Pension Crisis

California's Top Court Rules Against Pension Spiking

The decision will make it harder for government employees to abuse and milk the state’s retirement systems.

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California's ticking pension time bombs have not been defused, but a state Supreme Court decision has turned back the clock a bit.

California's Supreme Court has upheld part of a 2013 law that prohibited county public employees from "pension spiking," a trick by which government workers find ways to artificially jack up their total pay as they approach retirement. This inflates the size of the pensions they'll be paid annually for the rest of their lives.

In a unanimous ruling, the state's top court determined that pension spiking is not protected by the state's constitution or by what's known as the "California Rule," a decades-old legal precedent that has largely prevented governments within the state from scaling back any sort of benefits once they've been offered to employees.

Government employees would do things like hang on to unused vacation or sick pay and cash it all in as they approached retirement, or coordinate massive amounts of overtime for their final years of work, all for the purpose of artificially inflating their final wages. That puts state, county, and local governments (and taxpayers) on the hook for pension commitments that were dramatically higher than they should have been. Transparent California has been documenting the escalating amounts government employees have been collecting as they retire, well into six figures. Last year, the biggest pension payment to a retired employee topped $400,000.

As these pensions have grown in size and number, they've been devouring more and more of government budgets, leading to a fiscal crisis and, in some cases, city bankruptcies. So in 2013, then-Gov. Jerry Brown signed into law the Public Employees' Pension Reform Act, which put some limits on pension growth and was supposed to stop pension spiking.

The state's public employee unions have been fighting the law since it was passed (and looking for ways to circumvent the rules). In a highly technical ruling Thursday, the state's Supreme Court made it clear that pension spiking is not protected by the California Rule. It is absolutely permissible, the court says, to require pensions to be calculated from an employee's base compensation, undistorted by bonuses and one-time boosts.

The law's purpose, Chief Justice Tani Gorre Cantil-Sakauye writes, "was to bring administrative practice…into closer alignment with the system's underlying theory by excluding income designed to artificially inflate a pension benefit and limiting the inclusion of other types of compensation that were reasonably viewed as inconsistent with…pensionable compensation."

In less technical terms, the legislature wasn't trying to scale back benefits that had been promised to government employees; it was closing loopholes that allowed employees to abuse the system. Therefore, yes, lawmakers could specifically prohibit the use of these spiking games to drive up pension obligations.

Needless to say, the public employee unions don't see it that way. The Los Angeles Times talked with Ted Toppin, chairman of Californians for Retirement Security, which despite its name seems interested only in retirement security for government employees. "Their employer and retirement system made a promise to them that the court decision now allows them to break," he told the paper. "That is unfair and unfortunate. If public employers make a pension commitment to their workers, they should keep it."

Again, this ruling says that employers did not, in fact, promise employees that they could unnaturally jack up their final wages with tricks and accounting games and then use that to determine their pensions.

This decision doesn't dismantle the "California Rule," but it does give it better boundaries. It makes it clear that manipulation of the pension system is not protected.

Read the ruling here. And for an analysis of the current investment decisions of the state's largest public employee retirement fund, written by Ryan Frost and Leonard Gilroy of the Reason Foundation's Pension Integrity Project, go here.

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  1. Don’t worry, the new method will be to demand 20% raises for anyone with less than 5 years left to go.

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  3. Odds this ruling won’t be retroactive for the last 20 years of abuse?

    1. Waaaaaaayyyyyyyy tooo late. They buried the horse that got out of the barn as a foal years ago.

  4. The most successful guy in my high school, a homeroom friend,
    retired from his job as President of Univ. of California, with a pension of $357,000 per year after seven years service with the UC system!
    Who knows what other pensions he vested in his long academic career? Nice to be one of the 1%.

  5. There are worse things than being a pensioner. At least they don’t get to leave their pensions to their children, the way rich people do.

    1. they don’t get to leave their pensions to their children, the way rich people do.

      Explain this?

      1. He’s conflating a defined-benefit pension plan with accumulated wealth. Because he’s an idiot.

        1. That’s what I figured. I earn a dollar, put it in the bank, I guess I’m not allow to give that to my kid. But a government paycheck should be paid to people, and their children, in perpetuity.

    2. “There are worse things than being a pensioner.”

      You mean like being an envious, greedy asshat who thinks it’s his business what other people do with their stuff when they die?

      1. Of all the false equivalence, yours are the most retarded

        1. That was ment to be a comment to ernesto

          1. Sure it was, Harvey Weinstein.

  6. Now have states get rid of guaranteed pensions altogether and replace it with something like a 401K.

    1. They can do that, now…so long as it is for new hires.
      The existing employment contracts cannot, Constitutionally be impaired.

      1. Yes, they can. But they don’t.

  7. Evidently the judges figured out that even their budget will eventually get cut to keep shoveling money into the pensions.

  8. I would rather see a state so mismanaged as California explode their budget so I can watch them wallow in their socialist misery.

    1. Yeah, what happened to them loving equal outcomes. Well, as long as they’re more equal…

  9. Libertarians should be outraged at this decision.
    It basically states that contracts can be changed through post-facto legislation.
    Pensions are part of the employment contract. If legislation can revoke parts of the contract, even if it is what the courts consider a minor part, then no contract is safe. You know, those things libertarians say should be part of every agreement, without government having to intercede?
    Here’s the pertinent quote: “With regard to the ordinary contract issues, we hold that county employees have no express contractual right to the calculation of their pension benefits…”
    Hopefully, this will go to the USSC, where Article 1, Section 10 will prevail: “No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

    1. Where in the contract does it say that government employees can use chicanery to boost their pensions?

    2. Wow, that’s some mendacious bullshittery right there.

      Maybe you should have included the whole quote if it was so pertinent.

      “With regard to the ordinary contract issues, we hold that
      county employees have no express contractual right to the
      calculation of their pension benefits in a manner inconsistent
      with the terms of the PEPRA amendment.

      I mean, I just can’t imagine why you left out that part of the quote.

      1. Because it refers to a piece of legislation that was passed after these contracts were agreed to. AKA an ex post facto law.
        They are saying the employees have no contractual right.
        The later-passed law, which was an effort to prohibit the practice, by an amendment, to a law already decided to be not prohibiting the practice, was not pertinent to the underlying ruling that impaired the obligation of the contract.
        If these contracts are not safe, then none are.

        1. The original contract was ambiguous and open to interpretation whether it included ancillary compensation when calculating pensions. It was up to the court to guess what the legislature’s intent had been. Well, here comes the legislature, passing another law saying “we meant to exclude ancillary compensation all along” is not actually changing the law, merely clarifying. If the original law had been explicit, then sure, ex post facto, but it wasn’t. The new amendment is perfectly compatible with this new interpretation of the old contract.

    3. I was thinking the same.

      Most people take into account salary and benefits when accepting a job.

      The tentative employer made an offer, the tentative employee accepted the contract.

      Now, the employee is vilified for accepting the salary and benefits of the contract?

      Like you, I expect Libertarians to to be the lone voice in honoring contracts, along with one of the few proper roles of government enforcing contracts.

      1. considering the fact that they are heaping obligations upon taxpayers not yet even born, i think there’s an argument these contracts are not valid due to the doctrine of privity.

    4. Everything is so terrible and unfair.

    5. “Libertarians should be outraged at this decision.”

      Bullshit.

  10. As our country matures and our population growth rate approaches zero or less, defined benefit plans like pensions are nor workable. We will no longer have 8-10 workers for each retiree. We have to move to a define contribution plan (like 401Ks) probably with mandatory contributions (like Social Security except the government does spend it on pork barrel project or b.s. social program vote buying.) We need to change our system before it collapses.

    1. Having “8-10 workers for each retiree” is the plan the federal government set up and it is considered political suicide to even posit an alteration to FICA – The Federal Insurance Contribution Act.
      Public pensions take a set amount from the employee, and another sum from the employer, with each paycheck, plus investment returns and use that to fund the system.
      Once an employee retires NO TAXPAYER MONEY GOES TO PAY THAT EMPLOYEE’S PENSION – it is all taken from a fund (a real one) that was set up and pays out using those contributions and earnings. These plans are very workable.
      Any system that is underfunded is due to the employers – government entities – not paying what they are supposed to.

      1. Wouldn’t it be in the best interest for the employees – government workers – to make sure said government entities perform their duty to fund that system as they are supposed to?

        These rotting pension systems can be seen all over the country, and it’s going to get very ugly.

      2. “…plus investment returns…”

        You misspelled “fantasies”.

    2. Sooooo……. we should hire a lot more government employees? That’ll fix it!

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