The California Supreme Court handed a major victory to former Governor Jerry Brown and California’s governments in a pension reform case today. [Disclosure: I wrote an amicus curiae brief for the League of California Cities in the case.]

This case challenged the 2013 pension reforms, the “California Public Employees’ Pension Reform Act of 2013” known as “PEPRA.” The plaintiff unions argued the “California Rule” forbade the Legislature to amend the County Employees Retirement Law of 1937 (“CERL” or “the 1937 Act”)  to reduce pension benefits without providing an offsetting benefit. Jerry Brown and the California Business Roundtable used the case to try to overturn the California Rule entirely. In a cautious, incremental decision, the Chief Justice wrote for a unanimous court (with a brief concurrence by Justice Cuéllar) ruling as follows:

The California Rule survives, but has this new limitation: the Legislature can make changes to pension benefits which are net negative to employees provided that:

  • They serve a proper purpose that is consistent with the theory of a pension system;
  • They are reasonable;
  • It is not possible to provide offsetting benefits to employees without disserving the legislative purpose.

The crux of the case is this: “The Legislature must have the authority, discretion, and flexibility to address such [pension-spiking] problems without being required to, in effect, extend the life of the loopholes and the opportunities for abuse for the duration of the careers of current employees by providing comparable advantages.”  In short, loophole fixing is okay if a court concludes that is what the Legislature is doing and that it acted reasonably. This will likely mean that every new pension change that is not net-neutral to employees will be litigated, as only a court can confirm these standards are met.

The Court could have ruled more narrowly — just construing the 1937 Act on the basis that the Legislature does not have its own finances at stake under that law as it does under the PERS statute — an argument Lili Wyckoff and I made in an amicus brief for the League of California Cities. It could also have reasoned that PEPRA did not really change anything (as some other amici argued), but the Court chose a broader path. So, this case is good law for CalPERS and not just for 1937 Act pension systems. The Court could have relied only on statutory grounds, or on federal grounds, but decided to reach the state constitutional issue and to rely on state constitutional grounds alone (defeating any petition for cert. to the U.S. Supreme Court).

It could have ruled more broadly, too. The Court expressly rejected the argument that a pension change that affects only accruals to existing employees after the date of the change does not raise a contracts clause issue. Governor Brown and the California Business Roundtable made this unsuccessful argument to overturn the California Rule. So, the California Rule is alive and well, it just has a significant, new limitation.

A few aspects of the decision will affect other areas of public law practice:

  • The case reminds us that government agencies do not have power to make contracts that exceed their statutory (or constitutional) authority, so contracts are construed to imply terms needed to make them lawful. Here, settlement agreements after the 1997 Ventura County Deputy Sheriffs’ Assn. v. Board of Retirement case that promised certain pension benefits are read to include the implied term that those benefits would be provided only so long as they were authorized by statute. Among the cases cited on this point is the land use case public lawyers are familiar with: Trancas Property Owners Assn v. City of Malibu. This aspect of the opinion is also nice authority for the rule that a public agency cannot contract away its police power or other constitutional or statutory authority. The Court also cites Civil Code section 1643, which adopts the canon of construction which prefers readings which make a statute constitutional or a regulation consistent with statute.
  • Litigants cannot estop government (i.e., prevent it from changing a legal position) easily and, given the implied term just noted, estoppel was not shown in this case. Judicial approval of the post-Ventura settlement agreements does not change estoppel analysis.
  • Footnote 4 of the opinion has a useful reminder that “vested right” has at least three meanings — a vested right to some kind of pension after 5 years of public service, a vested right under contracts clause analysis to a particular benefit (say, retiree medical benefits), and vested rights as used in land use law.
  • The plaintiff unions argued their members had paid pension contributions based on calculations which assumed some of the benefits that have now been taken away. In a footnote (18) the Court suggested — but did not decide — that this might entitle them to a refund of premiums. That suggests a whole lot of litigation to come if the issues are not settled.
  • The Court reserves the question “whether the Legislature’s clarification of ambiguous statutory language would avoid contact clause scrutiny.”
  • Reasonable pension expectations vest whether they are rooted in statute or judicial decisions, although prompt legislative disagreement with a judicial construction of a statute is given weight.

Again, a nice win for local government and a big day in California’s law of pensions!