This often comes in the form of divestment, by which the funds are encouraged – or even required – to sell their assets in industries that are viewed negatively by the people who push these efforts. These efforts tend to work against the goals of the funds’ professional investment staff, which are charged with getting high investment returns to fund pensions for the systems’ retirees. Both funds have a fiduciary responsibility to maximize their return on taxpayer dollars.

Yet estimates from a consulting firm suggest that CalPERS has lost approximately $8 billion in returns because of previous efforts to divest from coal-related and tobacco industries. That’s become a particularly contentious issue as funding levels have fallen to 68 percent for CalPERS and 64 percent for CalSTRS. That means they have only around two-thirds of the assets needed to make good on all the current and future pension promises made to government retirees.

Despite the troubling numbers, there’s a new push for divestment from some politicians. Following the October massacre in Las Vegas, by which a gunman murdered 59 people at a country music concert, state Treasurer John Chiang has called for the teachers’ fund to sell its assets in weapons firms and sporting-goods companies that sell any guns that are illegal in California.

“Neither taxpayer funds nor the pension contributions of any of the teachers we represent, including the three California teachers slain in Las Vegas should be invested in the purveyors of military-style assault weapons,” said Chiang, a 2018 candidate for governor and member of both pension boards. Chiang also told the Sacramento Bee that he plans on making a similar request to the CalPERS board.

The newspaper also noted that both funds “this year have faced calls to divest from companies that do business with the controversial Dakota Access Pipeline,” which would transport oil underground from North Dakota oilfields to Illinois. It has prompted protests from a variety of environmental and Native American activists.

Critics of these proposals say they are largely symbolic and would do little to influence gun sales or the pipelines. Divestment from these relatively small industries wouldn’t have much impact on the massive funds’ financial returns, either.

On Oct. 30, 12 members of California’s Democratic congressional delegation sent a letter to CalPERS chief executive officer Marcie Frost urging the pension fund to divest from a fund that has acquired a hotel owned by Donald Trump’s organization. This move is more directly political than many divestment efforts, which tend to focus on the social implications of investing in the pipeline, weapons manufacturers, coal-related industries and tobacco companies.

Divestment advocates sometimes argue that these controversial products may be poor long-term investments. For instance, the Public Divestiture of Thermal Coal Companies Act of 2015 and similar efforts by the state insurance commissioner were based in part on the notion that these coal-related companies may face diminishing values as the world shifts away from carbon-based fuels – a point rebutted by those who note that the current price of the stocks already reflects that risk.

But the Trump-related divestment call, led by U.S. Rep. Ted Lieu of Torrance, is designed to target the president. The members of Congress expressed their disappointment that CalPERS “has not divested its interest” in that fund “nor has taken any actions to ensure that its fees are not being transferred to President Trump,” according to their letter. They criticized CalPERS for taking a “wait-and-see” approach toward the matter.

These members of Congress claim that this CalPERS investment could be in violation of the Domestic Emoluments Clause of the U.S. Constitution, which states that “no Person holding any Office of Profit or Trust under them, shall, without the Consent of the Congress, accept of any present, Emolument, Office, or Title, of any kind whatever, from any King, Prince, or foreign State.” This would be an unusual interpretation of an arcane clause.

Meanwhile, the pension funds have been expanding other divestment and socially motivated investment efforts. Last December, the CalPERS investment staff “recommended that the board remove its 16-year ban on tobacco investments in light of an increasing demand to improve investment returns and pay benefits,” according to a Reuters report. But instead of removing the ban, the board “voted to remain divested and to expand the ban to externally managed portfolios and affiliated funds.”

And last year CalPERS adopted a five year Environmental, Social and Governance plan that focuses on socially responsible investing. The fund has long used its financial clout to push companies it invests in to promote, for instance, board diversity and other social goals.

Whatever their chances for approval, the latest efforts are not out of the ordinary. But they will rekindle the long-running debate between political and financial goals, and whether the former imperils the latter given both funds’ large unfunded liabilities.

Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.

The underfunded California Public Employees’ Retirement System faces daunting challenges in coming years, with local governments increasingly vocal about not being able to afford the ever-growing cost of their CalPERS-managed pension programs, as CalWatchdog

The nation’s largest public pension fund could face these challenges with a board that appears both solidly pro-union and solidly in the corner of the pension giant’s top management. Or the board could once again have a rabble-rouser in its midst.

That was the takeaway from the voting that concluded last week for two of the six member-at-large seats on the 13-member board that are elected by CalPERS members. (The other seven members are chosen by various state leaders.)

David Miller, a state regulator and former president of the California Association of Professional Scientists, was elected to replace J.J. Jelincic, a maverick board member who has long accused CalPERS executives of poor management, bad decisions and a lack of openness.

Jelincic decided not to seek re-election in June after facing harsh criticism from other CalPERS leaders for allegedly leaking confidential information. In May, he made headlines on investment blogs for likening a top CalPERS lawyer to Roy Cohn, a notorious New York lawyer known for his ruthlessness. In particular, Jelincic’s acidic remarks have long drawn praise from writers at the Naked Capitalism website who share his low opening of how CalPERS is run.

Miller, who was backed by public employee unions and has emphasized the importance of preserving and protecting government pensions, easily defeated former CalPERS board member Michael Flaherman, who was backed by Jelincic and has a history of being open to pension reform.

Union-backed board incumbent denied re-election in initial voting

The union-backed candidate for a second member-at-large seat, incumbent Michael Bilbrey, led voting but was forced into a runoff next month after no one garnered majority support in a four-way race. Bilbrey’s opponent is a Jelincic-like wild card – Garden Grove Unified School District manager Margaret Brown.

While Brown too has vowed to protect and preserve government pensions, she has offered sharp criticism of CalPERS’ upper ranks.

In May, she accused CalPERS’ top officials of knowingly cooking the books – hiding investment costs to make the pension agency’s investment record look better than it actually was so annual bonuses would be larger.

In September, Brown wrote a letter to CalPERS CEO Marcie Frost, CalPERS board members and state officials including Attorney General Xavier Becerra alleging that the new rules for mail voting for the just-held elections broke state laws and made it possible that individual union members’ votes could be made public.

The runoff is also a mail election. Ballots must be mailed by Nov. 10. In initial voting, Bilbrey got 49,801 votes (40.8 percent) to Brown’s 43,132 (35.4 percent).

Jelincic took a final shot at a top CalPERS official on his way out the door. In a September email to Naked Capitalism, Jelincic mocked board President Rob Feckner’s remark that he had never been misled by CalPERS staff in his 18 years on the board.

Jelincic noted that Feckner was “board president while the CEO was collecting shoe boxes of cash.”

That was a reference to Fred Buenrostro, who was sentenced to a 4½-year prison term last year after after pleading guilty in 2014 to taking more than $250,000 in bribes during his six years as CalPERS CEO.

The Public Divestiture of Thermal Coal Companies Act of 2015 required CalPERS to “identify, engage and potentially divest from companies meeting the definition of ‘thermal coal companies.’” The pension fund was directed to do so “consistent with its fiduciary responsibilities,” providing some wiggle room for the fund, whose primary duty is to maximize investment returns to make good on its public-employee pension obligations.

Nevertheless, CalPERS promptly identified two dozen publicly traded companies that generate at least 50 percent of their revenue from mining thermal coal, as required by the law. As the recent report explains, three companies adapted their business model and redirected their investments toward clean energy. As such, they were exempt from divestment. CalPERS had no holding in eight other companies identified under the act.

But 14 companies “failed to indicate applicable business plan adaptations, or failed to respond to CalPERS engagement efforts and were subject to divestment,” according to the report. As the Sacramento Bee explained, “stocks for 13 of the 14 companies are worth more than they were a year ago when the pension fund was divesting from the industry.” The shares of one of those firms were trading at 15 times their April 2016 levels.

There’s little question that the act was designed to achieve a social goal, rather than one related to increasing CalPERS’ investment returns. “Coal combustion for energy generation is the single leading cause of the pollution that causes global climate change,” said the bill’s author, Sen. Kevin de Leon, D-Los Angeles, as quoted in the Senate bill analysis. He added that coal is “a leading cause of smog, acid rain, and toxic air pollution” and that “most U.S. coal plants have not installed these technologies.”

CalPERS’ investment staff tends to oppose socially oriented investments, but the CalPERS board has the final say. The issue was debated at the CalPERS Board of Administration meeting in May. The Sacramento Bee reported on union officials who criticized the policy at the board meeting. “We cannot afford to lose funding for law enforcement officers in exchange for a socially responsible investment policy,” said Jim Auck, treasurer of the Corona Police Officers Association.

This isn’t the first time that there’s been tension between the fund’s politically oriented investment goals and its desire to increase investment returns. At a board meeting last year, CalPERS investment officials argued for an end to a 16-year ban on tobacco-related investments made by the system’s own investment officers. (Tobacco investments by outside firms were still allowed.) Because tobacco stocks had rebounded since 2000, news reports estimated that the pension fund had lost about $3 billion because of that decision. The fund’s total investments are valued at more than $300 billion.

Instead of following the investment team’s advice, the CalPERS board continued to ban tobacco investments and also decided to divest about $547 million in tobacco-related investments handled by outside firms. That decision also was based on social goals. Advocates for tobacco divestment argued that CalPERS ought not invest in firms that sell deadly products.

At the time, the tobacco-divestment decision was particularly controversial because CalPERS faced investment returns of a measly 0.61 percent. Now, with CalPERS’ latest returns showing a robust 11.2 percent gain, it makes continuing with the coal divestment plan – and other socially oriented investment strategies – an easier option to pursue.

Regarding coal, CalPERS isn’t the only state agency to pursue divestment. Last summer, California Insurance Commissioner Dave Jones launched his Climate Risk Carbon Initiative, which called for any insurance companies that do business in California to divest “voluntarily” from most of their thermal-coal investments. The state vowed to publicize the names of companies that didn’t comply and ramped up mandatory reporting requirements.

Insurance commissioners regulate insurers to assure they have the resources to pay any claims. Yet the department’s divestment request clearly had a social (and some say political) goal. Jones justified it by arguing that such investments put the companies at risk. “As utilities decrease their use of coal and other carbon fuel sources … investments in coal and the carbon economy run the risk of becoming a stranded asset of diminishing value,” he said in a statement.

But critics of the policy, including a 2016 study by this writer, note that insurers are invested in extremely conservative positions, mostly in fixed-income bonds, and that even the insurer with the largest percentage of coal-related investments (TIAA-CREF) had only 1.76 percent of its total assets in such holdings. Furthermore, the value of the stocks already reflects the well-known uncertainties that the insurance commissioner raised. Jones’ office argued, in response, that “since 2011, coal prices, cash flows, and company valuations have fallen sharply thus adversely affecting and bankrupting numerous coal companies.”

The broad question, especially for CalPERS, is the one raised by the union officials at the recent board meeting: Are the political and social gains of divesting from these industries worth the costs in investment returns?

Chief investment officers “invest for value and don’t appreciate being hamstrung by legislators who don’t know how to manage a diversified portfolio,” said Sen. John Moorlach, R-Costa Mesa, who voted against Sen. de Leon’s divestment act. “I think I’m the only legislator who managed a $7 billion portfolio. And the studies I’ve seen have shown that social investing has produced lower returns.”

Despite the recent good-news returns, CalPERS has an enormous amount of unfunded liabilities – the shortfall in assets to make good on all the long-term pension promises made to government employees. The system is only funded at around 68 percent. This should be of concern not only to the agency, the Legislature and public employees who depend on a CalPERS retirement, but to California taxpayers. Ultimately, they are the ones who will pay for any pension shortfalls.

Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.

Last week’s announcement by the California Public Employees’ Retirement System that it had strong

Sacramento Democratic insider Steve Maviglio and the Californians for Retirement Security – a union-backed group that opposes any effort to change public employee pensions – shared a Twitter post about how the news “should quiet pension bashers.”

But credit ratings agencies, actuaries and investment experts aren’t likely to see the news as reason to change their grim view of CalPERS’ medium- and long-term prospects. Even with the strong year, CalPERS still only has 68 percent of funds in hand to cover its pension obligations – a roughly $100 billion shortfall – and that’s based on a forecast of 7 percent annual returns that CalPERS’ own consultant said should be reduced to 6.2 percent.

Meanwhile, local governments around the state are in no mood for happy talk about the nation’s largest public pension agency. Their required CalPERS’ pension payments are soaring and appear likely to keep increasing for years to come – even if CalPERS achieves its 7 percent return goal. Aging public agency work forces are swelling the ranks of retirees and “smoothing” practices that phased in CalPERS rate increases over the last 15 years no longer offer much of a cushion to governments’ bottom lines.

Modesto official: CalPERS status quo will collapse

In May, Joe Lopez, Modesto’s acting city manager, said the city eventually wouldn’t be able to afford its CalPERS bill, which will nearly double over the next eight years.

“Ultimately there is going to have to be a substantial change made to the way the pension system is run,” Lopez told a City Council budget committee hearing, according to the Modesto Bee. “We can’t continue to rely, CalPERS can’t continue to rely, on revenue [from cities and its other public sector members to meet its pension obligations]. There is going to have to be substantial changes to the actual benefit packages if these are ever going to be sustainable.”

There are similar worries in many small cities around the state.

Last month, Chico Councilman Randall Stone – a financial planner – predicted CalPERS would eventually collapse as the benefits it paid out exceeded the money it was taking in.

The grim assessment was triggered by a report showing the city’s CalPERS bill will go up about $370,000 in 2018-19, $803,000 in 2019-20 and nearly $2 million in 2020-21 alone.

“I think generally speaking, the community doesn’t understand what a time bomb this is,” Stone told the Chico Enterprise-Record. “You should be screaming with your hair on fire from the rooftops.”

In May, the Bay Area News Group reported that three small East Bay towns – Pittsburg, Walnut Creek and Martinez – had to cut several agencies’ budgets for 2017-18 to pay their CalPERS bills. And these cuts are even before the large pending CalPERS hikes.

In March, the Ventura County Star reported on how local cities were reeling because of the CalPERS hikes. Tiny Port Hueneme’s pension bill went from $774,000 in 2014-15 to $1.3 million in 2017-18 and will reach $3.2 million in 2022-23 – more than quadrupling over an eight-year span.

SEIU leader: Pension shortfall like drought

But union officials have not expressed sympathy with struggling local governments. In a June 26 op-ed for the Sacramento Bee, Yvonne Walker, president of the Service Employees International Union Local 1000, mocked “doomsday predictions about California’s public worker pension funds.” She likened the recent poor CalPERS returns to the state’s drought, which came to an abrupt end this winter.

This analogy – and Walker’s long-term optimism – prompted a tart response from David Crane, a financial expert and former aide to Gov. Arnold Schwarzenegger.

“No financial expert can present any real evidence showing that CalPERS can grow its way back from its current 63 percent funded ratio to anywhere close to 100 percent,” Crane wrote on the Medium website.

The 63 percent funded figure went up to 68 percent after CalPERS’ good returns were noted, but Crane stands by his dismissal of any optimism about CalPERS recovering from its current woes.

The giant California Public Employees’ Retirement System – with $320 billion-plus in assets, the nation’s largest pension system – is going to lose its only outspoken internal watchdog.

J.J. Jelincic – an eight-year incumbent on the CalPERS board who is on leave from his job as an agency investment officer – indicated earlier this year that he would seek another term in the mail-in election for his seat among CalPERS members this September and October. But Jelincic changed his mind and didn’t meet the recent election filing deadline, apparently meaning he’s going back to his old job.

While not returning media calls, Jelincic posted a statement on his website essentially trashing his board colleagues: “I originally ran for the CalPERS board because I thought the board was not doing its job and was too often being manipulated by staff,” he wrote. “After eight years on the board, I can tell you it was even worse than I realized.”

Jelincic’s run-ins with CalPERS’ board members and top officials began soon after his 2009 election and never stopped.

In January, he was accused by fellow board member Bill Staton of repeated leaking of confidential material since 2015 and urged to resign. Staton offered no evidence or examples of leaks, but a subsequent inquiry concluded there had been at least one leak. As punishment, Jelincic was ordered to attend a State Bar workshop on laws governing the CalPERS board’s responsibilities. Staton’s accusations came a month after Jelincic won wide attention for his failed attempts to get CalPERS to publicly explain major changes in its asset allocation.

National media sees bid to silence Jelincic

National financial media that keep close track of CalPERS’ affairs depicted the punishment as an attempt to silence Jelincic for his years of assailing the pension agency’s staff as secretive and of dubious competence and its board as ineffectual and uninterested in getting to the bottom of problems. The backdrop to Jelincic’s attacks gave them particular weight: a bribery scandal uncovered in 2009 that led to former CalPERS CEO Fred Buenrostro being sent to prison for getting kickbacks for some CalPERS’ investments.

“Jelincic is the one CalPERS board member who regularly challenges staff, with the result that he has repeatedly and unintentionally caught them out making obvious false statements and appearing to be seriously out of their depth,” the Naked Capitalism website wrote in February after breaking the story that Jelincic faced punishment.

“CalPERS’ is out to quash independent views and badly-needed inquiries because they are seen as socially uncomfortable. … CalPERS lives in a bubble and routinely denies well-warranted criticism.”

In 2015, Jelincic’s questioning of staffers established that – by choice – they weren’t keeping tabs on the fees that portfolio managers were charging. The revelation prompted an incredulous reaction from Fortune magazine.

Reprimanded for ripping choice of chief investment officer

In 2014, Jelincic was publicly reprimanded for criticizing the selection of Ted Eliopoulos as CalSTRS’ new chief investment officer in a media interview. He said Eliopoulos had done a poor job in his previous role as CalSTRS’ chief of real estate investments and didn’t merit a promotion. One of Jelincic’s favorite anecdotes is about his 2008 discovery that CalPERS had lost track of the fact that it owned 26,000 acres of land in the Phoenix area.

The filing deadline for Jelincic’s seat was extended after his surprise decision to not seek re-election. The first three to file appeared to be in the don’t-rock-the-boat category that CalPERS prefers: Long Beach Unified School Board member Felton William; David Miller, a scientist with the California Department of Toxic Substance Control; and State Personnel Board member Richard Costigan, who already serves on the CalPERS board representing his agency but wants a full, regular seat.

However, the last candidate to file, former CalPERS board member Michael Flaherman, appears to be in the Jelincic mold. Calpensions reported Flaherman is a harsh critic of the CalPERS status quo and thinks its board should be far less passive.

The governor’s plan is similar to the idea of pension-obligation bonds. That’s when a government borrows money to pay down escalating pension debts, in the hopes “that the bond proceeds, when invested with pension assets in higher-yielding asset classes, will be able to achieve a rate of return that is greater than the interest rate owed over the term of the bonds,” according to an explanation from the Government Finance Officers Association.

The governor’s plan, by contrast, would borrow money from the Surplus Money Investment Fund, a low-interest (around 1 percent) account where the state holds money to pay for short-term expenses. It would then make a supplemental $6 billion payment to the California Public Employees’ Retirement System (CalPERS), which currently predicts a rate of return of 7 percent (even though last fiscal year it received only 0.61 percent). If the CalPERS fund performs as predicted, it will allow the state to save $11 billion in pension liabilities over two decades.

“Absent additional action to address these growing liabilities, paying off retirement liabilities will require an increasing percentage of the state budget. For example, the state’s contributions to CalPERS are on track to nearly double from $5.8 billion ($3.4 billion General Fund) in 2017‑18 to $9.2 billion ($5.3 billion General Fund) in 2023‑24,” according to the May budget revision’s summary. This is purportedly a painless way to pay down growing pension debts.

The idea got a boost from one of California’s best-known pension reformers, Sen. John Moorlach, an Orange County Republican who recently introduced a package of pension reform bills in the Senate. They were all killed by majority Democrats. Nevertheless, Moorlach wrote, in a column for Fox & Hounds that he wishes the governor’s prepayment plan had “a little more sizzle to make it an even more interesting opportunity.”

“Governor Brown should ask the board of CalPERS what type of incentive they will give the state for the prepayment,” he wrote. “CalPERS will benefit from the large influx and should provide at least a 3.75 percent reduction on the actuarially calculated required contribution.” That’s unlikely to happen, of course, but Moorlach wrote that he likes the Brown proposal and thinks the governor should move forward with it.

The idea follows the lead of the Orange County city of Newport Beach, explained Ed Mendel, in his May 29 Calpensions article. The city is paying down its pension debt to CalPERS as quickly as possible, helping it avoid the possible fate of other cities. Mendel quotes Modesto’s acting city manager, who told the Modesto Bee “he is hearing that many cities are facing bankruptcy over rising pension costs.” In the case of looming fiscal trouble, most say slashing at debt is a good idea.

But not everyone is so favorably disposed toward the governor’s plan. David Crane, a Stanford University lecturer and president of Govern for California, argues in a column that the plan is terrible precedent that transfers more pension costs from the beneficiaries of the pension system to the state’s taxpayers. When the state makes pension promises to employees, he wrote, both the state and the employees make contributions into the system, which he refers to as “normal costs.”

By contrast, when agencies increase benefit levels or stock-market earnings go down, the pension funds face those “unfunded liabilities,” which are the unfunded promises they’ve already made to current retirees and employees. CalPERS currently is 74 percent funded, which means that 26 percent of those promises are unfunded. “In contrast to joint sharing of normal cost, employees don’t share in the cost of unfunded liabilities,” he wrote. “One hundred percent of that cost falls on citizens, whose services get crowded out and taxes get raised to pay off the liabilities.”

Borrowing these taxpayer funds to pay off the pension debt, he explains, would just let CalPERS continue to set these shared “normal costs” at an unfairly low rate. Furthermore, Crane notes that this special fund is funded entirely by taxpayers, so he fears the state will borrow from other special funds. The state could claim that these monies are going to pay for public services, when in reality they are being siphoned off for pensions.

As Gov. Arnold Schwarzenegger’s pension adviser, Crane wrote that he helped the former governor “engineer ‘Deficit Reduction Bonds’ as a way to address the deficit he acquired upon taking office.” But he now regrets the move: “Those borrowings didn’t solve anything. They just covered up the problem, with interest to boost.”

State and local governments are understandably in a bind. They have “few ways to slow the rapidly climbing cost, among them: cut staff and services, lower pensions for new hires, get unionized employees to pay more for their pensions or cut salaries …,” explained Mendel. He noted the key obstacle limiting the ability of governments to cut pension accruals in the future is something called the “California Rule,” which is making its way to the state Supreme Court.

For some, then, shuffling funds around to prepay a little pension debt seems like a cost-free no-brainer to likely limit the growth of the debts. But to others, it’s just a shell game that evades the more politically dangerous course of tackling the size of those benefits head on – and running into powerful resistance from the state’s public-employee unions.

Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.

Last week, a three-judge panel of the fourth state appellate court district unanimously rejected a 2015 PERB ruling that if upheld would have invalidated a successful 2012 San Diego ballot measure that gave newly hired city employees – except for police officers – 401(k)-style retirement benefits instead of defined-benefit pensions. The measure was meant to dig California’s second-biggest city out of a hole created by two City Council decisions to intentionally underfund the San Diego pension system, leading to a city fiscal crisis so severe that San Diego was dubbed “Enron-by-the-Sea” in 2004 by the New York Times.

PERB’s ruling was based on the view that any pension ballot measure that was promoted by elected city officials – in San Diego’s case, by then-Mayor Jerry Sanders and several City Council members – ran afoul of state requirements that local governments had to negotiate in the standard collective bargaining “meet and confer” process before they could change terms of employment.

This legal argument was tough to square with California’s history. Elected officials frequently have taken the lead in employing direct democracy to adopt new laws or modify existing ones – including those that affect terms of employment for public employees. In 2005, for example, Gov. Arnold Schwarzenegger sought to change teacher tenure rules in a special election. Schwarzenegger couldn’t sell the change to voters, but his attempt to do so was not seen as unlawful or unusual.

The appellate panel agreed with the city of San Diego’s argument that while elected officials helped lobby for the 2012 pension reform measure, it was crafted and placed on the ballot in keeping with standard practices for citizens’ initiatives, with petition committees, signature-gathering campaigns and other normal trappings of direct democracy. The ruling also noted that PERB had tried to use its official powers to block the ballot measure in early 2012 even before it reached the ballot, with the hint that appellate judges saw this decision as a sign of PERB abusing its authority.

PERB wanted collective bargaining to apply retroactively to older laws

PERB’s previous setback in asserting the sweeping powers of collective bargaining laws came in its response to a lawsuit filed in 2011. Parent activists sued the Los Angeles Unified School District for not considering student performance when formally evaluating teachers, as is required by the Stull Act, a far-reaching state education blueprint enacted in 1971.

PERB contended that before teachers were subject to such evaluations, the matter should be collectively bargained – even though the primary law establishing collective bargaining for teachers was approved in 1975, four years after the Stull Act took effect. The agency also held that it should have initial jurisdiction over the case – not state courts.

But Los Angeles Superior Court Judge James C. Chalfant’s 2012 decision categorically rejected PERB’s arguments, saying that LAUSD could not ignore the Stull Act’s requirements, that collective bargaining did not apply retroactively to older state laws and that parent activists were free to use the courts to challenge whether public schools were complying with state laws.

The Stull Act remains an area of contention for California public schools despite Chalfant’s ruling. In September, Contra County Superior Court Judge Barry P. Good rejected a lawsuit that said 13 Northern California school districts were breaking state law by refusing to consider student performance in evaluating teachers.

Good’s 40-page ruling held that the Stull Act’s requirements were not as “clear and unambiguous” as those who filed the lawsuit contended.

Legislators have largely avoided the pension issue since passage of a reform law that went into effect in 2013, and reformers have struggled to settle on an initiative strategy to take to voters. That’s unlikely to change. But last week the high court agreed to review a union appeal of a decision involving an obscure concept known as the California Rule. The decision could change everything.

The California Rule is not actually a rule, but a legal doctrine that emanated from a 1955 court case. Essentially, it states that no vested public-employee benefit such as a pension can be reduced unless public employees are granted another benefit of equal or greater value. Unions claim that a 2013 state law unfairly deprives them of vested benefits.

The rule remains the stumbling block for most efforts to reduce pension costs, given that it severely limits public agencies’ efforts to slice current pension costs. Hence, pension reformers and unions alike are eager to get a final verdict on the matter.

In the private sector, companies that offer defined-benefit pension plans – those plans that guarantee a pension payout based on a formula, as opposed to 401(k)s – are free to reduce the benefits going forward. In other words, employees must be made whole through today, but may start receiving lower benefits tomorrow. By contrast, in California and other states that follow this rule, government workers must be paid the full amount of the promised benefits until they (and their spouses) pass away.

The accepted interpretation has been that a benefit hike, once approved by a government agency, is permanent. It can never be rolled back. As a result, most pension reform proposals deal only with shaving benefits for new hires, who won’t start retiring for 25 or 30 years. That leaves service cuts and tax hikes as the only way to deal with increasing pension debt.

Some localities have tried to take on the rule. In 2012, for instance, San Jose officials put a pension-reform measure on the ballot that required current city employees to choose between new pension plans that offered fewer benefits than current plans. It passed with 70 percent of the vote, but the courts later gutted that measure. They relied on the California Rule.

But now the California Supreme Court is ready to address the issue, at least around the margins. Last week, the court, without comment, agreed to a union challenge of a San Francisco appeals court that put limits on the application of the rule. Last summer, unions appealed a similar Marin County case, in which an appeals court also put some limits on the rule’s application.

At issue is the California Public Employees’ Pension Reform Act, which went into effect in January 2013. Most analysts viewed the law as a modest attempt to get control of the state’s growing unfunded pension liabilities, or debt. Most of it applied only to newly hired state workers. But it did include a handful of provisions that affect current workers.

On Dec. 30, the First District Court of Appeal in San Francisco rejected a challenge by a state firefighters’ union claiming that PEPRA’s elimination of a 2003 benefit that let firefighters purchase up to five years of additional credits (airtime) before retiring was in violation of the rule.

“The unions argued that their members had a legal right to the pension benefits that were in effect when they were hired and that the state broke its contractual promise to them by eliminating those benefits,” according to a San Francisco Chronicle analysis. The 3-0 written opinion found that public employees have a right to a “reasonable pension” but they aren’t guaranteed “fixed or definite benefits immune from modification or elimination.”

“(P)laintiffs assert a vested contractual right to purchase up to five years of airtime service credit that is not subject to elimination or destruction by legislative amendment or repeal ‘even before the benefit has been accessed or the time for retirement has arrived.’” The court said plaintiffs “disregard the fact that, when amending the statutory scheme governing pension rights, the Legislature in fact provided (eligible public employees) … a several-month window in which to purchase the airtime service credit before the option terminated.”

The high court could uphold the rule or overturn it, or put certain limits on its application and deal narrowly with the “airtime” issue. In that separate Marin County case, five unions challenged PEPRA’s limitation of various ways that public employees enhance, or spike, their end-of-career salaries (bonuses, unused leave, etc.) to boost their lifetime retirement pay.

Unions argue that the reform reduced their vested pension benefits and was therefore in violation of their constitutional rights, as upheld by – you guessed it – the California Rule. “(W)hile 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 that pension,” ruled Justice James Richman, in language similar to the San Francisco ruling. He wrote that the Legislature may “prior to the employee’s retirement, alter the formula, thereby reducing the anticipated pension.”

As reporter Ed Mendel has explained in Calpensions, “The high court will wait until an appeals court rules on three similar spiking ban suits consolidated from Alameda, Contra Costa and Merced counties.” That might take some time, but this issue is definitely coming to the state’s high court in one form or another, sooner or later.

Battle lines are drawn. The unions claim that state and local agencies may not reduce any pension benefits. Pension reformers – and the courts, in recent decisions – say that while a reasonable pension remains a right, that doesn’t stop localities from reducing some things. These cases deal with pension-spiking enhancements and the purchase of airtime – controversial and somewhat limited practices. But the future of pension reform is on the line.

Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.

After years of criticism, the California Public Employees’ Retirement System made headlines in December when its board voted to lower the expected rate of return on investments from 7.5 percent to 7 percent over the next three years. The move was billed by board members as a responsible reaction to years of unrealistic projections followed by unimpressive returns.

But on another front, CalPERS continues to defy critics who say the giant pension agency should focus like a laser on achieving strong returns instead of using investments to make political statements.

Early last year, the CalPERS board rejected a staff recommendation that it resume investing in tobacco stocks after a 16-year moratorium. The board not only rejected that advice, in December, it broadened the ban to include more companies with ties to the tobacco industry.

Now a freshman lawmaker from Silicon Valley – California’s first Indian-American state lawmaker – is pushing for a bill with the potential to cause billions of dollars in investment losses for CalPERS.

Assemblyman Ash Kalra, D-San Jose, launched his legislative career by introducing Assembly Bill 20, which would require CalPERS and the California State Teachers’ Retirement System to sell all their investments in companies involved in building the disputed Dakota Access pipeline. For CalPERS, this divestment would start with the forced sale of about 1 million shares of Energy Transfer Partners, the pipeline’s primary builder, a Dallas-based Fortune 500 firm.

Divestment would not prevent Dakota pipeline’s construction

The Army Corps of Engineers has given its final approval to the project. As such, critics say Kalra’s bill – if enacted – would amount to a costly gesture of disapproval that achieved nothing beyond signaling the state of California’s allegiance with the Standing Rock Sioux tribe and environmentalists who have protested the pipeline plan.

CalPERS staff strongly opposed Kalra’s proposal, sayings such a forced divestment would yield losses of at least $4 billion. CalSTRS has no estimate of the cost yet.

The toll is so heavy on CalPERS because the ban would be so broad, applying not just to energy firms and their contractors but to the banks that financed the 1,100-mile project. Many of these banks have otherwise excellent relationships with California businesses and government agencies.

Despite staff concerns, last week, the CalPERS board took its first step toward an activist position on the project. It called on Energy Transfer Partners to choose a new route away from Indian land, echoing the concerns’ offered by opponents. A CalPERS statement warned that without a route change, it was possible that there could be “escalation of conflict and unrest as well as possible contamination of the water supply.” This, CalPERS said, could lead to a costly public backlash against the banks.

Kalra praised CalPERS’ statement but said he would continue pushing his bill. He depicted the state government as a “significant investor in the Dakota Access Pipeline” that should take steps to “respect the sovereign rights of the Standing Rock Sioux tribe and raise awareness on the environmental impacts” the project would have on tribe lands.

Trump’s OK of Dakota project could affect state Democrats’ view

CalPERS, which has a portfolio last officially estimated at $309 billion, prefers lobbying the companies it invests in to change their policies rather than make divestment threats. Some coverage of the statement from last week suggested this was just such a measured step, not a first sign of weakened opposition to Kalra’s bill.

But how CalPERS deals with Kalra’s legislation could become caught up in the rhetorical war between state leaders and the Trump administration, which cleared the way for a project blocked by the Obama soon after Donald Trump was sworn in Jan. 20.

State leaders’ eagerness to cast themselves as enemies of Trump has been the target of mockery by Sacramento Bee columnist Dan Walters, who questions how this will help California deal with its many problems.

But Trump’s hardline position on immigration and embrace of fossil fuels continues to infuriate state Democrats. In a state in which Trump lost in November by more than 4.2 million votes, the downside to opposing him at every turn seems minimal.

The House of Representatives voted to axe California’s planned retirement savings program, throwing the future of it and similar efforts around the country into serious doubt.

“Despite a plea from California Gov. Jerry Brown, the state’s GOP representatives voted unanimously [last week] on a resolution to block California and other states from setting up 401-K-type plans for private-sector workers who lack retirement benefits – a measure that sailed through the U.S. House of Representatives on a party-line vote,” the San Jose Mercury News reported.

Because the Labor Department enacted rules designed to enable those plans to be formed late in former President Obama’s last term, lawmakers are able to act to undo them. “The House passed the resolutions largely along party lines under a legislative mechanism known as the Congressional Review Act, which allows Congress to kill regulations rolled out during the final months of the previous administration,” as the Wall Street Journal explained. 

California pleading

In a letter to the California congressional delegation, Gov. Brown had admitted the plan would direct money away from the financial services industry, but pled for the broader menu of retirement options he said it would provide. “Brown, who signed legislation last year establishing the ‘Secure Choice’ program, called the retirement savings opportunity modest, but important,” according to the Sacramento Bee. “He said the labor department issued its rule to ensure the retirement schemes were financially and legally sound. Efforts to wipe away the Obama administration regulations could spur legal challenges to state programs like the one in California, and imperil future moves to enact the benefit in other states.”

Secure Choice promised to offer “automatic payroll deductions for as many as 7 million low- and middle-income workers whose employers don’t offer 401-k plans or other benefits,” the Mercury news noted. “Illinois, Connecticut, Maryland and Oregon have passed similar initiatives.”

Risky choices

The party-line split on the controversy has sharpened a debate over the distribution of retirement costs fueled by challenges on both sides. Republican lawmakers oppose the prospect of even greater public pension problems nationwide, while Democrats argue that private-sector pensions no longer cover the needs of retired workers to the degree they did in a different economic era. “Studies show that employees are 15 times more likely to save for retirement if they have a plan at work. But roughly half of American workers, many of whom are employed by small businesses, don’t have access to one,” AARP noted in a review critical of the Republican position.

Some state governments, already troubled by the prospect of public pensions crises, have found themselves torn between risking a private sector retirement crisis on the one hand and a funding crisis for private sector employee pensions on the other. The posture of many state officials has suggested that struggling with the latter may seem to them to be the safer political bet. “Fifteen state treasurers, including Republicans in Indiana, Idaho, Utah and Louisiana, wrote Congress on Tuesday opposing the effort to roll back the Obama-era rule, which they said ‘provides important flexibility to states and large municipalities as they seek to address the growing retirement crisis facing this country,'” according to The Hill. “The National Conference of State Legislatures also urged Congress to keep the rule in place.” 

At the same time, powerful private-sector interests have lined up an in-depth defense against supporters of the state pension plans, driven not only by self-interest but a concern that states’ track records on public pensions do not inspire confidence in their ability to successfully manage a broad new expansion of retiree benefit management into the private sector. “If Congress rolls back the rule, it would likely open retirement programs run by states to legal challenges,” The Hill added.