California court rules that pensions can be reformed going forward

September 1, 2016
By John Klingner

Unlike the Illinois Supreme Court’s protection of the status quo, a California appeals court is allowing a pension reform law to move forward and potentially reduce that state’s pension burden.

The state of California ranks near Illinois in having one of the worst pension crises in the nation.

And like in Illinois, previous pension reform proposals in California have been struck down as violating the promises made to government workers.

But things may be changing in the Golden State. A California appeals court ruled Aug. 17 that state and local pension reforms can alter the unearned benefits of active workers.

The case revolved around an issue Illinois struggles with: pension spiking.

In 2013, California enacted a pension reform law that, among other things, ended the practice of pension spiking for current government workers. When a county pension system enforced the provisions of the new law, the local government union sued, claiming the pension rules that allowed spiking – or raising a worker’s salary just prior to retirement – couldn’t be changed for current workers.

The appeals court upheld the state’s reforms, declaring in its ruling that government workers are entitled to a “reasonable” pension only, which does not include the practice of pension spiking.

More broadly, the court said that until employees retire, pension benefits that workers have not yet earned can be changed through pension reforms.

The appeals court ruling is noteworthy because it was unexpected. Unlike Illinois, California does not have a pension-protection clause in its constitution. Instead, California pensions have for decades operated under an interpretation of the California Constitution known as the “California rule.” The rule says that once a government worker is hired, neither the worker’s earned nor unearned pension benefits can be reduced.

The court disagreed with that broad interpretation of the “California rule.” The judges said, to maintain the integrity of the pension system, governments in California have the flexibility to make reasonable reforms to the pension system in reaction to changing conditions (such as economic downturns).

The appeals court’s ruling is not the last word, however. The case will likely end up in front of the California Supreme Court, which will ultimately decide whether active workers’ unearned pension benefits can be reformed.

Regardless of the ultimate outcome of the case, the fact that a California court ruled that unearned pension benefits can be changed to maintain pension funds’ financial integrity is significant.

The court’s ruling reflects a principle Illinois should use in reforming its own troubled pension system: While already-earned pension benefits should be protected, the benefits that workers have yet to earn can be changed.

Unfortunately for taxpayers and pensioners in Illinois, the Illinois Supreme Court has been inflexible in its own interpretation of whether pension benefits can be reformed.

In its decision striking down the modest pension reforms in Senate Bill 1 in May 2015, the court ruled that the Illinois Constitution’s pension-protection clause protected both earned and unearned benefits of current state workers.

The ruling diminished any chance for significant pension reform involving current workers.

Since then, Illinois’ state pension crisis has only worsened. Illinois’ pension debt has grown to a record $111 billion and the funds have only 42 cents on hand for every dollar they need to make future benefit payments.

However, a California court finally ruling in favor of pension reform after decades of inaction should give Illinoisans hope that reforms can happen here.

Like the California appeals court did with the “California rule,” the Illinois Supreme Court can and should change its interpretation of the pension protection clause to allow reforms of unearned benefits of current workers.

And if the court refuses to budge, Illinoisans’ next step should be to demand the end of the pension protection clause through a constitutional amendment.

In the meantime, Illinois lawmakers can enact a broad slate of pension reforms that will go a long way toward stabilizing the crisis, relieving some of the burden on taxpayers and protecting the retirements of government workers.

TAGS: pensions