On July 30, 2020, the California Supreme Court gave good government a win when it upheld the state law that outlawed forms of pension “spiking.” The law prohibited public employees from artificially increasing pensions by loading additional compensation into their final year or years of pay. (Alameda County Deputy Sheriff’s Assn v. Alameda County Employees’ Retirement Assn. S247095). Renne Public Law Group represented a successful petitioner in this case.
Although the Court stated that it had no reason at this time to revisit the so called “California rule” – which some believe prevents any significant pension reform – the Court narrowed future application of that rule.
Comparable advantage. Historically, public employee unions have argued that any attempt at pension reform had to provide a comparable advantage to offset any disadvantage. The Court rejected this argument, holding that the law “requires the level of pension benefits to be preserved if it is feasible to do so without undermining the Legislature’s permissible purpose in enacting the pension modification.” In this case, the Court held that providing a comparable advantage was not required because it would eliminate the Legislature’s permissible purpose — to end loopholes that were distorting the pension system.
Permissible modifications. For the first time, the Court provided substance to the long standing rule that pension modifications are permissible if they “bear [a] material relation to the theory of a pension system and its successful operation.” The Court stated that the legislative amendments at issue were “designed to limit pension spiking, the manipulation of compensation to artificially increase a pension benefit.” The Court held that this legislative action, which was intended “to align the express language of a pension statute more closely with its intended manner of functioning directly relates to both the theory of a pension system and its successful operation.” This holding may have positive future applications.
Cost considerations. Many have read prior Supreme Court opinions to reject the argument that the financial burden of pensions on public entities can be a legitimate reason to reform pensions. However, in this case, the Court did not foreclose that argument. The Court described one of its prior opinions as simply rejecting, as “speculative,” a City’s “hypothetical prediction of costs so great as to lead to the pension system’s abolition.” And importantly, the Court identified, as a reason to uphold the anti-spiking law, that “it serves to maintain the system’s financial integrity and discourage gamesmanship in the management of compensation practices.” (Emphasis added.) Bottom line – financial considerations are not automatically foreclosed and may be a factor in the future.
Prospective changes. Although the Court rejected the argument that “prospective” changes in pension benefit formulas were immune from contracts clause protection, the Court suggested that a truly “prospective” modification would be one “that applies only to pension rights accrued after its effective date while preserving unchanged the law applicable to pension rights accrued prior to that date.” Although the Court also stated, in a footnote, that it did not mean to suggest that such a change automatically would be lawful, this may be an open issue.
Other good government rulings. The Court ruled that the legislature, and not retirement boards, has the authority to set the rules on pensions. The Court also ruled that a public agency, like a retirement board, does not have the authority to circumvent governing law by entering into settlement agreements.
Bottom line – a win for public entities, and some potential options for future reform.