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“I’m Still Standing!” The California Rule After Alameda

   Published on:  04 Aug, 2020

The biopic Rocketman concludes with Elton John’s hit “I’m Still Standing,” which was written in 1983, and signaled a sharp turnaround from a darker place in the maestro’s career. After Thursday’s decision in Alameda County Deputy Sheriffs’ Association v. Alameda County Employees’ Retirement Association, the California Rule can also sing “I’m Still Standing;” however, its future prospects appear somewhat murkier.

Some preliminary takeaways:

1. THE CALIFORNIA RULE STILL STANDS BUT ITS CENTRAL PLANK IS REMOVED

The Court felt compelled to state unequivocally, at the end of the opinion, that the California Rule remained intact:

The State, at least implicitly, and amicus curiae California Business Roundtable, explicitly, urge us to use this decision as an occasion to reexamine and revise the California Rule … however, we have no jurisprudential reason to undertake a fundamental reexamination of the rule. The test announced in Allen I, as explained and applied here, remains the law of California. (Slip Op. at p. 90, emphasis added.)

Within the 90-page main opinion, however, the Court rewrote a key part of the rule. Recall that the California Rule, until now, was a three-part test, first articulated in Allen v. City of Long Beach in 1955 (Allen I), and later refined in a series of decisions through Legislature v. Eu in 1991. It provided that public employee pension rights may be changed only when (1) the change is reasonable, (2) it is materially related to the theory of pension system, and (3) any disadvantages to employees are offset by comparable advantages.

Under the Court’s ruling today, parts 1 and 2 remain. The Court had “no difficulty” concluding that legislative intent in PEPRA “to align the express language of a pension statute more closely with its intended manner of functioning directly relates to both the theory of a pension system and its successful operation.” (Slip Op. at pp. 77, and longer discussion at pp. 76-82.)

But the Court significantly revamped the third prong. Whereas before, negative pension changes had to be offset by comparable advantages, now they are only required “[w]hen preserving the value of public employee pension rights does not disserve the Legislature’s constitutionally permissible pension reform objectives, the contract clause requires it to preserve that value.” (Slip Op. at p. 87.)

Weighing whether the value of pension rights “disserve” the Legislature’s constitutionally permissible pension reform objectives seems a bit like weighing solids against gas.

2. UNANIMITY BUT AMBIGUITY

With important decisions, High Courts love to combine unanimity with the penmanship of a chief justice. And so it was here. Chief Justice Tani Cantil-Sakauye crafted the lengthy opinion and all of her colleagues signed onto it. But unanimity often involves horse-trading, justices offering support in return for incorporating their edits. That can create ambiguity. For example, as stated above, the new formulation of the third prong seems academic and conceptual rather than practical.

Some commentaries suggest this is a narrow ruling. We hope they are right, but we fear not. Perhaps Arnold Schwarzenegger’s most memorable contribution to the lexicon of California politics was his 2003 campaign zinger that Ariana Huffington had a loophole so big in her tax returns that he could drive his Hummer through it. We fear that the exception to the offsetting advantages rule is the same – so big it will swallow the rule.

3. WHAT GREAT RECESSION?

On May 5, after oral argument, we wrote “Don’t expect the economic impacts of the pandemic to play a significant role in the decision.” We got that bit right … but we assumed the economic impacts of the 2008 Great Recession would play a significant part. Not so. Despite the Great Recession providing much of the impetus for PEPRA and the foundation upon which the Marin Assn. of Public Employees v. Marin County Employees’ Retirement Assn (Marin) and Alameda court of appeal decisions, in 2015 and 2018, respectively, upheld the Legislature’s changes, the Supreme Court ignored the supposed economic justification for PEPRA and focused only on references to spiking in the legislative history. This was probably wise since PEPRA’s legislative record was largely devoid of evidence of the economic collapse that the professors of doom cited in Marin foretold.

But by ignoring the economic rationale, which also underpinned the Governor’s arguments, the Supreme Court leaves those issues unanswered – leaving the door ajar for future challenges based on economic necessity. In fact, the Court clearly left the door open to a future challenge to the California Rule itself. (See the block quote in part 1.)

4. “SHOULD” BEATS OUT “MUST”

As we noted in our commentary after oral argument, the Court seemed likely to resolve the “should” versus “must” debate that the Marin decision was premised on. And so it did – according to the Court, the “one-time use of ‘must’ in Allen v. Board of Administration (Allen II) in 1983 appears to have been inadvertent, and it should not be understood to have changed the Allen I standard.”

Perhaps, but coming 37 years after the Allen II decision, the Court’s statement seems flippant. Dozens of appellate decisions since 1983 invariably, until Marin in 2015, understood Allen II to, if not change the Allen I standard, at least clarify it. (For example, United Firefighters of Los Angeles City v. City of Los Angeles (1989); Pasadena Police Officers Association v. City of Pasadena (1984); Teachers Retirement Bd. v. Genest (2007); Association of Blue Collar Workers v. Wills (1986); Protect Our Benefits v. City and County of San Francisco (2015).)

Those decisions set up a clear understanding among retirement boards, practitioners, employees, and employers that the California Rule required that changes which cause disadvantages to pension benefits must be offset by comparable advantages. The Supreme Court disturbed none of those decisions. Yet in Alameda, it ignored them, and almost every other intermediate appellate court decision as if they did not exist. Instead, to justify the newfound flexibility it found in the California Rule, the Court reached back to 1947 and Kern v. City of Long Beach:

It might have been possible to adopt a rule requiring that any disadvantages imposed by a pension modification must be offset by comparable new advantages. But in Kern we effectively disavowed such a rule, holding, “The employee does not have a right to any fixed or definite benefits, but only to a substantial or reasonable pension. There is no inconsistency therefore in holding that he has a vested right to a pension but that the amount, terms and conditions of the benefits may be altered.”

But here’s the problem: Kern didn’t “disavow” a rule requiring that any disadvantages imposed by a pension modification must be offset by comparable new advantages. Kern simply said benefits could be altered. Building on Kern, eight years later, Allen I added its rule that “changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages.” Every Court that considered the issue since, until Marin, and now Alameda, whether they used “must” or “should,” REQUIRED that any disadvantages caused by the alteration had to be offset by advantages.

In other words, for 65 years, every court understood Allen I to stand for a proposition that the Supreme Court now says they should not have.

5. ARE RETIREES SAFE?

Retiree pension benefits have traditionally been perceived to enjoy greater protections than those of active employees. In Allen II in 1955, for example, the Supreme Court stated: “As to retired employees, the scope of continuing governmental power may be more restricted, the retiree being entitled to the fulfillment of the contract which he already has performed without detrimental modification.” However, for support, the Court cited Lyon v. Flournoy, an intermediate appellate court decision from 1969, and as discussed above, the Supreme Court almost entirely disregarded intermediate appellate decisions in its ruling. Plus, if Allen II’s use of “must” was inadvertent, what of its statement that “governmental power may be more restricted” vis-à-vis retirees?

Anyone who retired before PEPRA took effect on January 1, 2013 would appear to have nothing to fear from this decision. Those who retired after that date could be affected if the retirement system did not make the changes that the Supreme Court says PEPRA required. Retirement Boards could try to reduce the benefit going forward or they could try to claw back benefits to January 1, 2013. If the latter occurs, footnote 18 of the Alameda decision suggests retirees and employees would have claims for reimbursement for overpaid contributions, perhaps with interest.

Significant legal questions are presented on all these issues.

6. THE COURT IS TRENDING THE WRONG WAY

From Kern to Eu, in a series of landmark decisions, the California Supreme Court created the California Rule. The Rule held through courts dominated by Republican gubernatorial appointments. Now, however, with the Court’s majority comprised of Jerry Brown appointees, in two consecutive decisions, in close sequence, the Court has seemingly gone out of its way to rule against pension rights.

In Cal Fire Local 2881 v. California Public Employees’ Retirement System (2019), the Court upheld PEPRA and ruled against the employees and their union. The right to purchase additional retirement service credit after the employee provided at least five years of service directly impacted the employee’s retirement formula. Yet, the Court ruled that the benefit was not a pension benefit.

Now, in Alameda, the Court reformulated the third prong of the Allen I test to allow a constitutionally-permissive change to reduce benefits without offsetting advantages to the employee.

7. FOR ALL ITS FLAWS, COULD ALAMEDA HAVE BEEN WORSE?

There is certainly much to grumble about in the decision. But considering that a progressive Democratic governor advocated for the elimination of any protections for future accruals, the decision could have been far worse. And notwithstanding the fluidity with which the Court skirted decades of precedents, at a time when pension systems are under renewed stresses from the economic crisis, might not a rule that allows the Legislature to prevent manipulations of benefits beyond the levels they are funded help to preserve defined benefit systems for the long run? Perhaps a new line can be drawn to prevent further fracture of the rule.

8. SO WHAT COMES NEXT?

The Court has three other public employee pension cases on review:

Marin Assn. of Public Employees v. Marin County Employees’ Retirement Assn. (2016) 2 Cal.App.5th 674, which is closely related to Alameda;

Hipsher v. Los Angeles County Employees Retirement Assn (2018) 24 Cal.App.5th 740, involving forfeiture of pension benefits after a criminal conviction; and

McGlynn v. State of California (2018) 21 Cal.App.5th 548, judges elected pre-PEPRA and promised pre-PEPRA benefits but took office post-PEPRA and given reduced post-PEPRA benefits.

It is possible that all of these decisions may be returned to the lower courts with direction to reanalyze them in light of Alameda. If that happens, it will signal that the Supreme Court, after Cal Fire and Alameda, believes its work reformulating the California Rule is done for now.

TAKEAWAY: As the Supreme Court emphasized, the California Rule remains intact, albeit weakened. While no employer should plan on trying to reduce the core pension benefits promised employees, such as pension formula and retirement age, courts do, nonetheless, seem more apt to justify modifications of pension benefits on the fringes, particularly unusual benefits held by a limited number of employees. Legislation – and litigation – testing this new analysis is inevitable.

If you have any questions about this alert, please contact Gregg Adam in our San Francisco office.