees’ Pension Reform Act, or PEPRA. A fourth case challenges the application of PEPRA to judges who were elected in 2012 but took office in 2013. All come from California’s First District Court of Appeal.
The lawsuits carry significant implications for counties, cities, school and fire districts facing sharp increases in pension costs.
Right to a Reasonable Pension
Lower state courts have often interpreted the California Rule to prohibit any change in benefits, or at a minimum set a very high bar for changes, leaving the state and local governments with limited flexibility.
However, the state Supreme Court has held that prior to retirement, employees do not obtain an absolute “right to any fixed or definite benefits but only to a substantial or reasonable pension.” The concept is at the heart of Marin Association of Public Employees v. Marin County Employees’ Retirement Association.
The retirement board for the Marin County Employees Retirement Association adopted a policy in 2013 to exclude specified items from the retirement payment calculation consistent with changes made to the County Employees Retirement Law by PEPRA. This change in policy affected all members of the system, including existing members referred to as legacy members. The move was made to combat “pension spiking,” a practice where employees increase their final salaries for bigger pension payouts in retirement.
The legacy members sued, arguing they had a vested right to the continued inclusion of payments formerly included under Gov. Code Section 31461 in the calculation of their pension benefits. The trial court concluded the modifications made by the retirement board were permissible and did not unconstitutionally impair an employee’s contract. The appellate court affirmed that public employees only have a right to “reasonable” pensions.
The California Supreme Court granted review in November 2016, before granting review of the Alameda case, but deferred the matter pending disposition of the latter case.
High Level of Burden to Bear
The appellate court declined to follow the Marin holding in Alameda County Deputy Sheriff’s Association v. Alameda County Employees’ Retirement Association involving the labor unions from Alameda, Contra Costa and Merced counties.
Rather, the court recognized that while changes to a legacy employee’s pension benefits did not require a comparable new advantage be provided, it said retirement pension boards have a higher level of burden to justify a detrimental elimination or change to an employee benefit when such comparable new advantages are not extended in exchange.
The plaintiffs, who argued against retirement board changes to benefit calculations (Gov. Code Section 31461) that excluded payments previously included in compensation earnable, came out on top.
They, however, petitioned the California Supreme Court for review because, “the appellate court flatly refused to follow this Court’s longstanding precedent requiring that any detrimental changes to pension rights ‘must’ be offset by new advantages.”
The state Supreme Court granted review in March 2018.
The question before the Court: Did amendments to Gov. Code Section 31461 reduce the scope of the preexisting definition of “compensation earnable,” and thereby impair employees’ vested rights protected by the contracts clauses of the federal and state Constitutions?
In a surprise move, the Court made Alameda the lead case — its decision will come before the others.
Airtime Not a Vested Right
Decided after the Marin case, Governor Jerry Brown’s office took over defending Cal Fire Local 2881 v. California Public Employees’ Retirement System from the Office of the Attorney General — a move marking its importance on the governor’s tenure.
Plaintiffs in the case challenged changes made by PEPRA that ended public employees’ ability to purchase Additional Retirement Service Credits — known as “airtime” credits for extra years the employee did not actually work — and sought to force CalPERS to continue airtime purchases for “classic” members or those who are not new.
The state intervened to defend PEPRA.
The appellate court held that classic members have no vested right to purchase airtime service credits, on a prospective basis, under PEPRA. As in Marin, the appellate court said lawmakers can alter benefits so long as they are reasonable.
The California Supreme Court granted review of the case in April 2017. The case has been fully briefed, but a hearing has not been scheduled.
PEPRA Application Based on Entry to System
The most recent of the four cases before the California Supreme Court, McGlynn v. State of California takes a fresh look at when employment commences for purposes of pension benefit accruals.
Judges elected in November 2012, but who did not take office until after Jan. 1, 2013, argued that PEPRA was not applicable to them because they had accrued a vested right to the benefit formulas in effect at the time of their election.
The appellate court was unpersuaded arguing that PEPRA specifically provided that its application depended on when a member first entered the system, not when the member was first elected.
It also found that an estoppel claim could not be made against the retirement board even though pre-PEPRA benefits were extended to the affected judges for up to a year after the implementation of PEPRA because the board was entitled to correct a mistake of fact.
The California Supreme Court granted review of the case in June 2018 but like Marin, the Court has deferred a decision on McGlynn pending disposition of the Alameda case.
For a look at what public agencies may be permitted to do (modify, freeze or even terminate a defined-benefit plan — like CalPERS) if the California Supreme Court weakens the vested rights doctrine, check out the recent article: The Anticipated Demise of the Vested-Rights Doctrine.
Isabel Safie, a Riverside-based partner with Best Best & Krieger LLP, advises public and private-sector clients on employee benefit and retirement programs. She works extensively with public employers, many of which are CalPERS member agencies, to modify and reduce the costs of pension and retiree health benefits under California’s “vested rights” doctrine. Isabel can be reached at email@example.com.