‘California rule’ at center stage in pension dispute

Some thought an appeal of a court ruling blocking a key part of a San Jose pension reform could lead to a high court review of the “California rule,” an issue in an initiative ballot summary issued last week by Attorney General Kamala Harris.

But dropping an appeal of the superior court ruling is part of a settlement of union suits against the voter-approved pension reform that, under a San Jose city council agreement last week with police, could soon be implemented by court action.

Measure B used an option to cut pensions current workers earn in the future: Contribute up to an additional 16 percent of pay to continue the current pension or switch to a lower pension.

The “California rule” is a series of state court decisions widely believed to mean that the pension offered on the date of hire becomes a vested right, protected by contract law, that can only be cut if offset by a new benefit of comparable value.

Because of the rule, most cost-cutting pension reforms are limited to new hires, which can take decades to get significant savings. The rule prevents what the watchdog Little Hoover Commission and others say is needed to get immediate savings.

Namely, cut the pensions that current workers will earn in the future, while protecting the pension amounts they have already earned. It’s allowed in private-sector pensions and all but a dozen states that have something like the “California rule.”

A pension reform approved by 69 percent of San Jose voters in 2012, Measure B, used an option to cut pensions current workers earn in the future: Contribute up to an additional 16 percent of pay to continue the current pension or switch to a lower pension.

The “California rule” decisions made in different circumstances in the distant past could have a different outcome if reviewed by a high court now.

While approving other parts of the measure, Santa Clara County Superior Court Judge Patricia Lucas ruled in December 2013, citing previous “California rule” court decisions, that the option violated the vested rights of current workers.

Former San Jose Mayor Chuck Reed, the Measure B lead author, and others have said the “California rule” decisions made in different circumstances in the distant past, one in 1947, could have a different outcome if reviewed by a high court now.

For example, a legal scholar, Amy Monahan, argued that by imposing a restrictive rule without finding clear evidence of legislative intent to create a contract, California courts broke with traditional contract analysis and infringed on legislative power.

“California courts have held that even though the state can terminate a worker, lower her salary, or reduce her other benefits, the state cannot decrease the worker’s rate of pension accrual as long as she is employed,” Monahan said.

In addition, under the “California rule” a pension increase on the job becomes a vested right that can‘t be cut, even if it’s retroactive (such as SB 400 in 1999), not paid for with employer-employee contributions, and creates an immediate pension debt.

And the “California rule” decisions were made by judges who were in the state pension system. As Orange County unsuccessfully tried to overturn a retroactive increase for deputy sheriffs in 2011, an attorney for the deputies noted the conflict of interest.

An independent actuary expects the settlement to cut costs $1.7 billion over the next three decades.

“Miriam A. Vogel, a retired Court of Appeal justice, clearly told her former colleagues that the court’s decision would affect every pension in the state of California: “(I)t would affect yours, it would affect mine,” former Orange County Supervisor John Moorlach (now a state senator) wrote in the Orange County Register.

Litigation of Measure B was an issue in the San Jose mayor race last fall. The winner, Sam Liccardo, a Reed ally, said “a mayor who will fully litigate — and implement — Measure B reforms” is needed to solve deep city budget problems.

The loser, Dave Cortese, backed by public employee unions, advocated settling the Measure B lawsuits, warning that pension cuts were causing the city to lose police officers, endangering public safety.

“Public unions assert that pensions are inviolable, but California’s high court has never decided whether future benefits are protected under the state constitution,” a Wall Street Journal editorial said after Liccardo’s victory.

A need to rebuild a police department, which dropped from 1,400 members in 2009 to about 960 last month, was said to be a main driver of the police and firefighter settlement negotiated by new city staff and new union leaders.

Firefighters approved the settlement last month. Police said they would not ratify an 8 percent pay raise unless the city agreed to have a court invalidate Measure B and replace it with the settlement.

The police union president, Paul Kelly, told reporters last week he would have taken the settlement deal four years ago before Measure B.

The city wanted to wait until the next scheduled election, November 2016, for voter approval. Last Friday the city council agreed to ask the court to make the change. The police union was voting on the package over the weekend.

Liccardo and Reed said in an op-ed article in the San Mercury News on Aug. 7 that the settlement achieves their goals of reducing “unsustainable” retirement benefits, not adding to $3 billion in unfunded retirement debt, and rebuilding the police force.

An independent actuary expects the settlement to cut costs $1.7 billion over the next three decades compared to police and fire benefits in 2012, the two men said. More savings may come from negotiations with nine other city unions.

Lower pensions for new hires, competitive with other cities, are expected to save $1.15 billion over 30 years, cuts in retiree health care $244 million, and the elimination of a “bonus” pension check $270 million.

“The agreement would not include savings contemplated by Measure B’s mandate for employees to pay up to an additional 16 percent of their salaries for pensions,” Liccardo and Reed said in the article.

“We would need to chase those savings down a long and perilous road, however, spending millions in litigation over several years to appeal to the California Supreme Court. If we failed, we’d lose the $1.7 billion in savings achieved by this settlement, not to mention many more longtime employees who would be likely to resign.”

The city reportedly has spent $4 million on Measure B legal fees. The police union president, Paul Kelly, told reporters last week he would have taken the settlement deal four years ago before Measure B.

In the August issue of the San Jose Police Officers Association publication, Vanguard, Kelly said the union had proposed pension reforms saving tens of millions: “Reed preferred to roll the dice, putting forward the disastrous Measure B. He lost.”

Last week Attorney General Kamala Harris issued a ballot summary of a statewide pension initiative proposed by a bipartisan group led by Reed, a Democrat, and former San Diego city councilman Carl DeMaio, a Republican.

The “Voter Empowerment Act of 2016” would require voter approval of pensions for new state and local government employees, government paying more than half the cost of new hire retirement benefits, and any pension increase for current workers.

The first sentence of the Harris summary of the initiative: “Eliminates constitutional protections for vested pension and retiree healthcare benefits for current public employees, including those working in K-12 schools, higher education, hospitals, and police protection, for future work performed.”

Reed and DeMaio say the initiative would not overturn the “California rule” and allow cuts in the pensions current workers earn in the future. Harris agrees with union attorneys who say that door is opened by giving voters the right to set pay and benefits.

Why is overturning the “California rule” an issue? For one thing, hard-hitting opposition television ads could feature police, firefighters and others held in high public regard warning that their promised pensions could be cut.
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Ed’s Note:  Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.