Brown suffers major setback on statewide pension reform

Gov. Jerry Brown suffered a significant legal setback this week when a state appeals court dealt a blow to hopes for meaningful pension reform in California.

The decision after five years of litigation over pension spiking could undermine key portions of legislation the governor signed in 2012 to end such abuses and help shore up retirement systems across the state.

The good news is that the decision, issued by a three-justice panel in San Francisco, probably won’t be the final word on the issue. The state Supreme Court had already agreed to hear appeals of two other cases stemming from the 2012 legislation and is expected to take the latest one too.

Each case confronts the question of how much the state can alter retirement benefits without violating past promises to workers. In the two other cases, separate panels of the same appeals court in San Francisco had upheld implementations of Brown’s legislation.

Monday’s ruling broke that momentum, showing that the road to meaningful reform is fraught with legal obstacles.

The ruling blocked a lower court decision that had stopped some of the state’s worst pension spiking in Alameda, Merced and especially Contra Costa counties. Workers there had been able to count large payments for unused leave time as income to inflate their final-year salaries on which their pensions were calculated.

Under a legal doctrine known as the California Rule, pension attorneys across the state have said that once public employees start working, their retire- ment benefits can never be trimmed, even for benefits they haven’t yet earned. The unalterable benefit level was considered a constitutionally protected “vested right.”

For example, a police officer who accepted the job when it included a pension equal to 3 percent of top salary for every year worked would be entitled to accrue benefits using that formula for his or her entire career.

But the costs of current benefit levels in California are strangling local government budgets and are forecast to continue rising. Without the ability to lower the rate of future pension accruals for existing employees, local governments will be forced to raise taxes or forego more public services.

While the 2012 legislative changes generally worked around the California Rule by reducing benefits for new workers, they did alter some pensionpadding practices that benefited existing workers. It’s those reforms that are at issue in the three cases.

One provision eliminated “airtime,” which had allowed employees to increase their pensions by purchasing additional years of service credit at what turned out to be discount rates. Another set of provisions ended pension spiking.

Labor unions contend that, just as their pension benefit formulas cannot be reduced under the California Rule, so too were the airtime and spiking practices unalterable if they resulted in reductions in retirement pay.

The appellate courts ruled in 2016 decisions in an airtime case involving state firefighters and a Marin County spiking case that vested rights are not absolute.

So long as pension modifications are “reasonable,” the court panels said, they do not violate workers’ constitutional rights. Public employees do not have “an immutable entitlement to the most optimal formula of calculating the pension.”

Those rulings gave reformers hope that meaningful alterations to future pension accruals were also possible. But then came Monday’s ruling, involving the spiking cases in Alameda, Contra Costa and Merced counties.

While agreeing that there are limits to the California Rule, the justices in that case set a much tougher standard for changes than the appellate panel in the similar Marin County case.

In the latest decision, the justices ruled that pension benefit adjustments require “compelling” evidence that they are necessary and a showing that the pension system would otherwise have difficulty meeting its financial obligations.

The justices also said that state pension law did not permit the pension spiking that had been allowed in the three counties. But they said it was nevertheless binding because the county pension systems had agreed to permit it as part of legal settlements with the unions nearly two decades ago.

A Brown spokesman said the administration is “closely reviewing the decision and considering next steps.” Anything short of a full-throated appeal to the state Supreme Court would be a concession of defeat.