There have been two major court fights on public pensions in recent years. One deals with how pensions are prioritized during a municipal bankruptcy. The other, how much flexibility state and local governments have to cut future benefits of current workers.
The first ruling happened during Stockton’s bankruptcy.
On Oct. 1, 2014, a federal judge made a verbal ruling against public pension systems by finding that payments for worker retirements can be cut when a city declares bankruptcy. U.S. Bankruptcy Judge Christopher Klein determined that bankruptcy law supersedesCalifornia pension laws protecting retirement checks.
The ruling, however, was never acted on because Stockton limited the bulk of its cuts to bondholders and saved money by endinglifetime health care benefits for its retirees. The city also raised taxes and reduced services, leaving pensions untouched.
The second fight is still playing out.
In a 2016 ruling upholding a lower court’s decision, state appeals court Justice James A. Richman broke from decades of court decisions in finding the Legislature can alter pension formulas for current employees and reduce their anticipated retirement benefits.
A group of Marin County employees had argued that Brown’s 2012 pension changes infringed on their employer’s contractual obligation to provide retirement benefits at the level that was promised on their first day of work. That premise, known as the “California rule,” has left state and local governments with little room to modify retirement benefits except for new hires. It’s also the reason why recent benefit changes have done little to reduce public pension liabilities.
The Marin County case is one of several pension fights that could be considered by the California Supreme Court. In January, another appeals court came to a different conclusion about the “California rule” by deciding in favor of union employees in Alameda, Contra Costa and Merced counties. While the justices agreed there are limits to the California rule, they said benefit adjustments require “compelling evidence” showing that the changes are necessary to the success of the pension system.*
The high court has agreed to take up the issue of the California rule, which could have huge financial implications for California cities, counties, school districts and the state.
In an unusual move, Brown is defending his pension changes rather than the attorney general. His opening brief in another case brought by a firefighters’ union argues that the Legislature retains the right to modify benefits for current employees on prospective work.
Brown predicts the Supreme Court will grant greater flexibility in order to maintain the long-term health of public pension systems.
“The circumstances that first established the California rule are very different then the circumstances today,” Brown said when he released his January 2018 budget proposal. “Several lower courts of appeals with judges, both liberal and conservative, who have taken the position that the employees are entitled to a reasonable pension are not entitled to any remunerations they can imagine. So I think that there’s a rule of reason and based on the idea that the pension system must be maintained.”
* This description was added 4/5/18.