By Tom Moutes, RLACEI Director
On July 30, the California Supreme Court rendered its much-anticipated decision regarding public pensions. Following are the background and overview of the Court’s decision; and relevance for LACERS Members and Retirees.
- The California Public Employees’ Pension Reform Act of 2013 (PEPRA) was enacted by the State legislature.
- PEPRA amended the retirement provisions for new State employees and also amended the County Employees Retirement Law of 1937 (CERL) for county employees within California.
- Among other provisions, PEPRA limited the definition of the compensation that could be used to calculate retirement benefits.
- Following the enactment of PEPRA, the Alameda County Sheriff’s Association; the Merced County Sheriff’s Employees’ Association; and the Contra Costa County Deputy Sheriffs Association (together “Plaintiffs”) filed separate court actions against their respective county retirement boards.
- Among other assertions, the Plaintiffs contended that county employees who began their work prior to PEPRA’s enactment have a constitutional right to receive pension benefits calculated according to the law as it existed prior to PEPRA.
- Among other claims, the Plaintiffs indicated the so-called “California Rule” would require comparable new advantages for any impairment of a vested pension right – in these cases, the exclusion of certain types of income from compensation earnable – that was taken into consideration to determine the retirement benefits of persons who were county employees at the time PEPRA became effective.
- The Plaintiffs’ three cases eventually were consolidated in a single proceeding, which made its way to the California Supreme Court.
Overview of the Court’s Decision
In part, the California Supreme Court indicated the following regarding this case:
- One issue raised here is whether the amendment impaired county employees’ constitutionally protected implied contractual rights in the implementation of CERL as it existed prior to the PEPRA amendment.
- The vested rights doctrine, the foundation of plaintiffs’ contention that PEPRA’s amendment of CERL is unconstitutional as applied to existing (emphasis added) county employees, is grounded in the contract clause.
- In general terms, a state’s impairment of its own obligations (in this case, the factors used in calculating retirement benefits) “may be constitutional if it is reasonable and necessary to serve an important public purpose” …
- …When evaluating modifications to a public employee pension plan under the contract clause, a court must first determine whether the modifications impose an economic disadvantage on affected employees and, if so, whether those disadvantages are offset in some manner by comparable new advantages. The court must then determine whether the government’s articulated purpose in making the changes was sufficient, for constitutional purposes, to justify any impairment of pension rights. Although changes may be enacted “for the purpose of keeping [the] pension system flexible to permit adjustments in accord with changing conditions and at the same time maintain the integrity of the system,” such changes “must bear some material relation to the theory of a pension system and its successful operation.”
- An employee’s vested contractual pension rights may be modified prior to retirement for the purpose of keeping a pension system flexible to permit adjustments in accord with changing conditions and at the same time maintain the integrity of the system. Such modifications must be reasonable… To be sustained as reasonable, alterations of employees’ pension rights must bear some material relation to the theory of a pension system and its successful operation, and changes in a pension plan which result in disadvantage to employees should (emphasis added and note it does not state “must”) be accompanied by comparable new advantages.
- …We hold that the PEPRA amendment at issue here is constitutional under this analysis.
- PEPRA’s amendments of CERL were enacted for the constitutionally permissible purpose of conforming pension benefits more closely to the theory underlying CERL (as amended by PEPRA) by closing loopholes and proscribing potentially abusive practices (“pension spiking”).
- If a payment is made to an employee for the purpose of enhancing his or her pension benefit, it is not paid in return for the delivery of services but for another purpose entirely — to boost the employee’s postemployment pension benefits. This is clear pension abuse, and the express exclusion of such payments from compensation earnable is fully consistent with the theory underlying CERL as amended by PEPRA.
Relevance for LACERS Members and Retirees
- First, the specifics of this Court proceeding are not directly related to LACERS as LACERS was not included in PEPRA — the State pension legislation.
- Further, LACERS has a very specific definition of “compensation earnable” that would not have allowed any of the compensation elements in dispute in these cases.
- That said, these cases reminded me of the old adage: Bad facts make bad law. I thought the filing of the lawsuits consolidated into the Supreme Court case were high risk and low reward. While a decision in favor of the plaintiffs would have benefited a fraction of county employees, there was a small possibility the Court would take the opportunity to blow a big hole in the “California Rule” concept to the detriment of all California public employees – especially as pension funding ratios have decreased over the years.
- The good news is that the Court did not blow a big hole in the “California Rule” as it relates to the fact pattern in this case.
- However, the concerning news – especially in light of the pension system underfunding and the investment outlook with the pandemic – is that the Court indicated that pension changes “may be enacted for the purpose of keeping [the] pension system flexible to permit adjustments in accord with changing conditions and at the same time maintain the integrity of the system.” This wording from the California Supreme Court is one reason why it is important to ensure that the LACERS Board and the City properly fund our pension system. With proper funding, the “integrity” of our system cannot be used as an excuse to reduce our promised benefits.