Local Governments Looking for Revenue are Watching the CA Supreme Court

Joel Fox
Editor and Co-Publisher of Fox and Hounds Daily

While state and local governments try to figure how to deal with lost revenue to cover expenses, one solution may come from an unusual source. While taxpayers, the federal government, budget gimmicks and borrowing may all play a part in balancing state and local budgets, California governments anxiously await a decision on pension obligations from the California Supreme Court.

Last week, the court heard arguments over a pension reform law backed by Governor Jerry Brown the last time the state was trying to dig out of a budget hole. Brown attempted to limit some tricks that boost pensions by increasing compensation packages as a worker finishes his or her career. Public employee unions in different counties challenged provisions of the law and it ended up in the lap of the Supreme Court.

The big question is will the court limit its decision to specific attributes of the pension reform or make a broad ruling on the “California Rule?” That entrenched provision states that public employees are entitled to benefits that were in place when they started work and can only see benefit cuts if they are replaced with another benefit of equal value.  

Untying the California Rule from around the hands of local budget makers would give them more room to maneuver, especially in difficult fiscal times.

The so-called California Rule has been in place since the 1950s when a series of court decisions set up barriers to take away public employee retirement benefits, which the courts said were protected under contracts.

But as the burden on government budgets grow, the liability of retirement benefit obligations is eating away at budgets to the detriment of services provided by local governments and major government functions such as education.

More than one analysis (Stanford here) and (California Policy Center here) pegged California’s overall debt over a trillion dollars, the largest chunk pertaining to retirement benefits, and that was a couple of years ago before the pandemic sunk the economy and government revenues. The total cost of retirement benefits for state and local governments and schools and colleges tripled over 15 years from 2003. 

With revenue up and obligations unmet, more revenue will have to be set aside for pensions.

A Supreme Court decision giving more power to local governments to allow for adjustments to benefits for future work can relieve some pressure—although not immediately—but allow for any necessary borrowing to occur on better terms for government if their future obligations are reduced.

The Supreme Court has an opportunity to make a major adjustment to the system that was already in trouble before the coronavirus crisis appeared and will only be made worse because of the pandemic.

The Court could ignore the larger reform of the California Rule and still rule for the local retirement agencies making adjustments to the law by declaring that pension calculations do not have to include gimmicks like pension spiking—inflating compensation through ad-on to the salaries–which is at the heart of the legal challenge.  

Pension spiking was supposed to be the easy reform. Nearly all who look at pensions agree that manipulating compensation to increase pensions is a way to cheat the taxpayers. But even this easy reform is hard.

I was involved in a lawsuit to stem pension spiking in Los Angeles County in the 1990s. In a story I told here before, the Los Angeles Times editorial page was in our corner and at a press conference a Times reporter covering the event assured us that the report on the press conference about the lawsuit was scheduled for the front page of the next day’s paper—the editors thought dealing with pension spiking was an important issue.

Didn’t happen.

A short time after the press conference the Simi Valley jury acquitted the police officers in the Rodney King incident and the 1992 Los Angeles riots began. The pension issue was wiped off the front page and out of the minds of the voters. Our lawsuit was eventually rejected by the courts.

No telling which way the Supreme Court will go on the pension spiking issue nearly three full decades later but the surrounding circumstances are different. The disastrous economic environment may not influence the court directly but it was mentioned in the oral arguments before the justices. The court can throw local governments a lifeline as they consider an outdated government benefit that that the general public does not enjoy.

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