The California Supreme Court has until early December to rule on a request by public employee unions to de-publish an Appellate Court ruling that could help citizens meet rising public pension costs.
Public employee pension costs are designed to be shared by citizens and employees. Both contribute money when pension promises are made in the expectation that the combination of those upfront contributions plus investment earnings will be sufficient to make the pension payments to retirees. But if there is a deficit, only citizens are on the hook. That wouldn’t be a problem if the upfront contributions were fairly set. But in California they are not. Instead, they are set by pension fund boards controlled by public employees. To keep the employee share of pension costs as low as possible, those pension boards “low-ball” upfront contributions, as explained here. That lowers the only cost paid by employees but boosts the risks and sizes of deficits paid only by citizens.
The low-balling of upfront contributions is now coming home to roost in California as pension deficits have exploded and pension costs are crushing public services. But a recent court case has given citizens hope. Known as “MCERA,” the case was brought by public employees in response to legislation enacted by Governor Brown and the State Legislature in 2012 that reduced “spiking” benefits. The plaintiffs asserted that California may not reduce unearned pension benefits for current employees. But a state district court upheld the reform and an appellate court affirmed the decision. Public employee unions have asked the California Supreme Court to de-publish the decision.
The legal position taken by CA’s public employees is at odds with the way the same issue is handled under ERISA, the federal law governing private sector defined benefit plans. Under ERISA, employers may reduce unearned pension benefits for current employees. Eg, let’s say an employee starts work on January 1, 2017 under a defined benefit pension plan that entitles people in the employee’s work classification to retire at age 60 with a pension benefit equal to 2% times the number of years worked times the employee’s highest salary averaged over three years. Then assume that on January 1, 2018, one year after the employee started work, the plan is changed to reduce the rate for the employee’s work classification from 2% to 1.9%. Under ERISA, the employee would accrue pension benefits for one year at the 2% level and all future working years at the 1.9% level. But California’s public employee unions assert the employee is entitled to accrue at the 2% level for all 30 years.
The public employee legal position also contrasts with their own position regarding increases in benefits for current employees. See eg, SB400, which boosted unearned benefits for current employees (and even retroactively boosted benefits relating to years already worked).
The MCERA decisions demonstrate courage by California state judges because they are entitled to pensions under the California law about which they ruled. Now the question is whether the California Supreme Court — public employees entitled to pensions under California law — will be equally courageous. Citizens should hope so. They didn’t cause pension deficits but for now they are bearing all the consequences.