The California Supreme Court will hear arguments Tuesday on whether to strike down pension spiking in two Bay Area counties in a case that might significantly affect future taxpayer costs for public employee retirement plans across the state.
With state and local governments crippled by escalating pension costs and badly underfunded retirement plans, and with the problem exacerbated by the current coronavirus recession, now is the time for the high court to set some reasonable boundaries.
At the very least, the justices should strike down the pension spiking in Merced, Alameda and, most egregiously, Contra Costa counties. Abuses were so bad that some workers were retiring with pensions 25% greater than their top pay when they were on the job.
But the case also provides the high court an opportunity to reverse more than 60 years of misguided legal doctrine that prevents the state and its local governments from making reasonable adjustments to curb pension costs.
The amount of a public employee pension is based on three factors: age at retirement, years on the job and top salary, usually the last year or the average of the final three years. At issue in the legal case is what’s included in that salary.
For years, workers in the three counties were saving up their leave time, receiving cash payments for it as they prepared to retire and then counting those large payments toward their final year’s salary used in calculating their pensions.
Counting so-called “terminal pay” was legally questionable. But it had been going on for more than a decade until it was explicitly prohibited by a law signed by Gov. Jerry Brown in 2012.
The original version of that law contained a loophole that would have explicitly permitted such pension spiking. But when this news organization exposed the loophole lawmakers scrambled on the final day of the 2012 legislative session to pass an additional bill to fix the problem.
Labor unions soon filed lawsuits challenging that additional law, arguing that they were told they could spike their pensions when they started working and that it thus became a “vested right” that the state could not take away.
Attorneys for the governor’s office, first for Brown and now for Gavin Newsom, argue that counting such terminal pay was never legal to begin with so the workers don’t have a protected right to an illegal benefit.
The unions’ argument seeks to take advantage of misguided state Supreme Court precedence. In a string of cases dating back more than six decades, the high court has ruled that most pension benefits enjoy constitutional protections against being reduced. The decisions have been dubbed the California Rule because their constraints on the state Legislature are greater than in most other states.
Under the California Rule, it’s widely assumed that the rate and terms under which workers earn future pension benefits cannot be reduced, even if they are too costly to taxpayers.
So, for example, if a worker starts out accruing pension benefits at 3% of final salary for every year of employment, they would be entitled to keep accruing at that rate permanently. Under this argument, salaries are not locked in for the full term of employment, but pension benefit accrual rates are – even if the employer cannot afford it.
Pension reformers, including Brown, have been urging the justices to reconsider the rigidity of the California Rule. The issue is not the pension benefits a worker has previously earned; but rather whether the worker is entitled to keep earning at the same generous level for their future work.
In the current case, the court will have three options:
• Back the unions and, by affirming the rigidity of the California Rule, essentially indefinitely lock state taxpayers into unaffordable pensions.
• Side with the state by concluding the California Rule doesn’t apply because the pension spiking was never legally permitted.
• Temper the California Rule by emphasizing that it’s not absolute and allows for reasonable pension changes, especially when the benefits are too costly for governments to fund.
The 2012 legislation was an attempt to inject some minimal limits on out-of-control behavior. It would be a travesty for the Supreme Court to permit those practices to continue.
