Supreme Court: "California Rule" Stands, But Weakened

Today, the California Supreme Court issued its decision in Alameda County Deputy Sheriff’s Association v Alameda County Employees’ Retirement Association et. al. The key issue in this case was whether some of the changes mandated by the Public Employees’ Pension Reform Act of
2013 (PEPRA) unlawfully infringed upon vested pension rights. Unfortunately for the plaintiffs, the media characterized this case as one of “pension spiking.” Given that tagline, it’s not surprising that the Court found that the Legislature’s efforts to combat pension spiking were lawful and rejected the plaintiffs’ arguments.

However, what everyone wanted to know was whether the Court would affirm the “California Rule.” Under the California Rule, pension benefits promised to employees can only be reduced if they are replaced with something of equal value. Prior to today’s case, many commentators described the California Rule as “iron-clad.”

Notably, in today’s decision the Court declined to reexamine the California Rule. Thus, the California Rule remains the law of California. However, what is noteworthy is that the Court described the California Rule in different terms than it has been commonly understood. According to the Court, the California Rule—as set forth in Allen v City of Long Beach (1955) 45 Cal.2d 128—provides that:

An employee’s vested contractual pension rights may be modified prior to retirement for the purpose of keeping a pension system flexible to permit adjustments in accord with changing conditions and at the same time maintain the integrity of the system. [Citations.] Such modifications must be reasonable . . . . To be sustained as reasonable, alterations of employees’ pension rights must bear some material relation to the theory of a pension system and its successful operation, and changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages.

To evaluate whether a modification of pension rights will be upheld against a contract clause challenge, the court must first determine whether the modification imposes disadvantages on affected employees, relative to the preexisting pension plan, and, if so, whether the disadvantages are accompanied by comparable new advantages. Assuming the disadvantages are not offset, the court must then determine whether the legislative body’s purpose in making the changes was sufficient, for constitutional purposes, to justify an impairment of pension rights.

Even if the modification is based on a legitimate purpose, a decision “to impose financial disadvantages on public employees without providing comparable advantages will be upheld under the contract clause only if providing comparable advantages would undermine, or would otherwise be inconsistent with, the modification’s constitutionally permissible purpose.” This last test is key. Under an “iron-clad” interpretation of the California Rule, there is no mechanism to impose pension changes that are disadvantageous without providing something advantageous. However, under today’s decision it is at least theoretically possible to impose purely disadvantageous pension changes if the changes are necessarily for a constitutionally permissible purpose.

So while the California Rule still stands, it’s been weakened …