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Judges and pensions: A classic conflict of interest?

The public employees most lightly touched by a pension reform signed by Gov. Brown last month are the judges, whose court rulings on public pensions can affect their own pensions and retirement income.

Judges have the biggest pension formula and make one of the smallest pension contributions. But unlike others covered by the reform, current judges are not expected to pay half the normal pension cost, and new judges do not get a lower pension.

The one way judges are affected by the reform bill: New judges will be expected to contribute half the normal cost of their pensions. That could be about 15 percent of pay, well above the 8 percent that current judges will continue to pay.

Did the framers of the reform bill, AB 340, which was negotiated in private by the Brown administration and legislative leaders, go easy on the judges to reduce the risk of lawsuits in which judges have a personal stake?

“There is no linkage either implicit or explicit of the kind you are describing,” said H.D. Palmer of the governor’s finance department.

Instead, judges are said to receive special pension treatment because they tend to begin work as judges later in life and retire at an older age than most government employees.

The judicial conflict of interest on pensions drew national attention in July when the New Jersey state Supreme Court ruled that judges were exempt from a broad pension reform, a victory for the judges who filed the suit.

In a 3-to-2 decision, the court said paying more for pensions and retiree health care violated a New Jersey constitution ban on “diminishing the salaries” of judges, a protection against retaliation by legislators and executives when laws are struck down.

A Judgepedia website report in April on judicial pensions becoming an issue in several states said “it is clear judges hearing the cases have an undeniable conflict of interest, since any decision they make will also affect their own pensions.”

The website said the New Jersey chief justice, Stuart Rabner, recused himself from the pension lawsuit. But he left the panel because he had lobbied for the reform bill, not because the ruling might affect his own pension.

In a class-action lawsuit to overturn an Illinois law requiring retirees to begin paying for their health care, a retired appellate judge, Gordon Maag, was made the lead plaintiff last July, a move critics said is an attempt to influence his former colleagues.

As Orange County unsuccessfully tried to overturn a retroactive pension increase for deputy sheriffs, arguing violations of the debt limit and a ban on extra pay for work already performed, an attorney for the deputies made a brief argument last year.

“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,” Orange County Supervisor John Moorlach wrote in the Orange County Register last year.

Judges not only can have a conflict of interest when ruling on pensions, but another potential reason to leave them out of reforms is that they also are lawyers, knowledgeable about the inner workings of the law and possibly litigious.

Continuing an old battle, a suit filed last March in San Diego County Superior Court on behalf of about 125 active and retired judges and their spouses, heirs and trusts seeks, among other things, payment for annual inflation adjustments from1970 to 1976.

The suit contends that the Judges Retirement System administered by the California Public Employees Retirement System apparently is prolonging the legal battle in the mistaken belief that its financial obligation ends with the death of the petitioner.

“This constitutes unclean hands on the part of the respondent,” said the suit. CalPERS had no comment because the suit is pending. For inflation adjustments cut four decades ago, the suit seeks repayment with compounded interest, 10 percent a year.

The judges’ suit relies on the widely held view that a series of court rulings mean the pension promised a government employee on the date of hire is a “vested” right, protected by contract law, that can only be cut if offset by a benefit of equal value.

The new pension reform bill gives new hires, who are not vested in current pensions, a lower pension and requires them to pay an equal share with the employer of the normal pension cost, which does not include debt or any “unfunded liability.”

But the bill may touch on the vested rights issue by calling for current employees to pay an equal share of pension normal costs. Most state workers are already paying half the normal cost or more.

The bill raises the pension contributions for roughly a third of state workers from 1 to 3 percent of pay over the next two years, up from current contribution rates of 8 to 10 percent of pay.

For local governments in CalPERS and 20 independent county systems, the bill does not call for an equal split of the normal cost until 2018, allowing time for current contracts to expire and bargaining before an increase can be imposed.

Unions have mentioned a possible lawsuit. But legal action, if any, is not expected until after the Nov. 6 election. Pension reform was pushed to aid passage of Brown’s tax increase, Proposition 30, by showing voters costs are being controlled.

For judges, the reform bill avoids the vested rights issue. Current judges will continue to contribute 8 percent of their pay to pensions, less than a third of the normal cost of about 30 percent of pay. Only new judges are expected to contribute 15 percent.

Judges are covered by two retirement systems. The original, closed to new members since 1994, is a rare pay-as-you-go system lacking an investment fund, which for many pension plans is expected to pay about two-thirds of the cost.

The system has 413 active members, 1,873 retirees, costs the state about $212 million this year and has an unfunded liability of $3.3 billion. Prefunding the system and making the actuarially required contribution would cost $1.5 billion this year.

The second system for judges hired since Nov. 9, 1994, (Judges II Retirement System) has a conventional investment fund, 1,280 active members, 30 retirees, costs the state $56 million this year and has an unfunded liability of $48 million.

The pension formula for both systems is 3.75 percent of final pay for each year served. For a Judges II pension, members must be at least 65 with 20 years of service or 70 with five years. An optional “monetary credit account” is available after five years.

In comparison, the police and firefighter pension formula widely adopted after the trendsetting SB 400 in 1999, now said by critics to be unsustainable, is 3 percent of final pay at age 50. The new reform bill gives non-safety new hires 2 percent at age 62.

The average annual salary in the original judges retirement system was $183,825 during the fiscal year that ended in June of last year. The average salary in Judges II was $179,414.

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 http://calpensions.com/


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