A California Supreme Court case has relaxed a standard called the "California rule" also used by about a dozen other states to determine the degree to which public employee pension plans for existing employees can be changed, giving employers and states a little more wiggle room to close loopholes.
However, plaintiffs attorneys believe the new standard still will prevent modifications to address rising pension costs or revenue drops. Attorneys for the pension plan defendants, meanwhile, say the court upheld public retirement systems' authority to correct retirement system errors and improve retirement system operations.
Created by a series of California Supreme Court cases over 65 years, the so-called California rule provided that state agencies can change public pension plans to eliminate benefits from existing employees if the employees were provided comparable advantages.
In the latest case — involving the $7.4 billion Alameda County Employees' Retirement Association, Oakland; the $8.9 billion Contra Costa Employees' Retirement Association, Concord; and $896 million Merced County Employees' Retirement Association — California's highest court added a postscript to the rule.
In its July 30 opinion, the court ruled against plaintiffs' argument that the state's pension reform legislation, a law designed to eliminate so-called pension spiking — which is including extra pay elements such as voluntary on-call duty and cashing out unused leave time to compute pension benefits without offsetting advantages — violated the contract clause of the constitution. Public employee unions argued that employees have a right to the benefits that existed when they were hired.
The state supreme court disagreed. The California rule 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 Legislature enacted pension reform laws in 2012 "for the constitutionally permissible purpose of closing loopholes and preventing abuse of the pension system," the court said. "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."