Court Boots a Big Pension Punt
Steven Greenhut
by

Sacramento

For those hoping that the California Supreme Court might give California’s bloated governments a path out of a pension crisis that’s been two decades in the making, there was little to cheer in the court’s ruling Monday on a long-anticipated case about former Gov. Jerry Brown’s 2012 pension-reform act. The court upheld the modest reform law’s rollback of a shameless union giveaway known as “airtime,” but chose not to even consider the underlying set of legal precedents that have blocked state and local governments from rolling back lush pension deals.

“If all sides are declaring victory in the California Supreme Court’s pension ruling on Monday, it’s because the decision had a little something for all the combatants in the state’s pension wars,” wrote CALmatters’ Judy Lin. But this was no difficult-to-parse decision, where reformers and union officials could spin things one way or another. It was clear. The unions lost a tiny benefit, but gained the big prize. Pensions cannot realistically be reformed in our lifetimes, and localities will have no choice but to raise taxes and cut services.

For readers unfamiliar with the scope of California’s pension crisis, the state’s unfunded pension liabilities — the shortfall in dollars available to make good on all the municipal and state pension promises — ranges anywhere from $150 billion to hundreds of billions of dollars depending on whose estimates you believe. These debts — and they are actual, taxpayer-backed debt despite the funky way they are calculated — keep growing even after the pension funds had years of stellar stock-market performance. These numbers are too large to comprehend.

For a simpler sense of the problem, consider that more than 40,000 California government retirees are members of the $100,000 pension club. Check out the pension payouts on the Transparent California database, which has pages of retirees receiving hundreds of thousands of dollars in guaranteed lifetime pensions. The biggest numbers include one-time Defined Retirement Option Plan payouts, which are a special form of double-dipping, but it’s a lot of money any way you count it. And a former Democratic assembly member has detailed the resulting “crowding out,” as cities cut back on other services so they have the cash to pay the landed gentry.

Former Gov. Jerry Brown’s pension-reform law nibbled around edges at the problem. In one particular, it eliminated something called “airtime,” which allowed public employees to buy up to five years of fictional service time so they could bloat their final, ongoing pension payout. That additional time was vastly underpriced, and it became a crazy benefit courtesy of California taxpayers. Some unions claimed that eliminating airtime was an unconstitutional theft of their vested pension rights and they sued, which led to the current decision.

Our state, as well as some others, abide by something known as the “California Rule.” It’s not a rule, but a series of court decisions going back decades concluding that public employees cannot have any of their future pension benefits reduced unless they are given something of equal or greater value. Some cities and the state have reduced the overly generous pension formulas (e.g., the “3 percent at 50” plan that lets public-safety officials retire at age 50 with 90 percent of the average of their final three years’ pay) for new hires. But new employees don’t retire for 20 or 30 years, thus leaving California governments with few ways to get a handle on the current debt.

Virtually everyone who is interested in pensions and municipal finances has waited for the state Supreme Court to rule on this case, known as Cal Fire 2881 v. CalPERS and the State of California. On the surface, the case was about airtime, but few people were fixated on that element of the case. It’s an absurd benefit, but was the fiscal equivalent of pouring a gallon of water into the Sacramento River. Its costs aren’t all that significant in the scheme of things.

We were encouraged after lower courts found that California public employees only had the right to a “reasonable pension.” That opened the door to a review of the California Rule itself because it meant that some benefits could possibly be trimmed as long as cutbacks were, well, reasonable. Even the Brown administration weighed in with a legal brief arguing that the Supreme Court should consider paring back the rule.

In the end, the court found that purchasing airtime credit “was not a right protected by the contract clause.” Because it was not a core pension right, airtime could be expanded or eliminated at the discretion of the Legislature. The Legislature used such discretion when it passed the Public Employees’ Pension Reform Act, so that’s that. Airtime is a goner, which is good. But the court found an artful dodge around the California Rule issue.

The unanimous decision, penned by Chief Justice Tani Cantil-Sakauye, noted that the state government and many others asked it to modify or abandon that rule. “Because we conclude that the opportunity to purchase (airtime) credit was not a term and condition of public employment protected from impairment by the contract clause, its elimination does not implicate the Constitution,” she wrote. “For that reason, we have no occasion in this decision to address, let alone to alter, the continued application of the California Rule.”

Other similar cases are making their way to the court, but one would have to be Pollyanna to believe that this particular court will take any opportunity to change the rule. It’s a missed opportunity. By the way, pension reformers were not calling for public employees to be stripped of any benefits they had already accrued, but simply wanted municipalities to have the ability to pare back the formulas starting tomorrow. That’s how it works in the private sector.

Fox and Hounds Daily’s Joel Fox pointed to perhaps the only way forward: a statewide initiative that would make changes to the California Rule. He’s right, but that’s a tough road. Unions have the cash and foot soldiers — and a friendly attorney general who would likely write a biased ballot title and summary — to quash any such effort. In other words, the only answer to the court’s booming punt is a Hail Mary. This might be the end of the ballgame.

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

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