California Supreme Court Hears Oral Arguments in Critical Pension Case

05.07.2020

On Tuesday, May 5, 2020, the California Supreme Court held oral arguments via video conference for Alameda County Deputy Sheriff’s Association v. Alameda County Employees’ Retirement Association.

In this case, labor unions challenged a PEPRA provision that curbed a practice known as “pension spiking,” which in some instances resulted in employees collecting considerably more pay in retirement than they received while they were on the job.  Pension spiking is the practice of adding bonuses, cashing out leave time or using other mechanisms to boost an employee’s final salary and, in turn, pension benefits.

Governor Jerry Brown eliminated pension spiking in his 2012 PEPRA legislation, but the Alameda Deputy Sheriff’s union immediately challenged the provision.  The lawsuit, which made its way to the California Supreme Court earlier this week, sought to restore workers’ ability to count on-call pay, extra pay for working outside normal hours and cash-outs of accumulated leave balances toward their pension benefit calculations.   The Alameda County Deputy Sheriff’s Association argued that pension spiking is a vested right that cannot be abridged for any employees hired before 2013.  The Association argued that pension spiking is a vested right because the option of back loading an employee’s salary was essentially promised to these classic members upon being hired, which effectively lured these employees away from opportunities in the private sector.  Therefore, the right to spike one’s pension cannot be taken away according to the longstanding “California Rule.”  Under the California Rule, public pension benefits are seen as contracts protected under the California and U.S. constitutions and may not be reduced without being replaced with new and equal benefits.  The Association told the Justices, “One person’s pension spiking is another person’s expectation of a promise.”

The State of California, which represented the Alameda County Employees’ Retirement Association, argued that the practice of pension spiking was never legal and that employees cannot have a protected right to an illegal benefit.  The State also argued that eliminating the practice of pension spiking resulted in minimal changes to an employee’s prospective benefit rather than a vested right. 

Only four of the court’s seven justices spoke during this week’s hearing, and those who did speak challenged both sides in the dispute.  Justice Goodwin Liu, Justice Mariano-Florentino Cuéllar, and Justice Joshua Groban challenged the idea that the option to spike one’s pension is merely a prospective benefit.  Justice Liu suggested, for example, that many public employees might have reasonably believed that pension spiking was a legal practice all along, and, therefore, relied on the option to be exercised upon retirement.  On the other hand, Justice Groban asked the Association whether any changes to pensions could be made in light of an economic “doomsday” where agencies might be facing insolvency due to their pension obligations.  The Association responded saying that public agencies can offset this issue at the bargaining table by pushing for higher employee contributions and affirmed that bankruptcy can indeed address an agency’s budget shortfall brought on by pension obligations.  This latter point adheres to a federal bankruptcy court determination from 2015, In re City of Stockton, 526 B.R. 35 (Bankr. E.D. Cal. 2015), which held that pension obligations can be impaired in bankruptcy. 

Based on the oral argument, it is our assessment that the California Supreme Court can come down in one of three ways in this case:

1. Maintain the rigidity of the California Rule and hold that the State cannot eliminate a pension benefit, including pension spiking, without offsetting the change with a new and equal benefit;
2. Issue a limited ruling that avoids the California Rule altogether by holding that pension spiking is not a vested right that implicates the California Rule; or
3. Issue a broader ruling that clarifies the California Rule and explains that the rule is not absolute and allows for reasonable pension changes, especially when the changes are necessary to ensure the retirement system’s continued viability.

We believe the California Supreme Court will likely choose to issue a limited ruling and deem that pension spiking is not a vested right as it did in an earlier related case.  While the Justices might issue an opinion that offers better insight into how vested rights are defined and whether minimal changes to unvested rights are allowed, they will likely avoid addressing the California Rule’s durability in Alameda because the case does not involve a change to a “core” pension benefit.

As noted above, last year the court upheld a separate provision in Governor Brown’s PEPRA legislation against a similar challenge in Cal Fire Local 2881 v. California Public Employees' Retirement System.  The union lost its effort to restore its members’ ability to augment their retirement income by purchasing years of service credit through California Public Employees’ Retirement System.  The court in Cal Fire, however, sidestepped the issues surrounding the California Rule’s protection of as-yet-unearned benefits for current public employees.  

The California Supreme Court might be more inclined to address the California Rule in Marin Association of Public Employees v. Marin County Employees’ Retirement Association, which has been deferred pending the outcome in Alameda.  In Marin Association of Public Employees v. Marin County Employees’ Retirement Association, the appellate court opinion stated: “While a public employer does have a ‘vested right’ to a pension that right is to a ‘reasonable’ pension – not an immutable entitlement to the most optimal formula of calculating the pension. The legislature may prior to the employee’s retirement, alter the formula, thereby reducing the anticipated pension.”  If the court embraces that opinion in a broad ruling, it is possible the California Rule will be addressed.

The California Supreme Court will issue its opinion in Alameda County Deputy Sheriff’s Association v. Alameda County Employees’ Retirement Association within the next 90 days.  We will keep our clients aware of any developments.

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