California court opens door to changing public employee pensions

August 22, 2016


California’s perpetual debate over public employee pensions has always revolved about what’s called the “California rule” – a series of court decisions that seemingly prohibit any changes in pension benefits once they are granted.

The debate has intensified in recent years as the California Public Employee Retirement System and other state and local pension systems grapple with multibillion-dollar “unfunded liabilities” for pension benefits and increase mandatory payments from governments to reduce them.

The rule, first enunciated in a 1955 state Supreme Court case out of Long Beach, has often been cited by public employee unions and others as they resist efforts at state and local levels to overhaul pension programs and reduce their heavy costs.

It’s based on clauses in the federal and state constitutions prohibiting the “impairment” of contracts and the assumption that pension benefits are, in fact, protected contracts.

Two years ago, Christopher Klein, a federal judge overseeing Stockton’s bankruptcy, suggested that notwithstanding the California rule, pension benefits could be reduced in a bankruptcy action because “bankruptcy is nothing but the impairment of contracts.”

Klein’s declaration caused tremors in CalPERS, which claimed that, Klein’s declaration notwithstanding, reducing pensions would be illegal because it’s a state agency and therefore had “sovereign immunity” from federal interference.

Klein rejected CalPERS’ position, but the issue was never tested because Stockton refused to consider pension cuts, even though some creditors sought them, and eventually emerged from bankruptcy without them.

Last week, however, a state appellate court in San Francisco ruled unanimously that the California rule is not an absolute bar to modifying pension benefits that employees believe they are due.

The court rejected a challenge by employee unions to Marin County’s implementation of the 2012 pension reform measure enacted by the Legislature and Gov. Jerry Brown.

One provision, adopted by Marin, prohibits “pension spiking” – the practice of counting ancillary payments, such as unused sick leave, in pension calculations.

The three appellate justices – including Brown’s friend and former legal affairs secretary, Anthony Kline – concluded that 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.”

It added, “the Legislature may, prior to the employee’s retirement, alter the formula, thereby reducing the anticipated pension … so long as the … modifications do not deprive the employee of a reasonable pension.”


The ruling, if upheld by the state Supreme Court, punches a very big hole in the California rule, one large enough to accommodate some substantial changes in state and local pension promises to future retirees if politicians or voters are willing to make them.

It brings something new to the pension debate and gives new life, or at least new hope, to pension reformers who have repeatedly collided with the California rule.

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