California Case Opens Door for Pension Benefit Reductions - Bloomberg
- 1. 9/20/2016 California Case Opens Door for Pension Benefit Reductions Bloomberg
http://www.bloomberg.com/news/articles/20160906/californiacourtcaseopensdoorforpensionbenefitreductions 1/5
California Case Opens Door for
Pension Benefit Reductions
Along with death and taxes, Californians have counted on another inevitability: once pension
promises are made to public employees, they can’t be rolled back.
That belief, which has guided officials as they deal with mounting bills to cashstrapped retirement
plans, was shaken in August when a state appellate court said benefit cuts are permissible if the
pensions remain "reasonable" for workers.
The Marin Association of Public Employees, which lost its lawsuit seeking to prevent the county
from reducing the final salary levels used to calculate pension payments, says it will ask the state’s
Supreme Court to overturn the ruling. If upheld, it would give California and its local governments
a way to cut costs just as lackluster investment returns threaten to leave them under pressure to
pump more money into retirement plans.
"It signals that there’s potentially additional reform options on the table that never were there
before," said Thomas Aaron, senior analyst at Moody’s Investors Service. "That offers an
additional way for governments facing budgetary challenges to try and bring their costs down."
State and local pensions across the U.S. have $1.8 trillion less than needed to cover all the benefits
owed in the decades ahead, according to Federal Reserve Board data. The need to make up for such
shortfalls has contributed to creditrating cuts to Illinois, New Jersey and Chicago. Such financial
Source: Getty Images
September 6, 2016 — 2:00 AM PDT
Updated on September 6, 2016 — 9:11 AM PDT
Romy Varghese
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- 2. 9/20/2016 California Case Opens Door for Pension Benefit Reductions Bloomberg
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pressure has also been acute in California, where it helped bankrupt the cities of Stockton, San
Bernardino and Vallejo.
Efforts to reduce retirement expenses have focused on steps such as steering new employees into
401(k)style plans or persuading unions to consent to measures such as increasing retirement ages
or cutting costofliving adjustments. While the California court case has no impact beyond the
state, it could inspire challenges elsewhere by local governments seeking to push through changes
over the objections of workers.
"Courts around the country faced with similar litigation would likely hold in a similar fashion,"
wrote Bank of America Merrill Lynch analysts led by Philip Fischer in a note to clients.
The case in Marin County, a community
north of San Francisco that’s among the
wealthiest in the U.S., centers around the
formula for calculating retiree payouts.
Empowered by state law that sought to
prevent "pension spiking" which involved
boosting compensation at the end of one’s
career in order to elevate pension checks
the county in 2013 barred elements such as
payments for waiving health insurance from
being included in the formula that determines how much retirees receive. It was one of the first to
implement the state law, the court said.
The union sued, saying such factors are considered part of workers’ regular pay and that the county
violated legal precedents known as the California rule. Established through court decisions, the
guideline prevents benefits for current employees from being decreased unless they received an
offsetting advantage.
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- 3. 9/20/2016 California Case Opens Door for Pension Benefit Reductions Bloomberg
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The appellate court in San Francisco upheld the trial court’s decision against the union that the new
calculations didn’t violate workers’ rights. It also said that lawmakers have the power to change the
formula before retirement.
“While a public employee does have a ’vested right’ to a pension, that right is only to a
’reasonable’ pension not an immutable entitlement to the most optimal formula of calculating the
pension,” the court said.
The judges didn’t define what’s reasonable. That’s sure to lead to lawsuits if officials try to adjust
benefits outside of collective bargaining for their current workforce, said Rollie Katz, executive
director of the Marin union, which plans to appeal by Sept. 26, the deadline.
"There have been promises made. That’s pretty fundamental in our society," said Katz, whose
organization represents 1,300 members from custodians to office assistants. "They need to be kept."
The ruling may give officials an incentive to find ways to limit benefits, said Chuck Reed, a former
mayor of San Jose, California, who’s pushing pension overhauls nationwide through a group called
the Retirement Security Initiative.
"Going from an absolute ’no’ to a ’yes, if it’s reasonable’ is a huge shift in the political debate as
well as the legal debate," Reed said. "In order to save their jurisdictions from insolvency, some
systems will be motivated to try to make some changes."
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