California Pension Battles Play Out in Court

SAN FRANCISCO (CN) – A state appeals court ruled that overtime, severance pay and on-call pay cannot be included in pension formulas for public employees in the latest in the seemingly ceaseless battle over pensions in California.

A three-judge panel of the First Appellate District in the California Court of Appeals attempted to strike a balancing act on Monday between a lower trial court ruling that set forth a rigid interpretation of the state’s pension reform and public employee unions that wanted to give discretion entirely to County Employee Retirement [CERL] boards.

“In the end, we believe that the correct understanding of board discretion under CERL lies somewhere in between the expanded notion of discretion espoused by appellants and the constrained, arithmetical approach endorsed by the trial court,” Judge Timothy Reardon wrote for the panel in a 73-page opinion.

The opinion sets forth the complexities of the issue, which pits public employees – who believe they are entitled to pension after years of service – against public entities that worry the rising costs of retired employees will render them less able to address the pressing concerns of their institutions and constituents.

In 2013, on the heels of The Great Recession, Governor Jerry Brown signed the Pension Reform Act into law.

Part of the law’s purpose was to end what many viewed as pension abuses. In California, the formula for an annual pension is based in part on the salary earned by an employee in his or her final year of employment.

Investigations found that many employees were padding their final salary with items like equipment or vehicle use, overtime and on-call pay, sick leave and vacation time cash-outs, and other related pay variables.

In the aftermath of pension reform, several public employee unions sued in state court seeking court declarations about exactly what was and was not permissible under the new law.

In the present instance, the Alameda County Employees’ Retirement Association and other related unions sued in Contra Coast Superior Court.

The first of their two main points was that overtime, vacation and sick leave cash-outs, and on-call pay should be included in the employee’s final salary and thus incorporated into the pension formula.

Second, they asked whether legacy employees – or those  who were hired prior to the 2013 Pension Reform Act – should be subjected to the changes or guided by the law as it previously stood.

The appellate court agreed with the superior court’s ruling that overtime pay should not be included in pension equations.

The unions had argued that CERL Boards should have the discretion to decide what does or does not get included. The court shot this notion down, saying boards cannot decide to include items explicitly rendered impermissible by law.

“An item of compensation is either includable in compensation, compensation earnable, and final compensation under the CERL statutes, or it is not,” Reardon wrote.

However, the unions were not entirely without victory, as the court ruled vacation and sick leave cash-outs should be included in final salary formulas.

“Moreover, many such premiums and incentives—including the in-service leave cash-outs here at issue—can be understood simply as increased salary payments, specially designed by employers to encourage certain employee behaviors, such as longevity, foregoing time away from work, and the development of special employment enhancing skills,” Reardon wrote.

However, terminal pay and on-call pay are not included, according to the appellate court.

Terminal pay is when an employee is fired or laid off, but is entitled to the rest of his or her salary for a given year. On-call pay is when an employee may not be working, but needs to be available in case of emergencies, as is often the case for firefighters and police officers.

The appellate court remanded the question of whether legacy employees should be exempt from the 2013 law’s major changes back to superior court, citing insufficient briefing from both sides.


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