Compliance

Court Upholds California’s Pension Spiking Law

The appellate court in California said public employees have a “vested right” to a pension that is a “reasonable” pension—not an immutable entitlement to the most optimal formula of calculating the pension.

By Rebecca Moore editors@plansponsor.com | September 09, 2016

A California appellate court has agreed with a lower court that application of a new formula for pension benefits for employees did not amount to an unconstitutional impairment of the employees’ contracts.

The case involves changes to California’s state and county laws designed to prevent pension spiking in an effort to reduce pension plan’s unfunded liabilities. According to the court decision, pension spiking is “the practice of increasing [an employee’s] retirement allowance by increasing final compensation or including various non-salary items (such as unused vacation pay) in the final compensation figure used in the [employee’s] retirement benefit calculations, and which has not been considered in prefunding of the benefits.”

A number of individuals currently employed by various governmental entities in the County of Marin, together with a number of organizations representing current county employees, brought suit to halt implementation of the revised formula. However, the Court of Appeal for the State of California agreed with a lower court that the Legislature did not act impermissibly by amending the law to exclude specified items and categories of compensation from the calculation of pensions for current employees. 

The court said that while a public employee does have a “vested right” to a pension, that right is only to a “reasonable” pension—not an immutable entitlement to the most optimal formula of calculating the pension.  And the legislature may, prior to the employee’s retirement, alter the formula, thereby reducing the anticipated pension.  “So long as the Legislature’s modifications do not deprive the employee of a ‘reasonable’ pension, there is no constitutional violation,” the court said.

The court’s opinion is here.

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