All eyes are on California this week as the state Supreme Court hears oral arguments challenging what is known as the California Rule (“State’s justices consider pension disputes,” Los Angeles Times, Dec. 6). Three cases – the Marin, Tri-county and CalFire – relate to reductions in retirement benefits made by the Public Employees’ Pension Reform Act of 2012.
The California Rule protects only vested benefits, which cannot be reduced without mutual agreement from the employee. (Non-vested benefits are not covered.) But the state Legislature can still modify the promised benefits over objections from employees.
If the California Supreme Court rules in favor of the three plaintiffs, it will be the final straw in destroying attempts to recruit and retain the best and the brightest to the teaching profession. Morale is already at an all-time low, as attacks on teachers and their unions intensify, coupled with ever growing responsibilities.
One of the attractions of making teaching a career is that practitioners can look forward to a secure retirement. Once that security is abolished, what else is next? Teaching is not intended for those who seek affluence. But the reward of working with young people is not sufficient to induce college graduates to a classroom career. I hope the court keeps the California Rule in place, but I wouldn’t bet the ranch on it.
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This is a tough case legally — I’d probably rule in favor of the state and against the teachers re this somewhat unique issue.
As the linked LA Times article explains, the CA state courts have traditionally held that vested benefits constitute deferred compensation — that is, that the employee has already done the work and the employer must pay the employee what the employer promised the employee as the compensation for the work already done. Deferred compensation is treated the same way as wages; if Employee A and Employer X agree that A will do one week’s work and that X will pay A $1,000 for that work, X cannot — after A has done the one-week’s work — decide to pay A $900 instead of the contracted-for $1,000. The courts usually treat vested benefits the same way as already-earned wages.
The somewhat unique issue here is not a vested pension benefit but rather the employee’s right (under a 2003 state law) to purchase up to five years of additional service credit for pension purposes. The CA state legislature repealed the 2003 law in 2011 and this lawsuit followed. The teachers argue that, by having worked while the 2003 law was in effect, the opportunity to purchase the additional service credit became a vested benefit — like wages that had already been earned but had not yet paid.
I’d conclude that the opportunity to purchase additional service credit is not deferred compensation but rather a continuing condition of employment for the teachers and that the employer (the state) could change that condition of employment at any time (with the employees, of course, having the option to quit in response to the change in the conditions of employment. My analogy would be to Employer X hiring Employee A to work 40 hrs/week at $1,000/week and, after six months, X telling A that, starting the next week, A would work 35 hrs/week at $900/week. The 40 hrs/week and $1,000/week are conditions of employment rather than vested benefits. Once A has worked a 40-hr week, X has to pay A the $1,000. But, X can change the conditions of employment prospectively at any time and A then has the choice of continuing to work under the changed conditions of employment or quitting.
If the CA SCt holds for the teachers in this case, that would create potential administrative problems. Such a holding could easily be viewed as giving employees a right to demand that the employer never change an existing condition of employment (or, at least, never change an existing condition of employment in a way that disadvantaged employees who had worked under that condition of employment). Suppose the employer provided a BlueCross health insurance plan and wanted to change to an Aetna health insurance plan or to an HMO? Could the current employees force the employer to continue the existing BlueCross plan for them while allowing the employer to put new employees in the new plan? Suppose BlueCross refused to continue insuring the employer’s employees or that BlueCross withdrew from offering insurance anywhere in the state? Seems that real-world common sense requires that employers be allowed to change conditions of employment prospectively and that the employee’s constitutional/contractual right to be paid deferred compensation for work already performed does not give the employee the right to demand continuation of existing conditions of employment.
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Labor Lawyer: I think your analysis is correct. There’s a distinct difference between reducing pensions based on already done work and allowing teachers to buy additional years of work that they haven’t yet performed. But I hope existing pensions for teachers who are retired are not slashed.
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I strongly believe that existing pensions for teachers who are retired are a form of deferred compensation for work already performed. As such, it should be a contractual violation and an unconstitutional taking of property w/o compensation for the govt to reduce an existing pension.
Arguably, a closer question would be govt action to reduce the existing cost-of-living increase formula for an existing pension — that is, if the COLA was 100% during the employee’s last year of employment and at the time the employee retired, could the govt then reduce the COLA to 75% or even eliminate the COLA entirely at some point after the employee has retired? I’d say no — the COLA increase formula is part of the deferred compensation (just as the formula for determining the original pension benefit is part of the deferred compensation). But, I can see a gut-level analysis that says COLA formula is somehow different than pension-benefit formula.
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Labor Lawyer: Yes, COLA is more vulnerable for the reasons you say. But the question is whether existing pensions can be reduced when there is the threat of bankruptcy. Years ago, a small town in Rhode Island was on the verge of bankruptcy and slashed pensions paid to the town’s firefighters. The state supreme court allowed the town to do so.
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Re the RI town case — this is a potentially huge legal issue that remains in doubt (although I think the few court cases that have considered the issue have ruled in favor of the towns/cities). In my opinion, the critical legal issue is whether a town/city is a subdivision of the state govt for purposes of bankruptcy law. I think towns and cities have no legal existence or legal authority except that which is given/delegated to them by the state govt — that is, that its the state govt that has the legal obligation and authority to perform govt functions in a state and that while the state can delegate the authority to perform these functions to a town/city, the state cannot delegate the responsibility for performing these functions to a town/city. In other words, the state should be required to step in and fund any debts that a bankrupt town/city has incurred. If the state itself goes bankrupt, then the town/city employees (like the state employees themselves) are out of luck.
In bankruptcy law, there’s the additional issue of whether pension benefits should be treated as wages or as something else. Usually bankruptcy law gives a high priority to wages — that is, the wages a bankrupt owes for work already performed comes first, even before the secured creditors. Again, there is this gut reluctance on the part of the general public, at least, to view employee pensions as deferred wages; the general public — at least those who do not have defined benefit pension plans — seem to view pension benefits as something like gifts or bonuses.
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1. And the reason for not talking about renegotiating a contract is?
2. A Major League Baseball player signs a four year contract for a total of 20 million dollars. After 40 games the team is playing poorly and he is cut. Does the player receive the remaining portion of his contract?
3. A lawyer sings a contract with company X for $50,000 paid in equal monthly payments. After a month the company cancels the contract. Is the lawyer entitled to the remaining money?
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MC2 — Re renegotiating the contract: An excellent question. If there is a union representing the teachers, then it’s possible that the union could agree to a reduction in pensions for already retired teachers in exchange for something else that the union wants from the employer. Most unions would, however, be very reluctant to agree to something like this — unless the “something else” also benefited the already-retired employees. Almost certainly, the already-retired employees would sue the union and the employer to challenge a renegotiated contract that benefited current employees at the expense of already-retired employees alleging that the union had violated its duty of fair representation to the retired employees + if the plaintiffs won that lawsuit, it’s possible that the union (not the employer) would end up on the hook for the negotiated-away retirement benefits. There would also be issues re whether the union has the legal authority to represent the already-retired employees (since the employees are no longer part of the bargaining unit for at least some purposes — such as usually not being able to vote in union elections). I have not researched this issue in years — my guess is that resolution of the legal issues I’m outlining here are not clearcut.
Re the baseball player and the lawyer hypotheticals: It would depend entirely on the specific terms of the contract in each case. Re the baseball player, I’m pretty sure that MLB contracts do not allow a team to cut a player’s compensation based on poor performance by the team (as opposed to poor performance or injury of the player). Re the lawyer, usually such contracts allow either party to terminate the contract at any point but require some fixed period of advance notice + require the client to pay for work the attorney has already performed (perhaps at a specified hourly rate if the work already done exceeds the monthly retainer already paid).
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mathcoach2: Labor lawyer provides the clearest answer to your question. The rules applying to public employees are different from those applying to workers in the private sector.
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I find it laughable that California spends billions of dollars for illegals, but can’t fund pensions.
The priority is definitely not public employees.
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mathcoach2: You are quite correct. If teaching is such a plum, as many people believe, then why is there a shortage? Teachers deserve every cent they get in their pensions and in their salaries.
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