Gov. Jerry Brown this week predicted that his 2012 pension law will survive union challenges in court and blow a hole in the so-called “California rule” that has restricted changes to public employee retirement plans for half a century.
“When the next recession comes around, the governor will have the option of considering pension cutbacks for the first time in a long time,” Brown said at a news conference this week where he unveiled his 2018-19 budget plan.
Brown has been working to strike out the California rule, a precedent dating back to the 1950s that holds public agencies cannot reduce pension promises without offering workers new incentives to offset the loss of retirement income.
His office in November replaced the attorney general’s office in defending his pension law against a challenge filed by the state firefighter union. The union argues that the pension law denied benefits to employees who were promised them, including the ability to purchase “air time” that they could use to enhance their pensions upon retirement.
It’s one of several high profile pension lawsuits that are expected to appear before the state Supreme Court this year.
Those cases have collected a cluster of appeals court rulings that have questioned the California rule. One said public workers are “entitled only to a ‘reasonable’ pension, not one providing fixed or definite benefits immune from modification.”
Brown cited that ruling when he spoke to reporters this week.
“There is a lot more flexibility than is currently assumed by those who discuss the California rule,” Brown said. “At the next downturn when things look pretty dire, (pensions) will be on the chopping block.”
The worst-case scenario for public employees would be a reduction in the rate they accrue their pensions, say advocates who want to limit the state’s pension liabilities. Potential changes would not affect pensions that current retirees already receive, unless a government agency goes bankrupt and stops paying its bills.
On Monday, unions challenging the pension law received a more favorable ruling in a separate case filed by the Alameda County Deputy Sheriffs Association. The state’s 1st District Court of Appeal held that public agencies could modify pension benefits without offering additional compensation – disregarding the California rule – but the court emphasized that changes to pensions must also be reasonable and that agencies must consider the financial burden they’d place on their workers and retirees if they renege on benefits.
Brown’s pension law required public employees hired after Jan. 1, 2013, to contribute more money toward their retirements and capped their benefits by eliminating generous benefits the state gave to public workers during the dot-com boom. Brown’s administration says the law put the state’s two largest public pension systems, the California Public Employees’ Retirement System and the California State Teachers’ Retirement System, on a path to long-term stability.
Still, both pension funds are considered seriously underfunded because they owe tens of billions of dollars more in benefits than they have on hand. Local governments and school districts, meanwhile, have been drawing attention to their rising expenses on pensions, complaining that the costs are “crowding out” their ability to fund public services.
“The rate of growth in these spending areas is not sustainable in the future and diverts revenue that could be invested in education, transportation and truly addressing the causes of our highest-in-the-nation poverty rate,” Rob Lapsley, president of the California Business Roundtable, said after Brown released his budget proposal.
The two pension funds are getting some help from the booming stock market this year. CalPERS has gained more than $30 billion since July 1, giving it a portfolio worth more than $355 billion.