The California Supreme Court is expected to issue an opinion re-examining the so-called California rule for calculating public pension benefits, which has been adopted by nearly a dozen other states.
The virtual oral arguments held online Tuesday centered on whether pension benefits offered when a worker is hired become a vested right, leaving the state's employers unable to change the way pension benefits are calculated.
At issue in the case — involving the $8.8 billion Alameda County Employees' Retirement Association, Oakland, Calif.; the $9.3 billion Contra Costa Employees' Retirement Association, Concord, Calif.; and $816 million Merced County (Calif.) Employees' Retirement Association — is whether state's 2012 pension reform law, as it applied to county pension plan participants hired before the law's Jan. 1, 2013, effective date, was unconstitutional.
After the reform law took effect, all three pension plans applied the changes — which excluded certain pay items that had formerly been used to calculate employees' total compensation for pension purposes — to new hires and existing employees.
Rei R. Onishi, deputy legal affairs secretary for the California governor's office, arguing in support of the California pension reform law that changed how pension benefits are calculated to avoid pension spiking, in which employees before retirement increase their pension benefit amounts by adding such payments as accrued vacation pay. Mr. Onishi framed the issue as one that would require cities and counties already struggling to pay their pension liabilities to "shoulder the burden of financing abusive practices" to inflate pension benefits as well.
David E. Mastagni, representing employee organizations and unions including the Alameda County Deputy Sheriffs' Association, countered that reducing a pension benefits should be balanced by an offsetting advantage for the beneficiary."
A good portion of the argument centered on whether plan participants accepted employment based on a promise that they would receive a pension benefit based on all the types of pay that could have been included in the calculation when they were hired. Among the pay items no longer included under the 2012 state law are cash outs of vacation time and other leave pay in the final compensation calculation and payment for additional services outside of normal working hours.
"One person's pension spiking is another person's promise," Mr. Mastagni said. He said that reducing a pension benefits should be balanced by an offsetting advantage for the beneficiary, and employees should be able to rely on the elements that go into the calculation of their pension benefits when they are hired.
Taken to its extremes, the employees association and union arguments would prevent an employer, such as a county pension plan about to be insolvent, from making "cost-saving changes," even if it was on the brink of bankrutpcy, California Associate Justice Joshua P. Groban commented. Is it "better to let the county go bankrupt" than to change the compensation of existing employees, he asked.
Instead of bankruptcy, the county could adjust the actuarial contributions to adequately fund the plan, Mr. Mastagni said.