Battle Over Pension Padding Consumes California High Court

California Supreme Court headquarters in San Francisco. (Photo credit: Coolcaesar/Wikipedia)

SAN FRANCISCO (CN) — The California Supreme Court took up the contentious and seemingly unending battle over public employee pension reform Tuesday, questioning whether employees have a vested contractual right to pad their pensions.

Tuesday’s hearing revolves around the Public Employees’ Pension Reform Act, a law that advocates like former Governor Jerry Brown portrayed as an attempt to curb pension spiking, a practice where county workers can boost their pensions by cashing in on the unused paid vacation and holiday leave time they accrued while working. 

Pensions are calculated based on an employees’ final salary when they retire. PEPRA, also known as Assembly Bill 197, amended what employees can count as part of that salary, putting a halt to leftover vacation and holiday pay being added to that final amount.

The law pits counties worried about crippling pension costs against public employees like police officers and firefighters, who believe they are entitled to these benefits as a form of deferred compensation.

Labor organizations representing employees of county retirement systems in Alameda, Contra Costa, and Merced counties challenged enforcement of that law, which went into effect on Jan. 1, 2013. 

“The question presented by this case is whether on top of legitimate pension liabilities, should taxpayers along with their children and even grandchildren be forced to also shoulder the burden of financing abusive practices to artificially and unlawfully inflate pensions,” attorney Rei Onishi, deputy legal affairs secretary for Gov. Gavin Newsom, told the justices Tuesday.

Onishi argued that there is no protected right to pension spiking, as the practice was never lawful. He also said the law is prospective, so it only affects public employees hired after Jan. 1, 2013. 

“Because an employee generally doesn’t have a vested right to payment for which they haven’t even performed service, AB 197 could not have impaired any vested rights,” Onishi said.

The state’s highest court must decide whether the employees had the reasonable expectation they would be allowed to add pay items like accrued vacation time to their pensions.

“Can you describe what you understand prospective to mean?” Justice Mariano Florentino Cuellar asked Onishi, who answered that it means the law only applies to compensation that has yet to be earned.

“That’s another reason why it’s consistent with employees’ reasonable expectations. Employees don’t have reasonable expectations to the pensionability of pay items that they have not yet earned yet,” Onishi said.

Cuellar pushed back. “But surely you can understand the argument on the other side. Employees who are currently working might view this as not prospective because they’re arguing they have a set of expectations that are being violated.”

Arguing for the employees, labor attorney David Mastagni said police officers relied on the promise that they would receive significant pension benefits in exchange for lower salaries, a deal upended when AB 197 led to a 15% reduction in the pension formula.

“My clients were offered a deal by the county,” Mastagni said. “They said if you accept a lower amount of salary then you can maybe make in the private sector, and agree to provide us 30 years of service as a deputy sheriff or a first responder, we will provide you with significant amounts of deferred compensation. That promise is a very important aspect of the employment agreement.”

But Onishi said the Legislature has the discretion to make changes to the County Employee Retirement Law (CERL), a statutory framework by which pensions are calculated.

“Employees were repeatedly and constantly told their pension would be calculated according to CERL,” he said.

Justice Joshua Groban piped in. “Are you arguing that any pension modification is appropriate so long as the employee hasn’t retired yet?” he asked.

Onishi answered, “I think I’m arguing something more narrow. Prospective only changes to compensation that has not yet been earned doesn’t implicate the contract clause and I think that principle alone decides this case.”

That didn’t satisfy Groban. “The vacation time was earned and accrued prior to the PEPRA amendments. That’s the essence of accrued. So when you say it hasn’t been earned yet, can you drill down on what you mean?”

Onishi said employees are free to cash out accrued vacation time, “but CERL’s rules have always been clear that when it comes to determining your pensionable compensation, the amount cannot exceed the amount of leave that you could accrue and cash out.”

Justice Goodwin Liu zeroed in on Onishi’s argument that employees are not immune from the Legislature’s changes to the pension rules, asking whether that “eviscerates”  analysis under the U.S. Constitution’s Contracts Clause, which precludes states from enacting laws that impair contracts.

“That leaves me wondering what is protected by the Contracts Clause?” Liu asked.

Onishi said CERL is a regulatory statute, which differs from a contract entered into with the state. “These county employees are not bargaining for these benefits with the state or the Legislature,” he said, adding that state did not enact the law just to protect its own financial interests.

Liu also asked Mastagni whether the Legislature can change pension rules in light of the Contracts Clause.

“The Contracts Cause was a protection put into place at the end of the Revolutionary War to protect the stability of contracts and so that legislatures could not reset expectations after the fact,” Mastagni said. The attorney added modifications can be made but they must be reasonable and reductions must be offset by some kind of advantage to the employee.

Groban raised a likely worst-case scenario for cities and counties whose budgets have been compressed even more by the economic upheaval wrought by the Covid-19 pandemic.

“Let’s imagine a massive economic downturn and a pension system on the brink,” he said. “A counties’ pension is going to become insolvent. I hear you to be saying even given that doomsday scenario, if there’s not a commensurate advantage, the system cannot make any cost savings changes with respect to existing employees even if the pension system is on the brink. I hear you saying, better to let the county go bankrupt than make changes to existing employees. Does the argument go that far?”

Mastagni proposed a solution counties will probably find hard to swallow: Since the funding obligation rests with the counties, they can declare bankruptcy. But if the pension system is underfunded, they may be required to make additional contributions or re-negotiate for more contributions from employees.

The panel took the case under submission and did not indicate when it would rule.

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