Benefits & Executive Compensation News

California High Court Upholds Limits to Public Pension Benefits (1)

July 30, 2020, 5:55 PMUpdated: July 30, 2020, 8:42 PM

The California Supreme Court upheld provisions of a law Thursday that stops public employees from boosting their salaries before retirement with unused vacation days and other leave.

In a 7-0 ruling, the state high court said “the legislature must have the authority, discretion, and flexibility” to address problems in state and local pension systems without being required to extend the life of loopholes and opportunities for abuse for the duration of the careers of current employees.

At issue were provisions in the Public Employees’ Pension Reform Act (PEPRA) of 2013 that stopped retirement systems from counting money employees nearing retirement get by cashing out unused vacation and other leave as compensation when calculating pension benefits.

The law’s goal was to help underfunded retirement systems by keeping government employees from boosting their pensions benefits with unused time collected in the one to three years before retirement, a practice known as “pension spiking.”

Various employee groups and unions sued, arguing the state was trying to claw back money that was promised to employees who were in the retirement system before the law took effect.

“Of course we’re disappointed in the ruling,” said David E. Mastagni, a partner at Mastagni Holstedt who represents the Alameda County Deputy Sheriffs’ Association—one of the employee groups that challenged the provisions.

Under court precedent, known as the California rule, public pension benefits in the state can only be changed to save money elsewhere if that change is essentially cost neutral, the unions had argued.

However, the appeals court said broader reductions of pension benefits may be allowed if the government is afraid the retirement system will collapse. But public agencies can’t eliminate or reduce their financial obligations without filing for bankruptcy, the unions said. Doing so violates the contract clauses of the U.S. and California constitutions, they argued.

The California Supreme Court disagreed, finding the challenged provisions of PEPRA meet the requirements of the contract clauses. The provisions were enacted “for the constitutionally permissible purpose of closing loopholes and preventing abuse of the pension system,” the court said.

“Further, it would defeat this proper objective to interpret the California Rule to require county pension plans either to maintain these loopholes for existing employees or to provide comparable new pension benefits that would perpetuate the unwarranted advantages provided by these loopholes,” the court said.

Ambiguous Language

The California Business Roundtable, a group of leading businesses in the state, had asked the high court to revise the California rule, but it declined. That was seen by some as one upside for the state’s public workers in what was otherwise a loss.

“There are positive aspects in that the court upheld the California rule and heightened scrutiny for any modification of pension benefits that are contemplated to save money,” Mastagni said.

The court said legislatures are still “subject to significant constraints” when making changes to public pensions.

Recognizing pension benefits are not immune from change “does not grant carte blanche to the Legislature,” the court said, explaining that “the contract clause requires the level of pension benefits to be preserved if it is feasible to do so without undermining the Legislature’s permissible purpose in enacting the pension modification.”

However, labor attorneys questioned how courts will decide if a change is reasonable.

“Here I wonder if the gaining unanimity caused the decision to be written in such broad, and in my view, ambiguous language,” Gregg McLean Adam, a partner with Messing Adam & Jasmine LLP, said of the court’s 7-0 decision.

“I do fear there’s going to be a lot of litigation until we drill down on what some of this means,” said Adam, who filed a friend-of-the-court brief in the case on behalf of 19 labor organizations representing more than 100,000 retirees and active public employees.

So, both sides have things to celebrate and things to regret in this case, Michael G. Colantuono, a partner with Colantuono, Highsmith & Whatley PC in Grass Valley, Calif., said in an email. Colantuono represents municipalities and filed a fried-of-the-court brief supporting the public pension agencies,

The court’s decision “rejects the invitation to abandon ‘the California Rule,’ but makes an important change to it,” he said, explaining that legislatures can now make changes to pension benefits that could be a net loss to employees under certain conditions.

PEPRA applies to three state pension funds and 20 county funds, which together cover employees in over 2,000 state, municipal, and local districts, and agencies in California, one attorney involved in the dispute said.

The case is Alameda County Deputy Sheriffs’ Ass’n v. Alameda County Employees’ Retirement Ass’n, Cal., No. S247095, 7/30/20.

(Updated with additional context and reporting throughout.)

To contact the reporters on this story: Lydia Wheeler in Washington at lwheeler@bloomberglaw.com; Joyce E. Cutler in San Francisco at jcutler@bloomberglaw.com

To contact the editors responsible for this story: Fawn Johnson at fjohnson@bloomberglaw.com; Brent Bierman at bbierman@bloomberglaw.com

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