New ruling builds toward ultimate decision on California Rule for pensions

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A California appellate court’s decision this week is a small victory for advocates of a less stringent interpretation of the state’s constitutional limits on pension adjustments, attorneys said Tuesday.

The Court of Appeal in California's First Appellate District handed down a decision in Alameda County Deputy Sheriffs’ Association et al. v. Alameda County Employees’ Retirement Association, a case relating to the anti-spiking provisions of the Public Employees’ Pension Reform Act of 2013.

The decision is another blow to a long-running interpretation of the so-called “California Rule,” a 60-year-old state Supreme Court ruling generally read to mean that existing employees' benefits cannot be reduced, even for formulas in future years of employment, without offering pension plan participants a comparable advantage in turn.

“What the net result is, is that yes, reasonable modifications have to be made,” said municipal bankruptcy and restructuring expert James Spiotto, managing director of Chapman Strategic Advisors LLC. “Should be allowed."

The state Supreme Court will ultimately decide to what extent public pensions can be changed in the effort to combat underfunding.

The plaintiffs argued that the county can’t legally alter the future pension calculation formula for current employees, because that removes an existing benefit without offering them a new one.

The trial court did not rule in their favor, and they appealed.

The Court of Appeal said in its unanimous 3-0 Monday decision that while it was sending the case back to the trial court to further consider the specific facts of this case, it does not accept the argument that pensioners are absolutely required to be given compensation anytime a pension right is reduced.

In that analysis, the court said it largely agreed with another group of appellate judges in the 2016 Marin Association of Public Employees v. Marin County Employees’ Retirement Association decision.

“Much of Marin’s vested rights analysis—including its rejection of the absolute need for comparable new advantages when pension rights are eliminated or reduced—is not controversial, and we do not disagree with it,” said Monday's opinion, authored by Associate Justice Timothy Reardon.

Case law defines a “reasonable pension” as one which is subject only to “reasonable modification,” the court said, and remanded the case to the trial court for a determination as to the reasonableness of PEPRA’s effects on the Alameda pensioners specifically.

Spiotto said the case is consistent with the Marin decision and others across the country that are increasingly acknowledging that underfunded pension systems require some flexibility to alter benefits in order to remain fiscally sound.

“That’s what I think the trend is in all the decisions across the United States," he said. "You can’t live with an inflexible rule.”

Spiotto is a member of the Retirement Security Initiative, a group that concerns itself with the long-term health of public pension systems and which has generally praised pension reform legislation passed in various states over the past two years.

Chuck Reed, a special counsel at the firm of Hopkins & Carley who was previously mayor of San Jose, said that the Alameda decision ultimately just helps clear the way for the state's top court to have its say.

"The significance of this decision is limited since the Supreme Court will get the last word soon and nothing will likely happen on remand to the trial court until we get a decision from the Supreme Court,” Reed said. “However, it is another decision disagreeing with the most extreme interpretation of the California Rule asserted by the public employee unions.”

Reed is also a member of the RSI.

The Supreme Court of California has already accepted the Marin case, as well as another pension rights case filed by Cal Fire Local 2881, but has not yet signaled when it will take them up. It had previously indicated it was waiting for various cases, including Alameda, to make their way through the appeals process.

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