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GAVIN NEWSOM'S BIG SHOES TO FILL

Rick Roeder       January 2019

The unique political career of Jerry Brown ended on January 1. Many of his last pronouncements as Governor, including an interview on Meet The Press in late December, have dealt with the dire problems being created by climate change and the proactive steps needed to minimize its impact. From afar, Brown might have been viewed as a liberal Democrat in an increasingly Blue state. However, his financial views have often been at odds with the stereotype of a free-spending Democrat.

He leaves two significant legacies in the pension realm. 2012 legislation ("PEPRA") cut back pension benefits significantly for post-2012 hires. A previous Governor, Grey Davis, signed a rich pension bill in 2000 that was later deemed to be unaffordable, especially in light of the Great Recession.

An ongoing and compelling postscript to the 2012 bill is Brown's challenge of the "California Rule." Certain Firefighter unions have been challenging PEPRA's cutbacks pertaining to the elimination of "air time." Under the California Rule, no cutbacks of any pension provision can occur unless there is some compensating benefit. The contested aspect of the California Rule relates to the "grandfathering" of benefits also applied to all potential future years of employment for those employed at the point of benefit reduction. Thus, the California Rule mandated that reductions in benefits only applied to future hires. Application of the California Rule meant that the impact of reduced pension formulas on municipal balance sheets would be relatively insignificant until 5-10 years after implementation.

The California Rule has never applied in the private sector. ERISA generally protected accrued benefits for past service but never as to potential future service. Last month, Brown said many entities faced "fiscal oblivion" if pension benefits were "off limits" to employers. Brown has led the charge to modify the California Rule, much to the chagrin of the state's powerful unions. The various parties eagerly await the state Supreme Court ruling, expected in the first half of 2019.

For the unions, the Supreme Court's ruling will have a ripple effect in light of last June's Janus decision in the federal Supreme Court. The Court ruled that it was impermissible to require payment of union dues as a condition of public sector employment. The ruling is a huge setback for unions as five million employees are impacted. If the California Rule is overturned, a second major setback for unions will likely have repercussions.

Will Gavin Newsom possess the same independent streak as the former seminary student? Stay tuned.

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