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Appellate Decision Could Roll Back California Pension Rights

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By Casey C. Sullivan, Esq. on September 07, 2016 3:57 PM

A recent decision out of California's First Appellate District could open the door for benefit reductions for public sector pensions, Bloomberg reports. In that case, the court upheld a 2013 law changing pension benefits calculated in an effort to prevent "pension spiking," or gaming the system in order to retire with an inflated pension.

But, Bloomberg's Romy Varghese notes, the court's decision could open the door for other rollbacks, so long as the pension remains "reasonable" for workers.

The Pension Reform Act and Pension Spiking

California's public pensions are vastly underfunded -- by approximately $475 billion in 2009, according to the court. In 2013, the state legislature passed the California Public Employees' Pension Reform Act, an attempt to reduce some public pension obligations through altering how pensions are calculated.

One of the main targets of the legislation was pension spiking, or boosting compensation during the last years of one's career in order to walk away with a higher pension. To fight pension spiking, the Pension Reform Act made changes to how final compensation was calculated, removing factors such as payments for unused vacation days, payments for waiving health insurance, and any compensation "determined by the board to have been paid to enhance a member's retirement benefit under that system."

Retreating From the California Rule?

Public employees in Marin County sued, arguing that the county had deprived them of bargained for benefits and violated the so-called "California rule." The California Supreme Court clarified that rule in Allen v. Board of Administration. There, the state Supreme Court addressed the constitutional bar against the destruction of vested pension rights for active employees and held that:

any modification of vested pension rights must be reasonable, must bear a material relation to the theory and successful operation of a pension system, and, when resulting in disadvantage to employees, must be accompanied by comparable new advantages.

"Must" was not meant to be given "the literal and inflexible meaning attributed to it by plaintiffs," the appellate court ruled. The Supreme Court was not establishing a mandatory quid pro quo standard, but emphasizing that losses can be offset by reasonable new benefits. And in the Pension Reform Act, that benefit came in the form of increased net monthly compensation through reduced pension contributions.

The employees are planning on appealing the case to the state Supreme Court. In the meantime, however, it could become a model for other states, Bloomberg reports. "Going from an absolute 'no' to a 'yes, if it's reasonable' is a huge shift in the political debate as well as the legal debate," former San Jose Mayor Chuck Reed told Bloomberg. "In order to save their jurisdictions from insolvency, some systems will be motivated to try to make some changes."

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