California Court Upholds Pension Reform Aimed at Restricting Employee Benefits

We are tracking a California State Court of Appeals judgement last month that may have a profound impact on California’s state and local public pension plans. As municipalities throughout the country face growing pension liabilities, the major impediment to reducing those liabilities has been state court judgements, including those in California, restricting the ability of state and local governments to modify future pension benefits for current workers. Public pension plans have been able to modify pension benefits for new workers, but the ability to cut future benefits for current municipal employees has been severely restricted.

The present litigation was initiated by a Marin County municipal employee union claiming that a pension reform provision adopted by the California legislature in 2012 violated employees’ vested pension rights. The reform had eliminated from the benefit calculation for current employees compensation attributable to unused vacation, bonuses and terminal pay. In essence, the reform restricted what is known as pension spiking from the calculation of future pension payments.

The court decision may have opened the door for modifying future pension benefits for current employees by upholding a lower court decision that the elimination of pension spiking is not an unconstitutional impairment of the workers’ contracts. In the unanimous decision, the appeals court opinion stated that employees have a vested right to a pension, but only to a reasonable pension that the legislature can modify while the employee is still working.

The next stop in the appeals process, if the union decides to continue with the litigation, would be the California State Supreme Court. If California’s highest court were to hear the case and uphold the appeals court decision, it could open the door for state and local governments to reduce their pension liabilities not only by prohibiting pension spiking for current employees, but possibly by reducing future pension payments through altering basic pension formulas.

Source:  California Court of Appeal First Appellate District, Calpensions, East Bay Times