California Supreme Court Hears Pension Reduction Case

But the court might rule on a narrower issue, continuing the controversy over whether the benefits promised employees are fixed for life.

A controversial case over whether pension benefits for government workers can be reduced came before the California Supreme Court Wednesday, but justices at the hearing indicated they might reach a narrow decision on the case, leaving broader questions unresolved.

The court case involves California Gov. Jerry Brown’s 2012 pension reform law that ended the practice of the California Public Employees’ Retirement System (CalPERS) selling “airtime,” which allowed employees covered by CalPERS to buy up to five years of enhanced pension benefits without working those years.

At Wednesday’s hearing in Los Angeles, California Supreme Court Chief Justice Tani Cantil-Sakauye suggested that the selling of air time might not qualify for the protection that courts in the past have given pension benefits because it wasn’t a fixed benefit.

“How does that (airtime) directly affect your pension if it’s only an opportunity to purchase?” Cantil-Sakuye asked lawyer Gregg McLean Adam, who represented the state firefighter’s union, which had sued the state.

Adam insisted that once state workers are hired, the pension benefits they are given on day one of their employment cannot be changed, unless equal benefits are substituted, a stance California courts have held since the mid-1950s, concluding that pension benefits are part of a contract that cannot be broken.

Supreme Court justices also questioned what the intent of the state legislature was when it created the “airtime benefit” in 2003, and whether state lawmakers felt it was a program that could be ended at will.

The questioning leaves a very real possibility that the court could rule on the legislature’s intent on offering the airtime benefit without ruling on the larger question of whether pension benefits can be reduced for state employees hired before Brown’s pension reform act went in effect in 2013.

Workers hired in 2013 and after receive reduced pension benefits and pay more for it than state employees hired before the changes.

Justice Goodwin Liu said there was “no question” that the state could change other forms of benefits offered to workers, such as a discounted insurance plan, and questioned Adam as to why that would be different than airtime.

Adam held to the stance that no pension benefits could be taken away and stated that government workers may have taken their jobs because of the pension benefit package available at their time of employment.

Liu seemed to disagree.  “It seems everything is an inducement to employment,” he said, noting that vacation time and health benefits may also encourage employees to work for the state, and can be taken away.

Rei Onishi, Brown’s deputy legal affairs secretary, told justices at Wednesday’s hearing that state lawmakers who passed the airtime law never intended to create a permanent pension benefit.

Brown has argued since the passage of his pension reform legislation, that pension benefits can be reduced going forward for employee, a tool he said that may be needed by future administrations to reduce pension costs.

Upon questioning from justices, Onishi said that state workers are entitled to a “substantial and reasonable pension” and that eliminating defined benefit pension plans altogether “would certainly raise questions” about whether pension promises were being kept.

At another point, however, in questioning from the justices, Onishi conceded that the governor’s office believed there is no vested right to reducing future pension benefits even if employees were promised those benefits when they went to work for the state.

The Supreme Court is scheduled to rule on the case within 90 days. If it makes a narrow ruling on the case, the issue of vested pension rights still might be decided at a later point.

The court will have a chance to rule on several other cases that also hinge upon the issue of those vested pension rights. It has agreed to hear cases involving pension systems in various California counties taking away pension benefits following Brown’s reform law, such pension benefits paid for being on call but not actually working.

None of those cases have yet to be scheduled for oral arguments by the California Supreme Court and it is also possible the court could send the cases back to the trial courts for more fact-finding.

An ultimate decision by the California Supreme Court on the overall issue of vested pension rights would certainly bring national attention to the issue, particularly in an era where many pension plans are underfunded and have billions of dollars in unfunded liabilities.

The $377.6 billon CalPERS, which is at the heart of the “airtime” case, is only 71% funded.

A dozen other states use a similar approach to California, in effect holding pension benefits as a contractual right. They include Alaska, Colorado, Idaho, Kansas, Massachusetts, Nebraska, Nevada, Oklahoma, Oregon, Pennsylvania, Vermont, and Washington.

The court decision in California would not apply to the other states, but it is expected to be closely watched by them.

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