Vote approval needed before politicians can incur pension debt

County of Orange v. Association of Orange County Deputy Sheriffs and Board of Retirement

Contact: Harold E. Johnson or Meriem L. Hubbard

Status: The California Supreme Court denied review on April 13, 2011.

Summary:
In 2007, Pacific Legal Foundation attorneys, representing the Fullerton Association of Concerned Taxpayers, won an appellate court ruling that enforced the California Constitution’s ban on unapproved state debt. Article XVI, Section 1, requires voter approval for long-term state debt exceeding $300,000; PLF won a decision from the Third District Court of Appeal that a pension bond was invalid because it had not been submitted to the electorate.

At issue in the present case is the related constitutional provision dealing with local government debt. Article XVI, Section 18(a), requires a 2/3 vote of the electorate before a county may "incur any indebtedness or liability . . . exceeding in any year the income and revenue provided for such year."

The Orange County Board of Supervisors invoked Section 18 in its legal challenge to a retroactive public employee pension increase approved by a prior board, because that pension-benefit increase created a new, long-term, county liability, and voters were not consulted.

In 2001, the prior Orange County Board of Supervisors voted to increase pension benefits for a range of county employees, by authorizing a 3% at age 50 formula, meaning that the employee retiring at that age could receive a pension calculated by the number of years employed times 3% of his/her last salary level. An accompanying agreement applied the new pension benefit retroactively, i.e., retiring employees would receive the increased per year benefit "for all years of service"—even the years put in before the new, higher calculation took effect.

The prior Board awarded these extra benefits notwithstanding that the employees receiving the benefits had already been paid in full for their services in accordance with the terms of their contracts.

The county’s cost for the extra pension benefits for services rendered years earlier is estimated at $187 million. At the time the retroactive benefit was enacted, the immediate debt incurred by the county was estimated by consultants at more than $99 million—an amount in excess of the county’s unappropriated revenue for that fiscal year.

The lawsuit does not seek return of money already paid out to anyone who retired after the retroactive pension benefit plan took effect. Rather, it seeks an order ending, prospectively, higher payments to retirees based on years of service an employee accrued before the benefit increase was granted.

The California Constitution explicitly requires voter approval before politicians can incur long-term debt obligations—both at the state level and at the city and county levels. Any undercutting of this "fiscal responsibility" mandate for local governments, in the Orange County litigation, will potentially undermine the victory that PLF and Fullerton Association of Concerned Taxpayers won for state level fiscal responsibility; this is because courts use case law for Section 18 (the provision at issue in the Orange County litigation) to interpret the effect of Section 1 (the provision that PLF invoked in the pension bond case)—and vice versa.

The importance of preserving and enforcing these "fiscal responsibility" mandates in the constitution was never more clear than right now, with governments at all levels facing budget crises, creating the prospect of an unending series of tax increases in a state already burdened with high taxes and a difficult business climate.

On January 26, 2011, the Second Appellate District issued its decision. The court rejected the county's challenge to the retroactive pension-benefit increases for public safety employees.