California’s high court will review pension "spiking" case

November 30, 2016 | By MERIEM L. HUBBARD

Californians are accustomed to controversy when it comes to public employee pensions.  Although state and local governments across the country were left without adequate funding of pension obligations following the Great Recession of 2008-2009, California’s shortfall–estimated to be around $475 billion–was the biggest.

The California Legislature responded to the crisis by adopting the Pension Reform Act of  2013.  The Act excludes compensation paid for the purpose of enhancing a member’s retirement benefit, commonly referred to as “pension spiking.”   Public employees, unlike those in the private sector, can increase their pay at the end of their careers in order to “spike” their pensions.  They do so by padding the actual base salary with other pay for clothing, equipment or vehicle use, or adding service credit for unused sick time, vacation time, or other leave time.  

Marin County, which had been struggling with pension issues for years, was one of the first to implement the Pension Reform Act.  County Civil Grand Jury reports in 2005, 2011, and 2015 called for action.  The 2015 report concluded that, granting largely unpublicized “pension enhancements … contributed to the increase of the unfunded pension liability. … This unfunded liability increased from a surplus of $26.5 million in 2000 to a deficit of $536.8 million in 2013.  This increase may expose the citizens of Marin County to additional tax burdens to cover the unfunded costs and may place the future financial viability of the pension plans at significant risk.”

Pursuant to the Act, the Marin County Employees’ Retirement Association (MCERA) excluded standby pay, administrative response pay, callback pay, cash payments for waiving health insurance, and other pay items from the calculation of the members’ final compensation.  Not surprising, MCERA was sued by a group of current county employees and organizations representing them.  These plaintiffs sought to block implementation of the new formula for calculating the retirement income of current employees. (The Act does not apply to former employees collecting a pension at the time Act was adopted in January, 2013.)  The State of California intervened on the side of MCERA.

MCERA prevailed in both the trial court and the First District Court of Appeal.  Plaintiffs argued that the County’s change of policy, pursuant to the Act, unconstitutionally impairs members’ vested rights.  The appellate court, in a unanimous opinion, disagreed.  The Court held that, although an employee has a vested right to a reasonable pension, government entities can make reasonable modifications to the pension system.  In other words, pension rights may not be destroyed, but they can be modified prior to an employee’s retirement.  Thus, neither the Legislative change, nor the implementation of the change by MCERA, impair the right to a reasonable pension.

The California Supreme Court accepted review of this case, along with another pension case that is currently before an appellate court in Alameda County.  There is no doubt that the result of the Supreme Court’s decision will have repercussions far beyond California. The cases are Marin Association of Public Employees v. Marin County Employees’ Retirement Association and Alameda County Deputy Sheriffs’ Association v. Alameda County Retirement Association.