California often is a bellwether for the nation, for good or ill, and cases making their way through the state's court system promise to continue to be that in the public pension arena.
The cases involve whether, under the California Constitution, future pension benefits can be reduced for current public employees by the state or local governments. A ruling in the affirmative would reverse a decision made more than 60 years ago that said pension benefits are guaranteed from the date of hire.
Such is California's status that an affirmative ruling would also likely influence courts and legislatures in other states with similar prohibitions on the reduction of promised benefits for public employees.
If a state as liberal and pro-labor as California can find it appropriate to reduce promised future benefits under certain conditions, then other states might likewise find ways to deal with their tremendous unfunded pension obligations.
A California pension reform law passed in 2013 outlawed the addition of unused, accumulated vacation time and other leave provisions to workers' final year salaries to increase their pension benefits, a practice known as pension spiking. Pubic employee unions challenged the law in court.
A Contra Costa County judge ruled in 2014 that the practice was unlawful. However, an appellate court ruled early this month in a case involving public pension plans in Alameda, Merced and Contra Costa counties that the analysis was "incorrect in certain respects," sending part of the case back to a lower court.
The California Supreme Court has agreed to hear the case and will consider the issue while reviewing a decision of another state appellate panel ruling in 2016 that Marin County employees were entitled only to a "reasonable pension benefit," not the original pension promised.
The court in the Marin County ruling seemed to realize the difference between a pension "promise" and a pension "guarantee." Private pensions are often cut when companies are in difficulty and file for bankruptcy, as the Pension Benefit Guaranty Corp. does not guarantee the full benefit of all those workers whose pensions fall under its control. Should public employee pensions be different?
Whichever way the California Supreme Court rules will have implications for many state and local governments struggling to fund their public employee pension promises. The unfunded liabilities for such public employee plans are estimated between $1.9 trillion and $3 trillion, and the costs of addressing those liabilities, and current costs of the pensions, is squeezing other public services, such as education and infrastructure.
Unfortunately, in some states, good investment returns were often used to improve benefits, not to pay down liabilities and build a cushion against periods of poor investment returns. In other states, legislators failed to make needed contributions to fund the pension promises.
If the California Supreme Court should rule that only "reasonable" pension benefits are guaranteed, and that benefits may be reduced in times of economic difficulty, it will allow not only California plans to adjust to economic realities, but also it might embolden trustees in other states to test if similar adjustments are possible.
This would allow states and local governments to take reasonable steps to reduce their unfunded liabilities, and ease the pressure to swing for the fences in their investments seeking above-average returns to pay off the liabilities.
If the court rules the pension promises really are pension guarantees, then U.S. public employee pension funds likely will continue to be, as researchers have found, the biggest risk takers among pension funds worldwide as they try to invest their way out of the liabilities.
And if that effort fails, public employee pension funds will continue to be a burden on taxpayers in the states with heavily underfunded plans, squeezing other vital services until something gives.
