A Ray Of Hope On The State/Local Pension Front?

The good people at Maggie's Farm today post a link to an article from California's East Bay Times reporting on the latest court decision concerning legislative attempts to address the state and local pension crisis.  The court decision in question issued from the California Court of Appeals on August 17.  It concerns a California statute effective in 2013, and the efforts of the pension board of Marin County to implement that statute.

It's been a while since I posted on the issue of the state and local pension crisis.  This post from January 2014 has a good background.  But this crisis is so slow-moving that the word "crisis" itself is rather ill-fitting, and it's hard to maintain any sense of urgency about the subject.  Still, this is a gigantic problem.  The California Court of Appeals decision cites various sources that put the overall size of the problem (all states) in the range of $3 to 4 trillion -- and it could be even substantially higher if you use lower interest rates to measure the future obligations.  But it's unlikely that any state or local pension plans will actually run out of money and start bouncing checks until well into the 2020s.  Nevertheless, plenty of these plans are already so deep in the hole that there is no clear way out short of fundamental restructuring of the pension obligations -- and then, many state constitutions (not to mention the federal constitution's Contracts Clause) have provisions that many courts have interpreted to prohibit or severely constrain the fundamental restructuring of obligations.  So the problem just slowly worsens and worsens, and generations of politicians take the opportunity to punt and leave the situation to their successors. 

Two of the states in deepest trouble are Illinois and California.  In recent years Illinois passed two statutes to deal separately with the situations of the Illinois State and the Chicago pension plans.    In both instances, the Illinois legislature made the bold step of cutting already-accrued benefits of the workers, taking the position that it could do so under its emergency police powers given the direness of the situation.  In two opinions of the Illinois Supreme Court, one from May 2015 and the other from March of this year, that Court rather angrily struck down the legislature's efforts as contrary to the Illinois Constitution.  The Illinois Court took note of the fact that the legislative changes would modify not just future accruals, but also already-accrued benefits.  But its decisions did not turn on that distinction, and appear to stand for the proposition that an employee who joins the system and works for even one day has a constitutional entitlement (under the Illinois State Constitution) to have no reductions in his pension accruals of any kind throughout an entire 40 year working career.

So, into this breach now leaps the California Court of Appeals in its case of Marin Association of Public Employees v. Marin County Employees' Retirement Association, et al.  A major case from California is particularly noteworthy because, at least up until this time, California has been known for what has sometimes been referred to as the "California rule" of state pension obligations, which is that, even in the absence of any state constitutional protection, any government employee who works for even one day as part of a pension plan can never have his ongoing pension accruals cut in any respect, no matter how trivial.  I'm not sure that that is an accurate statement of the pre-existing California case law, but certainly many advocates have taken the position that that is what the California cases have stood for.  

This new case arises in the context of a statute designed to address issues arising from what was perceived as abusive employee pension "spiking."  It seems that the pensions in question were calculated based on so-called "final average pay," and the employees would maneuver to get various things, otherwise not normally a part of pay, paid to them in cash in their final years in order to get those things included in the pension calculation and drive up the pension amount.  Examples mentioned in the opinion included unused sick days, unused vacation days, and payments for waiving health insurance.  The statute passed by the California legislature allowed pension boards to modify the definition of a term called "compensation earnable" in the pension formula to do away with these perceived abuses, in the process lowering the "final average pay," and thereby lowering the pensions that would be payable to employees who were planning to take advantage of the spiking games.  

So, is this OK or no?  It would not pass the test of the "California rule" as I articulated it above.  But this court parses the pre-existing California law at great length, and comes to a very different result.  The court expresses its holding through quotes from prior California Supreme Court cases, most notably this one:

[A] public pension system is subject to the implied qualification that the governing body may make reasonable modifications and changes before the pension becomes payable and that until that time the employee does not have a right to any fixed or definite benefits but only to a substantial or reasonable pension.

On that basis it upholds the actions of the Marin pension board.  Note that the modification to the definition was not prospective-only, so this opinion would give the legislature flexibility -- within very vaguely-defined boundaries -- to make changes even to already-accrued benefits.

Needless to say, the case is on the way to the California Supreme Court.  That court can of course do what it wants with this subject, and is certainly not bound by the decision of the Court of Appeals, let alone by its own prior decisions.  

Meanwhile, back in New York, nobody has had the guts to take on these issues yet.  As I pointed out in this post from January 2014, we have two old cases from our Court of Appeals, one from 1958 and the other from 1972, that would appear to hold that any changes to pension accruals that are adverse to a public employee, even one who has only worked for one day, violate a provision of our state constitution.  The 1972 opinion actually specifically addresses an attempt to change the way unused vacation days are counted in final average pay.  Sooner or later these issues will have to be addressed, but meanwhile we have the benefit -- or maybe it's the curse -- of having funded our pension plans much more honestly than places like California and Illinois (and New Jersey and Connecticut).  That just means that the crisis will hit later, not that we can avoid it forever.