In California, New Ruling Called ‘Existential Threat’ to Pensions

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

The views of two CalSTRS attorneys show how an appellate court ruling weakening the “California rule,” which prevents changes in the pension promised at the date of hire, has alarmed and perplexed public pension officials.

Reformers hailed the decision in a Marin County case last month as a long-sought way, if upheld by the state Supreme Court, to control runaway costs by cutting pension amounts current workers earn in the future, while protecting pension amounts already earned.

But last week, the CalSTRS board was given a broader interpretation of the ruling by its fiduciary counsel, Harvey Leiderman. He seemed to suggest the ruling might open the door for cuts in pension amounts already earned.

“This ruling in my opinion poses an existential threat to the defined benefit (pension) plan,” Leiderman said.

The CalSTRS general counsel, Brian Bartow, outlined a case-by-case rebuttal of the appellate court ruling, calling it an “abomination,” a biased “result-oriented opinion,” and a view of 61 years of California jurisprudence through “a fun-house mirror.”

Bartow said the appellate court ruling that a comparable new benefit is not needed to offset reasonable cuts in pensions “undermines the entire theory of pensions” and is causing confusion.

“People like me, and even other lawyers who are more steeped in vested rights jurisprudence, are shocked, don’t know what to do,” he said. “It comes out of left field.”

Bartow said the ruling by a three-justice appellate court panel can only be appealed to the state Supreme Court by the parties in the case, the Marin County pension system and several unions. He said the deadline for an appeal is Sept. 26.

Meanwhile, Bartow said, the appellate court ruling has been “published,” which means lower courts can cite it as a precedent. He said anyone can ask the state Supreme Court to “depublish” the decision before the deadline on Oct. 16.

Leiderman said the CalSTRS board should watch the case carefully and possibly take legal action on behalf of the members. He said there is a CalSTRS precedent for similar action.

Bartow said he thinks the only correct role for CalSTRS would be to avoid taking sides in the local dispute and seek “depublishing,” leaving the court decision in force in Marin County but not as a legal precedent for pension systems throughout the state.

After a suggestion from Leiderman, the California State Teachers Retirement System board went into closed-door session to further discuss possible legal strategies and impacts on the pension system.

Leiderman told the CalSTRS board that the ruling in the Marin County cases is an “existential threat” to public pensions because it has the effect of taking the word “defined” out of the phrase “defined benefit.”

For example, he said, the pension formula covering a teacher for nearly 30 years might, in the year before retirement, be changed to a lower formula if the Legislature thinks it’s is a reasonable benefit.

“That means COLAs are at stake, that means formulas are at stake, that means the entire defined part of a defined benefit would no longer be valid,” Leiderman said. “So this is a threat to the entire membership’s benefit structure, if this case were to become final or if the Supreme Court were to uphold it.”

(Pensions are a “defined benefit” guaranteeing a monthly payment for life. A “defined contribution,” like the 401(k) plan common in the private sector, is a payment into a worker’s retirement investment fund that, depending on the market, can gain or lose money.)

Grant Boyken, state Treasurer John Chiang’s board representative, asked for a clarification of Leiderman’s suggestion that pensions already earned might be cut. He said the Marin case was about “prospective” pension amounts to be earned in the future.

“I think the court went out of its way in the language in the decision to limit its holding to prospective changes for existing members,” said Bartow. Leiderman did not reply to Boyken’s question in open session.

Under a series of court decisions known as the “California rule,” a key one in 1955, the pension promised at hire is widely believed to become a “vested right,” protected by contract law, that cannot be cut unless offset by a comparrable new benefit.

So, most cost-cutting pension reforms only apply to new hires, who have not yet attained vested rights. That can take decades to yield significant saving for employers, which is why reformers want to cut pensions earned by current workers in the future.

Marin unions contended the vested rights of current workers were violated when the Marin County Employees Retirement Association imposed state legislation enacted in 2012 to prevent “spiking” pension boosts from stand-by duty, in-kind health care, and other things.

Three similar union suits filed against the Contra Costa, Alameda, and Merced county pension systems were consolidated. Leiderman, also an attorney for the Contra Cost and Alameda systems, said arguments are scheduled to begin soon.

Bartow speculated that if the Marin ruling is appealed, as he expects, the state Supreme Court may await the outcome of the three consolidated suits in the appellate court before acting on the issue.

CalSTRS followed the “California rule” in legislation two years ago that will raise the rate school districts pay to CalSTRS from 8.25 percent of pay to 19.1 percent by 2020, while the rate for teachers was limited to an increase from 8 percent of pay to 10.25 percent.

The comparable new benefit offsetting the 2.5 percent rate hike for current teachers vested a routine annual 2 percent cost-of-living adjustment, which previously could have been suspended, though that rarely if ever happened.

Part of the Marin appellate court ruling is that a key 1955 state Supreme Court decision said pension cuts “should” be accompanied by a comparable new benefit, which is advisory, and only one high court ruling since then has used the mandatory word “must.”

Bartow argued that in several of the cases where the Supreme Court said “should,” the pension cuts were overturned because there was no comparable new advantage. He said the Marin ruling ignores the “actual and complete analysis in each of those cases.”

In what Bartow said he would “describe as a face-palm inducing aside,” the Marin ruling said that if reasonable cuts are made in pensions, the comparable new advantage or benefit is more money in paychecks because the lower pension results in lower employee rates.

Leiderman said a different panel of justices in the same appellate court cited the same cases as the Marin ruling, but made the opposite decision about vested rights in a case about cost-of-living adjustments in San Francisco pensions.

“That was last year — same appellate court, 180 degrees different view of vested rights,” Leiderman told the CalSTRS board. “The Supreme Court didn’t accept the petition (to review the appellate court decision). It’s hard to know.”