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Pension Law Update: CA Supreme Court Avoids Addressing the “California Rule” in Much-Anticipated Cal Fire Decision

In its March 4 ruling in Cal Fire Local 2881 v. California Public Employees’ Retirement System, the California Supreme Court held that the Legislature’s elimination of the opportunity for employees to purchase additional retirement service (ARS) credit does not violate the state or federal constitution because the opportunity to purchase such credit is not a vested right protected by the constitutional contract clause. (Cal Fire Local 2881 v. California Public Employees’ Retirement System (March 4, 2019, S239958) ___ Cal.4th___.)

California adheres to a long-standing rule, known as the “California Rule,” which provides that pension benefits in place when a worker is hired can never be reduced without equivalent compensation. While the Cal Fire Court avoided the California Rule, the holding suggests that state and local governments may reduce pension costs by repealing certain benefits without running afoul of constitutional protections for public pensions. However, benefits enacted with clear legislative intent to create contractual rights and other “core pension rights” that have traditionally been seen as deferred compensation are still constitutionally protected.

Cal Fire Background

State employees and other members of CalPERS were granted the opportunity to purchase ARS credit in 2003 by the enactment of Government Code § 20909. Participating employees could receive pension benefits calculated on the basis of up to five years’ more public employment than they actually worked. Because ARS credit was untethered to actual service, it acquired the nickname “air time.” In September 2012, the Legislature enacted the Public Employees’ Pension Reform Act (PEPRA), which effectively repealed the statute granting public employees the opportunity to purchase ARS credit. (see Gov. Code, §§ 7222 et seq.)

Plaintiffs and appellants Cal Fire Local 2881 (a labor association) and four individual employees of the California Department of Forestry and Fire Protection (known as “Cal Fire”) filed a petition for a writ of mandate against CalPERS challenging the elimination of the ARS credit, contending that the opportunity to purchase ARS credit was a vested right protected by the contract clause of the California Constitution.

Both trial and appellate courts entered judgment denying Plaintiffs’ petition concluding that eliminating the benefit did not impair or violate any pension right of plaintiffs. The California Supreme Court granted Plaintiff’s petition for review.

California Supreme Court’s Discussion

Plaintiffs’ argued that PEPRA’s elimination of the opportunity for existing public employees to purchase ARS credit violated the constitutional contracts clause, in both the United States and California Constitutions, which prohibits the enactment of laws effecting a “substantial impairment” of contracts, including contracts of employment. The Court pointed out that the terms and conditions of public employment, unlike those of private employment, generally are established by statute or other comparable enactment rather than by contract. The Court also recognized that it is well settled that public employees have no vested right in any particular measure of compensation or benefits and that these may be modified or reduced by the proper statutory authority.

However, the Court articulated two exceptions that could create rights protected by the contract clause in public employment: (1) when the statute or ordinance establishing the benefit and the circumstances of its enactment clearly evince a legislative intent to create contractual rights; and (2) where certain benefits of public employment, such as pension rights, are protected by implication, even in the absence of a clear manifestation of legislative intent.

Key Elements of Court’s Ruling

  • There was no clear evidence suggesting the Legislature made an affirmative commitment to make the opportunity to purchase ARS credit available indefinitely.

The Court did not find evidence that the Legislature intended to create a contractual right by allowing the opportunity to purchase ARS credits. Rather, the Court found that the Legislature had simply enacted more of a policy to allow the one-time election to purchase ARS credits. When read as a whole, the Court did not find the language of section 20909 suggested an affirmative promise by the Legislature to make the opportunity to purchase ARS credit available indefinitely.

  • The opportunity to purchase ARS credit is not entitled to the same type of constitutional protection as public employee pension rights.

Pension rights have historically been afforded constitutional protection because they are seen as deferred compensation that becomes part of the contract of employment itself. This is because pension benefits are earned by an employee’s work – the benefit flows directly from a public employee’s service, and their magnitude is roughly proportional to the time of that service. Thus, even in the absence of a manifest legislative intent to create contractual rights, the Court has held pension rights cannot be destroyed without impairing a contractual obligation. However, the Court held the opportunity to purchase ARS credits was not akin to deferred compensation. The Court found the opportunity to purchase ARS credit was “so unconnected to actual service time” because a public employee could increase his or her pension benefit merely by purchasing the ARS credit and not through the employee’s time in service.

  • The Court did not opine on the California Rule.

California’s long-standing rule, known as the “California Rule,” provides that pension benefits in place at the moment of a worker’s hiring can never be reduced without equivalent compensation. The protective legal doctrine has hindered state and local lawmakers’ ability to revise the laws governing public employee pensions. Although the state and many amici curiae urged the Court to use the Cal Fire decision as an occasion to re-examine the California Rule, the Court did not reach the issue because, as a preliminary matter, it concluded that California’s public employees do not have a contractual right to the continued availability of the opportunity to purchase ARS credit. Therefore, the question of whether PEPRA worked as an unconstitutional impairment of protected rights did not arise.

Next Steps

Unfortunately, despite great anticipation, the California Supreme Court did not opine on the California Rule. For now, the precedent that forbids public agencies from reducing pension benefits for current employees and retirees unless they provide additional compensation to offset the loss of income remains intact. However, the Court is expected to hear cases that touch on the California Rule and may potentially affect the Rule’s application to other pension benefits. Two such cases in Alameda County and Marin County relate to benefits that “spike” the final compensation that is used to calculate pensions. (see Alameda County Deputy Sheriff’s Association et al. v. Alameda County Employees’ Retirement Association, et al. (2018) 19 Cal.App.5th 61, and Marin Association of Public Employees’ Retirement Association (2016) 2 Cal.App.5th 674.)