MOU Language Precludes City from Unilaterally Changing Retiree Health Benefit
International Brotherhood v. City of Redding,2012 Cal. App. LEXIS 1149 (November 2, 2012)
Since 1979, MOU’s between the City of Redding (City) and International Brotherhood of Electrical Workers (IBEW) contained the following (or substantially similar) language:“The City will pay fifty percent (50%) of the group medical insurance program premium for each retiree and dependents, if any, presently enrolled and for each retiree in the future who goes directly from active status to retirement and continues the group medical insurance without a break in coverage.” All MOUs were approved by the City Council.
In 2008, the City proposed during bargaining for a new MOU that the City change the retiree health benefit to provide a subsidy of 2% per year of service, up to a maximum of 50%. The union rejected the proposal. After further negotiations, the City imposed terms and conditions, including the term altering the retiree health benefit.
The union petitioned for writ of mandate, and the City demurred. The superior court sustained the City’s demurrer without leave to amend and dismissed the action. The union appealed, and the Court of Appeal reversed.
The Court of Appeal identified Retired Employees Assn. of Orange County, Inc. v. County of Orange, 52 Cal. 4th 1171 (2011) (REAOC), as the centerpiece of its analysis. In that case, retired employees filed a federal action seeking an injunction prohibiting the County from making unilateral changes to their retire health benefit. The retirees conceded there was no express provision in the MOUs prohibiting the change, but argued that the “County’s long-standing and consistent practice of pooling active and retired employees, along with the County’s representations to employees regarding the unified pool, created an implied contractual right to a continual of the single unified pool for [retired] employees.” Id. at 1177-1178. The County argued that a public entity could not enter into an implied contract.
The Supreme Court ruled that “a county may be bound by an implied contract under California law if there is no prohibition against such arrangements, such as a statute or ordinance.” Id. at 1176. Moreover, the Court ruled that even when the law contains such a prohibition, legislative acts may contain an “implied term” when “the language or circumstances accompanying its passage clearly evince a legislative intent to create private rights of a contractual nature against the county. “ Id. at p. 1177.
In REAOC, on remand, the federal district court found that county resolutions did not contain any implied terms that created a contractual right in favor of retirees. The court held that county resolutions did not contain any language “indicating that pooling would be a ‘continuing obligation.’”
In City of Redding, the Court did not need to rely on an “implied contract” or “implied term” in a legislative enactment to find a vested right. Rather, the Court relied on express provisions in the MOU’s which were approved by the City Council. In doing so, Redding quoted REOAC, which stated: “Where, for example, the legislation is itself the ratification or approval of a contract, the intent to make a contract is clearly shown.” (52 Cal.4that p. 1187).
City of Reddingfound that the language of the MOU’s – “each retiree and dependents, if any, presently enrolled and for each retiree in the future” – could be reasonably interpreted as a promise to provide active employees with certain retirement benefits in the future when they retired.
The most significant aspect of City of Redding is the Court’s ruling that MOU’s can create contractual obligations “that survived the expiration of the MOU’s.” The Court explained: “Since ‘[v]esting remains a matter of the parties’ intent,’ and the petition alleged language in the MOU’s promising payment of 50 percent of the medical insurance premiums ‘for each retiree in the future,’ the petition adequately alleged a mutual intention to extend future retirement benefits to active employees.”
The Court noted that the City offered no interpretation of the actual language that conflicted with the Court’s interpretation. However, because the case was decided on a demurrer, and remanded to the Superior Court for further proceedings, the City is not precluded from proving an alternative interpretation on remand.
City of Redding is one of the few, early, cases interpreting the Court’s ruling in REOAC. It is important because it held that, depending on the language used, an MOU may create rights that extend beyond the life of the contract. Thus, the case serves as a reminder that agencies should exercise extreme caution when drafting, and agreeing to, MOU language.