The California Supreme Court this week will hear a lawsuit that could unravel a piece of Gov. Jerry Brown’s marquee pension law by reinstating a perk he eliminated five years ago.
The high stakes case tests the so-called California Rule, the legal precedent that forbids California government agencies from reducing retirement benefits without offering workers some kind of compensation to offset a loss in income.
If the court sides with Brown, unions worry that future city managers and governors will be emboldened to cut benefits they promised to their workers.
“If the court rules against the California Rule there’s going to be a lot of very nervous public employees and retirees,” said Steve Berliner, a partner in a law firm that advises local governments.
If the unions win, local governments say they’ll struggle to manage rising pension bills, particularly if a recession deals another financial blow to the already underfunded California Public Employees’ Retirement System.
The case centers on “air time,” a benefit that allowed California public employees to purchase credit for their pensions. Buying five years of service credit would have boosted a firefighter’s pension by 15 percent under the pension formulas that were in use at the time.
Brown’s pension law scaled back a range of pension benefits for employees hired after 2013, requiring them to pay more for their retirement plans and reducing accrual rates for their pensions.
The law also banned agencies from offering air time through the California Public Employees’ Retirement System. That change applied to workers who were hired before 2013, too.
In a sharply worded recent filing, Brown’s staff argued government agencies cannot afford to be locked into failing programs. His attorneys have characterized air time as a nonessential benefit that was not funded appropriately.
“Neither the U.S. Constitution nor the California Constitution requires the state to mismanage its affairs and continue a broken system for decades, even after the state has concluded the program is severely (if not fatally) flawed and cannot be implemented as originally intended.”
Union attorneys counter that air time is a fairly insignificant cost to CalPERS and that the state should not abandon it. The more meaningful changes that will strengthen CalPERS, the attorneys say, are the other adjustments in Brown’s law that have public employees paying more for their pensions.
“Our people get it. They get that everything is not hunky dory. Nobody is putting their heads in the sand. They understand the need to pay more. We get it. The question is we just don’t throw out the California Rule because there was a problem in 2008,” said Gregg McClean Adam, an attorney for the Cal Fire union, referring to CalPERS’ recession losses.
The arguments begin on 9 a.m. on Wednesday. The California Supreme Court will provide a live video stream of the hearing on its website., courts.ca.gov.
Attorneys and lobbyists say the case could play out three ways — A win for the union, a win for Brown or a very narrow ruling that weighs in on the validity of air time without addressing the California Rule.
Could ‘air time’ return?
If the unions win, California government agencies would get back in the business of offering air time to their employees.
The Legislature in 2003 passed a law that allowed agencies that belong to CalPERS to begin offering the perk.
It was pitched as a benefit that would not cost anything to cities and other government agencies. Their employees were supposed to pay the full cost that CalPERS would need to invest and secure their pensions.
CalPERS in 2010 reported that 33,000 workers bought additional service credit between 2004 and 2007. Brown’s office in a legal brief noted that CalPERS “underpriced” the plans and that workers who bought the credit tended to retire earlier than their peers.
A big win for the unions also would reinforce the California Rule, making it more difficult for local government executives to propose concessions in contract talks that would reduce pension benefits for current employees.
Will pension promises be taken back?
If Brown wins the case, California government agencies would not have to offer air time benefits, and a serious dent could be put in the California Rule.
At budget press conferences this year, Brown said that he believes future governors and government executives will gain authority to renegotiate pension promises.
“When the next recession comes around, the governor will have the option of considering pension cutbacks for the first time in a long time,” he said at a January news conference.
Pensions costs are climbing because CalPERS is billing cities more money to pay down its debts. The pension fund in 2016 acknowledged it expected to earn less money over time from its investment portfolio and made a corresponding hike in the rates it charges to its members.
Some government executives now contend those costs are “crowding out” their ability to fund basic services.
“Vital services are at risk,” the League of California Cities wrote in a brief supporting Brown in the pension case.
But, Berliner said the California Rule won’t break overnight. Pension commitments are written into state labor laws, and the Legislature would have to modify them for government executives to advance significant changes to the retirement plans they’ve offered to workers.
Gov.-elect Gavin Newsom assured at least one union last year that he’d defend the California Rule. Labor also retains a significant voice in the Democrat-controlled Legislature.
“I don’t think we’ll see monumental changes. I think we’ll see incremental changes,” Berliner said.
A narrow ruling
The state Supreme Court might find a path that lets it weigh in on the validity of air time without overhauling the California Rule.
Lobbyists and attorneys say that kind of ruling would center exclusively on air time, perhaps by calling it an ancillary benefit that is unrelated to an employer’s commitment to workers in a pension plan.
If it takes a narrow path, the court can look forward to a couple more cases in its queue that will test the California Rule. They include cases from Alameda County and Marin County that similarly challenge pieces of Brown’s pension law.