California High Court Upholds Law Closing Pension-Padding Loopholes

The California Supreme Court building in San Francisco. (Courthouse News photo / Maria Dinzeo)

SAN FRANCISCO (CN) — In a unanimous ruling Thursday, the California Supreme Court upheld a 2013 pension reform law forbidding police unions and other public employees from cashing in on unused sick and vacation time to increase their pension benefits.

The ruling centers on the Public Employees’ Pension Reform Act, a law restricting the types of pay that can be considered part of an employee’s final compensation on retirement. It also took aim at a practice known as “pension spiking,” whereby county workers boost their retirement income 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 amended the County Employees Retirement Law, the statutory framework by which pensions are calculated, to exclude leftover vacation and holiday pay from that final amount.

Beneficiaries of county retirement systems in Alameda, Contra Costa, and Merced counties challenged the law, but the state’s high court found it was enacted for the constitutionally permissible purpose of preventing perceived abuses of the pension system. 

The justices also ruled the state is not required to provide county employees with any equal new benefits in exchange.

The court stopped short of scuttling the California Rule, a set of decades-old legal precedents that say in short that diminished employee pension rights should be offset by some comparable benefit.

“Experience with the implementation of a statutory pension system will inevitably reveal the need for change to close loopholes and foreclose opportunities for abuse,” Chief Justice Tani Cantil-Sakauye wrote for the court. “The Legislature must have the authority, discretion, and flexibility to address such problems without being required to, in effect, extend the life of the loopholes and the opportunities for abuse for the duration of the careers of current employees by providing comparable advantages.”

Cantil-Sakauye said because the PEPRA does not run afoul of the so-called California Rule, the court saw “no jurisprudential reason to undertake a fundamental re-examination of the rule.”

In a separate concurrence, Justice Mariano-Florentino Cuéllar said it was important to note that the court tailored its analysis in finding that a reduction in pension rights without comparable new benefits was reasonable here. 

While PEPRA does not provide any recompense for county employees, despite diminishing their benefits, “We uphold the change nonetheless, in this quite particular situation: The definitional change was enacted for a constitutionally permissible purpose — one that would have been undermined by the provision of any offsetting financial advantage for employees,” Cuéllar wrote, adding, “Second, at no point did plaintiffs in this case attempt to show the amended definition was unnecessary to achieve the Legislature’s permissible purpose, or was otherwise unreasonable.”

The court’s ruling means the three counties’ consolidated challenge will end up back in state court for further proceedings.

Its narrow application is cold comfort for anyone hoping for a blockbuster opinion, according to pension expert Steve Berliner, a partner with Liebert Cassidy Whitmore

“It doesn’t resolve the underlying issues of what pension reform is OK, if any,” he said by phone Thursday.

He added the ruling implies that the court would not have looked favorably on the amendment if it was solely designed to make pensions more affordable for public entities. 

“The way I interpret the overall decision is the court has by and large, without wanting to say it, upheld the California Rule,” Berliner said. “It’s nice to know that if you’re closing loopholes the court will uphold it and you don’t have to provide alternative benefits, but that’s not where the money is. The savings is in reducing benefits going forward.”

Berliner said the ruling is “almost as disappointing” as the court’s unanimous decision last year that didn’t touch the California Rule even as it upheld the state’s repeal of a perk that allowed state employees to purchase “air time,” or credits to be added to their pensions on retirement.

“If anyone was thinking that we would have a decision that would clear the path to  knowing whether the Legislature can do further pension reform or not, it’s kind of still up in the air,” Berliner said.

Ted Toppin, chairman of Californians for Retirement Security — a coalition of representing unions — said in a statement that while the court’s ruling preserves the California Rule, it appears to jeopardize the retirement security of the sheriffs’ deputies in Alameda County who agreed to take lower salaries in reliance on the county’s pension promises.

“Their employer and retirement system made a promise to them that the court decision now allows them to break. That is unfair and unfortunate,” Toppin said. “If public employers make a pension commitment to their workers, they should keep it.”

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