The California Supreme Court just issued an opinion upholding the state’s prohibition on pension spiking, which was enacted as part of former Governor Jerry Brown’s 2013 pension reform law, known as “PEPRA.”
Specifically, county pension plans had previously exploited statutory ambiguity such that employees could dramatically inflate their future pension by including one-time payouts in their final, pensionable salary.
Daniel Borenstein of the East Bay Times provides an excellent overview of how that process works, or used to work I should say:
When it came time in 2006 to calculate Charles Batts’ pension, the departing general manager of the Central Contra Costa Sanitary District boosted his retirement pay by cashing out nearly 17 weeks of unused vacation and sick leave time.
That helped him spike his pension by 37 percent to $217,216 a year, or nearly as much as the $234,163 he earned during his final year on the job. At the sanitary district, he is not alone. Indeed pension spiking there is the norm — aided in large part by unusually generous provisions allowing all employees to sell back, and receive pension credit for, accumulated vacation time and unused sick leave.
(Click here to see the full list of pensions mentioned in the article, several of which exceed the employee’s highest regular salary before retirement.)
PEPRA specifically changed the law such that these types of one-time payouts could not be used to inflate the salary used for calculating an employee’s future pension. Naturally, several public employee unions sued, arguing that the change was unconstitutional because it reduced their benefits without providing an offsetting increase elsewhere.
The California Supreme Court rejected the arguments advanced by the unions and upheld the law. While the Court recognized that prohibiting pension spiking would reduce benefits for some employees, this reduction was permissible because it was made in furtherance of a legitimate purpose: closing loopholes created by statutory ambiguity that enabled abuse.
The incredibly thorough and well-reasoned decision can be read in its entirety here.