State Anti-Spiking Law Survives Vested Rights Challenge, With Narrow Limits

In 2012, the California Legislature passed and the governor signed into law AB 197, which amended the County Employees Retirement Law of 1937 (CERL) to prohibit “spiking” of the final compensation figure upon which pensions are based.  Specifically, AB 197 specifies certain categories of compensation that may not be included in the calculation of final compensation.

In November 2012, public employee unions sued four county retirement boards to stop implementation of the new law, contending that the law violates current employees’ vested rights to have these categories of compensation included in the calculation of final compensation. The California Attorney General is defending AB 197 against this challenge, as is the Central Contra Costa Sanitary District, which is represented by Meyers Nave.  

On December 17, 2013, Contra Costa County Superior Court Judge David Flinn issued a “Tentative Combined Decision,” ruling that (1) AB 197’s requirement that cash outs of vacation be “earned” in the final compensation period was consistent with CERL; (2) retirement board policies to the contrary were not authorized by law; and (3) AB 197 did not violate employees’ vested rights because unauthorized retirement board policies could not, and did not, create vested rights.

Although Judge Flinn held that the retirement board’s unauthorized policies did not create vested rights , he ruled that principles of equitable estoppel applied to restrict the application of AB 197.   The Judge ruled that vacation cash outs not “earned” in the final compensation period could still be included in the calculation of final compensation at the time – but only up to the amounts accumulated prior to enactment of AB 197 and not used since.

This ruling affects employees close to retirement who have been banking their vacation or other leave.  Judge Flinn’s decision states:

It is the view of the Court, however, that ‘injury’ applies only to those persons who did, prior to the enactment of B 197, accumulate vacation beyond that amount that when cashed out will be in excess of the amount that, using a FIFO calculation, will still be allowable as ‘compensation earnable.”  Reliance by other persons is far too speculative to qualify as ‘injury’ under the estoppel doctrine.

Judge Flinn’s reasoning on “cash outs” should also apply to “terminal pay” – according to case law, CERL does not authorize the inclusion of terminal pay in the calculation of final compensation above the amount that was both earned and payable in the final compensation period. 

The Judge also ruled that AB 197’s prohibition on compensation paid to “enhance a member’s retirement benefit” did not violate vested rights because that provision was enacted to prevent “connivance” and thus there could have been no reasonable expectation of receiving that type of enhanced benefit.  But Judge Flinn’s December 17 decision did not rule upon the continued legality of retirement board policies that include “on call” or “stand by” pay in final compensation, because, according to the Judge, that issue had yet to be adequately addressed by the parties.

Judge Flinn has ordered the parties to submit objections, requests for clarification, and further briefing on other pay items for hearing on February 25, 2014 at 2 pm.

In the meantime, the original stay order remains in place, preventing implementation of AB 197 for 60 days after the date upon which the order is lifted.

This case will likely be appealed, with the appellate court deciding whether to continue the stay, and conducting de novo review of all the legal issues involved.