California Supreme Court to hear potentially precedent-setting pension case

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The California Supreme Court will hear oral arguments Wednesday in the first of several cases that could challenge the California Rule — a series of decisions since 1955 that have made it difficult for state and city governments to make changes to pensions for existing employees.

The court cases pending before the state’s higher court have garnered broad attention in California and nationally, where laws similar to the California Rule have prevented significant pension reforms as states and municipalities struggle with increasing pension liabilities.

The rule has been interpreted as a bar against changes to any existing employee benefits.

The case to be heard Wednesday, the California Department of Forestry & Fire Protection, (CalFire), v. California Public Employees’ Retirement System, hinges on whether “airtime service credits” are a vested pension benefit of public employees enrolled in the CalPERS pension system. And if they are vested rights, did the Legislature’s withdrawal of this right though the enactment of the Public Employees’ Pension Reform Act (PEPRA) of 2013 violate the contracts clause of the federal and state constitutions.

California Gov. Jerry Brown has been urging the court to act before his time as governor comes to an end. Successor Gavin Newsom was elected Tuesday and will replace the termed-out Brown in January.

Conventional wisdom among attorneys is that the higher court will issue a narrow ruling on the specific issues in the CalFire and other cases, rather than making a broader ruling on the California Rule, said Karol Denniston, a partner with Squire Patton Boggs LLP and an expert in pension and bankruptcy law.

“There is an expectation that the narrow ruling will apply to the other cases,” Denniston said. “I don’t think the court wants to hear all of those cases, because they raise similar issues in respect to the California Rule.”

It will be up to the high court as to whether something precedent-setting regarding the California Rule comes out of the case, said Gregg Adam, a partner with Messing, Adam & Jasmine, who represents CalFire.

“The state has argued and lower court agreed we don’t need to get into the California Rule, because this not a really a pension benefit or the kind protected by the vested rights rule,” Adam said.

If the Supreme Court agrees, Adam said, then it might not get into the California Rule and how it’s applied. But, he said, the court could also decide on a looser standard than what has been read by the lower courts.

According to Adam, the issues are: Is this pension benefit a vested right? And if it is a vested right, does the California Rule apply to it? And has the California Rule been correctly understood by every court that considered it from 1955 to 2016?

The CalFire case is one of five cases of which the state Supreme Court has granted a review.

A case from Alameda was consolidated with Contra Costa, Merced; and the Marin case should be consolidated with those, because it raises similar issues, Adam said. In those cases, the retirement boards decided they were going to reduce benefits after PEPRA passed, he said.

A fourth case involves a firefighter who pleaded guilty to being involved in a gambling ring. The Legislature passed legislation under which it could eliminate the benefits of state employees convicted of a felony. The intention or the legislation had been to prevent government employees convicted of financial crimes such as embezzlement from benefiting from their crimes by receiving large pensions.

The fifth case involves judges who were appointed to the bench before PEPRA took effect—and were promised pre-PEPRA benefits—but who took office after the law took effect and ended up receiving post-PEPRA benefits.

“I don’t think it’s likely the Supreme Court will issue a ruling on five cases, I think it will be two,” Adam said.

The so-called "airtime" benefit being debated in the CalFire case, which allows employees to take up to five years off, and not suffer from reduced benefits, was originally created to allow female state employees to take time off to raise families, Adam said. It was also created to allow employees to take time off to further their education, he said.

“The employee is supposed to pick up the entire cost of airtime by purchasing up to five years of credits,” Adam said. “It is not supposed to cost the state a dime.”

He acknowledged that mistakes have been made in how it was administered. Through PEPRA, Adam said the state reached back to undo these benefits promised to current employees.

“That is why we are fighting it,” Adam said.

If the plaintiffs win in five decisions, it would only marginally affect PEPRA, at best, Adam said. The lion's share of changes and savings in PEPRA are unaffected by issues before the court. The vast majority of the changes in PEPRA have been embraced by employees and employers alike, he said.

"We can't continue in this unsustainable system," said Chuck Reed, special counsel for San Jose, law firm Hopkins & Carley, and a leader in pension reform efforts.

The current system means that retirement benefits are just stuck and non-negotiable for current employees, Reed said.

"All of the cases on PEPRA raise the same issues and it has to do with spiking," Reed said. "So, it doesn't matter which of them goes first, it just happened to be CalFire."

There were five amicus briefs filed in support of the governor's position, some of which Reed said he worked on.

"I helped some of those groups to make sure it wasn't just public employee unions weighing in on the case," Reed said.

The costs of pensions and healthcare have been rising faster than local government revenues even during the nine years of the economic recovery, Reed said.

"When a recession comes local governments will have little ability to cope with rising prices," Reed said. "Some cities will be facing insolvency and maybe bankruptcy. Local governments just don't have the capacity to raise taxes that the state of California does."

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Litigation Public pensions Pension reform State of California California
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