California pension ruling limits how many vacation hours workers can count for retirement

A new California Supreme Court ruling on retirement pay for public employees centered on a small amount of money — just one week’s salary for a retired attorney — but it had the potential to be a much costlier decision for government agencies and taxpayers.

The question: How much accrued vacation time can retiring public employees cash out at the end of their careers in ways that boost their pensions? Former Democratic Gov. Jerry Brown took aim at that cashouts, among others, in his 2013 pension reform law, but it was unsettled in courts until now.

The California Supreme Court’s answer: Under Brown’s law, employees can count toward their pension formula whatever amount of vacation their contract allows them to cash out in a single calendar year. 

That sounds simple, but some California government workers end their careers with two months or more worth of accrued vacation time — enough to cash out in increments over several years and increase their retirement pension by hundreds of dollars a month.  

The case that reached the state Supreme Court turned on retired Ventura County Counsel Leroy Smith, who designated October 2019 to October 2020 as his final year of civil service and cashed out 240 hours of accrued time off over that period. 

His contract allowed him to cash out only 200 hours a year and his pension plan, the Ventura County Employees’ Retirement System, would not count the extra 40 hours toward his retirement formula.

Smith and other retired Ventura County employees argued Brown’s law did not specify that the hours had to be in a single calendar year, and they should have been able to count leave cashed out over any 12-month period. 

A state appeals court ruled against them two years ago. Two public safety unions appealed that decision, bringing the case to the high court. They argued that Brown’s pension law does not refer to a calendar year when it discusses cashouts. 

“If the Legislature intended to restrict annual leave cashouts to a calendar year, it would have used the term “calendar year” instead of “each 12-month period,” attorneys for Ventura County attorneys and sheriff’s deputies wrote in a briefing to the court. 

But the Supreme Court found otherwise, pointing to what justices described as the common meaning of a 12-month period and the broader context of what Brown and lawmakers were trying to accomplish when they passed the pension reform law. 

At the time, California’s major pension funds were recovering from two successive blows — first the dot-com bust and then the Great Recession. The law Brown signed trimmed benefits, compelled employees to work longer to earn a full retirement and required them to kick in more money from their paychecks to fund their pensions. 

The Supreme Court ruling conceded that Smith wanted just 40 additional hours to count toward his pension, but the justices noted that other employees could go much further if California allowed workers to “straddle” a calendar year with vacation cashouts. They could effectively double the pensionable cashout if they timed it correctly. 

The justices wrote that it would be “perhaps not so inconceivable as to rank as absurd” to think the Legislature intended for that kind of pension boost in the pension reform law.

The court has previously upheld direct challenges to Brown’s law

The new decision applies to workers and retirees enrolled in California’s county-run pension plans. They operate outside of the statewide pension funds, which are the California Public Employees’ Retirement System and the California State Teachers Retirement System. 

A group of county pension funds wrote a brief to the court urging judges to limit pensionable cashouts to a single calendar rather than a movable 12-month period. They wrote it would be expensive for them to revise retiree benefits if the rules change.

“There is no reason to cause this confusion and undue burden to the (county retirement) systems,” they wrote.