In Massive Blow To California Unions, A Second Court Rules That Pension Benefits Can Be Reduced

Back in September, we noted that, in a surprisingly logical decision particularly for a state like California which is typically devoid of all reason, a court upheld the rights of Marin County (and it’s taxpayers) to reduce final year salary levels utilized to calculate pension payments.  The ruling was meant to protect taxpayers against “salary spiking,” a practice whereby union employees artificially drive up their final year salary, by taking cash vacation payouts or 1x bonus payments for example, in an effort to game the annual pension payment they’ll then receive in perpetuity. 

Now, according to Pension & Investments, a second California court in San Francisco has made a similar ruling, finding that while a public employee does have a “vested right” to a pension it is only to a “reasonable pension.”

A second California appeals court panel has said that vested pension rights can be reduced or eliminated in California as long as employees still receive a pension that is “substantial” and “reasonable,” court filings show.

 

The Dec. 30 decision by a three-member panel in San Francisco affirmed a state pension reform law that went into effect in 2013 and eliminated the right of participants of the $302.4 billion California Public Employees’ Retirement System, Sacramento, to enhance their pension by buying retirement credits. A lower court in Alameda County in 2015 had ruled that the pension enhancement benefits could be eliminated.

 

The enhanced benefit, known as an airtime service credit, allowed CalPERS participants to increase their retirement benefit by up to five years by making additional contributions from their salary.

Meanwhile, the San Francisco court cited the Marin Country decision from August which found that employees have a right to a pension but “not an immutable entitlement to the most optimal formula of calculating the pension.”  The August decision in Marin County was pivotal because, for the first time, it brought into question a 5-decade California rule which held that pension benefits could not be cut.

The panel cited another state appeals court’s decision in August, which said the $2.1 billion Marin County Employees’ Retirement Association, San Rafael, did not have to count pay given to employees for being on an on-call status toward retirement benefits.

 

That decision also cited the 2013 pension reform law, which applies not only to CalPERS but to most other public pension systems in California.

 

The law put in place anti-spiking provisions that prevent pension benefit increases from unused vacation and leave, bonuses, terminal pay, among other things.

 

These “anti-spiking” provisions apply to current workers.

 

“While a public employee does have a ‘vested right’ to a pension, that right is only to a ‘reasonable’ pension — not an immutable entitlement to the most optimal formula of calculating the pension,” the appeals panel wrote in August.

 

That decision put into question the so-called California rule, which held for five decades that pension benefits could not be cut.

The California Supreme Court has agreed to hear an appeal on the Marin County case, although no schedule has yet been set for oral arguments.

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For those who missed it, below is our note on a previous California court’s decision regarding a Marin County public pension.

Many public employees utilize a tool, known as “salary spiking,” to boost their annual pensions payment in retirement and we taxpayers get to foot the bill.  So what is “salary spiking?”  Typically, a public employee’s pension benefit in retirement is equal to some percentage of their highest annual pay which is often their final year on the job.  Fortunately for public employees who plan ahead, there are all sorts of fun games that can be played to “spike” your final year salary so that you actually earn more in retirement than you did on the job.  In fact, a recent report by the Los Angeles Times found that there are 60 ways to “spike” your final year salary in California including taking cash payouts for accrued vacation time, special 1x bonuses related to graduate degrees (though we’re sure you really needed that extra degree as you head off into retirement), “longevity” bonuses, etc.

One example of salary spiking comes from former Ventura County CEO, Marty Robinson, who offered up a textbook example of how to stick it to taxpayers by planning ahead.  Robinson’s official salary heading into her final year on the job was $228,000.  That said, Robinson “spiked” her final year salary by cashing out $34,000 in unused vacation pay, taking an $11,000 bonus for a graduate degree and collecting more than $24,000 in extra pension benefits the county owed her.  Adding all the 1x payments, Robinson earned nearly $300,000 in her final year which entitled her to an annual pension payment of $272,000 or the rest of her life…nearly 20% higher than the salary she received for actually working. 

But, as the Los Angeles Times pointed out, Robinson is not alone:

Former Sheriff Bob Brooks, for instance, added a $30,500 “longevity” bonus (for working more than 30 years), which boosted his pension to $272,000 a year, almost 20% higher than his base salary.

 

Former Undersheriff Craig Husband added nearly $92,600 in unused vacation time, resulting in a $257,997-a-year pension, nearly 30% above his working pay.

 

Fire Capt. T.N. Roberts, for instance, padded his final year’s pay by nearly $130,000, resulting in a pension 84% higher than his base compensation. He gets $159,598 a year in retirement pay.

In fact, the problem is pervasive.  In Ventura County, 84% of the retirees receiving more than $100,000 a year are receiving more than they did on the job. In Kern County, 77% of retirees with pensions greater than $100,000 a year are getting more now than they did before.

Well, turns out that the party might be over for the “salary spikers” in California.  In a surprisingly logical decision, particularly for a state like California which is typically devoid of all reason, a court upheld the rights of Marin County (and it’s taxpayers) to reduce final year salary levels utilized to calculate pension payments.  According to Bloomberg, the court found that while a public employee does have a “vested right” to a pension it is only to a “reasonable pension.”

“While a public employee does have a ’vested right’ to a pension, that right is only to a ’reasonable’ pension– not an immutable entitlement to the most optimal formula of calculating the pension.

Of course the Marin Association of Public Employees intends to take their fight to the Supreme Court in an effort to defend their right to manipulate pension benefits and defraud taxpayers of billions.

As we’ve noted multiple times, public pension funds around the country are currently underfunded by about $2 trillion.  The under-funding has ballooned materially since the “great recession” as asset returns have suffered while pension liabilities have grown due to lower discount rates.

Pension Underfunding

 

Meanwhile, taxpayers have been forced to cover the difference through higher contributions while employee contributions have remained fairly flat.

Pension Contributions

 

We eagerly await the next court’s decision on this topic and wish the best to California taxpayers.

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