High court could revisit the ‘California Rule’ in new cases

On March 4, in the case of Cal Fire Local 2881 et al. v. CalPERS et al., 2019 DJDAR 1819, the California Supreme Court issued a much-anticipated opinion addressing a major question regarding public employee pension rights. The issue concerned whether the opportunity held by many, but not all, public employees in California to purchase, at their own expense, additional service credit (known to as "air time") to be used towards the calculation of their retirement allowance, was lawfully eliminated by the California Public Employees' Pension Reform Act of 2012 (PEPRA). While the facts before the court case were limited to the elimination of that specific benefit, the case attracted significant public attention because, in the view of many, it presented the potential for the court to revisit six decades of its precedent which has consistently held that once an individual accepts employment with a California public entity, the pension benefits in effect at the time of acceptance of employment cannot be diminished absent the provision of an alternative benefit that provides a "comparable offsetting advantage." This principle is commonly referred to as the "California Rule." Among those who held the view that the court would alter course were former Gov. Jerry Brown, whose proposals formed the basis of PEPRA. Last year, then-Gov. Brown stated that "There is a lot more flexibility than is currently assumed by those who discuss the California Rule. ... At the next recession, when things look pretty dire, [pensions] will be on the chopping block."

Brown intervened in the case in the name of the state of California, taking the relatively unusual step of using attorneys from his own office as counsel in lieu of the attorney general. That legal team used their briefing to mount a full-throated attack on the California Rule, relying on extrinsic sources that were neither a part of the record before the Supreme Court nor in the PEPRA legislative record. Numerous briefs amicus curiae were filed with the court either in support of maintaining the California Rule in its current form or, in the alternative, adopting the governor's view that it should be modified.

In the end, the entreaties from the governor and amici who supported his position were to no avail with the court, which held that the opportunity to purchase "air time" was not a vested right and, therefore, the elimination of that opportunity did not present a constitutional concern. The court went on to state that: "For this reason, we have no occasion in this decision to address, let alone to alter, the continued application of the California Rule."

While the Supreme Court chose not to revisit the California Rule in Cal Fire, it has granted review in three other cases that similarly involve the validity of changes made to pension laws by PEPRA. Both Alameda County Deputy Sheriff's Association v. Alameda County Employees' Retirement Association and Marin Association of Public Employees v. Marin County Employees' Retirement Association involve changes made by PEPRA that limit the items of compensation that may be included in pension calculations, and Hipsher v. Los Angeles County Employees' Retirement Association presents a challenge to applicability of the so-called "felony forfeiture" provisions of PEPRA as applied to public employees who began their employment prior to PEPRA's enactment. Alameda is fully briefed and is awaiting a date for oral argument, while briefing in both Marin and Hipsher has been deferred by the court pending issuance of its decision in Alameda. Thus, while the court in Cal Fire seemed disinclined to revisit the California Rule, the possibility of their doing so in one of these future cases cannot be dismissed entirely.

The term "California Rule" is something of a misnomer, as 12 other states follow a similar approach with respect to the protection of the right to future benefit accruals, including Oregon, Washington, Oklahoma and Pennsylvania. There are two fundamental flaws in the position of our former governor and those organizations that filed amicus briefs in support of his view that the California Rule should be modified or eliminated, as our firm noted in our amicus brief filed for our client Californians for Retirement Security:

Flaw #1: The status of pension funding in California state and local government is not so dire as to require the extreme solution of allowing public employers to breach the pension promises made to their employees, including teachers, nurses, police and firefighters.

Pension costs for state and local entities as both an absolute number and as a percentage of total entity expenditures vary widely, with significant differences in normal and unfunded liability amortization costs. The reasons for these differences are many, including membership demographics (in particular, the ratio of employees still working to those that are retired), benefit structure, applicable actuarial assumptions, and the allocation of funding responsibility between the public entity and its employees. Pension costs for many jurisdictions remain manageable.

Flaw #2: Modification or Elimination of the California Rule will not reduce the existing pension contribution obligations of California public entities.

To the extent that public entities face increasing pension costs, those increases are in large part attributable to the cost of paying down existing unfunded liabilities, which by definition reflect already-earned benefits and in many instances have been earned by employees who have already retired. For example, for the state of California's peace officers and firefighters, of the required pension contribution almost two-thirds reflects payment towards the unfunded liability. Since that amount is, by definition, reflective of already-earned pension benefits, eliminating or modifying the California Rule would have no effect on the primary driver of currently required employer contributions.

To be sure, there are undoubtedly public entities that are confronting serious budget challenges that are in part the result of increasing pension costs. However, these challenges likely are not just the result of pension costs and result instead from a variety of factors and causes that will lend themselves to a variety of solutions, which in many instances can be and already have been reached through collective bargaining, without eviscerating the pension rights of the women and men working for California public entities.