WATCH NOW! DAVID E. MASTAGNI DISCUSSES LOOMING THREATS FACING PUBLIC EMPLOYEE PENSION PROGRAMS

On April 24, 2018, David E. Mastagni participated in a two-person panel discussion entitled: “Pensions: The Problems, Perspectives and Possibilities." The event was held at the Richard Nixon Presidential Library and Museum.

Click the link below to watch David’s discussion with Scott Ochoa--City Manager of Ontario California.

  

https://www.youtube.com/watch?time_continue=1096&v=CT4wG-GBTF4

Court of Appeal Breaks from Supreme Court Precedent in Upholding Prospective Reduction of Pension Benefits

The attack on public employee pensions continues with the California Court of Appeal's recent decision in Marin Association of Public Employees et al. v. Marin County Employees' Retirement Association et al. The Court of Appeal upheld the Marin County Employees' Retirement Association's ("MCERA") implementation of the Pension Reform Act (A.B. 197) in the face of constitutional challenges by employee organizations.

MCERA is subject to the County Employees Retirement Law of 1937 (often referred to as "CERL" or "the '37 Act.") In 2012, the Legislature passed the Public Employees' Pension Reform Act ("PEPRA"), which, in part, excluded forms of pay from the "compensation earnable" used to calculate employees' pension benefits.

After PEPRA's enactment, MCERA implemented policies to effectuate these changes. Under the new policy, MCERA would begin to exclude standby pay, administrative response pay, call-back pay, cash payments for waiving health insurance, and other pay items from employees' final compensation after January 1, 2013. Four employee organizations and four plaintiffs challenged these changes on the basis that they were unconstitutional impairments of current employees' vested rights under the state and federal contract clauses.

The court found PEPRA's prospective changes to pension calculations, and MCERA's implementation of such changes, were constitutional. The court agreed that current employees have vested rights to a "substantial" and "reasonable" pension, but held they do not have an "immutable entitlement to the most optimal formula for calculating the pension." Rather, in the court's view, pensions are subject to "reasonable" modification before they become payable.

The court's ruling abandons over fifty years of California Supreme Court rulings protecting public employee pension rights. In 1955, the California Supreme Court issued its ruling in Allen v. City of Long Beach, which established that any changes to pension benefits that result in a disadvantage to employees must be accompanied by comparable new advantages.

In this case, the court did not follow this precedent and claimed the Supreme Court did not intend its use of "must" to to be literal or inflexible. Rather, the court preferred the formulation that a disadvantageous change to pension benefits only "should" be accompanied by a comparable new advantage. In any event, the court determined under the facts of this case, that the employees received a comparable advantage to the reduction in their pension benefits in the form of reduced employee contributions to the retirement system. Since MCERA excluded standby pay, administrative response pay, and call-back pay from pension calculations, it would no longer collect retirement contributions on such pay. This ruling seemingly ignored the fact that, for years, employees contributed to MCERA to fund pension benefits that included such pay.

This case has significant limitations and is sure to be promptly challenged in the California Supreme Court.

Chicago Can't Impair Public Employee Pensions

On March 24, 2016, the Illinois Supreme Court declared Chicago Mayor Rahm Emanuel’s pension reductions unconstitutional under state law. (Jonesv. Municipal Employees' Annuity and Ben. Fund of Chicago 2016 IL 119618.)

The sole question before the court was whether a pension reform act violated the pension protection clause of the Illinois state Constitution. Similar to the U.S. Contracts Clause, the Illinois’ Pension Protection Clause prohibits the State or local governments from diminishing or impairing pension benefits.  

The Act reduced the value of annual annuity increases, eliminated them entirely for certain years, postponed the time at which they began, and completely eliminated the compounding component. The Act applied regardless of whether the employee was in active service on or after the effective date of the Act. The court found the modifications “unquestionably” diminished the value of the retirement annuities promised to the employees when they joined the pension system.

Chicago's political leaders, like many throughout the country, responded to the great recession and accompanying revenue reductions by under-funding the pension system.  City leaders then sought to reduce their funding obligations by reducing promised pensions. The City argued the pension cuts were necessary to avoid bankruptcy within 15 years, and therefore did not violate the Illinois Constitution.

The Illinois Supreme Court rejected the argument, stating that it “would lead to an unjust result” because employees have a “legally enforceable right to receive the benefits they have been promised” – not merely the remaining funding after politicians satisfied their more glamorous spending priorities.  

Further, under pension law any detriment to pensioners must be accompanied by an offsetting advantage. The court rejected the City's argument that "by offering a purported 'offsetting benefit' of ... sound funding and solvency in the funds, the legislation merely offers participants in those funds what already is guaranteed to them — payment of the pension benefits in place when they joined the fund." This justification for impairment of contract is frequently raised. The court flatly rejected the argument, stating "thus, the 'guaranty' that the benefits due will be paid is merely an offer to do something already constitutionally mandated by the pension protection clause." 

California courts have also held public employment gives rise to certain vested rights, including pension and retiree medical benefits, under both the United States and California Constitutions.  Our office has successfully vindicated the vested pension and retiree medical rights of public employees in cities as small as Pacific Grove and large as Los Angeles.  Nationally, this ruling sends an important message to public entities that they cannot resolve their budgetary woes on the backs of their employees by breaking promises.

Chuck Reed's Pension Attack Fails to Make the Ballot for a Third Time

Earlier today, former San Jose Mayor Chuck Reed admitted defeat for his third attempt to attack public employees' retirement security.  Accordingly to the Sacramento Bee, the move appears to be motivated by poor polling for the initiative and Reed's inability to raise enough money to pay people to gather signatures in support of the measure.

Reed's campaign for a statewide attack on retirement security follows his failed attempt to attack pensions in San Jose.  Despite his repeated failures of this issue, Reed said he and his partners planned to bring the issue up again in 2018.  He said in a press release that he planned to "re-file at least one of our pension reform measures later this year for the November 2018 ballot."

Reed is joined in his effort by Pacific Grove Mayor Bill Kampe and San Diego politician Carl DeMaio.  Pacific Grove's attack on pensions was ruled unconstitutional in 2013.

CalPERS Pension Benefits Generate Over $30 Billion in Economic Activity

The California Public Employees' Retirement System (CalPERS) released a study today demonstrating retirement benefits paid out by CalPERS generated $30.9 billion in economic activity across the State. For every one dollar of public funds invested in CalPERS, the fund returns $9.64 of economic activity throughout the state. CalPERS benefits paid directly to members have large impacts in the housing, restaurant, and health care industries. CalPERS also invests $25.7 billion dollars in California businesses, supporting millions of jobs across the state. The report breaks down the economic impact by state congressional district so tax payers can see how CalPERS benefits their local economy.

For eight decades, CalPERS has built retirement and health security for State, school, and public agency members who invest their lifework in public service. CalPERS serves more than 1.7 million members and administers benefits for more than 1.4 million members and their families in the health program. CalPERS is the largest defined-benefit public pension in the United States. The current market value of the CalPERS general fund is approximately $304 billion dollars.

California Attorney General Releases Title and Summary for Pension Busting Initiative

On August 11, 2015, the Office of the Attorney General released its title and summary for former San Jose Mayor Chuck Reed's pension busting initiative. The highly divisive initiative would strip pensions from public employees and allow voters to modify compensation packages at will. Fortunately, the Office of the Attorney General's title and summary highlight the problems with this initiative.

 

All ballot initiatives must be submitted to the Office of the Attorney General prior to being placed on the ballot. The Office of the Attorney General creates a title and summary of the initiative to appear on the actual ballot. 

 

The title the Office of the Attorney General gave Reed's initiative is "Public Employees. Pension and Retiree Healthcare Benefits. Initiative and Constitutional Amendment." The summary aptly states the initiative, "[e]liminates constitutional protections for vested pension and retiree healthcare benefits for current public employees." This language demonstrates how drastic this reform is and how it will prejudice California's public employees. The summary also notes the long term effects of the initiative are unknown and "depend heavily on future decisions made by voters, governmental employers, and the courts."

 

Mastagni Holstedt, APC has used the Contracts Clause in California’s Constitution to protect vested employee benefits in several high profile court battles: Stockton (fiscal emergency declaration does not authorize City to renegotiate a closed labor contract), Los Angeles (fiscal emergency declaration does not permit freezing retiree medical benefits or imposing furloughs), Pacific Grove (Ballot measure capping PERS pension contributions unconstitutional).  Similar rulings were obtained by the police and fire unions in San Jose invalidating in substantial measure Reed’s San Jose pension impairments.

 

This pension "reform" effort is led by Democrat Chuck Reed and his lawyers. As we blogged previously, the initiative amends the California Constitution to allow voters to impair employment contracts. While Reed claims his measure will not impair current employees' pensions, even Daniel Borenstein of the Contra Costa Times has acknowledged "the initiative would amend the state Constitution to give voters the right through an initiative or referendum to reduce the future pension accrual rate for current employees…Reed and DeMaio should be honest about it, or abandon the measure."

 

Additionally, the Constitutional amendment would abolish pensions for employees hired after January 1, 2019 and replace them with a "defined-contribution" system unless changes to benefits are approved in an election.  In a defined-contribution system, employees have to pay in a fixed amount with no guarantee of what their retirement income would be.  As a result, this approach shifts the risk and could prevent thousands of public employees from retiring.

 

The proposal is not limited to retirement benefits.  It provides, "Voters have the right to use the power of initiative or referendum... to determine the amount of and manner in which compensation and retirement benefits are provided to employees of a government employer."  As a result, the Constitutional Amendment would likely be used to pursue local voter initiatives to bypass collective bargaining to reduce public safety compensation or due process rights.

 

The proposal also seriously jeopardizes death and disability benefits for public safety employees. The new proposal states it shall not be “interpreted to modify or limit any disability benefits provided for government employees or death benefits for families.” But death and disability benefits are often an integral part of a pension plan. As noted by the Legislative Analyst's Office, death and disability benefits are usually prefunded through a pension plan's normal cost. If voters can modify, or even eliminate, pensions for public employees, this necessarily means the funding for death and disability benefits will be cut.  The measure does not provide any means of securing those benefits.

 

The proposal also seeks to insulate future measures from legal challenge by eliminating the jurisdiction of the Public Employment Relations Board to hear unfair practice charges regarding future measures which impair vested rights or collective bargaining agreements. 

 

Now that the initiative has a summary, the proponents must furnish the required number of signatures in order to make the November 2016 ballot. You can help stop this initiative by educating your family, friends, and community members about the drastic and detrimental effects of this initiative and encourage them not to sign any petition supporting the initiative. You can help stop future attempts to impair retirement benefits by opposing all candidates who endorse this imitative.

Mastagni Holstedt, APC Protects Retirement Rights in the Court of Appeal

Mastagni Holstedt, APC filed an amicus brief with the California Second Appellate District, Division One. At issue are adjustable retirement health subsidies under the City of Los Angeles’ retirement system. In 2006, the City of Los Angeles passed an ordinance which allowed the Board of the Los Angeles Fire and Police Pension System to provide an adjustable retirement health subsidy. This adjustable rate would allow the City to increase contributions as costs increased over time.

However, in 2011, the City of Los Angeles passed an ordinance freezing future increases to the subsidy. Los Angeles employee organizations brought suit alleging this violated their vested right to a variable subsidy. The trial court agreed and ordered the City to increase the subsidy pursuant to the 2006 ordinance.

The City appealed the decision arguing it had plenary authority to modify the pension subsidy as it was a type of “employee compensation.” In its brief, Mastagni Holstedt, APC argues a pension subsidy is not salary, but is instead a vested benefit. The California courts have already held on numerous occasions a pension benefit, once vested, cannot be revoked. The California Constitution’s Contracts Clause prohibits such an action. Thus, the City cannot arbitrarily revoke a benefit by reforming it as “employee compensation.”

Mastagni Holstedt, APC thanks the employee organizations who joined the firm in fighting back against the destruction of employee benefits.  Mastagni Holstedt attorneys David E. Mastagni, Isaac S. Stevens, and Ian B. Sangster represent the amici in the matter.

Chuck Reed Tries New Tactic in Pension Assault

Chuck Reed announced a new strategy to attack pensions in California today.  The text of new proposal has several features designed to take away employees retirement benefits.

It would abolish pensions for employees hired after January 1, 2019 and replace them with a "defined-contribution" system unless changes to benefits are approved in an election.  In a defined-contribution system, employees have to pay in a fixed amount with no guarantee of what their retirement income would be.  As a result, this approach shifts the risk and could result in thousands of public employees unable to retire.

The proposal is not limited to retirement benefits.  It provides, "Voters have the right to use the power of initiative or referendum... to determine the amount of and manner in which compensation and retirement benefits are provided to employees of a government employer."  As a result, the measure could be read to allow voter initiatives to eliminate or change MOUs, severely limiting collective bargaining in California.

The proposal also seeks to prevent the Public Employment Relations Board from hearing unfair practice cases involving ballot measures to strip employees of bargained-for compensation.

Illinois Supreme Court Blocks Attack On State-Funded Pensions

The Illinois Supreme Court blocked an attack on state employees and their pensions when it upheld a lower court ruling on May 8, 2015. In Pension Reform Litigation v. Pat Quinn, the Court struck down a 2013 law aimed at slashing state-funded public employee pensions. The Court ruled the law violated the Illinois State Constitution’s contracts clause.

In 1970, Illinois ratified an amendment to its constitution protecting state-funded pensions. From 1970 until 2013, the funding for the state-funded pensions stagnated, having only 41% of the funding necessary to meet the fund’s liabilities. Conversely, the Illinois Municipal Retirement Fund is funded at 96%. The IMRF is not state funded.

To meet growing concerns with its state-funded pensions and other budgetary issues, the Illinois state legislature passed Public Act 98-599. The heart of PA 98-599 aimed to cut state-funded pensions. The bill sought to delay eligibility for members. It also capped the maximum salary used to calculate benefits. PA 98-599 then tried to effectively reduce base pension amounts for some members. Senator Kwame Raoul, one of PA 98-599’s chief sponsors, characterized the bill as sacrificing state employee pensions to protect state finances.

Former Governor Pat Quinn signed PA 98-599 in 2013. Five separate lawsuits challenging the law’s validity were immediately filed. The lawsuits, all decided in this case, claimed that PA 98-599 violated Illinois’s contracts clause. Just like the California's contracts clause, the Illinois Constitution prohibits the impairment of state pensions. PA 98-599’s proponents characterized the bill as an exercise of the legislature’s emergency police powers. The Illinois Supreme Court disagreed. The Court ruled that the PA 98-599 violates the Illinois Constitution.

The Illinois Supreme Court warned against a slippery slope of unnecessarily using police powers. Writing for the Court, Justice Lloyd Karmeier instructed that emergency police powers must be reserved for true emergencies. If not, “no rights or property would be safe from the State. Today it is nullification of the right to retirement benefits. Tomorrow it could be renunciation of the duty to repay State obligations. Eventually, investment capital could be seized.” Justice Karmeier further explained that “crisis is not an excuse to abandon the rule of law. It is a summons to defend it.” The Court pointed to the possibility of raising taxes to meet the fund’s needs.

The Illinois pension victory represents just one battle in that state’s fight. Though the ruling came from the Midwest, the fallout hits close to home. Just like Chuck Reed here in California, Governor Bruce Rauner wants to amend the Illinois constitution so that he can gut state-funded pensions.

Similar attacks on retiree benefits have failed in California on similar grounds.  In Stockton, the superior court found a fiscal emergency declaration does not authorize City to renegotiate a closed labor contract.  In Los Angeles, a court determined a fiscal emergency declaration does not permit freezing retiree medical benefits or imposing furloughs, and in Pacific Grove the court found a local ballot measure capping PERS pension contributions violated California's contracts clause.  Mastagni Holstedt attorneys David E. Mastagni and Isaac S. Stevens represented the employee groups in Stockton and Los Angeles.  Mastagni Holstedt attorney Jeffrey R. A. Edwards represented the employee groups in Pacific Grove.