Some Light At The End Of The Pension Reform Tunnel

A number of you have asked for our view of a California Supreme Court decision announced earlier this week about a pension reform case entitled Cal Fire Local 2881 v. CalPERS.

While we are not experts in pension law, we were very pleased by the ruling, in particular (i) the logic it employed in upholding the 2012 pension reform’s elimination of “airtime” (which, until eliminated, allowed government employees to purchase high-yielding government-guaranteed annuities at a discount to add to their retirement income) and (ii) the opportunities for further reform presented by the combination of that logic and the court’s language in distinguishing between benefits that are and are not “deferred compensation” and associated with services that have and have not yet been performed.

The court found “airtime” benefits not to be deferred compensation and subject to the legislature’s power to amend or eliminate such benefits and noted that only when a benefit is deemed deferred compensation would the court need to determine whether or not that deferred compensation is entitled to constitutional protection (including protection, if any, under the so-called “California Rule”), and further whether the portion of that deferred compensation related to future work would be entitled to the same protection as compensation that has already been earned as a result of services provided. To us, all that provides fertile territory for more reform.

Meanwhile, the need for pension reform continues growing rapidly and despite robust stock markets, as demonstrated by this chart published in Bloomberg:

Despite nearly 7 percent annual growth in the S&P500 from 2003 through 2016, unfunded pension liabilities — the gap between pension fund assets and liabilities — exploded. That’s mostly because of “accretion,” which as explained here is growth baked into pension liabilities from the moment they are created via the employment of a deceptive accounting measure by public pension funds in the US. (For an example of a public pension that does not lie about pension liabilities when they are created, see here.) That gap will continue to grow, which means that — in the absence of reform — the crowd-out of state, local and school district budgets by pension costs will continue to grow.