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California Supreme Court to Hear Oral Arguments on Pension Reform Case Next Month

November 13, 2018
The California Supreme Court announced last Thursday that it will hear oral arguments in an important pension reform case on Dec. 5, 2018.
The case — Cal Fire Local 2881 v. California Public Employees’ Retirement System — involves a challenge to a provision of the California’s Public Employees’ Pension Reform Act (PEPRA).
The provision at issue eliminated the option for public employees enrolled in CalPERS to purchase up to five years of service credit (commonly referred to as “airtime”) to add to their pension benefit. The plaintiff, Cal Fire Local 2881, argues that it was unconstitutional under prior California precedent for PEPRA to eliminate the benefit. California courts have previously ruled that modifications of vested pension benefits violate the contracts clauses of the state and federal Constitutions unless they are “reasonable” and necessary to maintain the integrity of the pension system. Courts have interpreted “reasonable” to mean that modifications must provide comparable new advantages to offset any resulting disadvantages to employees. This is commonly referred to as the “California rule.”
The California Supreme Court has an opportunity to reconsider the “California rule” in this case. However, there is also a chance the Court may decide the case on narrower grounds.
The lower court found that the option to purchase airtime was not a “vested” pension benefit because the Legislature did not explicitly state that the benefit could or would not be eliminated or modified in the future. However, the lower court also concluded that even if the airtime benefit was “vested,” it was not unconstitutional for the Legislature to eliminate it because the Legislature acted reasonably. The lower court rejected the “California rule,” and concluded that modifications to pension benefits can be reasonable even if no comparable new advantage is provided to offset a resulting disadvantage.

If the California Supreme Court disagrees with the lower court and finds that the airtime benefit was “vested,” then the Court will likely address the California rule. If the Court agrees that the airtime benefit was not vested, however, then the Court is less likely to address the California rule, because it can dispose of the case on the basis that there are no constitutional protections under the contract clause for benefits that are not vested.
This case has important implications for cities that are facing fiscal hardships due to the unsustainable rise in pension costs, as documented in the League’s Retirement System Sustainability Study and Findings published in January. The League filed a friend-of-the-court brief in the case, which advocated for more flexibility for cities to sustainably manage their pension obligations.
Gov. Jerry Brown has also been a strong advocate for more flexibility in managing rising pension costs. In what can only be characterized as an unusual course of action, the Brown Administration rejected the interveners brief drafted by the State’s Attorney General opting to submit their own brief in this case. Moreover, the Administration drafted a letter in October urging the Court to hear this case while Governor Brown is still in office.
Under the California Rules of Court, once oral argument is held and the Court takes the case under submission, it has 90 days within which to issue an opinion. Any ruling would likely require state legislation to codify any direction given by the Court prior to cities being able to take action. Governor-elect Newsom has expressed concern about rising pension costs, specifically for local agencies but has not gone as far as the Brown Administration about the need for immediate reforms.
For more information on this case and the pension sustainability issue, visit the League’s Hot Issues page.

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