Tuesday, March 5, 2019
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California Supreme Court:
Legislature Validly Halted Sales of Public Employee Service Credits
Cantil-Sakauye Says Creation of Opportunity in 2003 to Buy Credits to Beef Up Pensions Did Not Create a Vested Contractual Right to the System Being Maintained Perpetually
From staff and wire service reports
The California Supreme Court held yesterday that the Legislature in late 2012 did not act unconstitutionally in stripping public employees of the right to buy up to five years of service credit, boosting their pensions upon retirement.
An employee’s ability to purchase additional retirement service—“ARS”—credit began in 2003 and was ended by the California Public Employees’ Pension Reform Act of 2013 (“PEPRA”). The legislation did not affect those who had purchased credits, known as “air credits,” by the cut-off date of Dec. 31, 2012.
Writing for a unanimous court, Chief Justice Tani Cantil-Sakauye said:
“We conclude that the opportunity to purchase ARS credit was not a right protected by the contract clause. There is no indication in the statute conferring the opportunity to purchase ARS credit that the Legislature intended to create contractual rights. Further, unlike core pension rights, the opportunity to purchase ARS credit was not granted to public employees as deferred compensation for their work, and here we find no other basis for concluding that the opportunity to purchase ARS credit is protected by the contract clause. In the absence of constitutional protection, the opportunity to purchase ARS credit could be altered or eliminated at the discretion of the Legislature. We therefore affirm the decisions of the trial court and the Court of Appeal, which concluded that PEPRA’s elimination of the opportunity to purchase ARS credit did not violate the Constitution.”
No Contract Intended
The Legislature, in creating ARS credits, did not act following negotiations with public employees, and did not create or ratify contractual rights, Cantil-Sakauye said.
“The Legislature simply enacted a statute granting the opportunity to purchase ARS credit,” she explained.
She likened the opportunity to purchase air credits to employees being able to purchase, at their option, additional health insurance benefits.
“We have never suggested that this type of benefit is entitled to protection under the contract clause,” the jurist remarked.
Modifying Rights
The plaintiff, Cal Fire Local 2881, a firefighters’ union, argued that PEPRA violated a series of cases beginning with the 1955 California Supreme Court decision in Allen v. City of Long Beach. There, the high court held that “[a]n employee’s vested contractual pension rights may be modified prior to retirement” but without “comparable new advantages.”
Cantil-Sakauye noted that the holding in Allen “has come to be referred to as the ‘California Rule,’ in part because its breadth has not been widely adopted by other jurisdictions.” Only about a dozen states have adopted California’s approach.
The chief justice went on to say:
“The state and many amici urge us to use this decision as a vehicle to reduce the protection afforded pension rights by modifying or abandoning the California Rule, while plaintiffs and many other amici urge us to leave the California Rule intact. Because we conclude that the opportunity to purchase ARS credit was not a term and condition of public employment protected from impairment by the contract clause, its elimination does not implicate the Constitution. For that reason, we have no occasion in this decision to address, let alone to alter, the continued application of the California Rule.”
Concurring Opinion
Justice Leondra R. Kruger wrote a brief concurring opinion, joined in by Justice Goodwin Liu, in which she elaborated on “why the opportunity to purchase additional retirement service (ARS) credits was not an employment benefit that vested by implication.”
The case is Cal Fire Local 2881 v. California Public Employers’ Retirement System, 2019 S.O.S. 1030.
Greg McLean Adam, of the San Francisco firm of Messing Adam & Jasmine, who represented the plaintiff, commented that the opinion was balanced and showed no inclination on the part of the court to repudiate the California Rule in any future decisions.
“I don’t see anything in this decision that suggests that the court wants to make a radical break from the last 70 years of California law,” he said.
Ted Toppin, chairman of Californians for Retirement Security—which filed an amicus brief in the case—said in a statement:
““There was always some question about whether air time was a vested benefit. The decision was not unexpected.
“More importantly, the Supreme Court leaves intact the California Rule, holding that vested benefits cannot be impaired. Thankfully, the decision protects the retirement security of California’s nurses, teachers, firefighters, school employees and countless other public servants and retirees dependent on their hard-earned pensions.”
Carl DeMaio, chairman of Reform California, said:
“We’re disappointed that the liberal California Supreme Court once again is serving as a barrier to common-sense reform of unsustainable and indefensible gold-plated government pension payouts. These government pension abuses must be reformed or California taxpayers will face a future of higher taxes, fewer services, and bankruptcy in our cities and school districts.”
Rei Onishi, an attorney for the Governor’s Office, said during arguments before the state Supreme Court in December that the plaintiffs would have a difficult time showing that the state Legislature intended state workers to have an “irrevocable right” to purchase additional credits for their pensions. The Legislature had broad authority to change pension benefits for existing employees unless it clearly indicated it intended a benefit to continue, he said.
Chuck Reed, the former mayor of San Jose who has warned about the dangers of unfunded pension debt, said the justices are considering several other pension cases, so they will likely address the California Rule at some point.
“They are very much aware of the serious question, so I don’t see them ducking the opportunity to get some clarification on the California Rule,” he remarked.
Reed backed a measure that passed in San Jose in 2012 that cut benefits for new hires, and he has also proposed a statewide ballot measure to limit public pension benefits. He said that measure was on hold pending the outcome of pension cases before the state Supreme Court.
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