March 5, 2019 California Supreme Court Upholds the “California Rule” on Public Employee Pension Benefits – At Least for Now

Yesterday, the California Supreme Court published its opinion in Cal Fire Local 2881 v. California Public Employees’ Retirement System, a case which former Governor Brown’s administration and many public agenices had hoped would be used to re-examine the so-called “California Rule.”  The California Rule is a long standing legal doctrine that public employee pension benefits are protected by the California Constitution, and thus cannot be diminished, unless replaced with similar benefits.  California courts have upheld the California Rule in multiple cases over the past six decades.  Only 12 other states follow the California Rule, and three of those have since modified it.

The Supreme Court sidestepped making a decision about the continued viability of the California Rule by holding that the Legislature’s elimination of the retirement benefit at issue in this case—the ability of public employees to purchase service credit to increase their retirement benefit—was not a benefit protected by the Constitution.  The court did not answer the question of whether the California Rule remains viable, effectively leaving it in place. 

Background

In late 2012, amid concern about mounting unfunded pension debt in California, Governor Jerry Brown signed a public employee pension reform law (“PEPRA”).  PEPRA required public employees hired after January 1, 2013 to pay more to fund their pensions, and capped the amount of pension they could earn in retirement.  In addition to these major changes for new workers, PEPRA eliminated some other pension benefits that had been offered to public employees.  One of the benefits eliminated was a perk allowing public employees to buy up to five years of service credit that would increase their pensions as if they had worked that time.  (This benefit came to be referred to as “air time” because no work was performed to obtain it.)  Cal Fire Local 2881 sued to reinstate air time for employees hired before 2013 when PEPRA took effect, arguing that the right to purchase air time was a vested benefit protected by the California Rule.

The Court Issues a Narrow Ruling

The Court held that air time was not a form of deferred compensation protected by the Constitution since no work was actually performed to earn this benefit.  As such, the Legislature properly eliminated the ability to purchase air time. 

One silver lining for public agencies was the Court’s statement that the opportunity to purchase public employee benefits, other than pensions, is not constitutionally protected.  This would include, for example, the opportunity to purchase certain health, life or disability insurance plans. 

Other Pension Cases are Pending

Other public employee pension cases are currently pending which may force the California Supreme Court to address the California Rule directly.  The Court will hearing oral arguments this year in a case challenging the constitutionality of yet another PEPRA change--whether salary adjustments from cashing out vacation or sick leave should count as pensionable benefits.

What This Means For Public Employers

Unfortunately, the California Supreme Court did not take this opportunity to address the California Rule, so employees and unions will continue to argue that any benefit related to retirement is vested and cannot be reduced.  At least the Court found the elimination of air time was not constitutionally protected.  It remains to be seen whether the Court will directly address the California Rule in future cases.  For now, public agencies must continue to carefully consider the legal ramifications of making changes to any retirement-related benefit for their employees.

This E-Update was authored by J. Rod Betts and Phillip Simpler. For more information, please contact Mr. Betts, Mr. Simpler or any other Paul, Plevin attorney by calling (619) 237-5200.