Exclusive: California Supreme Court Sets Oral Arguments on Public Pension Rights

The California Supreme Court will hear oral arguments on Dec. 5 in a case with potential national implications as to whether pension benefits can be reduced for existing public employees.

California Chief Justice Tani Cantil-Sakauye issued a notice on Nov. 7 setting the oral arguments for the controversial case that challenges the so-called “California Rule.” The rule holds that public workers enter a contract with their employer on the day they begin employment and that their pension benefits cannot be diminished, unless replaced with similar benefits.

Courts in California have upheld the rule in a series of legal rulings beginning in 1955.

A dozen other states use a similar approach to California, holding pension benefits as a contractual right. A court decision in California would only apply to the state but California court decisions can often be a bellwether for other states. The states that follow the California approach are Alaska, Colorado, Idaho, Kansas, Massachusetts, Nebraska, Nevada, Oklahoma, Oregon, Pennsylvania, Vermont, and Washington.

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The case before the California Supreme Court pits Gov. Jerry Brown and his 6-year-old pension reform law against unions representing California firefighters.

The Brown law eliminated a program by the largest US pension plan, the California Public Employees’ Retirement System (CalPERS), that allowed CalPERS members to buy “air time.” The “air time” gave workers extra years of service that was credited to their pensions even though the employees had not worked the additional years.

The case could ultimately have a bigger impact that just the selling of the “air time,” because if the court upheld the Brown administration law, it in effect would allow California officials to reduce guaranteed pension benefits if they chose to do so.

Brown, who leaves office on Jan. 7, asked Cantil-Sakauye in July to accelerate the state supreme court’s consideration of the case. A state appellate court panel had concluded that pension benefits could be reduced and thus the selling of the “air time” could be eliminated.

Back in January at a news conference, Brown stated that he anticipated that the courts would uphold his pension changes.

“When the next recession comes around, the governor will have the option of considering pension cutbacks for the first time in a long time,” he said.

CalPERS covers not only state employees but also those in many cities. In February, the League of California Cities released a report arguing that pension costs were becoming “unsustainable” for some local governments.

Lawyers for union leaders representing the firefighters have agreed that regardless of the fiscal conditions of government entities, the pensions for public employees are guaranteed and cannot be changed.

Cantil-Sakauye did not respond to Brown in July and it was unclear when the oral arguments would occur, but the court docket for Dec. 5 was . released on Nov. 7. It is unclear how long it would take for the court to issue a ruling and whether it could occur before Brown leaves office.

Tags: Benefits Reductions, California Supreme Court, CalPERS, Jerry Brown, Pension

The two US companies running private prisons, whose detainees including immigrants caught crossing the US-Mexico border, will no longer be part of the CalSTRS portfolio.

The investment committee of the California State Teachers’ Retirement System (CalSTRS) has approved divesting its holdings in CoreCivic and GEO Group, the two US publicly held companies running private correctional facilities.

The action by the committee on Nov. 7 makes CalSTRS the third major US public pension fund to divest from the private prison companies. In July, the New York State Common Pension Fund divested from the two correctional companies upon orders from its sole trustee, New York State Controller Thomas DiNapoli.

In 2017, the New York City Pension Funds also divested its holdings in CoreCivic and GEO Group.

While CalSTRS’s global equities and fixed income portfolio holdings in the two companies were worth only around $12 million as of November 6, the divestment by such a large pension plan is expected to shine more light on the companies and their practices. Advocates against private prisons and the federal governments policy of using the private facilities to house immigrant detainees have been pressuring other institutional investors to divest.

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CalSTRS is the second-largest pension system in the US with almost $230 billion in assets under management. Combined, CalSTRS and the New York State and New York City plans have almost $600 billion in assets under management, a powerful trio of institutional investors that have said no to private prison companies.

The vote by the CalSTRS Investment Committee comes after CIO Chris Ailman ordered CalSTRS investment staff to conduct a divestment review in July. This came after the Trump administration’s zero tolerance border crossing policy highlighted children being separated from their parents and the housing of detainees, both adults and children, in facilities run by the two private corrections companies.

Several dozen protesters calling on CalSTRS to divest from the two companies had appeared at the July 20 investment committee meeting. It was the same meeting at which Ailman made his decision to conduct the review.

“The board conducted a review of the staff research; we agreed that the engagement efforts were thorough and listened to our expert investment consultants,” said Investment Committee Chair Harry Keiley in a press release issued after the vote on Wednesday. “Based on all the information and advice we were provided, the board decided to divest according to the policy criteria.”

The divestment is scheduled to be completed within six months.

Keiley wasn’t more specific, but the committee wasn’t acting on a recommendation from the investment staff. The CalSTRS investment staff review released Nov. 7 did not take a position either way as to whether the pension system should divest from the private prison companies. The review looked at whether CalSTRS’s investments in the two companies violated its environmental, social, and governance (ESG) policy, which includes respect for human rights and whether the investments in the companies would be jeopardized.

“Staff does not take a position on whether or not private prisons violate the ESG policy to the point of justifying implementation of the CalSTRS Divestment Policy,” the review said. “Staff realizes the operation of prisons (public or private) pose noteworthy risks under the CalSTRS ESG policy. However, in several cases it is the contracting agency, such as the US Government, that creates and carries the risk.”

On the human rights issues, the investment staff report split down the middle pro and con on arguments that the companies were violating detainees’ human rights.

“While staff has been informed by both companies that they were not directly involved in the separation of the family, they did provide capacity for the detention of the parents,” the CalSTRS review noted.

The review said while neither GEO Group nor CoreCivic have facilities to house unaccompanied minors, both have a facility to house detained families. It said the two facilities operate outside San Antonio, Texas, and are designed to keep children with one of their parents.

CalSTRS officials said they toured the facilities and noted detainees were able to roam the grounds, the living units were not locked, and there was no razor wire or weapons carried by staff.

“While staff was not able to obtain evidence that these companies violate the respect for human rights, private prisons do add capacity, and help facilitate a system, that may be viewed as violating the Risk Factor,” the review said.

In an emailed comment to CIO, a GEO Group spokesman defended the company’s practices.

“We believe [CalSTRS’s] decision was based on a deliberate and politically motivated mischaracterization of our role as a long-standing service provider to the government,” the statement said. “Our company has never played a role in policies related to the separation of families, and we have never provided any services for that purpose. We are disappointed that misguided, partisan politics were able to jeopardize the retirement security of California’s educators.”

Officials of CoreCivic could not be immediately reached for comment.

The CalSTRS review disputes GEO Group’s contention that California educators’ retirement security would be affected by divestment. The review said removing the private prison companies from the CalSTRS portfolio does “not pose a significant risk or benefit to the portfolio because they are so small relative to the US equity and fixed income allocations.” CalSTRS’s combined allocations to the asset classes total more than $150 billion compared to its approximate $12 million in holdings of the two prison companies.

Tags: CalSTRS, Corecivic, Divestment, GEO Group, Pension, prisons