A Crack in Public Pension Wall Emerges in California

Many Oregon political leaders believe reforms are needed to public employee pensions to trim costs and plug a swelling unfunded liability, but few think reforms can pass a court test. Now a crack may be emerging in that impenetrable legal wall.

Many Oregon political leaders believe reforms are needed to public employee pensions to trim costs and plug a swelling unfunded liability, but few think reforms can pass a court test. Now a crack may be emerging in that impenetrable legal wall.

A state appellate court ruling in California will be studied carefully for its implications on whether public employee pension benefits are immutable or can be modified.

While unlikely to generate any immediate political response, the court ruling, if upheld on further appeal, could entice state lawmakers in California and elsewhere to explore public employee pension changes in the face of ballooning unfunded liabilities. Oregon’s Public Employees Retirement System unfunded liability has swelled to $21 billion.

The need to allocate more money for state and local public employee pensions has been one of the hardest fought issues in state legislatures around the country. Pension bills that have passed, including in Oregon, have mostly been struck down by courts as unconstitutional.

The Sacramento Bee reported the unanimous ruling by a California state appellate court says there is no absolute bar to modifying public employee pensions. The vested right to a pension “is only to a reasonable pension, not an immutable entitlement to the most optimal formula of calculating the pension,” the court ruling said. “The Legislature may, prior to the employee’s retirement, alter the formula, thereby reducing the anticipated pensions…so long as the …modifications do not deprive the employee of a reasonable pension.”

The effective prohibition of any change to an existing public employee pension provision, called the California Rule, stems from a series of court decisions beating back efforts to trim benefits and reduce costs. You could say there is an Oregon Rule, too.

Oregon’s latest attempt at what legislators called public pension reform was largely thrown out by the state Supreme Court. That’s what makes the new ruling in California intriguing. Does it reflect a crack in the California Rule? If so, how wide is the crack? And, most important, will the crack stand up when appealed to the California Supreme Court?

The genesis of the crack began in the judicial bankruptcy proceedings for the City of Stockton. Federal Judge Christopher Klein said "pension benefits could be reduced  in a bankruptcy action because bankruptcy is nothing by the impairment of contracts,” according to the Sacramento Bee’s reporting.

California’s Public Employees Retirement System (CalPERS) argued reducing state employee pensions couldn’t be ordered by a federal judge. Klein rejected CalPERS’ claim. However, Stockton never tested Klein’s opinion and emerged from bankruptcy without touching public employee pensions.

The appellate court opinion involved Marin County’s implementation of one of the public employee pension reforms included in the 2012 pension reform legislation enacted by the California Assembly and signed into law by Governor Jerry Brown. The provision that Marin County adopted prohibits using unused sick leave to “spike” pension benefit calculations.

There is a long road ahead before anyone will know whether the crack in the California Rule is real and just what it might permit in terms of modified pension benefits. That’s little consolation to lawmakers who will face budget holes and rising pension costs when they return to their state capitals early next year. But it does give them something to watch that could open a new conversation down the line.