In a closely watched case, the Court of Appeal for California’s Second Appellate District rejected in late January a legal challenge brought by Orange County against the County’s own retirement board regarding the “3% at 50” benefit. Orange County had claimed that the past service portion of the 3% at 50 formula (i.e., applying the enhanced benefit formula to past years of service already worked by current employees) violated California’s Constitution. What made this case particularly alarming to advocates of public employee labor was its seeming potential to call into jeopardy any retirement benefit enhancement granted to an already-employed worker. In short, if the County had succeeded, the upshot would have been that the level of retirement benefits available at the time you began your career as a public servant with your respective agency would have been the extent of your pension, nothing more. The various benefit enhancements that had been implemented in the years since you began your career would have been constitutionally void.
The County’s case hinged on two arguments which alleged that the past service portion of the enhanced 3% at 50 benefit (1) violated the California Constitution’s municipal debt limitation which requires the “assent of two thirds of the voters” before a public entity may “incur any indebtedness or liability . . . exceeding in any year the income and revenue provided for such year” (Cal.Const.Art.XVI., sect.18(a)) and (2) violated the State Constitution’s prohibition against “extra compensation or extra allowance to a public officer, public employee, or contractor after service has been rendered . . .” (Cal.Const.Art.XI., sect.10(a)). Fortunately, the Second Appellate District roundly rejected both claims.
One of the most instructive portions of the Court’s decision concerns a somewhat complex and confusing term that is a flashpoint for so many of the so-called “pension reformers” these days: unfunded accrued actuarial liability – or UAAL, for short. When you hear people speak of pension systems facing “unfunded liabilities” – and they usually do so in a manner redolent of a “sky is falling” mentality – they most often are referring to UAAL.
Indeed, the UAAL that resulted from the Orange County deputy sheriffs’ receiving the 3% at 50 enhancement in 2002 – an estimated $100 million – was the County’s main line of attack in its failed lawsuit. Such a figure represented what the Orange County Retirement Board’s actuaries had predicted would be the unfunded cost of the retroactive portion of the 3% at 50 benefit, i.e., the monetary liability resulting from the fact that deputy sheriffs already employed in 2002 had previously enjoyed less of a retirement formula and were then suddenly eligible for a higher level of retirement benefits without both employer and employees having paying increased contributions (necessary to fund the 3% at 50 benefit) into the retirement system from the date employment first began. Or to phrase it slightly differently, the figure represented the difference between actuarially accrued liability represented by the new 3% at 50 benefit and the valuation of assets in the retirement fund.
And so, the County argued that the $100 million UAAL was “indebtedness” within the meaning of California Constitution Article XVI, Section18(a), which, because it exceeded the County’s unappropriated revenue for fiscal year 2002, was constitutionally void insofar as the County had never held the required election to obtain voter approval. By contrast, the Association of Orange County Deputy Sheriffs (AOCDS) argued that the $100 million UAAL did not qualify as such “indebtedness” but rather was simply an actuarial calculation of what the County’s obligations were likely to be in the future for the past service portion of the 3% at 50 retirement formula for AOCDS members.
The Appellate Court rightly recognized the difference between actuarial estimates and out-and-out debt:
Given the multiple assumptions about the future involved in calculating . . . UAAL (investment returns, pay increases, marital status at retirement, retiree and beneficiary life expectancies, salary increases, contribution rates, and inflation), it is clear that the UAAL is a highly variable amount, which may or may not prove accurate depending upon actual future events and experience.
County of Orange v. Association of Orange County Deputy Sheriffs (Slip.Op., p. 10, Jan. 26, 2011).
Thus, the Court ultimately agreed with the AOCDS and ruled that UAAL does not qualify as municipal debt as that term is used in the State Constitution. The Court also rejected what to this author’s mind amounts to a variant on the aforementioned “sky is falling” theme that characterizes much of the pension reformers’ rhetoric – here, what the County described as the “ruinous fiscal irresponsibility” of its prior board of supervisors who had agreed to the 3% at 50 benefit for the AOCDS. In the words of the Second District Court of Appeal, “[i]mprudence, however is not unconstitutional. Courts . . . are not directed to sit in post hoc judgment of the wisdom of a municipality’s income and revenue estimates.” (Id., at 15; citation omitted).
The Court also made relatively short work of the County’s second argument – i.e., that the 3% at 50 benefit unlawfully compensated employees for work already performed – by tracing the progress of the law in this area and ruling unequivocally that “the past service portion of the 3% at 50 enhanced pension benefit formula for AOCDS members is not unconstitutional compensation.” The Court reasoned that rather than being “additional compensation,” the enhanced formula was to “become part of the calculation of the employees’ pension benefits upon retirement.” (Id., at 24-25; emphasis added). The Court also drew attention in a footnote to a fact cited by CALPERS that “including prior years of public service to calculate benefits has been a fundamental part of public employees’ pension benefits for at least the past 97 years.” (Id., at 28, n.16).
This case is obviously a tremendous victory for public employee labor. And here I must congratulate and applaud the Boards of Directors of both the SFPOA and SJPOA who helped champion the AOCDS’ battle against Orange County’s lawsuit by stepping up to the plate and paying the legal fees necessary for the fine lawyers at Carroll, Burdick & McDonough to file an amicus (“friend of the court”) brief on our behalf, as well as that of other like-minded public safety unions who joined with us. If you ever want to know what you pay dues for, this is it. Remember that if this case had gone the other way, all pension enhancements you might have seen during your career would have been in jeopardy. While the County plans to appeal to the California Supreme Court, I remain confident that we will prevail there as well in this terribly important fight for the retirement security of all of California’s finest.
“Roll the Union On . . .”
