The California Supreme Court ruled Thursday that employers and pension systems are not barred from reducing or eliminating certain extra pay practices that resulted in increasing employees' total compensation for pension purposes.
The practices, referred to as "pension spiking," were permissible before the state enacted pension reform in 2012.
At issue in the case — involving the $8.8 billion Alameda County Employees' Retirement Association, Oakland; the $9.3 billion Contra Costa Employees' Retirement Association, Concord; and $816 million Merced County 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. The court said the law does not violate the state constitution.
Public employee unions sued the pension systems for following the pension reform bill, and reducing or eliminating pay items that had increased employee pension benefits, arguing that employees have a right to the benefits that existed when they were hired.
The California Legislature enacted pension reform laws "for the constitutionally permissible purpose of closing loopholes and preventing abuse of the pension system," the court said.
The court said the so-called "California rule" for calculating public pension benefits, developed by a string of court cases stating that pension benefits cannot be cut without providing a similar benefit, did not prevent the state legislature from excluding or limiting the inclusion "of additional types of compensation in an effort to prevent perceived abuses of the pension system," the court said.
The California rule stems from the idea that employees enter into a contract when they are hired and cutting benefits would violate the contract clause of the state's constitution. About 12 other states follow the California rule approach.
"It would defeat this proper objective to interpret the California Rule to require county pension plans either to maintain these loopholes for existing employees or to provide comparable new pension benefits that would perpetuate the unwarranted advantages provided by these loopholes," the court said. "The legislature's decision to impose financial disadvantages on public employees without providing comparable advantages will be upheld under the contract clause (of the Constitution) only if providing comparable advantages would undermine, or would otherwise be inconsistent with, the modification's constitutionally permissible purpose."
The court remanded the case back to the trial courts.
The case is the second to come before the state's highest court involving the California rule. On March 5, 2019, the California Supreme Court ruled against the union representing some California firefighters who wanted to retain the option that existed before passage of the pension reform law allowing them to buy up to five years of additional service time, called airtime, to count toward earned retirement allowances. In that case, the court found the option to purchase airtime was not a protected pension right. However, it declined to rule on the continued application of the California rule.
The pension systems are waiting to see what happens in the trial court before making any changes.
In a statement on its website, the Contra Costa Employees' Retirement Association said it "does not anticipate implementing any changes until after the decision is thoroughly studied and the process continues, as ordered, at the trial court level, which may take several months."
Plaintiffs and their lawyers said they are unhappy about the opinion but pleased that the court upheld the California Rule.
"I am disappointed for my clients in this appeal, but thankful that the court upheld the efficacy of the California Rule and corrected the erroneous appellate court rulings from the First Appellate District which held pension benefits can be reduced so long as a substantial benefit remains," said David E. Mastagni, partner in law firm Mastagni Holstedt, which represents employee organizations and unions including the Alameda County Deputy Sheriffs' Association, in an email.
"In recounting and clarifying its prior jurisprudence, this decision in some ways strengthens the California Rule," he said.
"After committing their working lives to the public service, public service workers should receive the pension promised to them. On the whole, this decision confirms that California's public service workers can continue to rely on that promise," said Teague Paterson, deputy general counsel for one plaintiff, American Federation of State, County and Municipal Employees.
Mike Fara, Alameda County fund communications manager, said the fund “respects the California Supreme Court’s decision, and we’re pleased to have a resolution so the public employees who make up our membership can know what to expect for the retirement benefits they’ve contributed their pay towards and have earned through their hard work.”
Timothy K. Talbot, a principal at law firm Rains Lucia Stern St. Phalle & Silver who represents the Contra Costa County Deputy Sheriffs Association, said the association plans to move forward on a separate 2015 lawsuit on the issue. The parties agreed to a suspend the case until a final resolution of the Alameda case.
Other employee organizations are also considering whether to file their own cases to recoup contributions made by or for the benefit of employees that were based on actuarial calculations that included the costs of benefits they won’t be receiving. In a footnote, the California Supreme Court mentioned this argument by the plaintiffs but said it wasn’t addressing whether employees might be entitled to a partial refund of their contributions.
“We do not believe the pension systems are entitled to a windfall of contributions and that the contributions should be returned to the employees,” Mr. Talbot said in an email. “The Supreme Court acknowledged that such a remedy might be appropriate.”