The California Supreme Court has an opportunity to correct its mistakes and enable state leaders to rein in excessive public-employee pension costs.
Two appellate courts recently ruled that state lawmakers may alter retirement benefits for current employees. They said workers’ pension rules may be changed during their careers so long as they still receive “reasonable” benefits.
That’s a radical departure from decades of rulings suggesting pension benefits could not be reduced. Once granted higher accrual rates, workers were thought to be permanently entitled to them.
Whether the Supreme Court agrees will profoundly affect California lawmakers’ ability to slow soaring retirement costs strangling state and local governments.
It also might enable practical unions to negotiate changes for current employees, depending upon how broad the decision is.
Before San Jose’s pension reform discussions devolved into a ballot measure-lawsuit morass during former Mayor Chuck Reed’s administration, police union leaders said they’d be willing to negotiate small rollbacks that would save the city millions in the future and still provide reasonable pensions. But they were prevented by law from making that kind of deal on behalf of officers.
As background, remember that pension calculations rely on three factors: an employee’s years on the job, final salary and a multiplier determined by the worker’s retirement age.
The latest appellate court ruling, issued Dec. 30, pertains to years on the job. Under a 2003 law, workers could purchase “airtime,” credit for extra years they didn’t actually work.
“While a public employee does have a ‘vested right’ to a pension, that right is only to a ‘reasonable’ pension — not an immutable entitlement to the most optimal formula of calculating the pension,” wrote Associate Justice James Richman.
The benefit was supposed to be cost-neutral. The California Public Employees’ Retirement System would calculate the airtime price based on how much it expected to earn from investments.
But CalPERS consistently overestimated future investment returns and underestimated the lifespan of retired workers. Consequently, CalPERS did not charge enough for airtime. And workers got a sweet deal at taxpayers’ expense.
The Legislature and Gov. Jerry Brown in 2012 ended airtime. State firefighters sued, claiming they were permanently entitled to the benefit.
The appellate court disagreed, noting that airtime wasn’t for actual work and workers theoretically didn’t lose anything because the benefits were supposed to be cost-neutral. Besides, the court said, state lawmakers can alter benefits as long as they’re reasonable.
The earlier appellate court ruling, issued in August, pertains to the salary used for pension calculations. A separate 2012 bill ended schemes county pension systems had permitted that inflated final salaries.
Marin County workers sued, claiming they were promised they could spike their pensions so they were legally entitled to do so. The appellate court rejected that argument.
“While a public employee does have a ‘vested right’ to a pension, that right is only to a ‘reasonable’ pension — not an immutable entitlement to the most optimal formula of calculating the pension,” wrote Associate Justice James Richman.
The Supreme Court has said it will review that ruling and similar pending cases from Contra Costa, Alameda and Merced counties.
If it agrees with the “reasonable” standard, that could also affect California’s ability to roll back overly generous benefit formulas.
Currently if a government employer increases the formula for a worker, it can never reduce it. Changing that and reducing future benefit accrual rates could profoundly reduce California pension costs.
That would be real reform.
