On Monday, the First District Court of Appeal issued its opinion in a major pension reform case our office is litigating on behalf of the Alameda County Deputy Sheriffs’ Association (“ACDSA”). While there are issues the Supreme Court will likely be asked to address on further appeal, the appellate court found in the employees/unions’ favor on several significant points.
On behalf of the ACDSA, David E. Mastagni and Isaac S. Stevens from our office sued the Alameda County Employees Retirement Association (“ACERA”) in December 2012, after it announced plans to begin excluding forms of leave cash out and other pay items from ACDSA members’ pension calculations pursuant to the Public Employees’ Pension Reform Act (“PEPRA”). The lawsuit alleged that, by excluding these pay items from members’ pension benefits, PEPRA infringed on members’ vested pension rights. The case was eventually consolidated with cases from Contra Costa County and Merced County asserting similar claims.
The trial court largely ruled against employees and unions in the case. The trial court ruled there was no vested right to pension that included terminal pay, and found there was no basis for using the doctrine of promissory estoppel to require ACERA to continue including terminal pay in retirees’ pension benefits. We appealed that ruling.
Between when the trial court issued judgment and when the appellate court heard oral arguments in our appeal, the First District issued a decision in a case raising issues very similar to ours, filed by the Marin Association of Public Employees (“MAPE.”) The MAPE case also challenged the legality of excluding terminal pay from pension benefit calculations pursuant to PEPRA. In MAPE, the First District appellate court abandoned the long-standing requirement that any changes to a vested pension benefit be material to the theory of a pension and any detriment to the pensioner be offset by a corresponding new advantage. Specifically, the court found that a detriment did not need to be offset by a new advantage to survive scrutiny, so long as the impairment was reasonable.
Before oral arguments in our case, the appellate court told the parties to prepare to discuss MAPE’s impact on the issues in our case. We prepared arguments showing how the two cases differed, to ensure the court knew it could not simply apply the ruling from the MAPE case to the issues in our case. The parties attended oral arguments in early December, and addressed MAPE’s impact in depth with the appellate court.
On Monday, the appellate court issued a lengthy ruling, finding the trial court failed to include a vested rights analysis, and its analysis of PEPRA’s impact on the pensions of legacy members was incorrect. The following is a list of the main issues the court decided:
1. Leave cash outs before retirement (i.e. “in service cash outs.”) – the appellate court disagreed with the trial court. If an employee exercises a right to cash out vacation during his or her final compensation period, that pay must be included in the employees’ pensionable compensation – regardless of when the time was accrued.
2. Leave cash outs at retirement (i.e. “terminal pay.”) – the appellate court agreed with the trial court’s ruling that CERL excluded terminal pay from pensionable compensation before PEPRA. According to the court, there was no vested right to have terminal pay included in pension benefits. As such, PEPRA could not impair any vested right to have terminal pay included.
3. Pay outside normal working hours (e.g. standby and on call pay.) – the trial court ordered the retirement boards to continue including these pay items if they were previously included in pension calculations, they were earned and required of the employee during his/her final compensation period, they were “regularly applicable to the class of employees,” and were not designed to “enhance” the pension.
The appellate court found that these pay items were includable before PEPRA, and PEPRA was meant to exclude them. As a result, the appellate court found there was a vested right to on call pay being included in pensions, and the trial court should have analyzed whether changes to the definition of compensation earnable in Government Code section 31461 unlawfully impaired that right.
4. PEPRA’s exclusion of compensation the retirement board determines was “paid to enhance a member’s retirement benefit.” – the appellate court found PEPRA added a new requirement in Government Code section 31461(b)(1), by excluding from pension benefits and compensation a retirement board determines is “compensation paid to enhance a member’s retirement benefit,” It further held the trial court erred in refusing to determine whether legacy members had a vested right to be free from the uncertainty posed by the new requirement. Because (b)(1) changed the prior CERL law, the appellate court ruled the trial court must subject it to a vested rights analysis.
5. The proper analysis for vested rights impairment claims – the appellate court’s ruling was mixed for us. On one hand, the court found that MAPE’s elimination of the “corresponding new advantage” requirement was “not controversial.” On the other, it found that the MAPE court improperly hinged its analysis on what it believed a “reasonable pension” should be, as opposed to defining a “reasonable pension” as one subject only to “reasonable modification.” It also found that, while a modification could be lawful despite not being accompanied by a new offsetting advantage, any detrimental changes to legacy employees could only be justified by “compelling evidence” that the changes bear a material relation to the theory of a pension system and its successful operation. The court then found that the fact that the impact of changes to the definition of pensionable compensation for legacy members may seem modest when compared to the pension system as a whole may support a finding that the changes were unlawful – especially if the benefits at issue were already actuarially accounted for and treated as pensionable. This is good for us, because we can show ACERA has accounted for the inclusion of on call and standby pay in pension benefits over the years.
6. Estoppel - the employees had argued that, even if they never had a legal right to receive terminal pay in their pension benefits before PEPRA, they should nonetheless have it included under the doctrine of promissory estoppel. Promissory estoppel is a legal doctrine used to grant relief when a person detrimentally relies on the promise of another person. It allows the injured party to enforce the promise. The trial court found that certain employees were not entitled to relief. The appellate court found that employees in all three affected counties – including Alameda – could use promissory estoppel to obtain relief. According to the court, “all legacy employees should be entitled to include terminal pay in compensation earnable to the limited extent such pay was designated as pensionable by their relevant post-Ventura settlement agreement.”
So what does this all mean for legacy employees in 37 Act retirement systems? It is a mixed result. There are parts of the judgment that will likely be appealed by both sides. If the ruling stands, the matter will go back to the trial court to determine whether PEPRA unconstitutionally impaired legacy members’ rights to a pension free of any uncertainty caused by PEPRA’s new requirement that pensionable income not include pay meant to enhance a member’s retirement benefit. In the meantime, there would be grounds for ACERA, MCERA, and CCCERA to continue including terminal pay in legacy members’ pension calculations. It is not clear at this time what the retirement boards plan to do. Alternatively, the ruling could be appealed to the California Supreme Court. We will keep you posted as the case goes forward.
Attorneys David E. Mastagni and Isaac S. Stevens from Mastagni Holstedt represented the Alameda County DSA in this case.