A New Approach to Pension Reform Goes to Appellate Court

By Edward Ring

The recent ruling by the California Supreme Court in the case CalFire vs CalPERS has garnered much attention from pension reformers. While falling short of being a landmark ruling, the result was nonetheless encouraging. The court left open the possibility that vesting does not protect prospective benefits of current employees. The implications of that are left to related, still active court cases to decide.

Meanwhile, a completely different approach to pension reform has been hitting courts around California, centered on the argument that government agencies did not follow due process when approving pension enhancements. Between 1999 and 2007, one by one, nearly all of California’s government agencies enacted pension benefit increases of 50 percent or more. These increases were made retroactively, causing an actual financial impact well in excess of 50 percent. But when they did this, did they obey the law?

Three lawsuits have been filed by citizen taxpayers seeking to have pension increases overturned on the ground that they were adopted in violation of Section 7507, but each time, the trial court has dismissed the case on the ground that the lawsuit is barred by the three-year statute of limitations.

Convinced that the statute of limitations should not act as a bar to taxpayer claims to challenge these statutory violations, taxpayer/plaintiff George Luke raised the money to hire counsel, Robinson & Robinson LLP, to take an appeal from the statute of limitations ruling.  If Mr. Luke is successful, it will open the door to every agency, or their taxpayers, where pension increases were approved without complying with Section 7507 to either challenge those pension increases in court or to renegotiate them. The brief on appeal in the Luke case is available here.

The legal challenge claiming pension benefit enhancements were adopted without following due process is based on California Government Code Section 7507, which prohibits adoption of retirement benefit plan increases unless the approving agency first (1) retains an enrolled actuary, (2) who prepares an actuarial report, (3) which estimates future costs of the increases, and (4) the estimate of future costs are made available to the public at a meeting at least two weeks before the agency approves the increases. It is not clear that any of the several cities and counties that have been audited so far had complied with these requirements.

Local pension reform activists in California, along with local elected officials committed to pension reform, can request and copy archives from local agencies that documented the process they followed when they enhanced their pension benefits. That audit process can be summarized as follows:

(1) Find out whether your agency approved pension increases between 1999 and 2007.

(2) If so, obtain all documents pertaining to that approval as described below and ascertain whether the documents show compliance with Government Code Section 7507.

(3) If the documents do not reveal compliance, preserve copies of those documents. They will be important evidence if there is future litigation involving the pension increases.

(4) Contact the agency’s attorney to inform him or her of the non-compliance.

The California Policy Center has compiled a detailed set of instructions to assist elected officials, candidates, and taxpayers to determine whether their city or county pension system complied with the 7507 requirement when major increases in pension formulas were made between 1999 and 2007. That information can be found here.

California’s public employee pension systems are facing financial headwinds of growing strength. As of March 9th, America’s bull market in equities has lasted a record ten years. During the same time there has been a runup in real estate values that far exceeded the rate of inflation and is unsustainable. The long overdue rise in interest rates threatens the bond market. And yet, here on the tail end of one of the best decades for investors in history, California’s pension systems are only about 70 percent funded. When the markets slump, pension headwinds will turn into pension hurricanes.

To save pensions, it is a false choice to only offer tax increases and service cuts. Measured reductions to pension benefits accruals for future work – not even touching pension benefits already earned – will be an essential element of any successful strategy. Accomplishing this in court, when the politicians lack the will to do what must be done, may be the only avenue possible. George Luke’s appeal offers another path forward.