California Supreme Court Rules on Modification of Public Employees’ Pension Rights

In Alameda County Deputy Sheriffs’ Association, et al. v. Alameda County Employees’ Retirement Association, et al., the California Supreme Court rejected a constitutional challenge to certain provisions of the Public Employees’ Pension Reform Act (PEPRA), and explained the legal test that applies when vested public pension rights are modified.

The case concerned a provision of PEPRA which requires retirement boards in 1937 Act systems to exclude certain types of pay when calculating the amount of a pension.  In Alameda, Contra Costa, and Merced Counties, retirement boards previously included such types of pay, i.e., cash outs of accruals exceeding what the person earned in a 12-month period, pay for services outside of normal working hours, and other types of pay if intended to inflate the pension.  Unions representing affected public employees challenged whether the new exclusions could be constitutionally applied to people who were hired before PEPRA. 

In its opinion, the Supreme Court reviewed and followed its previous decisions that applied the “California Rule” test for constitutionality. Under the California Rule, modifications to pension rights must bear some material relationship to the theory of a pension system and its successful operation, and changes in a pension plan that result in a disadvantage to employees should be accompanied by comparable new advantages.  Political reasons are not permissible, nor are rising costs sufficient to justify reducing pension rights.  The Court emphasized that it would not reject the California Rule, and it remains the law.

However, in this particular case, the Supreme Court found that the Legislature’s purpose was permissible -- to close loopholes and prevent manipulation of compensation to artificially increase the pension benefit (what refer to as “pension spiking”).  Furthermore, the PEPRA amendment did not need to provide offsetting new advantages to employees, because in the Court’s view, that would defeat the purpose of closing loopholes that should not have been available in the first place. 

The decision can be found here:   

By: Anne Yen | August 19, 2020

Legal Developments