By Ed Mendel
October 10, 2016

Three appeals court justices, citing the alarming view of critics that unaffordable public pensions are headed for the financial cliff, looked for a new way to allow a change in direction and found one.

In a ruling in a Marin County case last August that reformers called a “game changer,” the panel weakened the “California rule” protecting the pensions of current workers. Most cost-cutting reforms have been limited to new hires, which can take decades to yield savings.

One reason unions asked the state Supreme Court to review the new ruling last month is that another three-justice panel, also from the first district appeals court, made an opposite ruling in a San Francisco case last year.

“Not only does the court of appeal opinion conflict with sixty years’ worth of California Supreme Court precedent, it flies in the face of a decision by the same district court of appeal only a year ago,” said the union appeal, arguing that “unanimity of decision” is needed on “vested pension rights doctrine.”

The California rule stems from a state Supreme Court ruling in 1955 (Allen v. City of Long Beach) that the pension offered at hire becomes a vested right, protected by contract law, that can only be cut if offset by a comparable new benefit, erasing employer cost savings.

Pension cuts for current workers in the Marin and San Francisco cases were an attempt to curb employer pension costs that soared after heavy pension fund investment losses during the recession and financial crisis in 2008.

The ruling in the San Francisco case overturned most of a voter-approved cut in a supplemental COLA for pensions, citing the California rule that a pension cut must be offset by a new benefit. The state Supreme Court declined to hear an appeal.

The Marin ruling allows the county, with no offsetting new benefit, to impose “anti-spiking” state legislation enacted in 2012 that prevents current workers from continuing the previously authorized boosting of pensions with standby pay, call-back pay, and other things.

Some suggest the Marin ruling could lead to cuts in pensions current workers earned in the past, even though the ruling is “limited” and the case is about pensions earned in the future. Uncertainty about what could be cut is another reason unions want a high court review.

The California rule, adopted by courts in a dozen other states, is unusal for a number of reasons. Cuts in the pensions that will be earned by current workers in the future are allowed in the dwindling number of private-sector pensions.

Pensions are regarded as deferred salary. Government employers can cut salary, but under the California rule they cannot cut pension amounts current workers will earn in the future, unless there is a comparable new benefit.

“This interpretation is contrary to federal Contract Clause jurisprudence, which holds that prospective changes to a contract should not be considered unconstitutional impairments,” argues Amy Monahan, a legal scholar.

Her 64-page paper, “Statutes as Contracts? The ‘California Rule’ and Its Impact on Public Pension Reform,” is mentioned by reformers such as former San Jose Mayor Chuck Reed, who think cutting pensions not yet earned is the key to curbing runaway pension costs.

Monahan argues, according to an abstract of her article, that California courts have not explained the “basis” for the California rule and have “improperly infringed on legislative power” with “a rule that is inconsistent with both contract and economic theory.”

The state Supreme Court ruling in the 1955 Allen v. Long Beach case gives little or no explanation of why cuts in pensions not yet earned by time on the job should be offset by a comparable new benefit. The main part of the ruling is a single sentence:

“To be sustained as reasonable, alterations of employees’ pension rights must bear some material relation to the theory of a pension system and its successful operation, and changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages.”

Monahan said the court “merely stated the new rule” and as support cited two appellate court rulings that mention the theory of a pension system and note that certain detrimental changes were offset by new advantages.

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