California governor adds voice to benefit cases

(updated with correction)

California Gov. Edmund G. Brown Jr. is intervening in several court cases that ultimately will be decided by the California Supreme Court, arguing that public worker pension benefits in the state can be reduced during employment.

If the court agrees with the governor, it would mark a revolutionary change from a ruling it made more than 60 years ago that pension benefits are guaranteed from date of hire.

Three cases in California are not only being watched closely in the state, but also across the U.S., because most states protect the pension benefits of public-sector workers. In California and more than a dozen other states including New York, Illinois and Pennsylvania, courts have upheld — or it is written into the state constitution — that accrued and future pension benefits are guaranteed.

A spokesman for Mr. Brown declined to say why the governor's office decided to intervene in two of the cases in November and December, through a legal brief in one case and oral arguments in the second.

Until the November legal brief, the matter was being handled by the California attorney general's office, and the governor had not made a statement on various challenges by public employee unions to 2013 pension reform law that ​ he backed.

That law reduced pension benefits for future employees, which is not being challenged. But it also affected some current employees because it eliminated what the governor considered pension spiking, using long-term unused vacation time or on-call pay to enhance an employee's final salary, the benchmark used for determining their benefit. It also eliminated buying pension credits for years not worked. Those provisions are the subjects of the three court cases.

Statements in the legal brief by Rei Onishi, the governor's deputy legal affairs secretary, who was moved from the attorney general's office, support the governor's pension reform law. But in a significant change in the state's position, Mr. Onishi also takes a broader view, supporting two recent California appellate court rulings that public-sector workers are only entitled to a "reasonable" pension benefit — not an ironclad guarantee of set benefits.

Selling pension credits

The case in which Mr. Onishi filed the brief involves the selling of pension credits known as "airtime." Until 2013, some 1.6 million public workers covered by the $348.7 billion California Public Employees' Retirement System, Sacramento, were allowed to buy additional years of pension credits, often at highly discounted rates, to enhance their pension benefit without actually working those years.

The November brief, written by Mr. Onishi, criticizes union representatives' view that airtime cannot be taken away, and argues in a footnote that "many legal experts have criticized the rigid inflexibility of the union's position, pointing out that it is contrary to contract clause principles, inconsistent with general contract and economic theory, and effectively depresses the salaries and benefits of new generations of public employees."

The brief also noted that "allowing the airtime practice of buying a bigger pension is an unworkable and fiscally irresponsible scheme."

An internal CalPERS report in 2010 had concluded the selling of airtime was underpriced by almost 40% in some instances. CalPERS, the nation's largest defined benefit plan, has an unfunded liability of more than $138 billion according to system actuaries and is only 68% funded.

The California Supreme Court also agreed to hear another case now before an appeals court panel, even though the panel has yet to rule, on whether workers in Alameda, Contra Costa and Merced counties can credit unused vacation they have accumulated through the years toward their final yearly salary.

The 2013 pension reform law also outlawed that practice and Mr. Onishi, in oral arguments last month, said the employees were only entitled to a "reasonable pension."

The state Supreme Court said it will consolidate this case once the appellate panel rules with yet another case. In this third case, a state appeals court ruled in August 2016 that employees in Marin County could not use pay they received while being on-call toward their final pension calculation starting in 2013.

The 2013 pension reform law also had outlawed on-call pay from being counted.

All eyes on California

Such legal questions and how the highest court in California will rule would attract the attention of lawmakers and residents in other states that, like California, face hundreds of billions in unfunded pension liabilities, said Amy B. Monahan, a law professor at the University of Minnesota Law School in Minneapolis who studies pension law.

"Part of that is because California has played such a leading role in sort of developing state law ... other states have found it influential and have sort of adopted it for their own (laws)," she said in an interview.

The so-called California rule, prohibiting pension changes once an employee is hired, dates to a 1955 California Supreme Court ruling that the city of Long Beach could not amend its pension benefits, said Ms. Monahan. She said the court concluded the only exception is that if pension benefits are taken away, they are replaced with benefits of comparable value.

She said 12 states — Alaska, Colorado, Idaho, Kansas, Massachusetts, Nebraska, Nevada, Oklahoma, Oregon, Pennsylvania, Vermont and Washington — incorporate the California rule as part of their own laws on pension rights.

"Other states are going to pay attention to it," she said. "They are going to read the decision. They are going to look at the reasoning. … California might continue to be influential here. It really depends on whether other state courts find their reasoning influential."

Ms. Monahan said that in times of fiscal distress, the inability by government units to change pension benefits could led to salary cuts, layoffs, hiring freezes and reductions in other fringe benefits — cuts that might be more damaging to employees than reductions in pension benefits.

But attorney Gary Messing, who represents California firefighters in the airtime case, said in an interview that reducing benefit benefits for current workers, "is a slippery slope."

"What the state has done is take the position that you are only entitled to a reasonable pension," he said. "If that is accepted, we get into a whole debate about what is reasonable. It's not a bright line that we now have and which we have lived with for many years."

Briefs in the airtime case were submitted in November. Mr. Messing said he expects the Supreme Court to hear oral arguments in the next few months and make a decision by the end of summer.

However, Mr. Messing said it's unclear if the state Supreme Court will choose to make a decision in the airtime case on narrow grounds — whether the state law had the authority to stop selling the credits — as opposed to making a broader decision on whether pension benefits are vested.

High stakes

Joe Nation, a professor of the practice of public policy at Stanford University, Palo Alto, Calif., said he was surprised the governor intervened in the case. He added that Mr. Brown might have come to the conclusion that pension benefit guarantees can't be sustained because of growing unfunded liabilities.

Mr. Nation said the unfunded liabilities of CalPERS, the California State Teachers' Retirement System, the University of California Retirement System and other public retirement systems in California combined exceed $335 billion.

"If indeed the courts rule that there is such a thing as the California rule and you can't modify benefits prospectively, I think this makes this very, very tough to solve," he said of the growing public pension plan debt in California.

Teresa Ghilarducci, a professor at the New School in New York who studies pension issues, said the defined benefit retirement system in California could actually be strengthened if the state's high court allows retirement plan benefits to be modified.

Modifying benefits slightly in times of financial instability, as the governor's pension reform did, still preserves the DB system and enables retirees to be paid.

"I see the tweaking as actually making the defined benefit plan system in the public sector stronger," she said.

The whole issue of changing pension benefits has moved to the forefront in California because of overall weak earnings for the retirement systems over the past few years, said attorney Timothy Talbot, who represents deputy sheriffs employed by the Contra Costa County Sheriff's Department. He said those weak returns raised concerns about plan funding, leading to the pension reform law and the union challenges.

"I think it is far less likely that we would be talking about it if there were ample investment returns,'' he said. "If these pension funds were closer to being fully funded than where they are now, I don't think anyone would be clamoring over it."

Mr. Talbot said he is concerned that a ruling allowing pension changes could lead to a reduction of benefits that workers were counting on as part of their employment package not just in California, but in other states.

"Those are some of the concerns everyone has, which is why the stakes are so high," he said.