Pension Reform Litigation & Legislation Roundup: October 2013
A group of California mayors has filed a proposed state ballot initiative that would amend the California constitution to provide state and local governments increased authority to reform their pension and retiree healthcare systems on a “going forward basis.” This initiative measure is a potential game-changer – and is sure to be challenged by public employee unions in the political and judicial arena.
Meanwhile, pension reform efforts by California local governments continue to face legal challenges by public employee unions in state and federal courts. This area is developing quickly in the lower courts. Each case turns on its own facts – the legislative intent evidence surrounding the contested benefit in each jurisdiction. Viewed together, these decisions should give local governments cause for cautious optimism that, if legislative reforms are carefully crafted in consultation with expert counsel, they may withstand challenges in the courts.
The Pension Reform Act of 2014
October 15, 2014, Proposed Initiative Constitutional Amendment Submitted By California MayorsTo Attorney General For Circulating Title And Summary
In response to the growing cost of retirement benefits, a group of California mayors has filed with the California Attorney General a statewide ballot initiative, titled “The Pension Reform Act of 2014,” that would give employees credit for years already worked, but permit state and local governments to modify the formulas that govern pension and retiree healthcare benefits on a “going forward basis.” (The full text of the proposed initiative is available here.)
The Act applies to the state and any political subdivision, including counties, cities, charter counties and cities, school districts, special districts, and state universities, among others.
Historically, based on the state constitution’s “contract clause,” Article 1, Section 9, California courts have found that employees have the right to a pension based on the formula in existence when hired and any improvements during employment.
The ballot initiative would amend the California constitution to provide that the following actions do not “impair the obligation of contracts”:
Rights Vested Only As To Work Performed. Section 12(a) of the Act makes vested rights applicable only to work already performed, and permits changes for future work. In other words, this section would preserve a retirement formula, such as 2.5% at 55, for years already worked, but would permit changes for future years.
Standard For Creation Of Vested Rights. Section 12(c) of the Act provides a standard to be applied in determining what is a vested right. It requires an express statement that benefits “are vested or are otherwise irrevocable.” To date, the courts have articulated the standards to be applied, most recently in the California Supreme Court case of Orange County Retired Employees v. County of Orange, 52 Cal. 4th 1171 (2011). This proposed amendment would provide a legislative standard to be applied by the courts.
Employee Contributions Are An Element Of Compensation, And Are Not Vested Rights. Section 12(h) of the Act states that the amounts that employees are required to pay for pension or retiree healthcare benefits are “a component of an employees’ compensation package” and subject to change. This statement is a clarification of the law. Some cases have held that contribution rates are vested, others have not.
Procedures For Changing Benefits. The Act provides that benefits may be changed for work not yet performed through a labor agreement, legislative action, or an initiative, referendum or other ballot measure initiated by the voters or a government body. The Act does not affect existing labor agreements, but contains provisions to prevent agreements created to undermine the Act.
Exclusive Judicial Jurisdiction. The Act grants the courts exclusive jurisdiction over all disputes relating to pension or retiree healthcare benefits enacted or proposed through an initiative, referendum or other ballot measure. Presumably, this would eliminate any jurisdiction on the part of the Public Employees Relations Board.
Threatened Plan Or Government Insolvency. The Act authorizes a number of measures in the event of threatened plan insolvency or a governmental fiscal emergency including: reducing the rate of future accrual for pension or retiree healthcare benefits, reducing future COLAs, increasing the retirement age for future benefits, requiring employees to pay a larger cost of pension or retiree healthcare benefits.
Supplemental Payments To Retirees—New Application of Allen Test Permitting Return To Original Purpose Of Benefit
Protect Our Benefits v. City and County of San Francisco, San Francisco Superior Court, No. CPF-13-512788 (Statement of Decision, Sept. 10, 2013)
Recently, San Francisco won a case testing a 2011 Charter amendment that sought to contain the costs of a supplemental retiree benefit tied to retirement system earnings. This ruling is an important extension of the Supreme Court decision in Allen v. Board of Administration, 34 Cal. 3d 114 (1983), which carves out an exception to the vested rights doctrine for reforms that return a benefit to its original purpose, eliminating unintended burdens and benefits. The Superior Court held that the Charter amendment, which limited supplemental payments to times when the retirement system was “fully funded” restored the benefit’s original intent.
Since 1996, San Francisco’s charter provided for the payment of supplemental cost of living benefit adjustments for retirees (known as “supplemental COLAs”). Unforeseen to San Francisco voters, however, was that supplemental COLAs would be paid out even in years when the retirement fund was underfunded, leaving City taxpayers and current employees to foot the bill by increasing employer contributions and accepting wage reductions.
In November 2011, San Francisco voters adopted Proposition C, which added to the charter a provision “to clarify the intent of the voters” that no supplemental COLAs were to be paid “unless the Retirement System was also fully funded based on the market value of the assets for the previous year.” (Charter of the City and County of San Francisco Section A8.526-3(d).)
Petitioner Protect Our Benefits sued, alleging that the 2011 charter reform had impaired retirees’ vested rights, protected by the contract clause of the federal and state constitutions, to receive supplemental COLAs regardless of the fiscal health of the fund in any particular year.
The court rejected this challenge, holding that retirees had no such right because the 2011 charter amendment merely made “explicit the basic and real character of supplemental COLAs…” (Statement of Decision, p. 4.) Relying on Allen v. Board of Administration, 34 Cal. 3d 114 (1983), the court found that the “real theory and objective” of supplemental COLAs was “to let retirees share in the bounty of unexpectedly high investment earnings, when the Fund can afford to do so.” (Statement of Decision, p. 4.) The 2011 reform served to correct an “unforeseen benefit” that retirees had enjoyed and to relieve the “unforeseen burden” borne by the City, its taxpayers, and its current employees, “of having to fund supplemental COLAs even in conditions which the voters did not contemplate...” (Id.)
Retiree Healthcare Benefits: City Retains Discretion Over Amount Of Subsidy
Los Angeles City Attorneys’ Association v. City of Los Angeles, Los Angeles Superior Court, Case No. BS135294 (Decision and Order, September 13, 2013)
The City of Los Angeles recently obtained a mixed result – including findings beneficial to the City – in a case challenging the City’s efforts to contain the costs of its retiree healthcare program. Contrary to some reports, the case did not involve whether there was a “vested right” to retiree medical care, but rather the narrow issue of the amount of a subsidy to be paid to retirees.
In a limited ruling, affecting only a small number of retirees, the Superior Court objected only to the change from “discretionary” to “fixed and permanent” payments. Consistent with its affirmance that the City had discretion, the court held that employees had not shown a right to a subsidy that perpetually increased or of any particular amount.
Meyers Nave represents the City of Los Angeles in this case.
The court’s decision was based on the following: the City of Los Angeles provides a subsidy to retirees to help cover some of the cost of medical premiums. Faced with rapidly escalating medical costs, and intent upon ensuring that its retiree health program was fiscally sustainable for current and future City employees, the City in 2011 enacted an ordinance which “froze” the amount of the subsidy for employees unless their bargaining unit agreed that employees would pay 4% of their salary towards retiree healthcare contributions. Up until 2011, City employees had contributed nothing toward retiree health care.
The majority of bargaining units agreed to contribute, but the Los Angeles City Attorneys’ Association (LACAA), along with another unit representing confidential city attorneys (EAA) opted instead to sue the City.
LACAA and EAA petitioned for a writ of mandate, claiming that their members were entitled to have the Retirement Board continue to grant increases in the medical premium subsidy under the prior formula. The prior formula, still applicable to retirees retiring prior to July 1, 2011, had permitted increases based on various factors such as the increase in the Kaiser two-party non-Medicare Part A and Part B premium, and medical trend rates. (Los Angeles Admin. Code § 4.1103.1.) The unions claimed a vested right to the continuation of the formula under the California constitution’s contract clause.
In an opinion filed September 13, 2013, the Los Angeles Superior Court issued a decision and order granting the petition for writ of mandate on limited grounds. The court focused on the fact that the City ordinance had established a “fixed and permanent” amount for the subsidy without providing a mechanism for potentially changing it in light of medical inflation. The court agreed with the City, however, on several important points. First, the court held that petitioners were not entitled to a subsidy that covers the full cost of healthcare premiums. Instead, the court recognized that the City intended to provide a subsidy for retirees that covers “part or all of the cost of a medical plan….” (Decision and Order, p. 8.) Second, the court noted that the City of Los Angeles Charter contains a reservation of rights permitting the City Council to “modify or add to the benefits…or change conditions of entitlement.” (Decision and Order, pp. 2, 9.) This reservation of rights meant that the City intended to reserve for itself the legislative flexibility to modify the program to adapt to fiscal conditions that changed over time. Third, and relatedly, the court held that the retirement board and the City have “discretion to set the amount of the medical subsidy.” (Id. at 9.) And conversely, the court expressly rejected the petitioners’ “argument that they have a vested right to a perpetually increasing subsidy or a subsidy that is indexed to the medical trend rate.” (Id.)
The ruling affects only 25 or fewer retirees to date, and future retirees currently represented by LACAA and EAA.
Retiree Healthcare Benefits: City’s Reservation Of Rights Preserves Discretion Over Benefit
Sacramento County Retired Employees’ Association v. County of Sacramento, U.S. District Court, Eastern District of California, Case No. CIV S-11-0355 KJM-EFB (September 30, 2013)
Sacramento County recently won a case challenging reform to its medical and dental insurance subsidy program. The United States District Court in Sacramento granted summary judgment in favor of the County and ended a putative class action brought by unions representing County employees.
This case illustrates the power of reservation of rights clauses, which the County continuously inserted into its retirement materials.
Since 1980, the County of Sacramento has provided medical and dental insurance subsidies that assisted County retirees with their medical and dental insurance premiums through the Sacramento County Employee Retirement System. From 1993 to 2002, the Sacramento County Board of Supervisors provided the subsidies by resolution and set the amount at the highest HMO premium for non-Medicare eligible retirees. Beginning in 2003, the Board began to freeze or eliminate the amount of the subsidy for employees retiring after certain dates.
Plaintiffs brought a putative federal class action against the County on behalf of four subclasses of retired County employees, challenging the County’s decision to reduce or terminate the health and dental insurance subsidy for several classes of employees. Plaintiffs alleged that the County’s past policies had created an implied contract with retirees, and the County’s reduction of the subsidy violated employees’ vested rights under the contract clause of the federal and California constitution by impairing implied contractual vested rights.
This decision is among the first in California applying the legal standard announced by the Supreme Court in Retired Employees Association of Orange County, Inc. v. County of Orange, 52 Cal. 4th 1171, 1194 (2011) (REAOC), which governs when a vested right to health benefits for retired employees can be implied from a county ordinance or resolution. The decision demonstrates that the standard announced by the Supreme Court in REAOC is very rigorous, and that the outcome of cases applying REAOC will depend upon the legislative intent evidence surrounding the contested benefit in each jurisdiction.
In this case, that evidence fell short. The County’s retirement materials were replete with statements reserving the County’s right to change the benefits. The court held that plaintiffs would not be able to withstand summary judgment because the evidence concerning the legislative intent behind the subsidy program did not create “a disputed issue of material fact on the question whether the County created a contract that provided the subsidy to retirees with an implied term that the subsidy was vested in perpetuity.” (Order, p. 22.)
Challenge To AB 197 – State Anti-Spiking Law
October 31, 2013, Contra Costa County Deputy Sherriff’s’ Association, et al. v. Contra Costa County Employees’ Retirement Association, et al., Case No. N12-1870. Contra Costa County Superior Court
On October 31, 2013, the Contra Costa Superior Court will hear an important challenge to the recent state law, AB 197, that outlawed “spiking” in county retirement systems.
Meyers Nave represents the Contra Costa County Sanitary District in this case. The District has filed a brief supporting AB 197.
Under the County Employees Retirement Law of 1937 (“CERL”), California Government Code sections 31450 et seq., pensions are calculated based on a member’s age, years of service, and “final compensation.” The respondents in this case are four retirement associations—for Contra Costa, Merced, Marin, and Alameda counties—created by and organized under CERL; they are charged with calculating pensions in accordance with CERL’s definition of “final compensation.”
For over a decade, these four retirement associations have maintained policies that expanded CERL’s definition of “final compensation” to include deferred pay items, contrary to CERL, that were not both “earned” and “payable” in the final compensation period. These items, such as annual cash-outs of accrued vacation time and lump sum payments upon retirement, have artificially inflated employee pensions, and left local government employers to pick up the tab.
In 2012, the California Legislature passed and the Governor signed into law Assembly Bill 197, which amended CERL to codify the construction that courts of appeal had announced a decade earlier. After AB 197 was enacted, unions filed four lawsuits, seeking to prevent the retirement associations from changing their policies to comply with the law. The retirement associations declined to defend this case, and courts permitted the State (through the Attorney General’s office) to intervene to defend the constitutionality of AB 197. The four cases were consolidated in Contra Costa County Superior Court. Several local government employers, including Central Contra Costa Sanitary District, represented by Meyers Nave, were also permitted to join the action.
The critical issue before Judge David B. Flinn on October 31 is whether the retirement associations had the discretionary authority to promulgate policies that include pay items in excess of those permitted by CERL’s definition of final compensation.
REAOC Standards On Appeal (Again) In The Ninth Circuit
November 4, 2013, Retired Employees Association of Orange County, Inc. v. County of Orange, Case No. 12-56706., U.S. Court of Appeals for the Ninth Circuit
On November 4, 2013, the Ninth Circuit will hear an important appeal involving the standards set by the California Supreme Court in Retired Employees Association of Orange County, Inc. v. County of Orange(“REAOC”), 52 Cal. 4th 1171 (2011) for determining the existence of a “vested right” to retirement benefits.
Meyers Nave represented the County of Orange before the California Supreme Court in REAOC and represents the County in this appeal.
This case began in federal district court, and the Ninth Circuit referred the case to the California Supreme Court to articulate the standards to be used in “vested rights” cases, and on remand, on August 14, 2012, the federal trial court applied those standards to grant summary judgment in favor of the County. The trial court found no vested right to a “pooling” arrangement that had resulted in lower medical costs for retirees.
This appeal involves an important application of the REAOC standards as it tests the trial court’s decision in favor of the County.
For years, Orange County had “pooled” retirees and active employees of the County together for the purposes of calculating a single set of health insurance premiums—generally resulting in lower premiums for retirees and higher premiums for actives. Retired County employees challenged the County’s 2007 decision to split active employees and retirees into separate pools, arguing that the County’s decision constituted an impairment of contract, and that the long-standing “practice” of pooling had created an implied contractual right to a continuation of a single unified pool for retirees and actives.
On remand, applying the REAOC standards, the trial court granted summary judgment in favor of the County, concluding that the retirees failed to show any basis for a vested right to continued pooling.
This case reaffirms the principle that a county sets compensation and benefits through its legislative body—the Board of Supervisors—and the Board expresses its intent itself through formal enactments such as resolutions. If the Ninth Circuit affirms the District Court’s decision in favor of the County, it will provide important federal precedent regarding how the legal standard announced by the California Supreme Court in November 2011 should be applied in practice, and will give meaning to how difficult it will be for plaintiffs to establish a vested right to health care benefits based upon an implied contract.