California Pension Spiking Case Nears End in Court Showdown

Government workers made their final arguments to the California Supreme Court on Tuesday in a controversial case deliberating whether public pension benefits can be reduced by the state legislature. The court’s decision is expected by mid-summer at the latest.

Public sector unions in Alameda, Contra Costa, and Merced counties in California are hoping to strike down a provision in former California Gov. Jerry Brown’s 2012 pension reform law that curbed pension spiking for all employees, including those hired before the law was enacted.

The practice allows workers to increase their retirement income by cashing out balances from vacation days, sick days, or on-call days, and adding them to their final salaries. Unlike many private workers, public employees can accumulate time off throughout their entire working career.

Similar cases from public employees have pushed through judicial courts since the former state governor’s Public Employees’ Pension Reform Act (PEPRA) went into effect.

Lawyers for public sector unions argue that the provision is unconstitutional because it cuts benefits for employees who were hired prior to the law. Employees hired before 2013 could see their retirement payments reduced by up to 15%.

Plaintiffs say that erodes employee trust and sets a dangerous precedent. “The government entered into a financial contract, and then said, ‘I’m not going to pay what I said I’d pay,’” said David Mastagni, the legal representative for Alameda County Deputy Sheriff’s Association, one of the plaintiffs.

But PEPRA supporters argue the reform addresses the state pension system’s funding crisis, which is adding pressure to the California government’s budget. The law also raised the retirement age and increased worker contributions.

When the state Supreme Court discloses its verdict sometime in the next 90 days, it’s expected to have wide-ranging implications for state governments, especially in regard to whether they can make adjustments to state retirement systems. Four of the current seven state justices were appointed by Brown.

That could be of interest to other states, including Illinois, which is struggling under the weight of a massively underfunded pension system, especially as the coronavirus pandemic adds pressure to government budgets. Illinois recently asked Washington for $10 billion to help fund its liabilities.

For investment chiefs, whose returns typically make up 63% of public pension fund revenues, the verdict will determine how much pressure is on them to generate risk-adjusted returns.