It’s another sign of how daunting pension reform is in California. Ed Mendel of Calpensions.com has the details:

A retiree group won a big victory last month. Reversing a superior court ruling, an appeals court overturned part of a voter-approved San Francisco pension reform in 2011 that ended higher payments to retirees when investments have “excess earnings.” …

Retirees, scattered and no longer union members, might seem unlikely to be formidable, particularly when battling a cost-cutting pension reform backed by all 11 county supervisors, business and labor groups, and 69 percent of San Francisco voters in 2011.

The reform, Proposition C, was the milder establishment alternative to deeper pension cuts in Proposition D by Jeff Adachi, one of the 16 candidates for mayor on the San Francisco ballot that year, including the incumbent and winner, Mayor Ed Lee.

“The epitome of greed,” Gary Delagnes, president of the San Francisco Police Officers Association, told SF Weekly in 2012 when the retiree group began its legal challenge.

“Vested benefits” theory protects flawed concept

The court decision shows that judges take the concept of “vested benefits” very seriously. Unlike in the private sector, once a government union is promised benefits, those benefits can’t later be reduced. When this legal axiom is combined with the state Public Employment Relations Board’s hostility to ballot measures on pension issues, the difficulty that taxpayers face in trying to scale back government pensions looks extraordinary.

But the San Francisco case is particularly noteworthy because it involves the single category of pension benefit that actuaries, accountants and good-government advocates find most indefensible. Giving government pensioners extra money when pension funds have strong years only makes mathematical sense if the pensioners get less when pension funds have bad years. No local government in California has such a policy.

“Excess earnings” benefits are never seen at big pension agencies with strong staffs like CalSTRS or CalPERS; it’s understood that they’re just not sustainable in the long run.

But in cities like San Francisco, San Diego and Fresno, and counties like Alameda and Mendocino, the actuarial, common-sense arguments were overwhelmed by political clout and expedience.

Here’s a link to a study commissioned by the Schwarzenegger administration that outlined the many costly quirks in local governments’ pension policies. It was highly critical of “excess earnings” bonuses.

On April 30, the court chose not to hear an appeal of an appellate court ruling upholding the city of San Diego’s 2011 deal rolling back retirement health benefits for city workers. San Diego City Attorney Jan Goldsmith had argued that while pension benefits for public employees are constitutionally protected, retirement health benefits could be reduced or rescinded because they amounted to a bequest from an employer to an employee.

As Goldsmith noted, the state Supreme Court’s action locks in the appellate court’s decision as a precedent for California. The decision found that retirement health care amounted to “additional benefits that are provided at the option of the City.” It held that existing law “does not mandate that these benefits be included in the City’s retirement system.”

Retirement health care benefits can be provided to workers using language that makes them a vested (guaranteed) right. Last September, a Los Angeles Superior Court judge rejected a freeze on retirement health benefits for Los Angeles city attorneys. Doug Rose, president of the California State Association of County Retirement Systems, told Governing.com that the benefit was found to be vested “because of the way it was written. It stated the premium subsidy [OPEB benefit] ‘will’ be provided. So it was unequivocal.”

Most retiree health benefits can be reduced or rescinded

But in general, the retiree health benefits provided by local governments are of the sort adopted by San Diego, provided by the employer after collective bargaining without any explicit or implied promise of permanence.

San Diego’s 2011 deal is forecast to save the city $714 million over 25 years; it reduces but doesn’t end health care benefits for current city employees when they retire. Since virtually every local government doesn’t prefund retiree health benefits, all that have the typical contracts with their unions could reduce their unfunded liabilities with a San Diego-type deal or by dropping health care as a retirement benefit entirely.

Gov. Jerry Brown’s 2011 statement of his goals for what would become his 2012 pension reform legislation included a provision on retiree health benefits that appears to encourage the more drastic approach — including for the state government.

“Contrary to current practice, rules requiring all [state] retirees to look to Medicare to the fullest extent possible when they become eligible will be fully enforced,” Brown wrote. “Local governments should make similar changes.”

It’s unclear if the rules for state retirees are enforced more now than in 2011. The website for the California State Retirees organization gives no indication of significant change.

Still, it’s noteworthy that the Democratic governor doesn’t give any credence to the argument from public employee unions that ending or reducing their retiree health benefits is part of a greater scheme to harm government employees.