California Supreme Court stops short of allowing school districts to modify existing pensions

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California Supreme Court building in San Francisco

John Fensterwald

March 4, 2019

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In a highly anticipated but narrow decision on pensions for teachers and other state and local public employees, the California Supreme Court on Monday upheld the elimination of a retirement benefit in the 2012 pension reform law that then-Gov. Jerry Brown championed.

The seven justices also made clear in the unanimous ruling that they were taking no position on the bigger issue that attorneys for Brown and others had asked it to consider: Whether school districts can modify vested pension benefits granted to teachers and other public workers.

School districts have been hoping that the court’s ruling in Cal Fire Local 2881 v. CalPERS would at least partially release them from long-term pension commitments that have caused their pension expenditures for teachers, administrators and hourly employees to double in the past five years. But districts will have to wait for other cases to persuade the court to permit changes to their pension obligations. And then they will have to persuade the Legislature and the governor to allow them to alter the benefits they approved or require employees to pay more toward their pensions.

“The court has yet to answer the fundamental question that keeps educators up at night: Is my pension safe? For that, we must wait for the Supreme Court to decide a forthcoming series of cases,” said Derick Lennox, a lawyer and advocate with Capitol Advisors Group in Sacramento, which represents school districts.

The court’s decision in the Cal Fire case covers public pensions through CalSTRS, the pension fund covering about 950,000 current and past teachers and administrators and retirees; CalPERS, the nation’s largest public pension fund covering other school employees in California like bus drivers and secretaries, as well as state, county and local government employees in California and smaller pension funds in the state.

The Cal Fire ruling is the first of four pension-related lawsuits that the court has agreed to hear. In the other cases, too, lawyers for the state and other public employers are asking the state Supreme Court to reconsider its decisions — dating back seven decades — collectively known as the California Rule. It says that pension benefits in effect when employees are hired create a contractual right that employers can change only under rare circumstances. The California Rule partly got its name because, as the Supreme Court noted in its ruling, few courts outside of California have adopted it.

In their lawsuit, members of a local firefighters union for the California Department of Forestry and Fire Protection, or Cal Fire, charged that Brown’s pension reform law illegally rescinded a decade-old benefit they were entitled to. Called “air time,” it allowed employees to purchase up to five years of credit for work they had not actually done by paying both their own and their employer’s pension contributions. Since a public employee’s pension benefit is partly based on length of time worked, adding “service credit” would create a bigger pension on retirement.

Air time turned out to be more expensive than the Legislature assumed. As a result, the 2012 Public Employees Pension Reform Act, commonly called PEPRA, eliminated it. The law also abolished “spiking” — the subject of another pending lawsuit — that allowed employees to increase the calculation for pensions by adding the value of unused vacation, leave time and other benefits.

Gregg Adam, the attorney for Cal Fire, argued to the Supreme Court that air time and other pension benefits are a form of deferred compensation that employees have earned and rely on in deciding whether to make public service a career. Just as they can’t violate terms of other contracts, governments cannot renege on promised pensions, he said.

Brown was so interested in the case that his legal counsel took charge of the defense from the state attorney general’s office. His attorneys argued that air time didn’t count as a vested right because employees didn’t actually work the time. “Spiking,” though not air time, also created an unfunded liability for CalPERS and CalSTRS by creating retirement benefits that government employers had not contributed toward throughout the employees’ careers.

Both the trial court and the court of appeal agreed with the state’s argument, and so did the Supreme Court. In her decision, Chief Justice Tani Cantil-Sakauye wrote that because air time involved no actual work, it differed from other core pension benefits granted as deferred compensation for work performed. There was also no evidence that the Legislature was conferring a permanent right that would be a constitutionally protected contract. Without that intent, the Legislature had the “discretion” to alter or eliminate the benefit, she wrote.

“We disagree with the decision that the air time didn’t qualify for constitutional protections,” said Adam, “but the court did not take our argument lightly (in its 48-page decision). Stay tuned for the next installment.”

The next case will likely be Alameda County Deputy Sheriff’s Association v. Alameda County Employees Retirement Association, in which deputy sheriffs sued Alameda County for denying their right to calculate the value of unused vacation and in-service leave toward retirement benefits. Three counties interpreted PEPRA as permitting their elimination.

California Rule untouched

Brown’s attorneys and others who filed briefs made a second argument that focused on an earlier court decision that employees do not have an absolute “right to any fixed or definite benefits but only to a substantial or reasonable pension.” That would have opened up the California Rule to scrutiny regarding what constitutes “reasonable” and under what conditions can an employer change the terms of a deal made with employees.

Cal Fire and unions argue that pension benefits can be modified only if a public pension system itself is facing a financial threat, and then changes can only be temporary, until the pension fund is restored to health.

Brown’s attorneys indicated that “reasonable” also applies to the burden on public employers to sustain the pension system. Partly because of the Great Recession, both CalPERS and CalSTRS lost about 25 percent of the value of their investment holdings and their income plummeted. The Legislature imposed sharp rate increases (see accompanying story) to pay down CalSTRS’ long-term unfunded liability — pension obligations it can’t pay — which was $107 billion in the most recent valuation.

In an off-the-cuff comment last year, Brown said he hoped the court would reconsider vested pension rights so that “when the next recession comes around the governors will have the option of considering pension cutbacks for the first time.”

But any attempt to change benefits will face fierce opposition from the California Teachers Association and the California School Employees Association. And districts also may have trouble persuading Gov. Gavin Newsom to change the status quo anyway. Last fall, during the campaign, he told unions that he didn’t support changing the rules for pension benefits they already had been promised.

In a statement on the Cal Fire decision, Ted Toppin, chairman of Californians for Retirement Security, a coalition representing California public employees and retirees, said, “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.”

With one decision in and more to come, groups favoring curbs on public pensions — such as Retirement Security Initiative and Reform California — must now decide whether to move forward with initiatives, possibly for the 2020 ballot, that would amend the state Constitution to override the California Rule to allow flexibility to change employees’ future benefits and convert to 401-K type pension systems.

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