New pension-cut rulings begin with little change

Publisher, CalPensions.com

Voter-approved pension cuts were the first wave of court cases after public pension investment funds had huge losses in a stock market crash a decade ago, creating the need for big bites out of government budgets to pay alarming debt.

Ballot measures in cities large and small were overturned by the courts, from a blunt-force cap on annual payments to CalPERS in Pacific Grove to a stark choice for employees in San Jose: pay more for pensions earned in the future or begin earning a smaller pension.

The local measures ran afoul of the “California Rule,” a series of state court rulings believed to mean the pension offered at hire becomes a vested right, protected by constitutional contract law, that can only be cut if offset by a comparable new benfit, erasing any savings.

A unanimous appeals court panel ruling in 2015 that overturned a San Francisco ballot measure cutting a supplemental cost-of-living adjustment for city pensions was based on one of the key California Rule issues.

“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 ruling in the San Francisco case.

Then a year later in a Marin County case another unanimous appeals court ruling, like the San Francisco ruling citing more than a dozen previous rulings, followed its presumably logical legal path to an opposite conclusion.

“There is no absolute requirement that elimination or reduction of an anticipated retirement benefit ‘must’ be counterbalanced by a ‘comparable new benefit,’” said the Marin ruling.

The Marin case is part of a new wave of court challenges to pension cuts, this time to fringe parts of the Public Employees Pension Reform Act (PEPRA) pushed through the Legislature by former Gov. Jerry Brown that took effect on Jan. 1, 2013.

Main cost-cutting parts of the reform, such as working longer to earn the equivalent of a pre-reform pension, are limited to employees hired after the reform who do not yet have vested rights, thus avoiding a clash with the California Rule.

The state Supreme Court has agreed to hear at least five cases challenging the governor’s reform. An issue in most of the cases is whether pension cuts applied to vested employees hired before the reform, not just new hires, violate the California Rule.

Last week the high court ruled on the first of the five cases, unanimously upholding the reform ban on boosting pensions by buying up to five years of additional service credit. It’s called “air time” because the employee does no work to get credit for the years.

In two steps mentioned in a court summary before the ruling, the court first found air time was not a vested right and then did not, as the state and others urged, consider the California Rule because air time was found to be unprotected by constitutional 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 said.

The ruling was a rare pension court loss for unions, led by Cal Fire Local 2881. While awaiting the next case, lawyers are analyzing the 45-page ruling written by Chief Justice Tani Cantil-Sakauye for any hint of clarifying or reshaping the California Rule.

Among the main points in the ruling is that public employment is ordinarily statutory, rather than contractual, and can be modified by the governing body. But constitutional protection can arise in two ways:

When statutes creating an employment benefit “clearly evince an intent by the relevant legislative body to create contractual rights,” or when “contractual rights are implied as a result of the nature of the employment benefit, as is the case with pension rights.”

The ruling said the air time legislation did not show intent to create contractual rights. “Further, unlike core pension rights, the opportunity to purchase ARS (additional retirement service) credit was not granted to public employees as deferred compensation for their work.”

The California Rule got its name in part because it has not been widely adopted elsewhere. The ruling said a research paper by Amy Monahan notes that “of the twelve states to adopt the rule, three have since modified it.”

 The next California Rule case heard by the high court may be the “Alameda” case, a consolidation of union challenges in three county retirement systems to Brown reform “anti-spiking” provisions, which curb improper boosting of the final pay that sets pension amounts.

The court put three other pension reform cases on hold, pending a decision on the Alameda County case (combined with similar cases in the Contra Costa and Merced county systems) about spiking curbs applied to vested pre-reform employees, not just new hires.

On the long list of items banned from final pay by the reform and the counties are, for example, one-time pay for performance and bonuses, cashing out unused vacation and sick leave, on-call and call-back pay, and terminal pay not earned in the final compensation period.

The three reform cases put on hold are a Los Angeles firefighter whose pension was cut after a felony conviction, six judges elected before the reform but who took office after the reform and must pay high new-hire pension rates, and the Marin case.

Like Alameda, the Marin County case is about the reform anti-spiking provisions. But the Marin appellate ruling was issued in August 2016, long before the unanimous appellate ruling in the Alameda case in January last year.

So, why did the high court make the lead case Alameda, which sets a high hurdle for pension cuts, and put the Marin case that contradicts the California Rule on hold, pending a decision on the Alameda case?

An attorney for the firefighters in the air time and Marin cases, Gregg Adam, has said he thinks the likely explanation is that the Marin trial court ruled on a “demurrer” requiring no evidence, unlike the Alameda trial court evidentiary hearing that produced a well-developed file.

“Courts usually prefer to work off a voluminous, well-run trial court record rather than the Marin case, which basically is nothing,” Adam said.

Former San Jose Mayor Chuck Reed, whose ballot measure lost a key provision under the California Rule, said last week the court also may think the complicated Alameda case has more parts from which to choose to make rulings than the Marin decision.

Although he is confident the high court will provide some guidance, Reed, a lawyer, said it’s not unusual for a big issue to go in and out of the courts several times before final clarification after a decade or so.

Brown said early last year he has a “hunch” the courts will modify the California Rule, so “when the next recession comes around the governors will have the option of considering pension cutbacks for the first time.”

His legal office replaced the state attorney general in the defense of the Air Time ban. An attorney for Brown, Rei Onishi, made the oral argument for the Air Time ban and also intervened in the Alameda case last year on behalf of the govenor’s reform.

Gov. Newsom reportedly told a firefighter group during his campaign last year that he supports the California Rule. His media office did not respond to a question last week about whether Onishi will continue to intervene in the Alameda case in defense of the pension reform.

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.

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