Public pension benefit suits being watched nationwide

All eyes are on the California Supreme Court as it works through cases that could determine whether the California rule, which stemmed from a series of state court decisions that have influenced the calculation of public pension benefits in nearly a dozen other states, will stand.

The California Supreme Court on March 5 issued a narrow decision on the first of a string of pension reform cases concerning whether the state Legislature can change public employee pension benefits. However, another case now before it that has yet to be scheduled for oral arguments could result in a decision on the rule's continued existence. The so-called California rule states that when the Legislature takes away a vested pension right from an employee, it must exchange it for something of comparable value.

In the recently decided case, the union representing some California firefighters brought the lawsuit after the passage of a 2012 pension reform law that had been championed by former California Gov. Edmund G. "Jerry" Brown Jr.

Before the pension reform law passed, California state firefighters' retirement benefits included the option to buy up to five years of additional service time, called airtime, in order to count those added years toward their earned retirement allowances.

The California cases have been watched closely across the U.S. because most states protect the vested pension benefits of public-sector workers from impairment.

In Cal Fire Local 2881 vs. California Public Employees' Retirement System, the firefighters argued that taking away airtime violated the California rule because the Legislature had not granted public employees anything of comparable value. (The law did not change the pensions of public employees who had already purchased airtime.)

The California Supreme Court ruled against the firefighters, finding that the option to purchase airtime was not a protected pension right. However, it declined to rule on the continued application of the California rule.

California is not the only state to have adopted the rule. Of the roughly 12 states that adopted the rule, three have changed it, the court noted in its unanimous opinion.

"Because we conclude that the opportunity to purchase ARS credit (airtime) was not a term and condition of public employment protected from impairment by the contract clause, its elimination does not implicate the constitution," the court stated. "For that reason, we have no occasion in this decision to address, let alone to alter, the continued application of the California rule."

This is not expected to be the California Supreme Court's last word on the issue. Another case, involving the $8.3 billion Alameda County Employees' Retirement Association, Oakland, Calif., $8.3 billion Contra Costa Employees' Retirement Association, Concord, Calif., and $778 million Merced County (Calif.) Employees' Retirement Association, is waiting to be scheduled for oral arguments, said Harvey L. Leiderman, partner of law firm Reed Smith LLP, which represents the Alameda, Contra Costa and Merced retirement associations and boards.

"That case is likely to be the vehicle for the much-anticipated re-examination of a rule that has been talismanic to California's public employees for three generations," Mr. Leiderman said.

The reason is that the Alameda case deals with the amount of the pension itself, or what should be included or not included in the retirement payment calculations, he explained. Various public employees and public employee organizations in Alameda, Contra Costa and Merced counties in California brought lawsuits, which have been consolidated, arguing that applying the state's 2012 pension reform law as it applied to county pension plan members hired before the law's effective date of Jan. 1, 2013, was unconstitutional. After the pension reform law took effect, all three pension plans applied the changes, which excluded certain pay items that had formerly been included in calculating employees' total compensation for pension purposes, to new hires and existing employees.

"My clients, the retirement boards, are trying to follow the law," Mr. Leiderman said. "They have not taken a position on the constitutionality of PEPRA (the California Public Employees' Pension Reform Act of 2013) or the California rule."

Cal Fire Local 2881 officials declined comment, said DeeDee Garcia, communications director.

CalPERS CEO Marcie Frost said in a written statement that the decision does not change how the $354.8 billion Sacramento-based pension fund administers benefits.

"CalPERS has not offered airtime since the Public Employees' Pension Reform Act took effect in January 2013," she said. "Our mission remains what it has always been: to protect defined benefit plans and provide retirement security to California's public employees, their beneficiaries, and retirees."

CalPERS estimated that PEPRA as a whole is expected to save $29 billion to $38 billion over 30 years. CalPERS does not break out cost savings on the elimination of airtime, she said.