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Did CalPERS Use Accounting “Gimmicks” to Enable Financially Unsustainable Pensions?

Gimmick – a concealed, usually devious aspect or feature of something, as a plan or deal.
– Dictionary.com

In the past week, from Millbrae’s city hall to the inner sanctum of the CalPERS leviathan in Sacramento, defenders of pensions have been active. In particular, they have criticized the recent analysis, published by the California Policy Center, “How Much More Will Cities and Counties Pay CalPERS?” It would advance the ongoing debate over pensions to summarize the points of the CPC analysis, how CalPERS and their allies attacked those points, and how those attacks might be challenged.

On January 19th, in a report published online by Chief Investment Officer magazine entitled “CalPERS: Ring’s Flippant Claim of ‘Tricky Accounting Gimmicks’ Is False,” author Christine Giordano interviewed CalPERS spokesperson Amy Morgan. Tellingly, they did not discuss the substance of the CPC analysis, which specified, using CalPERS’ own data, how much more cities and counties are going to have to pay CalPERS. They focused instead on specific criticisms of CalPERS that followed those payment calculations.

As noted by the title of the report, CalPERS spokesperson Amy Morgan seemed to suggest the characterization of their accounting practices as employing “gimmicks” is not backed up by evidence. Morgan is invited to review the following evidence, after which she may join our readers in deciding whether or not “gimmicks” were employed.

GIMMICK #1  –  THE CORRUPTION OF “ASSET SMOOTHING”

Asset smoothing is a practice whereby pension funds do not overestimate their assets after years of good returns, nor underestimate their assets after years of poor returns. It is a good way to avoid overreacting to market volatility. But in 2001, when the Dow Jones stock index had already been correcting for over a year and the Nasdaq was collapsing, CalPERS abdicated their responsibility to set the rules on smoothing.

When participating agencies in the CalPERS system were contemplating whether or not to follow the lead of the California Highway Patrol (SB 400, 1999) and retroactively increase pension benefits, CalPERS sent projections to these agencies in which a CalPERS actuary presented to elected officials three distinct values for the assets they had invested with CalPERS. Remarkably, that document gave these agency officials the liberty to choose which one they’d like to use – the higher the value they chose for their existing assets, the lower the cost from CalPERS to pay for the benefit enhancements they were contemplating. The usual disclaimers were present, but the mere fact that city officials were given three scenarios is suspect. Obviously these officials would be under pressure to pick the scenario that provided the biggest benefit enhancement for the lowest cost. Read “Did CalPERS Fail to Disclose Costs of Historic Bump in Pension Benefits?” for more details including several source documents.

One of the most revealing documents is exemplified by the “Contract Amendment Cost Analysis,” sent to Pacific Grove by CalPERS in July, 2001. Here is an excerpt from that document, showing the choices CalPERS offered Pacific Grove:

The available rate choices are offered under three different Alternatives:
Alternative 1 – No increase in Actuarial Value of Assets
Alternative 2 – Actuarial Value of Assets increased by twice the increase in the Present Value of Benefits due to the amendment, limited to 100% of Market Value of Assets
Alternative 3 – Actuarial Value of Assets increased by twice the increase in the Present Value of Benefits due to the amendment, limited to 110% of Market Value of Assets

To reiterate: CalPERS provided abundant disclaimers. They suggested that given recent “market volatility,” city officials “are strongly encouraged to have in-depth discussions with your CalPERS actuary about the financial consequences of any amendment.”

Now let’s get real: Further on in this same letter, CalPERS provides a breakdown of how much pension benefit enhancements will cost in terms of annual contributions as a percent of payroll under each of these three scenarios:

Alternative 1 – The actuarial value of the assets is not tampered with, the normal cost goes from 4.6% to 25.0%.
Alternative 2 – The actuarial value of the assets is lifted up to market value, the normal cost goes from 4.6% to 19.9%.
Alternative 3 – The actuarial value of assets goes up to 110% of the market value, the normal cost – to implement a massive, retroactive enhancement to pension benefits – goes from 4.6% to 6.2%.

What option would you choose, if you were a city manager whose own pension would be enhanced, or a city council member who has to answer to powerful unions whose members want more generous pension formulas?

The reason CalPERS was able to cram this through, in July 2001 as the market was cratering, was based on their decision to present various asset “smoothing” options to members. Why? Because the smoothing options they’d been using were understating the value of their assets because stock values had exploded in the final years of the 1990s. One can only speculate as to why they did this as late as July 2001 when it was obvious the internet stock bubble had popped. It’s possible CalPERS officials knew several agencies had already lobbied for pension benefit enhancements and the officials were under pressure to leave no agency behind. But to offer local bureaucrats and elected officials a choice of various asset smoothing methods was passing the buck.

Overnight, the CalPERS practice of asset smoothing went from being a prudent accounting guideline to a clever rationalization for disastrous policy decisions. If that’s not a gimmick, I don’t know what is.

GIMMICK #2 – CREATIVE AMORTIZATION OF UNFUNDED LIABILITY

When you talk about “tricky accounting gimmicks,” it’s hard to find one worse than the methods the participating agencies chose to amortize their unfunded liability. To be fair, final responsibility for these decisions usually rests with the cities and counties. But CalPERS should have tried to crack down on these practices a long time ago, and indeed, has recently become more aggressive in doing just that. The basic choice facing agencies with huge unfunded liabilities is whether they want to pay them off aggressively, or come up with creative accounting techniques that push the tough repayments into the future. For example, instead of using a “level payment” repayment calculation, many of them use a “percent of payroll” scheme which allows for graduated payments.

In practice, this means calculating a stream of payments that will pay off the liability in 30 years, but varying the payments so that as projected payroll increases, the payment increases. This allows agencies to make low payments in the early years of the amortization term, which frequently means the unfunded liability isn’t even being reduced in the early years of the amortization term. Then when the payments become burdensome, they refinance the new, larger unfunded liability, to get that unfunded payment down again, in a new tranche, again using the same “level percent of payroll method.”

Anyone who lost their home because a “negative amortization” loan conned them into buying something they couldn’t afford would likely call that type of loan a “gimmick.” Similarly, negative amortization payment schedules on unfunded pension liabilities are also gimmicks. To their credit, CalPERS is now recommending 20-year straight line amortization. Which begs the question, why didn’t they do this all along?

GIMMICK #3 – OVERESTIMATING LONG-TERM RATE-OF-RETURN ASSUMPTIONS

CalPERS spokesperson Morgan correctly claims that CalPERS returns have averaged an 8.4% return over the past 30 years. But Morgan conveniently selects the 30 year timeframe to capture all of the pre-1999 run-up in stocks that began in the Reagan years as interest rates were reduced from inflation-fighting highs of 16% (30 year T-bill in the early 1980s) and American consumers began piling on debt. The 20-year return for CalPERS investments through June 30, 2017 is 6.58%. And these last 20 years of returns are far more relevant, because not quite 20 years ago is when CalPERS began to offer pension benefit enhancements that were sold as affordable when they clearly are not.

But if CalPERS is exceeding its projected rates of return over the past 30 years, why is it only 68% funded (ref. CalPERS 2016-17 CAFR, page 4, “Funding”)? At the end of a prolonged bull market, pension systems should be overfunded. Being 68% funded would not be terribly alarming if we were at the end of a prolonged bear market, but we’re in the opposite place. How can CalPERS possibly claim their actuaries are doing a competent job, if the system is this underfunded at this point in the market cycle? For more on this, read “If You Think the Bull Market Rescued Pensions, Think Again.”

It is important to emphasize that even if CalPERS can get a 7.0% return on investment – and there is some chance that they can – why did the agency wait until it was 68% funded to announce the drop in its projected returns from 7.5% to 7.0%? The United States economy is in the terminal phases of a more than 60 year long-term credit cycle, and one might argue there is a stronger case to be made that even 7.0% is highly optimistic. But we like optimism, so never mind that for now. Why wait until 2018 to phase in that half-point drop? The actuaries at CalPERS are well aware how sensitive their payment schedules are to even half-point drops in long-term rate-of-return assumptions. Overstating returns understates true cost. Is this an accounting gimmick? Only if you can prove intent. But read on.

GIMMICK #4 – QUIETLY ALLOWING THE UNFUNDED PAYMENT TO DWARF THE “NORMAL” PAYMENT

Every year, each active worker who gets CalPERS benefits vests another year of service. This means that in the future, during their retirement years, they will have an incrementally greater pension benefit in recognition of one more year of work. To pay for that incrementally greater pension benefit in the future, additional money must be invested today. That amount of money is called the “normal” contribution. But when the “normal” contribution isn’t enough, and it hasn’t been for years, the so-called unfunded liability grows. This unfunded liability represents the amount by which invested pension assets need to increase in order to earn enough to eventually pay for all the future pensions that have been promised.

This “unfunded liability” may seem theoretical when a pension system has hundreds of billions in assets. But it has to get paid down, because when there aren’t enough assets in the pension system earning interest, higher contributions are inevitably required from the participating agencies. If the unfunded liability isn’t reduced via catch-up payments, it will grow even if the normal contributions are adequate to cover newly earned benefits.

This reality is corroborated using CalPERS’ own data, which announces that payments required, as a percent of payroll, are set to increase by 50% (in some cases much more) over the next six years in nearly every agency it serves. And where are these projected increases most pronounced? In the unfunded contribution – that payment to reduce the unfunded liability.

And why does the unfunded liability grow in the first place? Because the normal contribution is too low. Why is the normal contribution too low? Could it be because public employees are only required to assist (via payroll withholding) to pay the normal contribution? Could that be the reason that lifespans were underestimated and returns were overestimated? The actuaries obviously got something wrong, because CalPERS is only around 68% funded. You can download the spreadsheet that shows the impact of this on California’s cities and counties here –  CalPERS-Actuarial-Report-Data-Cities-and-Counties.xlsx.

In the original CPC report, along with the term “gimmick,” the term “outrageous” was used. If you don’t think sparing the beneficiaries of these pensions any responsibility to share in the costs to pay down the unfunded liability isn’t outrageous, you aren’t paying attention. For example, by 2024, using CalPERS own data, the City of Millbrae will be paying CalPERS a normal contribution of $1.0 million, and an unfunded, or “catch-up” contribution of $5.8 million – nearly six times as much! Is Millbrae just an isolated example? Not really.

Again, using CalPERS’ own data, in 2017-18, their 426 participating cities will contribute $3.1 billion to CalPERS, an amount equal to 32% of their cumulative payroll. In 2024-25, just six years from now, they are estimated to contribute 5.8 billion, 48% of payroll. And the normal vs unfunded contributions? This year in the cities in the CalPERS system, 13% of payroll constitutes the normal contribution and 19% of payroll constitutes the unfunded contribution – for which current employees and retirees have no responsibility to help pay down. In 2024-25? The normal contribution is estimated to increase to 16% of payroll, and the unfunded contribution, rising to $4.0 billion, is estimated to increase to 33% of payroll.

Put another way, today the unfunded “catch-up” pension contribution for California’s cities, cumulatively, is 140% of the normal contribution. By 2024-25, that “catch-up” contribution is going to be 210% of the normal contribution, more than twice as much! And participating individual employees and retirees have zero obligation to help pay it down, even though that payment is now twice as much as the normal payment.

But it’s not the fault of the individual beneficiaries. The responsibility lies with CalPERS and the politicians they reassured for all these years, using gimmicks.

Let’s review these practices: (1) Letting the agencies decide which type of asset smoothing they’d like to employ, (2) permitting the agencies to make minimal payments on the unfunded liability so the liability would actually increase despite the payments, (3) making overly optimistic actuarial assumptions, (4) not taking action sooner so the unfunded payment wouldn’t end up being more than twice as much as the normal payment.

“Gimmicks”? You decide.

THE CASE OF MILLBRAE

On January 22, the San Mateo Daily Journal published an article entitled “Millbrae officials question, criticize pension cost report.”

The paper’s Austin Walsh reports that Millbrae officials told him that using staffing projections to calculate Millbrae’s future pension burden won’t work because Millbrae has fewer employees than most municipalities. Here’s how Millbrae’s Finance Director DeAnna Hilbrants put it: To limit pension costs, Millbrae contracts for positions in police, fire and public works departments. Quote: “Most notably, Hillbrants pointed to Millbrae joining the Central County Fire Department with Burlingame and Hillsborough and contracting with the San Mateo County Sheriff’s Office for law enforcement.”

What Millbrae officials are saying is that because they contract out much if not most of their personnel costs, their pension contribution is a small percent of their total budget. What they neglect to acknowledge is the fact that the Central County Fire Department and the San Mateo Sheriff’s Office themselves have pension costs, which are passed on to Millbrae to the extent Millbrae uses their services. Millbrae may have made a financially beneficial decision to outsource its public safety requirements. But they did not escape the pension albatross.

CALPERS IS NOT UNIQUE

What has been described here does not just apply to CalPERS. It is the rule, not the exception, for every one of California’s pension systems to engage in the same gimmickry. The consequences for California’s cities, counties, agencies, and system of public education are just beginning to be felt.

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The Fall of Pacific Grove – The Immediate Future

The Final Chapter, Part 4 of 4

The facts and law indicate that the lawyers defending the city in the POA pension reform law suit, directed by the city attorney, and supported by a city council majority, consciously and intentionally failed to uphold two legal ordinances which could have prevented the financial “Fall of Pacific Grove.”

Current annual pension costs for Pacific Grove, including the pension bonds and a new $625,000-per-year charge are about $4 million, soon to increase to $5 million, then $6 million, and increasing forever. Its unfunded deficit grows at about $3 million per year, and in 9.2 years will grow at $6 million per year. Average revenues are about $17 million. The current unfunded deficit (based on a 3.5% income rate) is about $90 million; it will double every 9.2 years. Pacific Grove is upside-down financially.

It is important for pension reformers to understand that a legislative body, after negotiating with the unions, and after impasse, can reduce salaries under California law. Currently salary reduction is the only leverage for pension reform, but it will require the election of a majority loyal to the salary reduction plan to save cities and counties like Marin and Sonoma.

An alternative for Pacific Grove would be to terminate with CalPERS and modify pensions and salaries in a chapter 9 bankruptcy. Bonds like pension bonds get reduced dramatically in bankruptcy, and pay for the bankruptcy.

Neither of the two alternatives will happen in Pacific Grove, because it is impossible to apprise the voters of the impending peril. The local press does not have forensic capabilities in law and accounting, so it refuses to acknowledge the serious financial plight of Pacific Grove and surrounding cities.

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Pacific Grove’s current commercial district contributes insufficient tax revenue to fund
six-figure pensions for the city’s retirees. Time to rezone and sell public assets!

 

The current Pacific Grove (union controlled) council majority plans to pay for pensions by attacking the current zoning laws and thereby build three large hotels and permit several bars in the downtown area. Pacific Grove is fully built out and has a dearth of parking spaces; it has one-way streets each way, so its current residential culture will disappear with such development. A second plan of the unions and the council is to sell off city property, like the recreation field and center. So far they have granted a long-term lease of its 18-hole municipal golf course. Tennis courts and parks will be sold off for development. There is no alternative without pension reform.

Lack of Impartial Lawyers and Financial Experts

Recent grand jury findings in Marin and Sonoma counties document corrupt pension enhancements since 2002, benefiting all unions, staff, the board of supervisors and the local pension administrators. Marin just announced that next year’s pension contribution cost for each supervisor is $54,000. The Marin county counsel receives an annual retirement payment and a salary that total about $475,000 a year. He was county counsel in Sonoma at the time the corrupt pension enhancements were adopted there.

In both Marin and Sonoma, the agents who planned the illegal pension enhancements were experts in the laws mandated for pension enhancement. The law mandated an actuarial declaration of the yearly cost of the proposed benefit. The lawyers, actuaries and financial experts in both counties had to knowingly and covertly by-pass the law. Including interest on pension bonds, each county now has about $1.5 billion in pension debt (up from almost zero).

Each county hired outside lawyers to respond to the grand jury reports. Each outside law firm treated the beneficiaries and the perpetrators of the wrong-doing documented in the grand jury reports as the client, and wrote astounding mythical legal opinions saying that everything was fine with the law. There were no lawyers in the system to protect the voters and the integrity of the grand jury findings. Where were the district attorneys? Evidently they intend to keep every penny of the illegal pensions.

The State Bar must enter this fray and set forth rules for public agency lawyers that provide legal representation to the voters and protect them from the insidious practices that occurred in Marin County, Sonoma County, Pacific Grove, and cities that went through bankruptcy without modifying pensions.

A Surprise Ending

In the game of golf, there is a saying, “Don’t ever say that things can’t get worse.” They can and do.

Take the POA v. Pacific Grove pension reform law suit as an example:

  1. As referenced above, the law firm of Liebert Cassidy Whitmore (LCW) sponsored a CEB-approved course about the acquisition of vested rights. The course was accurate and faithfully laid out the rules to establish a vested pension or OPEB in California: A+
  2. A partner from LCW applied the referenced principles to convince the trial and appellate court that the South Pasadena POA did not have vested rights based upon years of MOUs and reliance by employees, providing a medical benefit that had been reduced going forward: A+
  3. Pacific Grove was represented by LCW in the POA law suit discussed at length herein. The lead attorney in that defense was the same LCW partner who led the defense in the South Pasadena law suit, and totally failed to explain the principles set forth in the CEB course and in the South Pasadena law suit to Judge Wills, the voters, and the city were defrauded by their lawyers. F-

Conclusion

As demonstrated by this case study, also by the response to the grand jury reports in Marin and Sonoma counties, the current agencies of state and local government are opposite to the interests of its citizens.

I believe there will always be collective bargaining in the agencies; talk of eliminating collective bargaining is a pipe dream.

The problem is that in the current system, the governor, city and county managers and administrators, lawyers, and financial experts are de facto union members. That must change. The executive staff of each agency, particularly the lawyers, administrators, and financial experts, must be removed from the collective bargaining process.

It is beyond the scope of this effort to provide the solution. But as shown in Pacific Grove, Marin, and Sonoma, the current system of de facto union membership will trash each and every pension reform.

Read the entire series:

The Fall of Pacific Grove – A Primer on Vested Rights
 – The Final Chapter, Part 1, October 20, 2015

The Fall of Pacific Grove – The City’s Tepid Defense of the Vested Rights Lawsuit
– The Final Chapter, Part 2, October 27, 2015

The Fall of Pacific Grove – The Judge’s Ruling
– The Final Chapter, Part 3, November 2, 2015

The Fall of Pacific Grove – The Immediate Future
– The Final Chapter, Part 4, November 9, 2015

*   *   *

About the Author:  John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34749) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. 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.

*   *   *

Note to readers:  During 2014 author John Moore published the first chapter of The Fall of Pacific Grove in an eight part series published between January 7th and February 24th. For a more complete understanding of the history, read the entire earlier series:

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

The Fall of Pacific Grove – The Judge's Ruling

The Final Chapter, Part 3 of 4

The parties to the law suit made final oral arguments, and on June 18, 2013, Judge Wills issued his Statement of Decision, setting forth his conclusions and the legal reasoning that led to his conclusions.

First, he found that because the charter stated that the city council was directed to set the compensation of all officers and employees, the people could not process an initiative that set compensation. Recall that the attorneys for the city did not cite the case of Spencer v. City of Alhambra (or any of the 122 cases in which it had been cited) which said that articles in a charter which direct the body that is to set compensation do not preclude an initiative that sets compensation.

The city failed to argue that the city council had in fact adopted the initiative ordinance as its own, thereby complying with the charter.

The city failed to inform Judge Wills that a legislative act, like setting compensation, could only preclude the right to petition a compensation ordinance via the initiative if the charter had expressly excluded that power from the initiative process; and there was no such exclusion in the Pacific Grove Charter.

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The Pacific Coast shoreline – rezoning these areas for high-density luxury hotels will
bring tax revenue to the city so they can afford to pay their pension fund contributions.

Measure R was affirmed by a vote of 74% of the voters. It had clarified that Article 25 of the charter was amended (if necessary) to assure that the voters retained its initiative power to set compensation and affirmed that employees did not have vested pension rights. The POA argued that Measure R was too late, because it didn’t apply at the time the council adopted the initiative as its own. Incredibly, the city attorney had not submitted his declaration indicating that Measure R was to apply retroactively to supplement the pension reform ordinance. He could have pointed out that the video of the council meeting placing Measure R on the ballot would have clearly shown that Measure R was to apply retroactively. That was the only reason for Measure R. His failure to point out that he had drafted Measure R to concur in time with the earlier adoption of the retirement reform ordinance was an omission much more serious than malpractice, it was a breach of his fiduciary duty to uphold the ordinance and to act with his singular fidelity to the city and its laws.

Second: Finding that employees had a vested pension right, Judge Wills said:

“The Retirement Contribution Ordinance is invalid in violation of Article 1, Section 9 of the California Constitution, the Contracts Clause. The employees were told that they were to receive retirement benefits under a CaLPERS administered plan with an employee cost set at a fixed percentage of their salary. The fluctuating portion would be borne by the employer.”

“Upon entering employment with such a promise, the employee has a vested right to earn a pension on those terms and conditions.”

“Measure R Resolution 10-055 violates the Contract Clause of the California Constitution for the same reasons.”

“Again, the Court reiterates that what is vested in the employee is a right to earn a pension on the terms promised him or her upon employment. That right commences when the promise is made and the employee then commences or resumes work.”

Based on the facts and the law, the judge was in error on every point he made to justify his conclusion:

  1. Per the city charter, compensation must be set forth in an ordinance. There was no ordinance that promised employees a vested pension right (ever).
  2. Prior to the trial, the court had ruled that the MOU (contract between labor and the city) did not grant a vested right.
  3. Prior to the trial, the court had ruled that the contract to administer pensions between the city and CaLPERS did not grant a vested pension right:
  4. As set forth in the LCW CEB course on vested rights, an “implied” vested right can only be implied from the legislative intent.
  5. Legislative intent by implication looks to evidence that showed the intent of the legislative body at the time of adopting an ordinance or adopting a contract (County of Orange case, South Pasadena case, and other cases). There are no appellate cases contra to this principle.
  6. An “implied” vested right can only flow from a statute or contract that created the benefit, in this case a pension. The issue was not whether a pension benefit was granted, but whether the council adopted an ordinance or contract that promised the benefit for life. The POA did not even argue that there was a statute that granted a vested right, and the only documents it had included in its complaint were stricken from the evidence. The city did not inform the court that a statute or contract was essential to the analysis.
  7. The opinion makes it clear that Judge Wills was unaware that the law presumes that an instrument does NOT create a vested right. He was not even aware that a statute or contract granting a benefit was a precondition to determining whether the benefit was vested (for life). So he hung his decision on alleged oral promises, promises which had not been made by the legislative body.
  8. Only the police unions sued, but the court invalidated the ordinances totally, thereby giving all of the unions not before the court and the non-union staff a gratuitous judgment. Each union negotiated most MOUs separately from other unions. There was no evidence related to their rights.
  9. If there had been a basis for invalidating the ordinances, it certainly was still valid for new hires. New hires had no right to an expectation of any kind. The ordinances would have limited the new hires to a pension whereby the city could pay no more than 10% of salary. Over time, if the city could survive through the cost of current employees’ pensions, Pacific Grove could have been saved by applying the ordinances to new hires. In fairness to the judge, the attorneys for the city did not even request that if all else failed, the ordinances clearly applied to new hires. In the San Jose pension reform law suit, defendant unions stipulated that the contested reform ordinance applied to new hires.
  10. The most critical flaw in the judge’s decision was his failure to apply the two-step process described in the LCW State Bar seminar: was there a benefit? Yes. Was it granted for life, or only for the term of the MOU? Only for the term of the MOU.

Read the entire series:

The Fall of Pacific Grove – A Primer on Vested Rights
 – The Final Chapter, Part 1, October 20, 2015

The Fall of Pacific Grove – The City’s Tepid Defense of the Vested Rights Lawsuit
– The Final Chapter, Part 2, October 27, 2015

The Fall of Pacific Grove – The Judge’s Ruling
– The Final Chapter, Part 3, November 2, 2015

The Fall of Pacific Grove – The Immediate Future
– The Final Chapter, Part 4, November 9, 2015

*   *   *

About the Author:  John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34749) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. 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.

*   *   *

Note to readers:  During 2014 author John Moore published the first chapter of The Fall of Pacific Grove in an eight part series published between January 7th and February 24th. For a more complete understanding of the history, read the entire earlier series:

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

The Fall of Pacific Grove – The City's Tepid Defense of the Vested Rights Lawsuit

The Final Chapter, Part 2 of 4

In June of 2010, the City of Pacific Grove (City) received an initiative petition from a citizen’s group containing the requisite number of signatures. Thereafter the city adopted the petition as an ordinance. The ordinance limited the city’s obligation to pay for employee pensions for work not yet performed to 10% of salary. Employees retained full credit for work already performed. At that time, the city attorney and city manager openly and intensely opposed the adoption on political grounds. In an attempt to raise a legal objection, the city attorney referred to Article 25 of the city charter, which indicated that compensation should be set by the city council. He argued that it could not be set by initiative.

There were two problems with the city attorney’s legal point: first, the council was in fact adopting the ordinance as its own, and second, because setting salaries was a legislative act, it was subject to the citizens’ power of initiative regardless of the gratuitous charter directive that the council should set salaries; that point had been held in the case of M.R. Spencer v. City of Alhambra (as of this writing it is good law and has been cited in 122 appellate cases). The only way that the people could have excluded “compensation” from the initiative power was to set forth the exclusion in the charter, and it had not.

The council approved the ordinance 6-1; the current mayor who was and is against any pension reform for Pacific Grove was the lone dissenter. He was elected mayor in November 2012 (along with two other pro-union anti-pension reformers), and that became important in allowing the unions, the city attorney, and city manager  to ultimately defeat the pension reform measure by throwing the law suit challenging the ordinances. What follows is a description of how they pulled it off.

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The Monarch Butterfly’s Pacific Grove Sanctuary – selling this to developers might
pay for one year of employer pension fund contributions! Maybe even two years!

When I first learned of the pension reform initiative, I had the three legal sponsors of the initiative delay obtaining signatures until I had researched whether PG city employees had vested contract rights by actual contracts or by a statute or the charter. Through public record requests, I reviewed the original charter (1927) and every change going forward. Until 1955, the charter expressly prohibited a pension. In 1955, the charter was amended to allow the council to enroll the city in a pension plan where the sole obligation of the city was to pay premiums. Another part of that charter provision allowed a “complete” (vested) pension plan by a vote of the people. In 1957 the council, without a vote of the people, authorized the city to join CaLPERS. Thereafter, there were no further amendments to the city charter dealing with pension rights.

I reviewed all of the resolutions, codes, and ordinances, together with all MOUs (contracts between the city and labor) and the contract and all amendments thereto between the city and CaLPERS from 1957 to date.

There was no document that even hinted that the pension rights were vested. To the contrary, because there was no vote of the people approving a “complete” pension it was clear that if it was claimed that joining CaLPERS created a vested pension right, it was void because of the absence of a vote of the electorate. As noted, in the POA case, the court had made a pre-trial ruling that there were no documents that created a vested pension right.

Article 16 of the city charter states: “The right of initiative and referendum is hereby preserved to the citizens of the City to be exercised in accordance with procedures proscribed by the Constitution and General Laws of this State.”  If the citizens wanted to prevent initiatives about compensation, then it needed to say so in Article 16, but did not. Otherwise, as a legislative act, fixing salaries and compensation was reserved to the people in the initiative power (Spencer). And of course, the council did in fact adopt the pension reform ordinance as its own.

As a safety measure, at the time that the council adopted the pension reform ordinance, it had the city attorney prepare a council-sponsored ballot measure that simply clarified that the people had the authority to sponsor an initiative about compensation regardless of Article 25. It also reaffirmed that employees did not have and never had vested pension rights The measure became Measure R on the ballot. Because it was sponsored as part of the pension reform ordinance, it was clearly intended to be retroactive to protect the ordinance from any claim that it could not save the ordinance because it came after adoption of the ordinance. The city attorney was clear that the measure was timely to protect the reform ordinance. Otherwise, why bother? And of course it was unnecessary because the law was so clear that the people retained the legislative power to set salaries and compensation. You can probably guess how the city attorney and SF counsel took a dive on this issue in the trial.

In November 2010, the Pacific Grove Police Officers Association et. al. (POA) sued the city, alleging that the new ordinances breached vested pension rights as set forth in MOUs and the contract with CaLPERS; that only the council could set compensation and setting compensation was not subject to the initiative (Article 25 of charter); and that plaintiffs had an “implied vested pension right” based on hiring advertisements and oral statements made by a city administrator to new hires.

During 2011 through November 2012, the law suit was processed on normal punch and counter punch practices. The city initially had notable success. On July 27, 2011, the court (not by the trial judge) made its order granting the city judgment on both POA claims that it had vested pension rights arising out of the MOUs between the city and the unions and arising out of the contract between the city and CaLPERS. The POA had not referred to any statute, code, resolution, or charter provision as the basis for a vested pension right, so that left the unlikely claim of a vested pension right by implication. But the law is clear, as set forth in the CEB seminar and the cases, that even such a claim must have its genesis in a legislatively adopted contract or a statute, and there was none. The trial court was not informed of this by Pacific Grove’s attorneys, who as experts in the legal issue, knew this requirement beyond all doubt.

In November 2012, Bill Kampe, a dyed-in-the-wool union backer was elected mayor, replacing then-mayor Carmelita Garcia. Garcia was a determined pension reformer whose love of the city was like a tattoo on her forehead.  After Kampe’s election, defense of the POA case by the city deteriorated from winning to lost; based on its attitude and statements, it became clear that the Kampe council majority hoped that the city would lose the law suit. Per the charter, the council, the city attorney, and the city manager all had an unqualified duty to enforce the pension reform ordinance. Measure R passed by a vote of 74% of the voters and thereby created a second pension reform ordinance that was challenged in the POA law suit.

I was concerned because it was clear that neither the city attorney, nor the San Francisco law firm defending the city, was aware of the content of my research of the charter, codes, resolutions, ordinances, MOUs, and other contracts. The history about the prohibition in granting a vested pension in the charter at the time PG joined CaLPERS would have defeated any claim of a vested pension right. And in particular, the CA Supreme Court had stated that there could be no implied vested right if it violated a legal prohibition. The vote requirement of the charter was such a prohibition.

When the POA sued, I protested to the council and the city attorney about the city attorney’s bias as openly displayed by him at the time the city adopted the pension reform ordinance. I, joined by the sponsors of the initiative, demanded that he not be involved in defense of the POA law suit. Regardless, he was allowed to choose and to supervise the lawyer selected to defend the case. In doing so, he restricted the lawyers from interviewing Dr. Daniel Davis and me.

Dr. Davis was the author and one of the three sponsors of the initiative adopted by the council. He had served for years on the city planning commission and two terms as a member of the city council. He was a practicing mathematician, with graduate degrees from Georgia Tech and a Ph.d. in math from Cal Tech. He had worked as a scientist at the Monterey Bay Aquarium Research Institute (MBARI) for 18 years, interfacing with David Packard. He was the key representative of the thousands of citizens favoring the pension reform (74%). He was ably qualified, and in 2008 wrote an academic-quality article about the risks arising from defined benefit pension plans. How could he not be allowed to participate in the defense of the law suit? Unless, of course, the mayor and the attorneys wanted to lose the law suit (at a defense cost of hundreds of thousands of dollars).

After the 2012 holidays I became very concerned that the city was not prepared for the trial of the POA law suit. I had made numerous e-mail requests to the city council and the SF attorneys demanding that Dr. Davis and I be allowed to participate in the defense of the vested rights case. Trial of the case was set for March 21, 2013. I met with Mayor Kampe and councilmen Cuneo and Huitt on March 13, 2013 and explained the need for our participation in the case. I received nothing in response, just blank looks. No “Yes,” no “No,” just “This meeting is over.”

On February 22, 2013, each side in the law suit filed its trial brief. I read both briefs and concluded that the city attorney and the SF lawyer wanted the city to lose the case. Why did I believe that? Most importantly, the city brief did not inform the judge about the law and evidence necessary for the POA to prove a vested right. The judge should have at a minimum been provided the six points listed in Part One from the LCW CEB seminar.

As set forth in the CEB seminar, when analyzing whether a pension or other benefit is vested, the beginning point is the language of the document conferring the benefit; and that vesting is a two-step process: is there a valid contract conferring the benefit, and if so does the contract contain an express or implied term that the benefit is not just for a limited term, but vested for life? Most importantly: there is a presumption that a vested right has not been created and the POA had the burden of producing evidence (the burden of proof) to overcome the presumption. The judge was not even informed of this basic principle.

The law in the case was so basic. The attorney for the city, supervised by the city attorney, did not inform the trial judge of the simple rules for determining the existence of a vested contract right. The omission concerning the presumption against creation of vested right, that put the burden of proof on the back of the POA, was well beyond legal malpractice.

As I have demonstrated, the judge assigned to the case had no understanding of the city’s defenses because the trial brief did not inform him of the basic law of vested contracts. I attended the first day of the trial. It was assigned to Judge Wills. By agreement, the case was submitted on declarations, documents, and judicial notice of documents. There was no testimony.

Judge Wills acknowledged that he had never seen the file until that moment and that he would review the file and the trial briefs and decide the matter. The city had turned a case that could not possibly be lost into a certain loser. I wrote several e-mails to the council and the press explaining how the case had been intentionally thrown.

Was there a statute, charter provision, code, ordinance, or resolution that provided for a vested pension benefit? No. To this day, none has been asserted by the city or the unions. There is none.

Was there an implied term in any of the statutes, charters, codes, ordinances, resolutions, or contracts that created an implied vested contract right? As set forth in numerous cases like Retired Employees of Orange Co., Inc. v. County of Orange, the implied vested right must flow from concurrent evidence surrounding the time of adoption of the contract or statute (minutes, agenda reports, etc.), not an oral utterance or publication for new hires years later. Attorneys reading this must be thinking, “How in hell could the court admit a hearsay statement made 50 or more years after adoption of the benefit? How could one witness be allowed to testify in a declaration that all new hires were told they had a fixed-cost pension benefit?” Even the declaration of the witness was not so raw as to say that they had been promised the benefit for life. Both the city and SF attorney understood that for the last 40-50 years, retirement benefits for new hires were set forth in a writing, an MOU agreed to after collective bargaining; the best-evidence rule required that the writing, not an oral comment of one union member to another, was the best evidence of what employees were to receive as pensions. And the court had already ruled that the MOUs did not create vested contract rights. But the attorneys for the city could have, but did not, object to the hearsay declaration of the union witness. In my view, a failure of that magnitude could only be intentional. Both the city an SF attorneys were experts in this area of the law.

According to the Pacific Grove Charter, “The compensation of all officers and employees shall be fixed by Ordinance.” Under the law there are no exceptions to such a provision. In June 2012, LCW in its California Public Agency Labor and Employment Blog discussed the case of San Diego Firefighters, Local 145 v. Board of Administration of the San Diego City Employees Retirement Board. In the case, the appellate court held that because the benefit in question had only been approved by a resolution and not an ordinance as required by the city charter, the contract granting the benefit was void. So clearly, oral statements by administrators describing compensation as asserted by the POA could not possibly grant a vested right. Only an ordinance could do that. The case also held that there was no estoppel based upon the employees’ reliance on the contract. The case was not cited in the city brief.

As set forth in the LCW CEB seminar outline, it is “legislative intent” expressed at the time of the adoption of a contract or statute granting the pension benefit that is critical to establishing an implied vested pension right. Why? Because, by law, the only intent that could create a vested contract right is the legislative intent (the city council); after it adopts a contract or statute, the only type of evidence that supports an implied claim is evidence “concurrent with the adoption,” but not set forth in the document.

An administrator informing a new hire of the current pension plan orally or in a publication of any kind 50 years later cannot prove the required legislative intent.  LCW proved that beyond all doubt in its defense of the city in the South Pasadena case discussed above. To date, all of the appellate cases that dealt with a claim of an implied vested right have been lost by the claimants. In every case, like the Orange County case and the South Pasadena case, claimants argued that decades of  MOUs proved a vested benefit right. They lost because they could not show legislative intent by evidence concurrent with the time of adoption of the benefit.

What evidence would provide the legislative intent to grant a vested right although the contract or statutes did not? I believe a concurrent agenda report or benefit committee report that made it clear that the adopted benefit was intended to be for life would do the trick. But that is just my opinion.

After reviewing the trial briefs, Dr. Davis and I independently did what we could. Dr. Davis wrote a letter to the council indicating that the city’s brief did not set forth even a token defense, let alone the clear winning evidence. Dr. Davis said: “We have repeatedly pointed out that the City Attorney’s opinions . . . created a conflict of interest with regards to a defense of the 2010 initiative. . . . Now that the City has utterly failed to defend the fundamental basis of pension reform in the POA law suit the City has proven that our fears were justified.”

I wrote several e-mails to the city council, the SF attorney defending the case, and even met with the pro-union mayor and two of his council yes-men prior to trial. I expressed that based on the city trial brief, the case was not ready to be tried, would be lost, and that it was imperative that Dr. Davis and I be allowed to participate in defense of the city’s case. It did not happen. The Kampe council majority, the city attorney, city manager, and the unions made sure that the city lost the pension reform law suit.

Read the entire series:

The Fall of Pacific Grove – A Primer on Vested Rights
 – The Final Chapter, Part 1, October 20, 2015

The Fall of Pacific Grove – The City’s Tepid Defense of the Vested Rights Lawsuit
– The Final Chapter, Part 2, October 27, 2015

The Fall of Pacific Grove – The Judge’s Ruling
– The Final Chapter, Part 3, November 2, 2015

The Fall of Pacific Grove – The Immediate Future
– The Final Chapter, Part 4, November 9, 2015

*   *   *

About the Author:  John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34749) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. 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.

*   *   *

Note to readers:  During 2014 author John Moore published the first chapter of The Fall of Pacific Grove in an eight part series published between January 7th and February 24th. For a more complete understanding of the history, read the entire earlier series:

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

The Fall of Pacific Grove – A Primer on Vested Rights

The Final Chapter, Part 1 of 4

Editor’s Note:  In early 2014 we published a eight part series, “The Fall of Pacific Grove,” written by retired attorney and Pacific Grove resident John Moore. It describes in detail how this small coastal city slid inexorably towards insolvency by yielding, again and again, year after year, to pressure from local government unions to award unaffordable pension benefits to city employees. Pacific Grove’s challenges are a textbook case of how there is simply no interest group, anywhere, currently capable of standing up to the political power of government unions. This small city now faces the possibility of selling off every asset they’ve got, primarily real estate, to private developers to raise cash for the city’s perpetually escalating annual pension contributions. They face the possibility of rezoning to allow construction of huge tourist hotels that will destroy the quality of life for residents, in order to enable new tax revenue producing assets to help pay the city’s required pension contributions. Anyone familiar with local politics knows that one of the only special interests with the financial strength to oppose government unions are major developers. This end-game, where public assets are sold to developers to generate cash for pension contributions ought to put to rest any remaining debate as to who runs our cities and counties. Of course developers aren’t going to oppose government unions. By extension, and in a tragic twist of irony, why should any libertarian leaning private sector special interest oppose government unions? As these unions drive our public institutions into bankruptcy, private sector investors buy the assets of our hollowed out public institutions at fire sale prices.

In this new four part series, author John Moore challenges the so called “California Rule” that supposedly makes pension modifications – even prospectively – legally impossible. But he also summarizes another legal approach to reform, one that takes into account the lack of due process and the ignorance of specific commitments made in the original granting of financially unsustainable pension benefit enhancements. It is an approach that has many facets and can be utilized in many California cities and counties. Sadly, Moore also exposes why this approach to reform, while viable, was only tepidly attempted in Pacific Grove. Regardless of how Pacific Grove’s situation evolves, what Moore has come up with here offers insights to anyone serious about pension reform in California.

The California State Bar governs the practice of law in California. Licensed active attorneys must continue their education by attending Continuing Education of the Bar (CEB) courses on a wide variety of subjects. Recently the law firm of Liebert Cassidy Whitmore (LCW), a large multi-office law firm emphasizing public law, was authorized by the State Bar to present a CEB course entitled Understanding “Vested” and Other Post-Employment Benefits. In order to understand precisely how the city government of Pacific Grove (city attorney, city manager, unions, and a union-backed council majority) defeated citizen pension reform, I can now, for the first time, with reliance on the course materials and the seminar, set forth important established principles of vested pension rights in California government agencies without being subjected to the retort that my assertions are only my opinions. The LCW seminar materials provide ample gravitas to my assertions. But first, here are some general principles that limit the applicability of vested right determinations.

Principle One: As set forth in the CA Supreme Court case of Valdez v. Cory (1983), state employees have vested pension rights. The court found there was a statutory scheme that gave state employees a contract right that continued for the life of each affected employee and was protected by the state and federal contract clause. Cases discussing state employee pension rights are not germane to the issue of whether a local agency’s employees have a vested pension right, because the discussions in the state employee cases assume that the employees have vested rights, while in non-state cases the issue is whether the legislative body granted a vested right.

Principle Two: California Teachers Assn v. Cory (1984), like Valdez, grants teachers in the State Teachers Retirement System a vested pension right.

Principle Three: Certain counties and some other local public agencies provide pension benefits pursuant to the County Employee Retirement Law (CERL). There is no case holding such benefits as vested, but a government code provision provides that benefits cannot be reduced or eliminated without the consent of all agency unions. A trial judge in Ventura found that unlike CaLPERS, CERL agencies did not have the right to terminate its plan. Its pensions are clearly vested-like.

Principle Four:  The California Constitution grants plenary authority to charter cities to provide for compensation of officers and employees (Article XI, Section 5[b]).

20151019-UW-Moore1
Will Pacific Grove’s parks be sold to developers to fund pension contributions?

There is no sweeping principle that provides a vested-right litmus test for particular at-law cities, charter counties, charter cities, cities and counties in CaLPERS and other cities and local municipal agencies.

The LCW CEB seminar sets forth the general rules that govern the process to determine whether a governing body had granted a vested pension or other post-employment right. Here is a summary  of those rules, based on the seminar and CEB course documentation:

  1. Vested rights are created by contract (that contract is protected by the state and federal contract clause). Contracts can create vested rights, but also charters, ordinances, resolutions, codes, etc., dependent on the expressed intention of the legislative body.
  2. When analyzing whether a pension or other benefit is vested, the beginning point is the language of the document conferring the benefit.
  3. Vesting is a two-step process: Is there a valid contract conferring the benefit, and, critically, does that contract contain an express or implied term that the benefit is only for a limited term or is it vested for life?
  4. The established rule, supported by a legal presumption, is that a statute–like a charter, ordinance, resolution, or contract–does NOT create vested contractual rights. Employees have a heavy burden of proof to overcome the presumption.
  5. Written contracts like MOUs (contracts between labor and the employer) and contracts with a pension administrator like CaLPERS have the potential to contain contract language vesting a benefit, but rarely do. In the 2013 Pacific Grove vested rights law suit, the court, in a pre-trial ruling, held that neither the MOUs, nor the contract with CaLPERS, granted vested contract rights. Recently, the US. Supreme Court in M&G Polymers, Inc. v. Tacket (2015) held that benefits (medical) provided under a collective bargaining agreement are presumed to expire when the contract expires.
  6. The final area covered in the seminar dealt with implied vested contract rights. As an example, for analysis, LCW discussed the 2015 case of South Pasadena Police Officers Assn et al v. City of South Pasadena. LCW in fact defended that city against a claim that plaintiffs had a vested contract right to certain medical benefits at a fixed cost. To succeed in such a claim, the facts must show that the legislative body intended to grant the claimed benefit for life. Such claims are very difficult to prove, and the LCW attorney successfully and adeptly defeated the claim.

In the Pacific Grove case, the Pacific Grove POA argued that evidence set forth in the affidavit of a police officer and job advertisements indicated that new hires were entitled to a “fixed-cost pension benefit” and hence an implied vested pension right for all. That turned out to be the KEY issue in the law suit.

*   *   *

Why is there so much confusion about whether a government agency has granted a vested pension right? In my experience, the present confusion is caused by statements by commentators, CalPERS, city, county, and agency lawyers describing the law that applies IF it has been established that a vested contract right existed. Quotes from Allen v. City of Long Beach (1955) are consistently out of context.

Kern v. City of Long Beach and Allen, were the foundation of the California Rule, which holds that in California (and 12 other states), if employees have a vested pension, not only pensions earned are vested, but employees are entitled to the rate of the current benefit and any increases for life (a benefit for work not yet performed cannot be eliminated). Earlier, in Kern, the Supreme Court held that a certain pension right set forth in the Long Beach charter could not be unilaterally eliminated by the city because current employees had a vested contract right created by the charter. A later attempt by the city to increase the employees’ contribution rate from 2% to 10% was struck down in Allen as a violation of that charter-granted vested contract right.

The confusion arises because quotes from Kern and Allen are cited as if the state and federal contract clauses created a vested pension right upon the date of employment without first establishing that a contract or a statute (charter, ordinance, resolution) had created the vested contract right for work not yet performed. In Pacific Grove, there was never any such statute, or any vested right to any employment contract ever adopted by the city legislative body or the charter. In both Kern and Allen a charter provision created such a right. The federal and state constitution protected the contract right, but did not and could not create it for a charter city like Long Beach or Pacific Grove.

Part Two will discuss Pacific Grove’s unprecedented non-defense in opposing the POA claim that the Pacific Grove police had a vested pension right based NOT on a document indicating legislative intent, but  by a claimed instance of an oral contract between one administrative city agent, possibly the police chief, and one newly hired police officer, opining that all new hires had been told they had a fixed-cost retirement benefit.

Additionally, both Kern and Allen distinguished modifications by an agency when there is no financial threat of the pension system losing its integrity (the ability to pay pensions). If facts were presented showing that a pension system was flawed, e.g. that by mistake or fraud its cost was so great that all pensions were threatened, the system could be modified without off-setting benefits. The most oft-quoted misstatement of Allen is: “Reasonable alterations of pension rights must bear some reasonable relation to the theory of a pension system and its successful operation, and changes to a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages.” The court went on to say (this is always omitted by commentators): “There is no evidence or claim that the changes enacted bear any material relation to the integrity or successful operation of the pension system.” Also in Allen (and earlier in Kern), the court said again: “The city does not claim (that changes) were necessary to preserve the pension program applicable to persons employed prior to March 29, 1945 (the date pensions were eliminated in Long Beach) and there is no indication that the city would have difficulty in meeting its obligations.” Several cases where pensions were reduced without off-setting benefits, because the integrity of the pension system was in peril, were cited in Kern and alluded to in Allen.

In other words, Kern and Allen dealt with a city where there was no threat to the ability of the system to pay pensions, but both cases made it clear that even agencies that have created vested pension rights may claim that the vested pension rights are unsustainable, but it must offer financial evidence that the system is failed. A court, pursuant to Kern and Allen, could find that the financial condition justified a reduction of vested benefits without off-setting benefits. No such evidence was offered in Kern or Allen, but it is maddening that pension reformers do not demand that legislative bodies reduce even vested benefits pursuant to the integrity doctrine of Kern and Allen. Almost all California pension systems are irrevocably under water financially. And the assertion that Allen stands for the proposition that vested pension rights have been created by the courts without the creation process described in the CEB LCW seminar is simply based on ignorance.

*   *   *

About the Author:  John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34734) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. 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.

Read the entire series:

The Fall of Pacific Grove – A Primer on Vested Rights
 – The Final Chapter, Part 1, October 20, 2015

The Fall of Pacific Grove – The City’s Tepid Defense of the Vested Rights Lawsuit
– The Final Chapter, Part 2, October 27, 2015

The Fall of Pacific Grove – The Judge’s Ruling
– The Final Chapter, Part 3, November 2, 2015

The Fall of Pacific Grove – The Immediate Future
– The Final Chapter, Part 4, November 9, 2015

*   *   *

About the Author:  John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34749) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. 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.

*   *   *

Note to readers:  During 2014 author John Moore published the first chapter of The Fall of Pacific Grove in an eight part series published between January 7th and February 24th. For a more complete understanding of the history, read the entire earlier series:

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