Pension Reform: Be Clear About Defining the "California Rule"
I just read a recent commentary that described the following as the best definition of the California Rule that the writer had ever seen:
“By entering public service an employee obtains a vested contractual right to earn a pension on terms substantially equivalent to those then offered to the employee.” In other words, one has “the primary right to receive any pension benefits upon retirement as well as the collateral right to earn future pension benefits through continued service, on terms substantially equivalent to those offered.”
The definition omits a critical element to establish whether a government employee has gained the vested right described: namely that a statute or charter, by its terms, legislatively intended to grant a contractual vested right to a pension (or other benefit, like a medical plan).
Also, while included in the above definition, the California Rule refers discretely to the principle that once hired, if granted a vested pension right, the current state of the benefit (pension) cannot be taken away from the employee as to work not yet performed. This is the heart of the Rule.
In our separation-of-powers form of government, only the electorate or a legislative body can enact a charter or a statute that grants one group (government employee unions) a vested non-repealable right to a pension or medical benefits. The three leading cases (Kern v. City of Long Beach, Allen v. City of Long Beach, and Betts v Board of Administration) all contain just a part of the critical element to establish a vested contract right under California law, i.e. a charter or a statute. But in each case, the court failed to describe the precise language in the charter, or statute, that indicated that the benefit was guaranteed even as to work not yet performed. The court simply said that we’ve always interpreted such provisions that way; meaning, “as if” the statute contained the necessary words even though they did not (see Kern).
In the Kern and Allen cases, the court dealt with an attempt by the city to eliminate a pension created by the city charter, just 32 days before Kern would have met the 20-year period to qualify for the pension benefit (50% of salary). The court said: “It is settled in this state that pension rights acquired by public employees under statutes similar to the Long Beach Charter become vested as to each employee.” As to those employed at the time of the repeal, their pension rights were vested. But as to new hires, they obtained no pension rights from the repeal of the Long Beach Charter provision. Also, if Kern had died, quit, or been legally fired prior to the completion of the 20-year requirement, the court implied that he could have lost his pension.
In the Allen case, the court dealt with an attempt by the city to affect that same group of retirees who had been hired while the charter provision referenced in Kern was in effect. After losing the Kern case, the city attempted to increase the contribution cost of those vested employees and to reduce the amount of their retirement. The court noted that there was no claim by the city that the retirement system was destroying the financial integrity of the Long Beach pension system, implying that if a pension system was in financial distress because of its cost, reasonable modifications of benefits would be acceptable to save the system. The court stressed that for this latter test to apply, each case must be considered based on its own facts. There being no threat to the pension system, the reduction of benefits was disallowed.
In the Betts case, Betts’ salary and pension were set by a state statute which, by implication, allowed the court to assume, without any analysis of how the intent had been manifested, that a vested right had been created. So in all three cases, there was a charter or statute which the court assumed indicated a legislative intent to create a vested contract right to a pension. In many cities, like Pacific Grove, the only pension rights ever granted were by short-term contracts, with no charter provision or statute (ordinance) that could have been considered as a basis for a vested pension right. But its city attorney does not recognize the need for a charter provision or statute, let alone legislative intent, to create a vested pension right.
The California Rule as set out in the three cases, has been criticized by scholars because the California Supreme Court did not evince how the specific language of the charter and statute at issue created an in perpetuity vested contract right. And in fact the legislative intent to create a vested right could not have been shown in the Long Beach or Betts cases because no such language existed. In California, there is a presumption that a statute or charter does not create a vested contract right and that a legislative body can always repeal prior acts. So, the criticism is that because the charter and statute in the seminal cases establishing the California Rule in fact did not contain any reference to a vested pension right “for work not yet performed,” the court was guilty of improperly legislating.
It is interesting that in the Retired Employees Assn. of Orange County case, decided in 2011, the current Supreme Court did state that to create a vested contract right (arising from a charter or statute) to a pension or health insurance benefit, the retiree needed to show that at the time of enactment of the charter or statute that was the basis for the vested right claim, there was a clear legislative intention to create a vested contract right. In that case, at trial, it was determined by the trial court that the Retired Employees Assn. had failed to show that intent, and their claim was denied (denial upheld by the 9th Cir. Ct. of Appeals Decision filed Feb. 13, 2014). Has the California Supreme Court seen the light? Will it henceforth actually require language in the charter or statute that clearly shows the language that created a vested right to a pension “for work not yet performed?”
Long Beach went for five years after the repeal referenced in the Kern case without any pension benefit for new hires. Then it committed pension suicide by joining CaLPERS(Although who could have know what a Monster CaLPERS would become from 1998 to the present). It is interesting that CaLPERS allows public agencies (like cities and counties) to withdraw from the system, so a contract with CaLPERS should not create vested rights.
Modification of Vested Rights under the California Rule
In the Allen case, the court said: “An employee’s vested contractual pension rights may be modified prior to retirement for the purpose of keeping a pension system flexible to permit adjustments in accord with changing conditions and at the same time maintain the integrity of the system.”
The court went on to comment on the instant case: “… there is no evidence or claim that the changes enacted bear any material relation to the integrity or successful operation of the pension system…” (citing Kern).
Keep in mind that in 1947 (Kern) and in 1955 (Allen), there was not an issue, as now, of whether monarchical pension rights would destroy democracy in California cities and counties. But the Kern and Allen court was held in high esteem for its quality and pragmatic legal opinions. The sections quoted immediately above should be given a reasonable interpretation. In my opinion that interpretation means that if the cost of a pension system, in the reasonable opinion of its legislative body, is so onerous as to prevent the agency from providing services required by its police powers, then the cost of the pension system should be reducible for services not yet performed. The decision of the legislative body would only be reversible if, based on the facts, the legislative decision was “arbitrary or capricious.”
Is there any evidence or case law that indicates that “my opinion” regarding the standard for reducing pension benefits is correct? Absolutely. In the Kern case, the court gave two examples of reasonable modifications: “The kind of modification that has been upheld is illustrated by Brophy v. Employee’s Retirement System where the court sustained an amendment made before the time of retirement, reducing the monthly amount to be paid to retired employees engaged in gainful occupations.” And, “It has also been held that a pension could be reduced prior to retirement from two-thirds to one-half of the employee’s salary.” The court went on to confirm that whether modifications were reasonable required an analysis of the facts of each specific case, to determine whether the pension system was so costly as to undermine its integrity. Both of the examples were major modifications.
But what about the old saw that you can only modify a pension if the employee receives something of comparable benefit? It is obvious from both Kern and Allen that that rule only applies to a case like Kern and Allen where no financial burden was claimed or existed. In those cases, the integrity of the pension system was not at issue. But in Pacific Grove, Sonoma County, San Jose, Stockton, Vallejo, and many other California agencies, the cost of pensions has destroyed the ability of the agencies to pay pensions (except by creating huge deficits) and has destroyed their ability to provide governmental services. Per the Kern and Allen cases, those entities should be able to modify pensions for work not yet performed.
States that do not follow the California Rule have rules similar to California concerning the vesting of pension rights for work already performed. What is different is that in states that follow the rule, pensions cannot be modified for “work not yet performed.”
However, even in California, as both Kern and Allen cases state, if a pension system for a city or county becomes so expensive that it threatens the very existence of that pension system, reasonable and substantial modifications may be made.
CaLPERS and government employee unions have greatly exaggerated both the scope of the California Rule and the rules for modification of onerous and destructive pension systems. Bad law especially results when the attorneys for the public agencies personally benefit by the mis-statements of the law and perpetuate the exaggerations. Unfortunately, even pension reform associations have fallen for and repeat the exaggerations. Read the cases. In my opinion, there is one golden rule of pension reform: Elect a majority of pension reformers to the legislative body of the public agency that controls pension decisions.
* * *
Read “THE FALL OF PACIFIC GROVE,” also by John Moore, published earlier this year.
The Fall of Pacific Grove – How it Began, and How City Officials Fought Reform
– Part 1, January 7, 2014
The Fall of Pacific Grove – How City Thwarted Reform, and CalPERS Squandered Surpluses
– Part 2, January 14, 2014
The Fall of Pacific Grove – CalPERS Begins Calling Deficits “Side Funds,” Raises Annual Contributions
– Part 3, January 21, 2014
The Fall of Pacific Grove – Outsourcing of Safety Services Causes Increased Pension Deficits
– Part 4, January 28, 2014
The Fall of Pacific Grove – Anti-Pension Reform Mayor Claims to Favor Reed Pension Reform
– Part 5, February 3, 2014
The Fall of Pacific Grove – Privately Owned Real Property are the Only Assets to Pay for Pensions
– Part 6, February 11, 2014
The Fall of Pacific Grove – The Cover-Up by the City After the Hidden Actuarial Report Surfaced in 2009
– Part 7, February 18, 2014
The Fall of Pacific Grove – Conclusion: The “California Rule” Cannot Stand
– Conclusion, February 24, 2014
* * *
About the Author: John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar and a member of the “Public Law” section of the State Bar. John graduated from San Jose State College with majors in Political Science and Economics (summa cum laude). He then received a JD from The Stanford School of Law and practiced business and trial law for 40 years before retiring. In 1987, he was the founding partner of a Sacramento law firm that he formed in 1987 to take advantage of the increased bankruptcies brought about by the Tax Act of 1986. Although he did not file and manage bankruptcy cases, he represented clients in numerous litigation matters before the bankruptcy court, including several cases before judge Klein, the current judge of the Stockton bankruptcy case. He is an admirer of Judge Klein, for his ability and accuracy on the law. As managing partner, he understood the goals of bankruptcy filings and its benefits and limitations.