Last week, the court issued its long-awaited decision in a court case involving a Sacramento local firefighters union that alleged a provision of the 2012 pension reform measure approved by the Legislature and signed by then-Gov. Jerry Brown was illegal under the “California Rule.” That’s the legal concept stemming from a 1955 state Supreme Court ruling that holds the terms of a public employee’s pension benefit cannot be reduced for years not yet worked, only kept the same or increased.

Cal Fire Local 2881 said that the pension reform’s ban on “air time” – the purchase of service credits to enhance pensions – violated the California Rule. But a unanimous state Supreme Court said “air time” was not a comprehensively bargained or legislatively approved vested right.

Yet in the lead opinion, Chief Justice Tani Cantil-Sakauye (pictured) explicitly said she was not taking a position on the California Rule question of whether pension terms could be changed going forward for years not worked.

This mixed message produced media confusion. Some news bulletins declared the justices had approved allowing a rollback of local benefits. Others suggested the California Rule had dodged a bullet.

Was ‘California Rule’ weakened or untouched?

Interest groups were similarly split.

Officials with the League of California Cities saw the court’s willingness to change the terms of pensions on a relatively minor issue as a sign it was open to a significant weakening of the California Rule. The league and many like groups hope for a state Supreme Court ruling that echoes a lower court’s ruling that pensions are not “immutable.” They were heartened by Cantil-Sakauye specifically noting the state had raised the retirement age from 67 to 70 for current as well as prospective employees.

But the Californians for Retirement Security, which represents 1.6 million public employees and former public employees, declared victory after noting that Cantil-Sakauye had specifically said “air time” was changeable because it was not a vested right – unlike basic pension formulas basing retirement checks on years worked times a percent of late-career salary.

The group and others also cited a concurring opinion written by Justice Leondra Kruger and joined by Justice Goodwin Liu that held that government employers could not “withdraw” from the pension terms established upon initial employment by “an implied unilateral contract.”

The state Supreme Court is expected to eventually take up at least two more cases involving union objections to the 2012 pension reform, so the sanctity and extent of the California Rule is likely to remain in the news. In his final year in office, Gov. Jerry Brown repeatedly urged the court to give governments the option to change future pension terms as pension costs have crowded out local, county and school programs and services. Brown’s office defended the 2012 reform law before the high court because of concern that state Attorney General Xavier Becerra was not eager to defend it.

Like 2017 case, ruling seen as murky, not clarifying

But in the meantime, last week’s ruling seems as murky as the court’s decision in the 2017 California Cannabis Coalition v. City of Upland case. Previously, Proposition 218, approved by voters in 1996, had been understood to require that any tax whose revenue would go to a special purpose – building a sports arena, adding libraries, etc. – had to be approved by a two-thirds vote.

Upending decades of precedent, the state Supreme Court held in a 5-2 decision that the two-thirds threshold applied only to ballot measures initiated by local governments. Because they were not local government measures, those qualified by citizen initiatives only needed simple majority support to be enacted.

In dissent, Justice Kruger took square aim at the idea that this interpretation was what voters expected in 1996 when they made it harder for local governments to raise taxes.

Kruger wrote, “A tax passed by voter initiative, no less than a tax passed by vote of the city council, is a tax of the local government, to be collected by the local government, to raise revenue for the local government. None of this could have been lost on the electorate that, also by initiative, amended the California Constitution to set ground rules for voter approval of local taxes.”

In August, a California appeals court ruled against the Marin County Employees’ Association in its case challenging a 2012 state law reining in pension-spiking abuses – i.e., those various end-of-career enhancements (unused leave, bonuses, etc.) that public employees use to gin up their final salary and their lifetime retirement pay.

One of the few areas of widespread agreement at the Capitol on public-employee pensions involves spiking. Gov. Jerry Brown signed into law the Public Employees’ Pension Reform Act of 2013, known as PEPRA, to reduce escalating pension liabilities. Most of its provisions applied to new hires only. The governor also signed related legislation, Assembly Bill 187. Its goal was to “exclude from the definition of compensation earnable any compensation determined … to have been paid to enhance a member’s retirement benefit.”

This limitation on pension spiking was implemented by the Marin County Employees’ Retirement Association to help the county reduce its pension debt. As the court explained, “Reaction to the change in policy was almost immediate.” Five public-employee associations filed suit, claiming that a ban on these spiking conditions reduced promised levels of pay to their members. They argued this was an impairment of their “vested rights.” Vesting confers ownership rights.

Even though the dollars at issue are relatively minimal, the case has become a major flashpoint. California courts have long abided by something known as the “California Rule.” It’s not a law or even a rule, actually. It refers to a series of court rulings concluding that once a pension benefit is granted to public employees by a legislative body (board of supervisors, city council, state legislature), it can never be reduced – even going forward.

In the private sector, for instance, courts allow employers to reduce pension benefits, starting tomorrow. Employees could be paid everything promised to the point of the benefit change, but they can have certain benefits removed or reduced in the future. That’s seen as reasonable given they haven’t earned them yet. It’s different in the public sector.

In California (and a number of other states that follow a similar rule), these benefits can never be reduced. The problem, from a public-finance point of view, is that reducing benefits for new hires only won’t address the bulk of the debt problem until those employees start retiring in 25 or 30 years. Fixing the current debt problem requires dealing with current employees.

Ironically, almost all of the benefit increases public agencies have granted to union members since the 1999 passage of Senate Bill 400 have been done “retroactively.” In other words, the courts have allowed public agencies to give a boost in pensions to public employees for years they previously have worked – but they won’t allow those same agencies to reduce future benefits for years that have yet to be worked. This is politically controversial, but there’s little debate that such a rule has been followed by the courts.

“Public employees earn a vested right to their pension benefits immediately upon acceptance of employment and … such benefits cannot be reduced without a comparable advantage being provided,” according to the plaintiffs, as quoted in the appeals court decision. “A corollary of this approach is that public employees are also entitled to any increase in benefits conferred during their employment, beyond the benefit in place when they began.” In this view, compensation is a one-way ratchet.

This understanding has largely undermined every major reform proposed in California. For instance, the courts gutted the city of San Jose’s voter-approved 2012 pension-reform initiative because it rolled back future benefits for current employees. And the “California Rule” has been the obstacle that has stopped reformers from coming up with other similar approaches.

In this case, Justice James Richman ruled, “(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. And the Legislature may, prior to the employee’s retirement, alter the formula, thereby reducing the anticipated pension. So long as the Legislature’s modifications do not deprive the employee of a ‘reasonable’ pension, there is no constitutional violation. Here, the Legislature did not forbid the employer from providing the specified items to an employee as compensation, only the purely prospective inclusion of those items in the computation of the employee’s pension.”

The judge pointed to conclusions from California’s watchdog agency, the Little Hoover Commission, pointing to uncontrollable unfunded pension liabilities. As the commission explained, “To provide immediate savings of the scope needed, state and local governments must have the flexibility to alter future, unaccrued retirement benefits for current workers.” The commission pointed to spiking as a particular problem. This report, he wrote, is part of what motivated the state Legislature and governor to implement reform.

Furthermore, the judge pointed to previous cases acknowledging that government entities have the right to “make reasonable modifications and changes in the pensions system ‘to permit adjustments in accord with changing conditions and at the same time maintain the integrity of the system and carry out its beneficent policy.’” This echoes what myriad pension reformers have argued: agencies are not stuck watching their systems go over the cliff. They have the right and duty to make adjustments to assure their future solvency.

If the California Supreme Court sides with the unions, then local governments will have fewer options left to gain control of their pension debts. If the court agrees with Judge Richman, then pension reform could be a brand new ballgame – although it’s unclear whether the court might toss the California Rule entirely or simply allow localities to change some of the benefits within the framework of that rule.

The court has 60 days to decide whether to consider the matter, according to reports. Unions and reformers will no doubt be watching the court’s decision closely.

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

But they do things differently in Contra Costa County. Dan Borenstein writes:

Warren Katchmar’s top annual salary was $102,896; his starting pension was $104,020. Similarly, Bhupinder Dhaliwal traded up from a $135,433 salary to yearly retirement pay of $143,462.

How did these Central Contra Costa Sanitary District employees collect more in retirement than working? They leveraged generous district leave accrual policies and retirement system rules that enabled workers to spike pensions as much as 40 percent.

The rules were never legal. But public employee retirement systems in Contra Costa, Alameda and Merced counties had ignored past court decisions, prompting state lawmakers in 2012 to pass a law reaffirming the earlier rulings.

Contra Costa Superior Court Judge David Flinn recently upheld the new law, ending most of the spiking for future retirees. Labor unions in the three counties, who claim the law violates past promises, have appealed.

Hey, it’s government.

By Chris Reed

So CalPERS is found to allow ridiculous, outrageous double-dipping by salaried employees that boosts their pay (and probably their pensions), and faces sharp criticism. So when the giant pension fund responds, does it do so with an apology? Of course not, according to the Sacramento Bee:

“CalPERS has decided to immediately suspend a program that allowed some salaried managers to moonlight in-house and take hourly pay, saying that the controversy surrounding the practice has become a ‘significant distraction’ to its work.”

If CalPERS wouldn’t apologize for the propaganda it put out to get SB 400 passed in 1999, starting the retroactive pension spiking that is now destroying local governments, why would it apologize for shady behavior now?

If CalPERS’ upper ranks for years engaged in gross corruption even as CalPERS offered itself up as a moral force for socially conscious investing, why would it notice the dissonance between the high opinion the agency has of itself and the way it looks to the rest of the world now?

If CalPERS thought it was an appropriate use of public funds to build itself a 560,000-square-foot, $153 million tribute to its glory and importance, why would it be expected to behave prudently with taxpayer money now?

If CalPERS reacted to a factual analysis questioning its investment history by having its high-paid lead flack engage in a juvenile tirade against the Bloomberg reporter who wrote the analysis, why would it be classy now?

If CalPERS spent years denying the pension crisis was real, why would it show any common sense now?

CalPERS’ massive headquarters is probably visible from outer space. But so is its bizarre combination of self-congratulation, incompetence and obliviousness.

The California Public Employees’ Retirement System: Always assume the worst. Don’t let any “significant distraction” prevent you from understanding that it’s the CalPERS way.

First on a series on public pensions.

Sept. 20, 2012

By Mark Cabaniss

The politicians in charge of “doing something” about the ongoing California pension debacle like to play a little game. It goes like this:  They decry the high costs of pensions that have already been granted, pretend to want to do something to rein in future pension obligations, and then turn their hands up and shrug that there is really nothing they can do about current pensions (including, cough cough, their own) — since, after all, pensions are contracts, and therefore they are protected by the Constitution.

But there is a problem with this self-serving assertion:  Even if politicians’ pensions are contracts protected by the Constitution, they are still breakable.  In pretending otherwise, the politicians are lying.  In other words, merely noting that pensions are contracts protected by the Constitution is not the end of analysis, but only the beginning, for all contracts are breakable, and all constitutional rights are subject to limits.

When, not if, state and local governments begin dishonoring the highest public pensions, there will be, obviously, a huge blizzard of litigation.  And when those cases are heard, some of the following basic concepts of contract law may be applicable.  (Note: My purpose here is not to write a treatise on contract law, nor to predict the course and outcome of future litigation.  My purpose is simply to show the lay person that there are several possible theories under contract law under which governments might be able to reduce the highest existing pensions rather than go bankrupt.).

All contracts are breakable, if you have a legally valid reason for breaking them.  For example, if a used-car salesman sells a car to a 10-year-old, the contract can be broken on the basis that the 10-year-old didn’t have the legal capacity (age) to sign a binding contract in the first place.  And all constitutionally protected rights, including contract rights, are nonetheless limited by finite resources. For example, your right to a fair trial does not mean that the government has to hire the entire Harvard Law School faculty to defend you in your shoplifting case. Society can’t afford it.

Regarding public pensions, the best and most obvious legal ground under contract law to get out of onerous pension obligation may be mistake of fact.  The legal rule goes like this: If you make a contract while holding a belief that isn’t true, you can get out of the contract.  For example, you make a deal to buy a Picasso for a million dollars, but it turns out that the painting is not a Picasso.  You can get out of the deal.  (Under the mistake doctrine, both sides have to be making the same mistake.  If only one side is mistaken and the other side knows the truth, you may still be able to get out of the contract under a different theory, such as fraud; more below.)

Pension spiking

Regarding high public pensions, the mistake that was made was simple, fundamental, and huge:  the supersize pensions that began to appear in the 1990s were justified on the grounds that pension funds “would” generate average annual returns of 7.5 to 8 percent or more into the future, forever.  This has turned out to be, ahem, not true.

The infamous SB 400, that then-Gov. Gray Davis signed into law in 1999, and which gave retroactive pension raises to state employees, including already-retired state employees, was sold by the California Public Employee Retirement System to the Legislature with lie after lie after lie — or “mistake” after “mistake” after “mistake,” if you prefer.  The CalPERS “analysis” that was “presented to” (perpetrated on?) the Legislature implicitly assumed that the Dow Jones Industrial Average would be at 25,000 by 2009, and 28,000,000 by 2099.  On the morning of Sept. 20, it is at 13,556.

Proving the existence of and reliance on the mistake(s) ought to be a lark. After all, a great deal of time, money, and work went into creating the rosy projections that were used to bamboozle government into granting the unsustainable pensions.  Were the mistakes made regarding future stock market returns mutual?  Well, the government certainly made a mistake on behalf of the taxpayers.  How about the public employees?  Who knows?  However, as a practical matter it is very hard to see how they would go in to court and say, “We were not mistaken as to future stock market returns.  We knew full well that the projections were a joke and that CalPERS was lying.”

Performance

The second big legal ground to get out of pensions is impossibility of performance.  If events make it impossible for you to perform the contract, then you can get out of it.  For example, you contract to sell your car, but before you deliver, it is destroyed by lightning.  Regarding pensions, the argument would be simply that the state and local governments have gone bankrupt since the pensions were granted.  In that event, the pensions could be modified to match the ability of government to pay them.

The third possibly applicable doctrine is known in contract law as consideration:  for a contract to be legally binding, there has to be something of value promised, on both sides.  For example, if I promise to give you a million dollars, and you promise to take three breaths between the hours of 1:00 p.m. and 2:00 p.m. next Tuesday, there is no mutuality of consideration, since I am giving something up and you are not.  The contract is voidable.

In the public pension realm, one obvious place where the consideration doctrine would come into play would be SB 400, the 1999 retroactive pension increase.  Since some of the workers who received retroactive pension increases were already retired, they obviously could not promise or give anything at all in exchange for the money, and indeed they did not.  Therefore, at least in regard to these already retired workers, there was a complete absence of consideration.  (A similar argument can be made not on contract law, but on Article 16 Section 6 of the California Constitution, prohibiting the giving away of public funds.)

A fourth possible ground for breaking managements’ pensions is fraud: If CalPERS or any of the other groups pushing big pensions knew that the pensions would not be self-funding and would require massive infusions of taxpayer cash, and they did not divulge that information, then any such pensions obtained on the basis of such fraudulent disinformation would be voidable.  Moreover, widespread and undisclosed self-dealing might qualify as fraud. For example, CalPERS officials, as public employees, themselves benefitted from the huge pension increases granted in 1999, and they did not disclose to the legislature that they would benefit.

Unconscionability

Another contract doctrine which might be used to break onerous pensions is “unconscionability,” which means simply that a contract is so one-sided that it is just unfair to enforce it against the disadvantaged party.  While normally this doctrine is applied to consumer contracts, some of the factors courts look to in weighing claims of unconscionability — such as whether the parties had equal bargaining power, whether the contract makes a one-sided allocation of risk (for example, where the taxpayers have to pick up the tab, all the tab, in the event that the Dow does not hit 25,000 by 2009, ha-ha) — are applicable to public employee pensions, as well.

Finally, one more area of contract law might be used to break the pensions: lack of capacity to contract.  If you are drunk or insane, for example, you cannot sign a contract to buy a house.  In the public pension context, the lack of capacity would be a little more subtle (maybe; hopefully).  For example, if you are under duress, being threatened to get you to sign a contract, that could qualify as a lack of capacity, since you lack free will.

Steven Greenhut and others have written recently about bullying tactics, including the attempt to frame a city councilman for DUI, being used in Costa Mesa to get local officials to see things the public employees’ way.  Testimony about such incidents could nullify the contracts obtained thereby.

Similarly, if you were being bribed to sign a contract, that too would qualify as a lack of capacity, since you would not be acting in your capacity as a fiduciary to the public, but rather in your private capacity as a criminal.  Another way to look at it is that if you are a manager sitting at a table “negotiating” a pension increase that will benefit not just the parties across the table but yourself as well, you may not be acting within the scope of your employment as a public official, but instead acting on your own behalf.  Therefore, you do not have the legal capacity to act to bind the public to pay for your self-dealing little scheme, since you are not at that moment acting as a public official.   Needless to say, were the courts to start taking bribery and self-dealing seriously, they could nullify a lot of contracts.

To sum up: There are a great many helpful doctrines under contract law that could be used to break onerous public pensions.  These legal arguments are strongest against the very top pensions, because they are the most unconscionable, they are the least possible to continue to pay, and they are the most likely to have been the result of self-dealing or bribery.

Therefore, the legal grounds for attacking the biggest pensions, managements’ pensions, coincide nicely with the public policy grounds of wanting to go after only the largest, most abusive pensions, and not the pensions of the retired school teacher or janitor.

Next article in this series: Breaking public employee pensions: The political path.

Mark Cabaniss is an attorney from Kelseyville. He has worked as a prosecutor and public defender.

By Steven Greenhut

If a politician has based his career on advocating a set of policies, and has always been aligned with a group of special interests, only a fool would believe that he has suddenly seen the light just at the time when those past policies and alliances are causing him some political grief.

Yet Orange County Republican Party Chairman Scott Baugh last weekend compared supervisorial candidate Todd Spitzer — a Republican with a long track record in the DA’s office, as an Assemblyman and previously as a supervisor and local school board member — to the adulterous woman at the well whom Jesus forgave. This implies that Spitzer has seen the light and is now a reformed man. I think Baugh is being as loose with his endorsements as the woman was with her partners.

Baugh, writing a rebuttal to an Orange County Register editorial that I had penned blasting his decision to headline a fund-raiser for Spitzer, argued: “It’s a good thing that Register editorial writers did not meet the woman at the well mentioned in the biblical book of John. The fact that she had five previous husbands and was living with a man who was not her husband would have doomed her to a life not worth living. Instead, the woman met Jesus, and she became a great messenger for changed lives.”

If we’re talking about a person’s heart, and a religious conversion, then I see what Baugh is talking about. When people change in those ways, I would never question it. That is, as the cliché goes, an issue between a man and his God. But my Register editorial pointed to Spitzer’s long-standing association with the public employee unions and the way that Spitzer led the charge for a 2001 retroactive pension increase that has put Orange County in a deep fiscal hole.

Baugh became well known for his “manifesto” declaring that the party will not give any support to politicians who take donations from unions. Baugh said in a speech trumpeting his edict that it is not enough for Republican politicians to avoid taking such cash. He expects them to be proactive and create solutions to the mess caused by excessive public-employee compensation.

Pension spiking

As I wrote in the Register editorial:

“Mr. Spitzer was the lead advocate on the Board of Supervisors for a 2001 pension increase for deputy sheriffs that retroactively increased their pensions to the unsustainable ‘3 percent at 50’ formula — guaranteeing a pension of 90 percent of a 50-year-old employee’s final year’s pay after 30 years of work.

“Mr. Spitzer since has said he was wrong on that vote but mainly he blames others for not warning him, which suggests that he won’t provide the kind of pension-reform leadership that Mr. Baugh previously said he was expecting from politicians. In the Assembly, Mr. Spitzer was the cat’s-paw for the public-safety unions. He is smart and hardworking, but he epitomizes everything Baugh and the party said it would stand against.”

I recall Spitzer changing his tune about that increase — at one point saying he didn’t know it was retroactive, at another saying he knew it was but believed the deputies deserved the extra taxpayer cash — and remember him defending it to me right up until the point that it became a political liability. Spitzer has publicly talked about a religious conversion he has had, but we’re talking here about a political conversion — and there’s no actual evidence he really has had one.

‘Trust, but verify.’

Ronald Reagan famously said that the United States should “trust, but verify.” He was talking about arms-reduction talks with the Soviet Union. Baugh recently told me that “I’ve had my conversation with Todd and he is a changed man on this issue and many others. He now admits to me that the vote is wrong . … He has committed to me that he will work to reform the system in the same way as [OC Supervisor] Shawn Nelson and others have done.”

But where is the verification? Spitzer has a long history of saying whatever needs to be said to advance his political career. Most politicians do that, but Baugh is one of those people who over the years had warned me about Spitzer and his union alliances and opportunistic ways. The verification would come in some sort of policy decisions, yet there’s little evidence that he has pushed in the right direction not only on the pension issue but on the civil liberties issues that Baugh and others care so much about.

Even in defending Spitzer, Baugh told me that he is bothered by Spitzer’s positions on civil liberties issues. In the Assembly, Spitzer was the lead Republican voice for police-union-backed policies that made it nearly impossible to do anything about those officers who abused their power. When Spitzer was fired from the Orange County District Attorney’s Office, he held his press conference at the deputies’ union headquarters.

He told a colleague of mine that I don’t like him because he was a police officer. That’s right out of the police union playback. If someone disagrees with his views on expanding police pensions or protecting bad-apple officers, then that makes the critic a “cop hater.” I recall an outrageous floor speech Spitzer gave suggesting that supporters of a minor good-government reform were friends of criminals. That type of toxic rhetoric defines Spitzer as well as everything that’s wrong in Sacramento.

Conviction…or convenience?

Sensible people could conclude that Spitzer’s political conversion is one of convenience, not conviction.

And it’s obvious that Spitzer is conforming to the letter, but not the spirit of Baugh’s manifesto. As I wrote in the Register, “Mr. Baugh said that Mr. Spitzer has complied with the manifesto — i.e., he is not taking union money for this race. But Mr. Spitzer has received large amounts of union money over the years. And as his opponents note, he still operates an old political account holding money collected well before Mr. Baugh drew his line in the sand.”

According to former Republican Assemblyman Chuck DeVore, who was running against Spitzer but bailed out after accepting a new job in Texas: “Donations to county office are limited to $1,800 per person or business.  But, Spitzer also has an account for Orange County Republican Party Central Committee — an account that allows unlimited donations.  Spitzer is also his own treasurer for this account, meaning that there is no oversight on how he spends his Central Committee cash.  This Central Committee account Spitzer uses to finance everything from Internet costs, to gasoline, to paying off his credit card, to fancy restaurant meals, to an XM Satellite Radio subscription, and even a trip to Las Vegas.”

DeVore then argued that “Dozens of checks from Big Labor totaling some $54,000 that were listed in Spitzer’s 2014 D.A. committee vanished.  Rather than detail the union money in his 2012 Board of Supervisors account, Spitzer hides it, then shifts it into his unlimited Central Committee account from his, serving as his own treasurer, he can use it to pay for virtually anything, including inappropriately underwriting his current campaign for O.C. Supervisor.”

In other words, he is still using union money, although that money is hidden from view. Spitzer criticized DeVore for pointing this out, telling the OCWeekly, “Chuck needs to learn how to read campaign finance reports.” Spitzer also said, “I’m adhering to [Orange County Republican Party boss] Scott Baugh’s manifesto and will not take any union contributions for my supervisor’s campaign. What Chuck is saying is frivolous. All of my money is traceable.”

But DeVore added that “[W]hen Spitzer thought no one was looking on the eve of the Labor Day weekend, he filed a 519-page amended campaign finance report.  This report contains 189 missing pages of information that Spitzer was legally required to report last month … detailing dozens of Big Labor donations of the type Spitzer denied accepting just a few weeks before.”

Spitzer did not return my call to his home seeking an explanation. Baugh admitted that Spitzer is still using union money, but that Spitzer is indeed following his edict because this is past money. According to Baugh, it would be impossible to hold candidates to the same standard for past financial contributions, but in my view he could insist that they not spend money from labor unions for current campaign-related expenses.

As DeVore told me via email, “Every Californian pays $1,105 every year to support state and local retired government workers — more than double the burden in Texas. Spitzer made this burden worse in his years on the board and in the state Assembly. Spitzer’s talking a good game now, but it will take years of discipline to make up for past mistakes.”

Spitzer is almost certain to win the election. It will be interesting to see what Baugh will have to say if Spitzer reverts to his ways and advocates policies that benefit the unions. I hope Spitzer did indeed have a political conversion, but I think Baugh’s comparison to the adulterous woman at the well might be more apt than he thought, but for less noble reasons.