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.