On July 30, 2020, the
California Supreme Court issued its long-awaited ruling on the “California Rule”
in Alameda County Deputy Sheriffs' Association,
et al. v. Alameda County Employees' Retirement System, et al. ("ACDSA"). The opinion permits the Legislature to
address perceived pension abuses, even if the modification reduces some employee
benefits, while upholding the requirement of the California Rule that
detrimental changes otherwise must be accompanied by offsetting new
advantages. Under the standard articulated by the Court, pension reforms
advocated by former San Jose Mayor Chuck Reed to reduce pension costs would
almost certainly be held unconstitutional.
Although the Court
denied the pensioners' claims by upholding PEPRA's anti-spiking provisions, the
ruling affirms and strengthens the California Rule. Carving a narrow exception
from the requirement to offset detrimental modifications of pension benefits
with new advantages, the Court held PEPRA's limitations on the inclusion
certain leave payments, on-call pay, and other payments to enhance pension
benefits were “enacted for the constitutionally permissible purpose of closing
loopholes and preventing abuse of the pension system.” The Court also ruled
that terminal pay was never includable. The Court then declined to apply
equitable estoppel to enforce the Ventura settlement
agreements providing for the inclusion of the disputed items in pension
benefits.
The Court articulated
a two-part test for evaluating pension modifications under the California Rule.
First, the Court must determine whether the modifications impose an economic
disadvantage and, if so, whether those disadvantages are offset in some manner
by comparable new advantages. The Court must then determine whether the
government's articulated purpose was sufficient, for constitutional purposes,
to justify any impairment of pension rights.
The Court recognized PEPRA resulted in a detriment to the Plaintiffs in this case but held the Legislature's purpose justified the modifications. In the unanimous ruling, Chief Justice Tani Cantil-Sakauye explained, prior contracts clause jurisprudence delineated what is not a constitutionally permissible purpose, including modifications to address revenue shortfalls and rising pension costs. The Chief Justice noted, “we have never addressed the circumstances under which such advantages need not be provided.”
The Court also
resolved the confusion over whether plan modifications that that result in
disadvantages to employees "must" or "should" be
accompanied by new advantages. During oral arguments, David E. Mastagni
asserted that the distinction made little difference. The Court largely agreed.
"Should" is the proper test, but "should" cannot "be
disregarded as merely precatory" and generally, "modifications of
public employee pension plans "should" preserve the value of plan
participants' pension rights."
In short, the
California Rule “requires the level of pension benefits to be preserved if it
is feasible to do so without undermining the Legislature's permissible purpose
in enacting the pension modification.” Here, the Court found PEPRA's reforms
pigeonholed this narrow exception. “The Legislature's decision to impose
financial disadvantages on public employees without providing comparable
advantages will be upheld under the contract clause only
if providing comparable advantages would undermine, or
would otherwise be inconsistent with, the modification's constitutionally
permissible purpose. We conclude that the PEPRA amendment survives this
constitutional scrutiny.” (Emphasis added.)
"Given our past
decisions, we have no difficulty finding that the PEPRA amendment was enacted
to maintain the integrity of the pension system." The Court further explained,
"it would defeat this proper objective to interpret the California Rule to
require county pension plans either to maintain these loopholes for existing
employees or to provide comparable new pension benefits that would perpetuate
the unwarranted advantages provided by these loopholes."
Additionally, the Court
rejected the argument that the employees acquired a contractual right to the
inclusion of the disputed pay items because their contributions to the county
pension fund were based on an actuarial calculation that included the
additional benefit costs attributable to the inclusion of the disputed items.
However, in footnote 18, the Court held that by paying for the inclusion of the
disputed items, the employees might be entitled to a partial refund of their
contributions.
The Court severely
limited the power to modify pension benefits in the future, expressly holding
the California Rule “remains the law of California.” Rejecting the State's contention
it possessed sweeping police powers to reduce pension benefits, the Court
upheld the long-standing principle that pension rights vest upon commencement
of employment. The State attempted to evade Contracts Clause analysis by
arguing the changes only operated prospectively.
In repudiating the
State's contention that PEPRA's changes were only prospective, the Court agreed
with Mr. Mastagni's argument that PEPRA's amendment applies to all pension
rights, regardless of when they were accrued. The Court characterized the
State’s argument as "misguided" and explained that the law in effect
at the end of an employee's career is used to determine all pension benefits,
resulting in a "profoundly retroactive impact."
The 90-page Opinion is
nuanced and complicated. While the outcome is a disappointment to the
plaintiffs, in this case, the standard upheld by the Court is a major win for
all public employees in California. Any future pension modifications must be
analyzed under the California Rule and the validity of the modifications will
be determined based upon the facts of each case. Simply put, the employers
and the state cannot terminate or modify your retirement plans to address
increasing pension costs as Governor Brown stated that he had hoped to do.
Mastagni Holstedt clients with any questions regarding this case should contact David E.Mastagni at davidm@mastagni.com. David argued the appeal on behalf of the Alameda County Deputy Sheriffs' Association.
