By Pension and Benefits Editorial Staff
The amendment of a California law to deny public employees the right to increase their pension benefits by purchasing additional retirement service credits did not violate the California Constitution, according to the California Supreme Court. The opportunity for public employees to purchase the credits was not, unlike pension benefits, a vested right subject to the protection of the state’s constitutional contract clause.
Repeal of option to purchase additional service credit. Beginning in 2003, state employees and other members of the California Public Employees’ Retirement System (CalPERS) were extended the opportunity to purchase up to 5 years of additional retirement service (ARS) credit. Specifically, state employees with at least 5 years of service were allowed to make a one-time election to acquire service credit that was not based on any type of actual service (i.e., “airtime”), but would effectively increase the amount of their pension benefits. However, the credit was not without cost, as employees were required to pay CalPERS the present value of the increase in their pension benefits that would result from the purchased ARS credit.
When enacted, the ARS credit was expected to be cost-neutral, given that public employees were required to pay CalPERS the full present value of their future benefits. However, the state subsequently came to the realization that the eventual cost of the ARS credit could exceed the purchase price paid by pensioners, especially those who experienced a significant increase in salary between the time the ARS credits were purchased and their retirement. A CalPERS analysis of the years 1997-2007 further indicated that it had underestimated the actual cost of the credit by 12-38 percent for various categories of state workers.
In an attempt to manage the state’s burgeoning pension costs, the California state legislature, following a pension reform plan promulgated by Governor Edmund G. Brown, enacted the California Public Employees’ Pension Reform Act of 2013 (PEPRA). Among other revisions to the laws governing public employee pensions, PEPRA eliminated the opportunity for public employees to purchase additional retirement service credits after December 31, 2012. The repeal, however was prospective, and did not alter the rights of employees who had already purchased the credit.
Public employees of the California Department of Forestry and Fire Protection (Cal Fire) brought suit against CalPERS, maintaining that the opportunity to purchase the ARS credits was a vested right protected by the contract clause of the California Constitution. The trial court rejected the employees’ claim, ruling that the opportunity to purchase the ARS credits was not protected by the state Constitution and, even if the option was protected, its elimination was a permissible modification of the pension plan.
The California Court of Appeal affirmed the trial court, reasoning that, absent a legislative intent to create a contractual right, the opportunity to purchase the ARS credit was not constitutionally protected. The appeals court agreed with the trial court’s ruling that the elimination of the option was a permissible modification of the pension plan.
No legislative intent to create contractual right to purchase ARS credit. The California Supreme Court affirmed the lower courts’ rulings that the opportunity to purchase the ARS credit was not a term or condition of public employment protected by the state constitution’s contract clause. However, having determined that the opportunity to purchase the credit was not entitled to constitutional protection, the court declined to address whether the elimination of the option was an unconstitutional impairment of the vested rights of public employees. In so doing, the California Supreme Court effectively left unaltered the wide scope of constitutional protections afforded public pension rights in the state (i.e., the “California Rule”).
SOURCE: Cal Fire Local 2881 v. California Public Employees’ Retirement System (Cal. Sup. Ct.).
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