California Supreme Court to Weigh in on Pension Formula Dispute

In November 2016, the California Supreme Court granted review of Marin Association of Public Employees v. Marin County Employees’ Retirement Association, 2 Cal. App. 5th 674 (1st Dist. 2016) (“Marin Association”).  However, in granting review, the Supreme Court indicated that it would defer action in the matter pending the decision of the First District Court of Appeal in Alameda County Deputy Sheriffs’ Association et al. v. Alameda County Employees’ Retirement Association et al., case number A141913 (“Alameda County”).

Both cases involve challenges to provisions of the California Public Employees’ Pension Reform Act of 2013 (“PEPRA”).

Marin Association of Public Employees v. Marin County Employees’ Retirement Association

Facts and Background

In December 2012, the Board of Directors of the Marin County Employees’ Retirement Association (collectively, “MCERA”) adopted a policy implementing provisions of PEPRA relating to the definition of “compensation earnable.”[1]  Pursuant to the policy, commencing January 1, 2013, specified items would be excluded from the definition of compensation earnable to comply with PEPRA’s amendment to Section 31461 of the Government Code.[2] Pursuant to the policy, MCERA would exclude from the calculation of members’ final compensation for compensation earned after January 1, 2013 standby pay, administrative response pay, callback pay, cash payments for waiving health insurance, and other pay items.

On January 18, 2013, four individuals employed by various governmental entities in Marin County and five employee organizations (“Plaintiffs”) filed a lawsuit against MCERA.  Plaintiffs sought declarative and injunctive relief that Assembly Bill 197, one of the bills that enacted PEPRA, and MCERA’s actions were unconstitutional impairments of vested rights and were therefore unenforceable. Plaintiffs also sought a writ of mandate to compel MCERA to continue to calculate the pensions of its members in a manner consistent with the policies in effect prior to its adoption of the new policy and in a manner consistent with binding promises made to its members.

The trial court concluded that the application of the new formula to current employees did not amount to an unconstitutional impairment of the employees’ contracts, and sustained MCERA’s demurrer without leave to amend.  Plaintiffs appealed.

Discussion

Division Two of the First District Court of Appeal ultimately concluded that the California Legislature did not act impermissibly when it amended Government Code Section 31461 to exclude specified items and categories of compensation from the calculation of pensions for current employees.  The Court explained that while a public employee does have a “vested right” to a pension, that right is only to a “reasonable” pension.

In reaching its conclusion, the First District reviewed the general law relating to pensions.  The Court focused its discussion on several California Supreme Court cases, including Kern v. City of Long Beach, 29 Cal. 2d 848 (1947), Allen v. City of Long Beach, 45 Cal. 2d 128 (1955), Miller v. State of California, 18 Cal. 3d 808 (1977) and Allen v. Board of Administration, 34 Cal. 3d 114 (1983).

The Court cited Miller for its statement of pension principles, noting that Miller, quoting Kern, explained that “‘pension rights are not immutable.  For example, the government entity providing the pension may make reasonable modifications and changes in the pension system.  This flexibility is necessary to “permit adjustments in accord with changing conditions and at the same time maintain the integrity of the system and carry out its beneficent policy.”’”  Further quoting Miller’s reference to Kern, the Court noted Miller’s emphasis that “‘a public pension system is subject to the implied qualification that the governing body may make reasonable modifications and changes before the pension becomes payable and that until that time the employee does not have a right to any fixed or definite benefits but only to a substantial or reasonable pension.’”

Quoting Kern in more detail, the Court explained:

What the Supreme Court stated in Kern deserves more than the excerpt quoted in Miller:  “The rule permitting modification of pensions is a necessary one since pension systems must be kept flexible to permit adjustments in accord with changing conditions and at the same time maintain the integrity of the system and carry out its beneficent policy. … [¶] Thus it appears … that an employee may acquire a vested contractual right to a pension but that this right is not rigidly fixed by the specific terms of the legislation in effect during any particular period in which he serves.  The statutory language is subject to the implied qualification that the governing body may make modifications and changes in the system.  The employee does not have a right to any fixed or definite benefits, but only to a substantial or reasonable pension.  There is no inconsistency therefore in holding that he has a vested right to a pension but that the amount, terms and conditions of the benefits may be altered.”

Citing Miller’s reference to the 1955 Allen decision, the Court explained that the scope of permissible modifications to vested pension rights was established in Allen. “‘“Such modifications must be reasonable, and it is for the courts to determine upon the facts of each case what constitutes a permissible change.  To be sustained as reasonable, alterations of employees’ pension rights must bear some material relation to the theory of a pension system and its successful operation, and changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages.”’”

Throughout its discussion, the Court made repeated references to Kern and Miller for the principle that a public pension system is subject to the “implied qualification” that the governing body may make “reasonable” modifications and changes before the pension becomes payable and that, until that time, the employee does not have a right to any fixed or definite benefits but only to a “substantial” or “reasonable” pension.

After review of the Supreme Court cases noted above, as well as other pension cases, the Court concluded that the Legislature did not act impermissibly by amending Section 31461 to exclude the specified items and categories of compensation from the calculation of pensions for current employees.  Noting that an employee has a vested right only to a “reasonable” pension, “not an immutable entitlement to the most optimal formula of calculating the pension,” the Court explained that the Legislature, prior to the employee’s retirement, may alter the formula and reduce the anticipated pension.  Such modifications by the Legislature will not constitute a constitutional violation as long as they do not deprive an employee of a “reasonable” pension.  The Court further stated that “short of actual abolition, a radical reduction of benefits, or a fiscally unjustifiable increase in employee contributions” reasonable modifications to a pension plan were permissible.

Based on these principles, the Court found that neither the statutory change, nor MCERA’s implementation of that change, amounted to an impairment of the employee’s receipt of a “reasonable” pension upon retirement.

Supreme Court Review

As explained above, the California Supreme Court granted review of the Marin Association case in November 2016. However, the Supreme Court stated that action in the matter would be deferred pending the decision of the First District Court of Appeal in the Alameda County case.

Alameda County Deputy Sheriffs’ Association, et al. v. Alameda County Employees’ Retirement Association, et al.

Similar to the Marin Association case, the Alameda County case involves consolidated challenges to amendments made to the County Employees Retirement Law of 1937 (“CERL”) by PEPRA.  Appellants in the case include Alameda County and Contra Costa County and their respective Deputy Sheriffs’ Associations, as well as the Merced County Sheriffs’ Association.  The parties in Alameda County challenged their respective county employee retirement associations’ ability to implement AB 197 as to members hired before January 1, 2013 (referred to as “legacy members”).  Among other things, the parties sought a declaration that the county employee retirement associations’ actions in implementing AB 197 as to legacy members was an unconstitutional impairment of a vested contractual right to have “the value of accrued leave cash-outs exceeding the amount that was both earned and payable during their ‘final compensation’ period” included in their “compensation earnable.” The parties also sought a writ of mandate directing the employee retirement associations to calculate legacy members’ retirement allowance in accordance with their policies and procedures in place prior to the implementation of AB 197 and also sought injunctive relief prohibiting the associations from further implementing AB 197.

The Contra Costa Superior Court judge that heard the consolidated matters denied the request that the court declare the associations’ actions unconstitutional impairments of vested contractual rights and also declined to issue a writ of mandate or declaratory or injunctive relief on the issue of leave cash-outs to be included in “compensation earnable” and “final compensation.”  The Deputy Sheriffs’ Associations appealed.  The case is still pending before Division Four of the First District Court of Appeal.  According to the First District’s website, the case is fully briefed, but has not yet been set for oral argument.

Cal Fire Local 2881 v. California Public Employees’ Retirement System

Division Three of the First District Court of Appeal issued an opinion in another pension-related case in late 2016: Cal Fire Local 2881 v. California Public Employees’ Retirement System, 7 Cal. App. 5th 115 (1st Dist. 2016) (“Cal Fire”).  In Cal Fire, which involved airtime service credits that eligible employees had the option to purchase between 2003 and 2012, and which option was eliminated with the enactment of PEPRA, the First District concluded there was no express vested right to purchase airtime service credit.

In its conclusion, the First District noted, “While plaintiffs may believe they have been disadvantaged by these amendments, the law is quite clear that they are entitled only to a ‘reasonable’ pension, not one providing fixed or definite benefits immune from modification or elimination by the governing body.”  Division Three’s analysis in the Cal Fire decision aligns with Division Two’s analysis in Marin Association, in that both panels concluded that employees are entitled only to “reasonable” pensions, not pensions that provide benefits that are immune from reasonable modification by the governing body.

Cal Fire Local 2881 filed a petition for review with the Supreme Court on February 8, 2017.

HOW THIS AFFECTS YOUR AGENCY

The cases already decided by separate panels of the First District, Marin Association and Cal Fire, appear to signal a shift in California pension law.  Rather than entitling an employee to the pension that was offered at hire, and prohibiting a reduction in such pension unless the reduction is offset by a comparable new benefit, both cases concluded that public employees are entitled only to “reasonable” pensions, not pensions that provide fixed or definite benefits immune from modification by the governing body.  Of note, in the Marin Association opinion, Division Two of the First District, citing several Supreme Court decisions, found that there is no absolute requirement that elimination or reduction of an anticipated retirement benefit “must” be counterbalanced by a comparable new benefit.  This determination marked a significant shift in prior pension case law.

Notwithstanding, it should be noted that the benefits reduced in each of these cases were relatively minor and therefore agencies should not interpret these cases as giving carte blanche to initiate major changes in their pension plans.

Since the Supreme Court deferred action in the Marin Association case pending a decision in the Alameda County case, it is possible that the Court will review both cases, and possibly the Cal Fire case together, given that the cases raise similar issues.  Whether or not the cases are reviewed together, if the Court upholds the decision in Marin Association or Cal Fire, such ruling may provide the state, as well as local governments, with the ability to reduce employee pension benefits so long as the modifications do not deprive employees of a “reasonable” pension.

Given that the Supreme Court deferred action in the Marin Association case until a decision is made the Alameda County case, which has not yet been set for oral argument, it will likely be several months before the Supreme Court weighs in on these issues.

As in all matters involving interpretation of the law, it is important to secure advice and guidance from your agency’s legal counsel. As always, if you wish to discuss this matter in greater detail, please feel free to contact James R. Touchstone at (714) 446–1400 or via email at jrt@jones-mayer.com.

Information on www.jones-mayer.com is for general use and is not legal advice.  The mailing of this Client Alert Memorandum is not intended to create, and receipt of it does not constitute, an attorney-client-relationship.

[1] California Government Code Section 31461 defines a member’s “compensation earnable” as “the average compensation as determined by the board, for the period under consideration upon the basis of the average number of days ordinarily worked by persons in the same grade or class of positions during the period, and at the same rate of pay. The computation for any absence shall be based on the compensation of the position held by the member at the beginning of the absence. Compensation, as defined in Section 31460, that has been deferred shall be deemed “compensation earnable” when earned, rather than when paid.”

[2] PEPRA amended Section 31461 of the Government Code to add a subdivision (b), which sets forth items and categories that are not included within “compensation earnable.”





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