Kurt Kappes, Robert Milligan and Jessica Pandika Published in The NAPPA Report
“California Court of Appeal Strikes Down the State’s Latest Attempt to Divert Public Pension Funds to Address Fiscal Problems”

Kurt Kappes, Robert Milligan and Jessica Pandika were published in the February issue of the National Association of Public Pension Attorneys’ newsletter The NAPPA Report. Their article, “California Court of Appeal Strikes Down the State’s Latest Attempt to Divert Public Pension Funds to Address Fiscal Problems,” examines a recent California Court of Appeal decision that agreed with a state trial court that “the state government’s attempt to withhold $500 million from a state teachers’ retirement fund was unconstitutional.”

The authors note, “The dispute dates back to 2003 when California attempted to solve a purported fiscal crisis with the passage of SB 20, which eliminates a $500 million appropriation to a state teachers’ retirement fund, the Supplemental Benefit Maintenance Account (‘SBMA’).” They further explain that California’s Teachers’ Retirement Board, along with members of the State Teachers’ Retirement System (“CalSTRS”) and the California Retired Teachers Association obtained “a judicial determination that SB 20 impairs vested contractual rights provided by law in violation of… the California Constitution.” Furthermore, the authors note that “SB 20 also enacted Education Code Section 22954.1, which requires an actuarial valuation of the SBMA every four years between 2006 and 2036” and the state “has no obligation to transfer funds to the SBMA after July 1, 2036, and any amounts not required to be repaid by that date are unrecoverable.”

The authors note that the court held that certain enactments of SB 20, “unconstitutionally impaired the vested pension contract rights of CalSTRS’ members” and that “CalSTRS’ members have a vested contract right under Section 22954 that requires a continuing income stream and that the measure of the State’s performance under the contract is the payment of 2.5% of the creditable compensation for the previous year.” Further, the authors note that the court “held that both the plain language of the statute and the legislative history contractually obligate the State” to make an annual 2.5% contribution into the SBMA. They conclude, “The Court of Appeal’s decision… will have a pronounced impact on those relying on public retirement benefits and the various approaches that state governments’ employ to attempt to use such funds for other purposes.”