PD Editorial: A court ruling opens a path for pension reform

A Marin County lawsuit may be a game-changer for pension reform.

The lawsuit, filed by public employees seeking to thwart recently enacted state restrictions on pension spiking, produced an appellate court ruling that instead promises greater flexibility for public agencies saddled with crushing unfunded liabilities.

In a 39-page ruling issued last week, a three-judge panel of the state’s 1st District Court of Appeal examined and rejected a common argument that pension benefits for public employees in California can only be increased, never reduced or adapted to changing financial circumstances.

Further appeals are possible, so the ruling may not be final.

So there’s no confusion: pension benefits for retired public employees aren’t at stake in this case and won’t be affected by the outcome.

However, the appellate decision would affirm that public employers have some leeway to adjust unaccrued benefits for present employees through collective bargaining or legislation to “maintain the integrity of the system.”

“While a public employee does have a ‘vested right’ to a pension, that right is only to a ‘reasonable’ pension - not an immutable entitlement to the most optimal formula of calculating the pension,” Justice James Richman wrote.

A pension reform law enacted four years ago applies primarily to state and local employees hired after Jan. 1, 2013. One exception is spiking. The law ratcheted back the use of non-salary compensation such as bonuses and payouts for unused vacation in calculating retirement benefits for all public employees, regardless of when they were hired.

A group of Marin County employees sued, contending that any reduction in benefits for present employees without a replacement benefit of equal value is unconstitutional – a violation of what’s commonly called the California rule.

Richman’s decision called the scope of the rule into question. He reviewed a series of court decisions over several decades, noting that all but one said any reduction or modification of retirement benefits “should” be matched by a comparable new benefit. One case, and it isn’t the most recent, said “must” rather than “should,” and that case has become the basis for arguments that benefits are, effectively, untouchable even if they threaten to break the bank.

In the case of the Marin County employees, Richman noted that the new pension spiking rules were accompanied by a reduction in withholdings from their paychecks.

“Put simply,” he wrote, “the benefit is an increase in the employee’s net monthly compensation. Put even more simply, it is more cash in hand every month.”

Addressing the broader scope of pension benefits, Richman concluded that “short of actual abolition, a radical reduction of benefits, or a fiscally unjustifiable increase in employee contributions,” public employers may make “reasonable modifications” to pension plans for current employees.

The decision, if it withstands possible appeals, gives new leverage to public agencies whose pension liabilities have grown to alarming levels as a result of retroactive benefit increases and crippling investment losses experienced by public pension funds.

The next big test may be the willingness of elected officials to follow the 1st District Court of Appeal’s lead and pursue cost-saving changes to retirement plans.