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