New pension rules go before Contra Costa County judge

MARTINEZ, CA — Nearly a year after California pension-spiking reforms became law, tens of thousands of former and current East Bay local government workers will soon learn whether their monthly retirement benefits will drop.

Contra Costa County Superior Court Judge David Flinn will hear oral arguments Dec. 10 in the legal challenge to the new law filed last November by public employee unions from Alameda, Contra Costa, Merced and Marin counties.

If the unions lose, some of the counties’ approximately 50,300 current and future retirees could see reductions in their monthly checks. The final number will depend on how far the judge’s ruling extends.

So far, Flinn has sided with the state.

In a preliminary ruling, the judge agreed that county-level retirement boards in the 1990s unlawfully began allowing employees to save primarily vacation and holiday pay, cash it out upon retirement and count the income in their pension calculations.

But Flinn left open the question of what he will do about it.

As attorneys and officials involved in the case explained, the judge has two groups of people to consider.

For people who have retired since 1998 when retirement systems began allowing pension calculations based on what is collectively called “terminal pay,” he is expected to decide whether to ask them to pay back money they have already received or only reduce their benefits going forward. He could also leave them untouched.

For active employees hired before Jan. 1, 2011 — the date at which Contra Costa’s system stopped allowing terminal pay — the judge is expected to decide whether to disallow the perk outright or set a future date by which workers must retire or lose the benefit.

In addition, the judge could order retirement associations to refund the contributions made by the public agencies on behalf of the employees to help pay for the perk.

“Rectifying the situation we’ve gotten ourselves into is going to be extremely difficult,” said Central Contra Costa Sanitary District board member Mike McGill, whose agency offered the most generous pension-spiking perks in the county. “In the end, someone is going to be hurt, either the taxpayers and ratepayers who will pay an amount they shouldn’t have to pay, or long-term employees are going to lose what they were promised in their employment package.”

The issues behind the lawsuit date to the 1990s, when public employee unions won key court decisions that expanded what could be included in pension formulas for county-level retirement systems across the state.

In response, a handful of systems began including terminal pay when calculating employee pensions.

The outcome was predictable: Employees used the new rules to their financial advantage, and employers touted retirement security as a recruiting tool.

Flinn would later write in his preliminary ruling that the lawmakers who wrote the California County Employees Retirement Law — the state codes governing county pension systems — never intended that terminal pay would be used to inflate an employee’s average annual compensation for the purpose of calculating their pension.

In the mid-2000s, the economy tanked and pension systems lost investment income that had paid for a large chunk of the retirement system’s ongoing costs. Government agencies and workers saw their annual contribution rates skyrocket, and public scrutiny over pension spiking and benefit levels intensified.

Responding to public pressure, the Contra Costa County Employees Retirement Association board stopped counting terminal pay for all new hires as of Jan. 1, 2011.

The governor and state lawmakers took the issue a step further in 2012 and signed into law Assembly Bill 197, which banned the inclusion of terminal pay in pension formulas for public workers starting Jan. 1, 2013.

Public employee unions responded last November with lawsuits in four counties, arguing that the promised benefits are vested rights that cannot be taken away. State attorneys say it was an illegal benefit to which they were never entitled.

The judge stayed implementation of the new law pending his decision.

The financial impact could be significant.

Pensions are based on a worker’s age, years of service and compensation in the final earning period, which is typically the highest paid year or average of the highest three. The greater any one of these three components, the greater the benefit.

Adding terminal pay into the formula boosts the monthly retirement benefit anywhere from a few percentage points to far more, depending on each agency’s vacation-accrual policy.

Contra Costa County deputy sheriffs estimate that losing terminal pay out of their retirement will cost them 15 percent.

“We are not challenging AB197 going forward for people who are hired under the new rules,” said Contra Costa Deputy Sheriffs Association President Ken Westermann, one of the unions behind the litigation. “But those benefits were granted in good faith at the time, and they have been accounted for in the contribution rates. These benefits are part of the employees’ compensation package.”

Assemblywoman Joan Buchanan, the Alamo Democrat who wrote Assembly Bill 197, agrees with Judge Flinn that legislators never intended to permit workers to save up vacation for the purposes of inflating their pensions.

“When we wrote the bill, we were trying to clarify the pension legislation and make our intent clear going forward,” Buchanan said.

Whether the law’s provisions should apply to people who have already retired or were hired under the old rules is a decision for the courts, she said.

Both sides expect Flinn’s ruling will be appealed, possibly all the way to the California Supreme Court.

“It is good that we are getting answers to these questions,” Buchanan said. “These retirement systems have huge unfunded liabilities. We all own this problem, and we have to figure out how to solve it because we need to be able to meet our legal obligations to our employees and continue to provide public services.”

Contact Lisa Vorderbrueggen at 925-945-4773. Follow her at Twitter.com/lvorderbrueggen.