Cal­i­for­nia Pen­sion Case Aired

The Bond Buyer - - Front Page - By Kee­ley Web­ster

LOS AN­GE­LES — Ques­tions came fast and fu­ri­ous at the at­tor­neys ar­gu­ing be­fore the Cal­i­for­nia Supreme Court in a po­ten­tially prece­dent-set­ting pub­lic pen­sion case.

The high court heard oral ar­gu­ments Wed­nes­day in Los An­ge­les in the first of sev­eral cases with the po­ten­tial to weaken or so­lid­ify the sta­tus of the so-called Cal­i­for­nia Rule — a se­ries of de­ci­sions since 1955 that have made it dif­fi­cult for the state and lo­cal gov­ern­ments to re­duce prospec­tive pen­sion ben­e­fits for ex­ist­ing em­ploy­ees.

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

“I feel like I got beat up in there,” Gregg Adam, a partner with Mess­ing, Adam & Jas­mine, said af­ter the hear­ing.

Ahead of the hear­ing, the court clerk warned all the at­tor­neys that the Jus­tices would ask ques­tions in the mid­dle of their re­marks — and that some­times more than one might ask a ques­tion at once.

That proved true. “These are very im­por­tant is­sues and the court asked chal­leng­ing ques­tions of both par­ties,” Adam said.

It re­mains to be seen if the jus­tices will is­sue a far-reach­ing opin­ion or a more nar­row opin­ion in CalFire Lo­cal 2881 et al. v. Cal­i­for­nia Pub­lic Em­ploy­ees’ Re­tire­ment Sys­tem et al.

In an in­ter­view ahead of the hear­ing, Karol Den­nis­ton, a partner with Squire Pat­ton Boggs LLP, said that the 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 that could have more far-reach­ing con­se­quences.

The CalFire case hinges on whether “air­time ser­vice cred­its” are a vested pen­sion ben­e­fit of pub­lic em­ploy­ees en­rolled in the CalPERS pen­sion sys­tem, and if they are a vested right, if the Leg­is­la­ture’s with­drawal of the right through the en­act­ment of the Pub­lic Em­ploy­ees’ Pen­sion Re­form Act (PEPRA) of 2013 vi­o­lated the con­tracts clause of the fed­eral and state con­sti­tu­tions.

Whether the court rules nar­rowly or more broadly de­pends on whether the court de­cides that “air­time” is a pro­tected right, Adam said.

The so-called “air­time” ben­e­fit be­ing de­bated in the CalFire case, al­lows pub­lic em­ploy­ees to buy credit to­ward their pen­sions for up to five years they didn’t work.

It was cre­ated, Adam said, to al­low fe­male state em­ploy­ees to take time off to raise fam­i­lies and to al­low em­ploy­ees to take time off to fur­ther their ed­u­ca­tion with­out los­ing pen­sion ben­e­fits, Adam 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 the Cal­i­for­nia Pub­lic Em­ploy­ees’ Pen­sion Re­form Act, Adam said, the state reached back to undo these ben­e­fits promised to cur­rent em­ploy­ees.

As part of a 2011 pen­sion re­form plan, the gover­nor sin­gled out air­time as a source of fis­cal in­sta­bil­ity, ex­plain­ing that pen­sions “are in­tended to pro­vide re­tire­ment sta­bil­ity for time ac­tu­ally worked and that em­ploy­ers, and ul­ti­mately tax­pay­ers should not bear the bur­den of guar­an­tee­ing the ad­di­tional em­ployee in­vest­ment risk that comes with air­time pur­chases,” the state’s at­tor­neys ar­gued in a brief.

Ac­cord­ing to the state, air­time be­came a po­ten­tial source of un­funded li­a­bil­ity in pen­sion sys­tems and em­ploy­ees were con­sis­tently and sub­stan­tially un­der­pay­ing for air­time. CalPERS also found in a 2010 re­port that em­ploy­ees who bought air­time re­tired at a much faster rate than em­ploy­ees who did not buy air­time, in some cases twice the rate.

“In prac­tice, air­time be­came a po­ten­tial source of un­funded li­a­bil­ity in pen­sion sys­tems,” the state’s brief said.

In his ar­gu­ments for the state, Rei Onishi, the gover­nor’s deputy le­gal af­fairs sec­re­tary, ar­gued that “air rights” are not a vested ben­e­fit, hit­ting on how the courts have tra­di­tion­ally de­fined pen­sion ben­e­fits.

If the court de­cides air time is not a vested ben­e­fit to be­gin with, than it may not see the need to an­a­lyze the larger Cal­i­for­nia Rule, lead­ing to a nar­row rul­ing spe­cific to air time, Adam said.

“I think what­ever opin­ion comes down, it will give greater guid­ance to the Leg­is­la­ture,” Adam said.

Onishi ap­peared to cau­tion the court against ren­der­ing a de­ci­sion that would in­fringe on the Leg­is­la­ture’s au­thor­ity.

The jus­tices asked ques­tions nar­rowly spe­cific to the case at hand, but also asked ques­tions that hinted at the po­ten­tial for a broader rul­ing.

The Cal­i­for­nia Rule has been in­ter­preted to mean a pen­sion ben­e­fit agreed to on day one of ser­vice can­not be al­tered through­out the life of an em­ployee’s ca­reer, even for years he or she has yet to work.

On Wed­nes­day, sev­eral jus­tices pointed out that when the Cal­i­for­nia Pub­lic Em­ploy­ees’ Re­tire­ment Sys­tem changes its as­sump­tions for re­turns, it al­ters the ben­e­fits em­ploy­ees re­ceive if em­ploy­ers and em­ploy­ees don’t in­crease their con­tri­bu­tions to the fund.

Onishi ar­gued that the courts through the Cal­i­for­nia Rule had only pro­tected em­ployee rights to a “sub­stan­tial and rea­son­able pen­sion.”

Jus­tice Mar­i­ano-Florentino Cuél­lar asked Onishi if that meant that short of a com­plete di­vest­ment in re­tire­ment ben­e­fits, if he thought it was all in control of the Leg­is­la­ture. Cuel­lar added that couldn’t the Leg­is­la­ture de­fine a sub­stan­tial and rea­son­able pen­sion as $1.

“So ab­sent clear in­tent, there is no im­plied con­tract that the Leg­is­la­ture can’t prospec­tively change ben­e­fits?” asked Jus­tice Good­win Lieu.

“Yes, in the ab­sence of clear leg­isla­tive in­tent,” Onishi said.

Sev­eral jus­tices quizzed both at­tor­neys about whether they were ask­ing the court to de­ter­mine “where the line is.”

“Cal­i­for­nia’s pro­tec­tions are rooted in statute and some­what dated case law and in­ter­preted un­der the state and fed­eral con­tract clauses, which could al­low for ad­di­tional wig­gle room,” Gurtin Mu­nic­i­pal Bond Man­age­ment wrote in a com­men­tary in early 2016.

In his re­but­tal ar­gu­ments, Adam said the court had the op­por­tu­nity cre­ated a clear rule that has not ex­isted since the Allen case was first de­cided in 1955.

“You need a stan­dard,” Adam said. “We are in a pe­riod of full em­ploy­ment in the state [and clear guide­lines are needed to re­cruit em­ploy­ees to gov­ern­ment jobs]. The state is ar­gu­ing for a non-stan­dard.”

“The Cal­i­for­nia Rule is re­lied on not just in this state, but in other states,” Adam said. “We be­lieve a clear Rule could be ar­tic­u­lated.”

The Supreme Court has 90 days to rule. It won’t nec­es­sar­ily be done with the topic of pen­sions. It agreed in late 2017 to re­view sev­eral Cal­i­for­nia Rule cases. It has been 27 years since the Jus­tices last weighed in on is­sues around the Cal­i­for­nia Rule, Adam said.

The Jus­tices were ex­pected to hear Marin As­so­ci­a­tion of Pub­lic Em­ploy­ees v. Marin County Em­ploy­ees Re­tire­ment As­so­ci­a­tion first. In­stead, the court an­nounced a month ago it would first hear oral ar­gu­ments in the CalFire case.

In an in­ter­view be­fore Wed­nes­day’s court ar­gu­ments, Adam said he thought the Alameda-Con­tra Costa, Merced and Marin cases would be con­sol­i­dated, be­cause those cases raises sim­i­lar is­sues. In those cases, the re­tire­ment boards de­cided they were go­ing to re­duce ben­e­fits af­ter PEPRA passed, he said.

He also thinks it likely that the high court could rule on two cases, but not all five. Both the CalFire and Marin cases have been briefed for the Supreme Court, 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 took of­fice af­ter the law took ef­fect and ended up re­ceiv­ing post-PEPRA ben­e­fits. ◽

Cal­i­for­nia Ju­di­cial Coun­cil

Cal­i­for­nia Supreme Court Jus­tice Mar­i­ano-Florentino Cuél­lar had ◽ues­tions in oral ar­gu­ments Wed­nes­day in a pub­lic pen­sion case.

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