On July 30, the California Supreme Court ruled against public agency employee unions attempting to overturn central elements of the Public Employees’ Pension Reform Act (PEPRA) of 2012, while still leaving the so-called “California Rule” intact. This decision is a positive development for public employers because the Supreme Court’s decision approves a modification to existing pension benefits without requiring offsetting benefits. The narrow ruling did not address the issue of strictly cost-saving measures.
Under the “California Rule,” pension benefits promised to an employee may be reduced only if accompanied by comparable new advantages. According to the court, any modification must “bear some material relation to the theory of a pension system and its successful operation.”
Alameda County Deputy Sheriff's Assn. v. Alameda County Employees' Retirement Assn. (Alameda) was filed in 2012 by the Alameda County Deputy Sheriff’s Association, challenging changes made by PEPRA to the County Employees Retirement Law of 1937 (CERL). In particular, PEPRA excluded certain forms of compensation from the calculation of retirement benefits that had been used by employees for many years, including elimination of overtime pay, on-call pay, call-back pay, vacation and sick leave sold back, recruitment bonuses, and other items from pension calculations (e.g., so-called “pension spiking”).
The Alameda County employees filed suit to try to keep those types of pay as pensionable, arguing that PEPRA violates the vested rights of employees protected by the contracts clauses of the state and federal constitution and failed to provide alternative benefits to make employees whole for the reductions. Public employee groups from Contra Costa and Merced counties also filed lawsuits challenging PEPRA that were in the appellate stage; the California Supreme Court combined those suits with the Alameda case.
The Supreme Court held that PEPRA’s changes did not violate contracts by amending CERL, and that PEPRA was enacted for the constitutionally permissible purpose of clarifying existing rules and closing loopholes. Notwithstanding the fact that PEPRA reduced benefits, the Court held that there was no requirement to provide employees with alternative advantages because doing so would defeat the constitutionally proper objectives of the pension system. Even if the modification is based on a legitimate purpose, a decision “to impose financial disadvantages on public employees without providing comparable advantages will be upheld under the contract clause only if providing comparable advantages would undermine, or would otherwise be inconsistent with, the modification’s constitutionally permissible purpose.”
Notably, the Court clearly stated “[b]ecause we conclude that PEPRA’s amendment of CERL did not violate the contract clause under a proper application of the California Rule, however, we have no jurisprudential reason to undertake a fundamental reexamination of the rule.”
CSDA will continue to monitor important decisions affecting public employee pensions. For questions about this decision and how it may impact your district, contact CSDA Deputy General Counsel Mustafa Hessabi at email@example.com.