The California Supreme Court will soon schedule oral argument in controversial cases involving legislative pension reform impacting the pension benefits of state and local government employees. By the close of 2020, the Supreme Court will issue a decision that may very well strike at the heart of the so-called “California Rule.”
For nearly 60 years, since the California Supreme Court issued its decision in Allen v. City of Long Beach in 1955, the “California Rule” remained a mainstay of California common law. The California Rule is the general notion that a public employee is vested in the pension benefit promised at the start of employment such that those benefits cannot be reduced even for prospective service except under exceptionally limited circumstances. To be legally permissible under the California Rule, the modification of a pension benefit “must bear some material relation to the theory of a pension system and its successful operation” and any modification that results in disadvantages to employees must be accompanied by comparable new advantages.
Among the provisions enacted with the Public Employee Pension Reform Act of 2013 (PEPRA) were changes to the definitions of “compensation earnable” or “pensionable compensation.” These two terms refer to the items of employee compensation that may be included in the calculation of the employee’s ultimate pension benefit. For example, compensation for special assignments, education, or performance of extra duties. The PEPRA revised a statute under the County Employees Retirement Law of 1937 (CERL) such that particular items of compensation that were formerly included in “compensation earnable,” are now expressly excluded for employees hired prior to PEPRA’s effective date (“Legacy Members”). Soon after, Legacy Members challenged what they believed to be PEPRA’s violation of the California Rule.
The first of these cases decided by a California Court of Appeal was Marin Assn. of Public Employees v. Marin County Employees’ Retirement Assn. in 2016. In Marin, the court held that public pension system members are not entitled to an immutable, unchanging pension benefit for the entirety of employment, but are entitled only to a “reasonable” pension. The Marin court further held that detrimental pension modifications should, rather than must, be accompanied by comparable new advantages. The Marin court focused heavily on the “dire financial predictions necessitating urgent and fundamental changes to improve the solvency of various pension systems” in concluding that PEPRA’s modifications to the definition of compensation earnable for Legacy Members was “reasonable” and therefore, did not impair constitutionally protected vested rights. The Marin Association of Public Employees appealed the decision. The California Supreme Court granted review on November 22, 2016, but deferred action in the matter pending the decision in the next case, Alameda County Deputy Sheriff’s Assn. v. Alameda County Employees’ Retirement Assn.
Decided in 2018, the Alameda court declined to follow the decision in Marin, issuing a decision closer in line with the California Rule. The court held that the law requires an individualized balancing test to determine if modifications to pension benefits are reasonable and lawful. The Alameda court explained that when detrimental modifications are made to a public employee’s pension benefits, and no corresponding new advantages are provided, the application of the detrimental changes can only be justified by compelling evidence establishing that the required changes bear some material relation to the theory of a pension system and its successful operation. The Alameda court instructed that the individualized analysis requires focusing on factors such as the impacts of the detrimental changes on the Legacy Members and whether exempting the Legacy Members from the detrimental changes would make it difficult for the particular pension system to meet its pension obligations. The Alameda decision was appealed and the California Supreme Court granted review on March 28, 2018.
Marin and Alameda leave us with somewhat conflicting legal frameworks for analyzing if, when, and under what circumstances a public employer or the legislature may modify the pension benefits of public employees after they have begun employment. On January 10, 2020, the Supreme Court issued notice for the scheduling of oral argument. This means a final decision of the Supreme Court may come before the end of the year that may provide an answer as to the existence and fate of the California Rule.
Marin Assn. of Public Employees v. Marin County Employees’ Retirement Assn. (2016) 2 Cal.App.5th 674 review granted, Marin Association of Public Employees v. Marin County Employees’ Retirement Association (State of California) (Cal. 2016) 210 Cal.Rptr.3d 15.
Alameda County Deputy Sheriff’s Assn. v. Alameda County Employees’ Retirement Assn. (2018) 19 Cal.App.5th 61, as modified (Feb. 5, 2018), review granted Alameda County Deputy Sheriff’s Association v. Alameda County Employees’ Retirement Assn. (Cal. 2018) 230 Cal.Rptr.3d 681.