Public employees in California are not only much more likely to receive a pension than their counterparts in the private sector, but their pensions have an unusual degree of protection under law. Thanks to a doctrine called the California rule, pension benefits for current public employees may not be reduced after they've started work. Any change that lowers the value of one aspect of a pension has to be offset by improvements elsewhere that are worth at least as much.
In other words, the pension elevator can go up (even retroactively), but it cannot go down. And as a result of this inflexibility, numerous local governments around the state have struggled to cover the growing cost of the pensions they've promised.
At the California Public Employees Retirement System, for example, the gap between the amount owed to current and future retirees and the amount set aside is about $100 billion. And because they couldn't legally reduce the pensions' value or cost, the only real options for government employers were to lay off staff, deny pay hikes or try to persuade their unions to accept less costly pension plans for new hires. Those moves have put a squeeze public services — and the employees who provided them.
Gov. Jerry Brown and state lawmakers responded four years ago with a pension reform law that reduced the maximum benefits for future state and local workers — those hired after Jan. 1, 2013. It also barred pension "spiking" — the practice of lumping unused sick leave and vacation time, hours spent on call and other forms of compensation into the pay on which a pension is based — for all employees.
After the financially troubled Marin County Employees' Retirement Assn. implemented the ban on pension spiking, however, workers there sued, saying the new state law cut their benefits in violation of the state Constitution. A Superior Court judge upheld the ban, and in August a three-judge panel on the Court of Appeal agreed in a 40-page opinion that took direct aim at how courts have been interpreting the 1983 state Supreme Court decision that buttressed the California rule. The opinion, written by Justice James Richman, held that pension benefits that workers have not yet accrued can, in fact, be reduced. And those reductions do not have to be offset, Richman wrote, as long as the pensions are still "reasonable."
This is a fair reading of the law. The benefits workers have already accrued and that are promised by their current contracts should be sacrosanct; the ones they have not yet earned for work they have not yet performed should be subject to limited amendment if necessary to ensure the health of the pension fund. This can serve the employees' interests too — for example, they may prefer to increase their pension contributions in order to avoid layoffs or pay freezes. Nor is anyone served when local governments go bankrupt, raising the possibility of cutting benefits for current retirees too.
But it's not clear just how much latitude Richman's ruling gives governments. That's why the Supreme Court should agree to hear the Marin County employees' appeal and clarify what a "reasonable" pension means. State and local governments need more flexibility to tackle the enormous challenge that their pension obligations present. But there also need to be clear limits on how far governments can go in adjusting the benefits that current workers may accrue in the future.