California public employees have no vested right to “spike” pensions a state appeals court ruled Wednesday, upholding key elements of a 2013 law aimed at ending the expensive practice in many counties.
The practice known as “pension spiking” allows some public employees to include unused vacation and sick leave from earlier years to be cashed out and counted as final pay when they retire. Final pay rates are the basis of calculating lifetime pensions and the practice can significantly increase retirement income.
To remedy this issue, the Legislature excluded specific items from pension calculations to prevent spiking. Public employees of the Marin Association of Public Employees sued arguing the change altered employment contracts.
The First District Court of Appeal concluded the new formation applied to current employees was constitutional and did not impair the employee contracts. In upholding the trial judge, the appeals court said that while public employees have vested right to a pension, it is to a “reasonable” pension, not an entitlement to the “most optimal formula of calculating a pension.”
Prior to an employee’s retirement the legislature may alter the formula and reduce an anticipated pension, the court said.
In the wake of the 2008-2009 financial crisis, public attention turned to the cost of pensions and a state report estimated between $2 trillion and $3 trillion in unfunded pension liabilities in the state. By 2011, the Little Hoover Commission advised the governor and legislature that state pension plans were “dangerously underfunded, the result of overly generous benefit promises, wishful thinking and an unwillingness to plan prudently.”
The lawmakers took action in 2013 to prevent use of unused vacation, personal sick leave, compensatory time off or other lump sum amounts in the last year of work to be used to increase the base salary calculation for pension purposes.
Case: Marin Assoc. of Public Employee v. Marin County Employees’ Retirement Assoc., No. A139610