California court case could have big pension benefit implications

All public sector workers deserve the retirement benefits they have been promised. But when states are strapped for cash, tax increases are a political third rail, and pension benefits are beyond generous, what’s a state to do?

A case to be heard soon by the California Supreme Court could determine whether the state’s retirees have, as the California Court of Appeals phrased it, an “immutable entitlement to the most optimal formula of calculating a pension,” or simply to a “reasonable” pension. Much, obviously hinges on how one defines reasonable.

Many states, including Colorado (with a notable exception described below) follow what’s known as the California Rule. Here’s how the Reason Foundation, a libertarian think-tank, describes the rule:

“(It) holds not only that public employees are entitled to the pension they’ve accrued by their work so far, but also that they’re entitled to keep earning a pension (as long they continue in their job) according to rules that are at least as generous. Thus, in states where the California rule applies, one can’t constitutionally increase employee contribution rates or reduce cost-of-living allowances.”

When the Colorado Legislature passed Senate Bill 10-001 in 2010, it weakened the California Rule’s grip on the state by decoupling cost-of-living adjustments from the rule. The law reduced COLAs for PERA members from what had been 3.5 percent to a maximum of 2 percent.

State courts upheld the change, ruling that retirees did not have a “clear and unmistakable right” to an unchangeable COLA for the rest of their lives.

Still, under the California Rule, it’s hard to make other changes to PERA, so this California case bears watching.

Here’s how the implications are described in a post on reason.com’s Hit & Run blog:

As Steve Greenhut wrote in Reason shortly after the August ruling in the appeals court, the so-called California Rule isn’t really a rule, but “a precedent derived from a variety of rulings that date back to 1955. Ultimately, it says that once a legislative body (city council, board of supervisors, the state Legislature) grants a pension-benefit increase, that increase is indeed immutable; it can never be rolled back. Employees can never be forced to contribute more to their pension plan unless they get something of equal or greater value in return.”

In short: under the California Rule, states are obligated to come up with the money to pay their pension promises, no matter what other services have to be reduced or what taxes must be raised.

If the California Supreme Court upholds Judge Richman’s ruling, “the legal door will be open for Californians to begin to take reasonable actions to save pension systems and local governments from fiscal disaster,” said former San Jose Mayor Chuck Reed, who now serves as a board member on the Retirement Security Initiative, a national group working to ensure the sustainability of public pension plans.

We’ll keep a close eye on this case, and how its outcome might affect Colorado.

No Comments

Post a Comment