For California Supreme Court watchers, this all may sound strangely familiar: A public agency is being sued by its unionized employees for fiddling with their pensions and the state’s highest court is now preparing to weigh in. At stake in the case is more than a single squabble over retirement benefits, but one of the most consequential elements of state labor law, the fiscal legacy of a former governor and the future of California’s pension debt.
Yes, this is just like that widely-watched pension case you may remember from last March, but no, this isn’t the spring of 2019. The dead give away: this morning the entire court convened digitally, box-on-box Brady Bunch-style, with Chief Justice Tani Cantil-Sakauye sporting a mask.
Today’s socially distanced oral argument was just the latest installment in a nearly decade’s long legal drama that pits unionized public-sector workers against cash-strapped state and local governments and pension debt hawks.
The court isn’t supposed to take current events under consideration when they rule on legal matters, but the state’s lawyer was happy to remind them of the latest headlines.
“Public services are being cut across California, some jurisdictions have already announced layoffs and furloughs of public employees and many counties and cities are struggling to pay for their pension liabilities,” Rei Onishi, legal affairs secretary to Gov. Gavin Newsom, told the seven justices.
“The question presented by this case is whether on top of legitimate pension liability, should taxpayers along with their children and even grandchildren, be forced to also shoulder the burden of financing abusive practices to artificially and unlawfully inflate pensions.”
The origins of this case begin in 2012 when the Legislature passed what then-Gov. Jerry Brown called the “biggest rollback to public pension benefits in the history of California.” Among other things, the law increased the retirement age for state employees, allowed for new restrictions on the types of pay that can be factored into an employer’s final retirement pension calculations, and banned “airtime,” the practice of paying to increase one’s future retirement benefit.
Unions and state and local agencies have been duking it out in court ever since. Organized labor has argued that application of the law undermines the “California rule,” a long-standing legal doctrine that requires any reductions in retirement benefits to be offset with new benefits of equal value.
Last year, the California Supreme Court sided against the unions, but only in the narrowest sense. The unanimous judgment held that public-sector employees couldn’t engage in a particular type of financial gimmickry. But on the larger question of whether the California rule was in or out, they ducked the question.
Now, a new occasion has presented itself.
This time the challenge was brought by the Alameda County Deputy Sheriff’s Association, joined by public-sector unions in Contra Costa and Merced counties. They argue that the county violated the California rule when they decided that certain types of overtime, sick leave and bonus pay could be excluded from future pension calculations for current employees.
Critics of public pension spending have long bemoaned the practice “pension spiking” — artificially boosting retirement benefits by cashing out unused sick leave or running up overtime just before retirement.
But David E. Mastagni, a lawyer representing the sheriffs, said that law enforcement officers may have taken their jobs banking on that future payout.
“One person’s pension spiking is another person’s expectation of a promise,” he said. “These items of compensation (were) included in order to induce them to select working for the Alameda Sheriff’s Department as opposed to another employer.”
The state argued that while retirement benefits can’t be rewritten for work that has already been done, state and local governments can revise any benefits promised for prospective work. In one of the more pointed exchanges of the morning, the justices tried to pin down exactly what the state’s lawyer meant by that word.
“Employees that are currently working might view that as not ‘prospective’ because they’re arguing that they have a set of expectations that are being violated,” said Justice Mariano-Florentino Cuéllar.
If state lawmakers can shave off future benefits after a union contract has already been hammered out, even if the work hasn’t already been done, added Justice Goodwin Liu, “then there would be no implied contractual rights that are protected against legislative impairment because the legislature could always override prior understandings. But that’s the essence of a constitutional contract claim.”
If the court upholds the California rule, it would strike a blow for city managers and school districts who are on the hook to the tune of hundreds of billions of retirement benefits to their current and former employees.
Justice Joshua Groban, the court’s newest member and a Brown appointee, asked the sheriff’s lawyers whether state law gives public agencies any flexibility to renege on their pension debts.
“I hear you to be saying, better to let (a pension system) go insolvent, better that a county go bankrupt, than make changes to existing employees,” said Groban. “Does the argument go that far?”
Essentially yes, said Mastagni. “Were the county unable to make its obligations then bankruptcy is the forum where contracts are impaired,” he said. Barring that, the county can just negotiate directly with the public-sector union.
The justices didn’t offer many hints about where they might come down this time, said Gregg Adam, a labor lawyer who argued on behalf of unions in last year’s case and who watched Tuesday’s proceedings remotely. But after dodging the issue once and with four related cases waiting on its decision, he said, “I don’t see there’s any way for them to ignore what I would call the ‘pregnant constitutional question’ this time.”
One thing was clear: Despite his progressive reputation, Newsom is picking up right where his more fiscally moderate predecessor left off.
“When you drill down and look at the actual arguments, there’s not a lot of daylight between the two in my view,” Adam said.
CalMatters.org is a nonprofit, nonpartisan media venture explaining California policies and politics.