Former Gov. Jerry Brown predicted two years ago that public pensions would be “on the chopping block” during the next economic downturn.

This week, with state and local budgets teetering amid the coronavirus outbreak, the state Supreme Court will hear arguments in a case that could determine in part whether Brown’s prediction will come true.

Alameda County Deputy Sheriff’s Association v. Alameda County Employees’ Retirement Association, scheduled for oral arguments Tuesday, is the next big test of the so-called California rule.

The rule is a set of legal precedents dating to the 1950s that have protected public pensions from any reductions without new and equal benefits.

Dozens of unions and associations representing employees and retirees have joined the case to try to protect pensions, while local governments and organizations representing employers have joined with the state to argue pensions may under certain circumstances be reduced for workers who haven’t yet retired.

The case focuses on the pay workers receive in their last one to three years of employment, which, along with their length of public service and other factors, determines the size of their pensions.

Over the years, some public workers found creative ways to make their pensions bigger by adding pay at the end of their careers. Strategies included cashing out accrued leave balances, working hundreds of on call hours and receiving bonuses shortly before retiring.

Some local pension boards eliminated some of those tactics on their own amid the dot-com bust and the Great Recession. Brown targeted the practice, known as pension “spiking,” in a broader statewide overhaul of pension law in 2012.

Brown’s law, known as the Public Employees’ Pension Reform Act, targeted end-of-career payments “paid to enhance a member’s retirement benefit.” The law said those payments couldn’t figure in pension calculations for any public employees.

The Alameda County Deputy Sheriff’s Association filed a lawsuit over the change in December 2012, just before the law took effect on Jan. 1, 2013.

More flexibility on California pensions

Prior to the law, deputies were able to count as pensionable extra pay for working outside normal hours, on-call pay, accumulated leave cashouts and other types of special pay. The unions argue that anyone hired before 2013 should still be able to count those payments toward their pensions.

A sentence from a 1983 California Supreme Court decision is at the heart of the association’s argument.

“We have held that any modification of vested pension rights must be reasonable, must bear a material relation to the theory and successful operation of a pension system, and, when resulting in disadvantage to employees, must be accompanied by comparable new advantages,” the court ruled in Allen v. Board of Administration.

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The deputy sheriff’s association says the word “must” is absolute and represents a “bright line” rule that helps avoid arguments over which types of pay are reasonable and which aren’t.

Interpreting it otherwise, according to the association, would allow lawmakers to favor other political priorities over workers’ promised benefits.

In recent years, California appellate courts have ruled otherwise, offering more flexibility so long as reductions are “reasonable.” Several of those decisions were appealed and ultimately the cases were combined in the Alameda case.

Attorneys representing the State of California say the association’s interpretation is far-fetched and that the California rule goes too far. In court briefings, state attorneys say the interpretation robs the Legislature of its authority over public employee compensation and its power to protect the “integrity and solvency” of public pension systems.

Schools asking for pension relief

The lawsuit centers on county-run pension systems that are independent of the largest statewide plans, the California Public Employees’ Retirement System and the California State Teachers’ Retirement System.

Many local governments contract with CalPERS and CalSTRS to administer their pensions. The systems are about 70 percent and 64 percent funded, respectively, falling short of what the systems would need to pay all current and future obligations.

Local governments are paying more into the systems each year under long-term plans to return them to 100 percent funding, where they stood before the Great Recession.

Those payments are growing increasingly burdensome for local governments, which have to raise taxes or cut spending elsewhere when spending on pensions goes up.

With another recession likely setting because of the coronavirus, some local governments and school districts have already announced furloughs and layoffs and are requesting pension relief from the state systems.

“At a time when taxpayers are already struggling to pay for legitimate pension liabilities, they should not be forced to absorb unlawfully calculated pension liabilities as well,” state attorneys said in a 2018 brief.

The deputy sheriff’s association allows that pensions may be reduced, as long as the reductions are accounted for in a cost-neutral way through some other benefits, when reductions suit a public purpose.

“The court must look at whether the change results in a detriment to employees and, if it does, must then determine whether the change is reasonable and necessary for an important public purpose. Saving money is not an important public purpose,” association attorneys say in a legal brief.

Under emergency guidelines instituted by the court, attorneys will argue their cases Tuesday via telephone or video conference. Video of the arguments will be publicly viewable at courts.ca.gov.