A case that could result in the state Supreme Court reviewing the California Rule, which has overturned several voter-approved public pension cuts, is fully briefed and ready to be scheduled for oral arguments.

As record-high pension costs take a growing bite out of government budgets, causing tax hikes and cuts in staff and services for some, reformers say an escape route is needed to avoid going over the financial cliff.

Public employee unions and others say the government is obligated to keep its promises, relied on for financial stability and security by many, and can manage the pension problem without major change.

Now the Supreme Court faces conflicting appeals court rulings, arising from former Gov. Brown’s pension reform, and has a second chance to clarify how pensions can be cut or even lay out a new path.

Last March, while upholding Brown’s ban on the employee purchase of service credit to boost pensions, the Supreme Court avoided a review of the California Rule by finding that buying “air time” (no work is done) was not a vested right protected by contract law.

“For that reason, we have no occasion in this decision to address, let alone to alter, the continued application of the California Rule,” the Supreme Court ruling said, apparently responding to the state and others who urged a review of the rule.

The Supreme Court now moves on to two appeals court rulings that have very different views of how pensions may be cut, both issued in union challenges to a part of the Brown reform that curbs boosting county pensions by “spiking” final pay with a wide range of add-ons.

The high court made the appellate ruling in a consolidation of Alameda, Contra Costa and Merced County cases the lead, and it’s ready for oral arguments. The “Alameda” ruling stays close to conventional readings of the California Rule.

Pension cuts are allowed, without an offsetting comparable new benefit, if there is “compelling evidence establishing that the required changes ‘bear a material relation to the theory . . . of a pension system,’ and its successful operation.”

The appeals court sent the cases back to the trial courts to determine the threat to the county systems from the spiked pension payments. But moving the issue back to the superior courts was put on hold after both sides asked for a review.

A ruling in a Marin County case by a different three-justice appeals court panel, put on hold by the Supreme Court pending a ruling in the Alameda case, overturns the California Rule by finding employees only have a vested right to a “reasonable” pension.

The Marin ruling begins with a look at soaring pension debt after the financial crisis in 2008-09 and an influential Little Hoover Commission report in 2011 that urges cuts in pensions current workers earn in the future, while protecting amounts already earned.

“The Legislature may, prior to the employee’s retirement, alter the formula, thereby reducing the anticipated pension,” said the Marin ruling. “So long as the Legislature’s modifications do not deprive the employee of a ‘reasonable’ pension, there is no constitutional violation.”

Whether the Supreme Court would include the Marin ruling in its Alameda case decision, or consider it in a separate hearing later, is not clear. The Marin ruling was issued in August 2016 and the Alameda ruling in January 2018.

Some think the Supreme Court may have put the Marin case on hold because the county pension system made a “general demurrer”, while the Alameda ruling was based on a trial court hearing with a long evidence record.

The California Rule is a series of state court rulings believed to mean the pension offered at hire becomes a vested right, protected by contract law, that can only be cut if offset by a new benefit of comparable value.

A comparable new benefit erases cost savings. So most pension cuts are limited to new hires who haven’t worked long enough to earn vested rights, usually five years. New hires often are decades from retirement, delaying significant savings if their pensions are cut.

The main parts of Brown’s reform, notably lower pension formulas, were limited to new hires. But some county provisions were applied to employees hired before the reform took effect on Jan. 1, 2013. They have vested rights, and the lawsuits were filed on their behalf.

Avoiding a violation of the California Rule is not just a useful bogeyman to provide a rationale for a moderate pension cut. In at least three instances in the last decade, the courts have cited the California Rule while overturning pension cuts approved by voters.

Superior courts cited the California Rule when overturning a limit on contributions to CalPERS approved by Pacific Grove voters in 2010, then again when tossing a requirement that workers pay more for pensions or earn a smaller pension approved in 2012 in San Jose.

Neither of the measures were appealed. After San Francisco voters approved an end to supplemental pension payments in 2011, a change backed by all 11 supervisors and labor and business groups, the measure was approved by a superior court, then overturned on 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 an appeals court panel in 2015.

The state Supreme Court declined to hear an appeal of the San Francisco case. But the high court door seemed to open for appeals involving the California Rule after the Marin ruling in 2016, followed by a similar appeals court ruling in the air time case later that year.

A ruling by yet another appeals court panel referred to the Marin ruling several times while upholding Brown’s ban on employee purchases of up to five years of additional service credit, challenged by the state firefighters union.

“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,” said the appeals court ruling in the air time case.

Among signs the Supreme Court may be doing some reading for an in-depth review of the California Rule, which is based on a key ruling in 1955, was a brief reference in the court’s air time ruling to an academic paper cited by pension reformers.

A study of the California Rule by legal scholar Amy Monahan 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.

“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 got its name in part because it has not been widely adopted elsewhere. Monahan’s study said that “of the twelve states to adopt the rule, three have since modified it.”

If the Supreme Court loosens the California Rule, pension cuts may not quickly follow. In bankruptcy, Stockton and San Bernardino chose not to try to cut their biggest debt by far, saying pensions are needed to be competitive in the job market, particularly for police.

To cut pensions, cities and other local governments in CalPERS might need legislation to change state law. The giant fund, whose top priority under a labor-backed initiative approved by voters in 1992 is protecting pensions not taxpayers, could be a formidable opponent.

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Originally posted at Calpensions.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com. Posted 28 Oct 2019