The California Rule on Public Employee Pensions Under Attack: Will We Still Call It The “California Rule” If It Is No Longer The Rule In California?

Category: Published Articles
Date: Feb 19, 2019 09:00 AM

This article was published in Business Law Today on February 15, 2019.

Most public employees in California are eligible to enroll in a state or county retirement system.  These retirement systems are governed by state statutes, known primarily as either the Public Employees’ Retirement Law (“PERL”) or the County Employees’ Retirement Law (“CERL”), depending on the retirement system in question. 

While the legislature enacts statutes to provide benefits in retirement, the California courts have developed what is known as the “California Rule” regarding vesting of these benefits. This judicially created rule states that public employees in California have vested rights in their pension benefits, and therefore begin earning this deferred form of compensation from their very first day of employment. While they may not remain employed long enough to actually receive benefits, as long as they do remain employed, they have the right to keep earning this deferred compensation to be paid after they retire. The courts have held that these pension benefits cannot be modified unless: (1) the modification maintains the integrity of the system; (2) bears some relation to the theory of the pension system; and (3) if the modification results in some disadvantage, it is accompanied by a comparable new advantage. Practically speaking, this makes it difficult for the state legislature to revise pension statutes in order to allow reductions in benefits that had previously been promised to public employees. The result is that promises made years or decades earlier generally cannot be modified despite current exploding costs being absorbed by public employers. 

On September 12, 2012, Governor Jerry Brown signed into law the Public Employees’ Pension Reform Act of 2013 (“PEPRA”) in order to address the looming crisis of increasing pension costs. PEPRA primarily changed the pension benefits that employees hired after its enactment could expect. However, PEPRA also modified some of the pension benefits for existing public employees under both the PERL and CERL. Some of these changes include the discontinuation of the right to purchase service credit not related in any way to prior employment (known as “airtime”), as well as the discontinuation of certain types of compensation in pension calculations, among others. There are currently several cases before the California Supreme Court, which will analyze whether PEPRA changes to existing employees’ pension benefits violated the California Rule. 

On December 5, 2018, the California Supreme Court heard oral argument in Cal Fire Local 2881 v. CalPERS, which it chose to hear first. The state intervened in the case to defend PEPRA. In this case, public employees are challenging PEPRA’s elimination of “airtime.” The appellate court held that employees did not have a vested right to purchase airtime because there was no express language in the statute, or its legislative history, that unambiguously stated an intent by the Legislature to create a vested pension benefit.  Alternatively, the appellate court held that it was permissible to eliminate “airtime” because a pension system was established to compensate for actual work and that, in fact, the option to purchase “airtime” was detrimental to the successful operation of the pension system because it does not relate to any work performed. Finally, the appellate court held that while a comparable new advantage “should” be provided, the term “shall” in prior decisions was not a mandate. If upheld, this decision would mark a serious erosion of California public employee pension vesting principles.  

During oral argument before the California Supreme Court, the justices directed questions at both attorneys to address whether the opportunity to purchase airtime was a vested right. The employees argued that the opportunity to purchase airtime was a vested right upon one’s acceptance of and/or continued employment. The justices challenged this notion because any such rule may be overbroad and may apply to any employment benefit offered to an employee.  Interestingly, the justices did not question either side on whether there needed to be a comparable new advantage provided to employees in exchange for the elimination of the right to purchase “airtime.”

On the other side, the state argued that the legislature never intended for this opportunity be to a vested right, neither expressly nor impliedly. The justices seemed to concede that there was no express language that created a vested right, but questioned whether the legislature could ever create an implied right to a benefit and if so, how. The state responded that there appears to be an implied right to a “substantial, reasonable pension,” but that purchasing “airtime” was not necessary to providing a substantial, reasonable pension.

While it is usually difficult to predict a court’s final ruling based on the questions the justices ask during oral argument, the court could be signaling its direction here given the questions it did not ask. Specifically, the justices did not ask about the heart of the California Rule; whether alternative benefits must be provided whenever a vested right is impaired. Given the other cases pending before the Supreme Court and the nature of the justices’ questions in Cal Fire, the court appeared to signal that it will likely issue a narrow ruling related to airtime itself, allowing major components of the California Rule to be argued in later cases. In any event, even if the Supreme Court overturns the California Rule in full and allows pension benefits to be modified more easily, there is unlikely to be an immediate impact on California public employees nor relief to public employers facing ever-increasing pension costs. Any change to public employee pension benefits must first come from the state legislature. While overturning the California Rule would, in theory, make it easier to modify pension benefits, it would still be up to the state legislature, not individual public employers enrolled in these pension plans, to first make modifications to the state statutes. Absent such statutory change, these benefits will remain largely untouchable, regardless of the court’s ultimate decision.

Partner Steven M. Berliner and Associate Danny Y. Yoo are attorneys with Liebert Cassidy Whitmore, California’s largest education and public sector labor and employment firm. Berliner is the Chair of the firm’s Retirement, Health and Disability Practice Group; he can be reached at sberliner@lcwlegal.com or 310-981-2000. Yoo represents public agency clients in all facets of labor and employment law; he can be reached at dyoo@lcwlegal.com or 310-981-2069.

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