Third Appellate District Upholds Elimination of Pension Pick Ups

In San Joaquin County Correctional Officers' Association v. County of San Joaquin the Court of Appeal upheld a County’s ability to force employees to pay a portion of cost of living (“COLA”) adjustments to their retirement program. This case involved two laws governing public employee retirement, the County Employees Retirement Law of 1937 (“CERL”) and the Public Employees’ Pension Reform Act of 2013 (“PEPRA”).

Prior to PEPRA’s passage, the default retirement program arrangement was that counties and county employees shared the cost of COLA contributions to retirement programs. However, as an option, CERL permitted counties to pay all of the cost of COLA contributions of its employees if it chose to do so. This was known as a “pickup.” This pick up was a common strategy employed by Counties to provide a benefit that was less expensive than a salary adjustment.  In 1975, San Joaquin was one of the counties that agreed to pay the employee share of COLA contributions as part of some of its MOUs.

PEPRA was passed in 2013 to reduce unfunded liabilities in public employee retirement systems. One of PEPRA’s provisions seeks to eliminates the pickups of the employee share of COLA contributions, but does not take effect until 2018.

In 2012, the County negotiated a new MOU with the San Joaquin County Correctional Officers’ Association which eliminated the pickup. The membership voted the MOU down and impasse procedures were engaged. Once impasse was reached, the County unilaterally imposed the elimination of its pick up as part of last best and final offer. The Association challenged the imposition arguing that PEPRA shielded them from such a change until 2018.

Rejecting the Association's challenge, the Court found counties have always had the power to eliminate or reduce pickup under CERL. The CERL permitted the pick up employee costs of COLA contributions, but did not require the pickups nor restrict the employers ability to modify or eliminate them. The court concluded, “In short, the County always has had the power to eliminate the COLA pickup, subject to labor laws, and those laws permitted the county to do so in the event of a bargaining impasse, which occurred. Nothing in PEPRA limited the County’s power in this regard.”

Interestingly, the court cited Marin Assn. of Public Employees v. Marin County Employees’ Retirement Assn. (2016) 2 Cal. App. 5th 674, 681, review granted Nov. 22, 2016, (MAPE) in explaining "the historical backdrop animating recent pension reform legislation in California", but "express[ed] no view" over MAPE's "interpretation of precedent regarding the validity of changes to retirement benefits."

Court of Appeal Breaks from Supreme Court Precedent in Upholding Prospective Reduction of Pension Benefits

The attack on public employee pensions continues with the California Court of Appeal's recent decision in Marin Association of Public Employees et al. v. Marin County Employees' Retirement Association et al. The Court of Appeal upheld the Marin County Employees' Retirement Association's ("MCERA") implementation of the Pension Reform Act (A.B. 197) in the face of constitutional challenges by employee organizations.

MCERA is subject to the County Employees Retirement Law of 1937 (often referred to as "CERL" or "the '37 Act.") In 2012, the Legislature passed the Public Employees' Pension Reform Act ("PEPRA"), which, in part, excluded forms of pay from the "compensation earnable" used to calculate employees' pension benefits.

After PEPRA's enactment, MCERA implemented policies to effectuate these changes. Under the new policy, MCERA would begin to exclude standby pay, administrative response pay, call-back pay, cash payments for waiving health insurance, and other pay items from employees' final compensation after January 1, 2013. Four employee organizations and four plaintiffs challenged these changes on the basis that they were unconstitutional impairments of current employees' vested rights under the state and federal contract clauses.

The court found PEPRA's prospective changes to pension calculations, and MCERA's implementation of such changes, were constitutional. The court agreed that current employees have vested rights to a "substantial" and "reasonable" pension, but held they do not have an "immutable entitlement to the most optimal formula for calculating the pension." Rather, in the court's view, pensions are subject to "reasonable" modification before they become payable.

The court's ruling abandons over fifty years of California Supreme Court rulings protecting public employee pension rights. In 1955, the California Supreme Court issued its ruling in Allen v. City of Long Beach, which established that any changes to pension benefits that result in a disadvantage to employees must be accompanied by comparable new advantages.

In this case, the court did not follow this precedent and claimed the Supreme Court did not intend its use of "must" to to be literal or inflexible. Rather, the court preferred the formulation that a disadvantageous change to pension benefits only "should" be accompanied by a comparable new advantage. In any event, the court determined under the facts of this case, that the employees received a comparable advantage to the reduction in their pension benefits in the form of reduced employee contributions to the retirement system. Since MCERA excluded standby pay, administrative response pay, and call-back pay from pension calculations, it would no longer collect retirement contributions on such pay. This ruling seemingly ignored the fact that, for years, employees contributed to MCERA to fund pension benefits that included such pay.

This case has significant limitations and is sure to be promptly challenged in the California Supreme Court.

Ventura County Pension Initiative Barred from November Ballot

On August 4, 2014, Ventura County Superior Court Judge Kent Kellegrew tentatively decided to issue an injunction barring the initiative to phase out Ventura County's pension system from appearing on the November 2014 ballot. The ruling has significant statewide implications for counties that participate in CERL.

The initiative seeks to withdraw Ventura's participation in the County Employees Retirement Act of 1937. This would put future Ventura County employees into a 401(k)-type retirement savings plan rather than the benefit plan covering current employees. The court held Ventura county cannot 'opt out' or terminate its participation in the Act based on a countywide voter initiative.

When the Legislature enacted the Act, it permitted individual counties to choose to participate. When Ventura County chose to participate in the Act, it agreed to follow the rules established by the Legislature. The Legislature only allows a county to terminate participation in the Act using the procedures set forth in Government Code sections 31564 and 31564.2. These procedures do not allow a county to opt out of the Act using a countywide voter initiative.

The court held allowing this measure to be considered on the November ballot would only result in wasted public resources. Even if the voters adopted the initiative, the measure could not be implemented because the initiative did not comply with Government Code sections 31564 and 31564.2.

In addition, the initiative fails on other grounds. The court held the initiative violates the single subject requirement imposed by the California Constitution.

On Wednesday, August 6, 2014, the Ventura County Taxpayers Association said it will not appeal Judge Kellegrew's August 4 ruling. This ruling marks a significant victory in preserving pension rights for county employees.

The ruling is unique as a pre-election challenge victory. After the superior court denied a pre-election challenge to a retirement-related Menlo Park initiative, most victories, such as those in San Jose and Pacific Grove successfully challenged initiatives after the election. This win helps establish that even highly unusual pre-election challenges can thwart attacks on retirement security.

Alameda County DSA Secures Stay to Stop Pension Changes

On December 12, 2012, the Alameda County DSA secured a stay to stop the Alameda County Employees' Retirement Association from implementing controversial changes to deputies' pension formulas.  ACERA announced it would change the formula to calculate deputies' retirements to exclude cashed-out vacation and sick leave accruals from "final compensation" because of its interpretation of AB 197, part of Governor's Brown's pension reform package.  The DSA quickly filed suit the block the changes and preserve members' bargained-for benefits.  The stay protects members benefits while the legal challenge proceeds.  Alameda County DSA is represented in the matter by Mastagni Law attorneys David E. Mastagni and Isaac S. Stevens.  See a copy of the stay here.

PERB Files Lawsuit to Block San Diego Pension Initiative

On February 14, 2012, the Public Employment Relations Board filed a lawsuit in San Diego Superior Court to block the so-called "Comprehensive Pension Reform Initiative for San Diego."  PERB found the City put the initiative on the ballot without meeting and conferring with labor organizations as required by the MMBA.  PERB's lawsuit follows a decision to grant injunctive relief and issue a complaint after the San Diego Municipal Employees Association filed an unfair labor practice charge. A copy of the complaint/writ petition is available here.

California Supreme Court Issues Landmark Decision Affirming Public Employees' Vested Rights

In Retired Employees Association of Orange County, Inc. v. County of Orange (November 21, 2011) 2011 WL 5829598, a unanimous California Supreme Court ruled public employees can receive constitutionally-protected vested rights by way of implied contract terms.  The holding means public employers can be liable for promises made to employees, even if they do not formally adopt them by ordinance.  The case has been closely watched for its broad implications on labor relations, employee compensation, and pension benefits.

The case arose after Orange County substantially increased the cost of retirees' health insurance premiums by splitting retirees into a separate pool from active employees for calculating premiums.  The retirees filed suit in federal court, arguing they have a vested right to premiums calculated from a joint pool.  The County claimed the retirees have no vested rights because the MOUs under which they retired did not expressly indicate how the cost of retiree health benefits would be calculated.  The District Court sided with County, finding the County could not be liable because it did not explicitly confer vested rights through an ordinance.  The retirees appealed and the federal Court of Appeals asked the California Supreme Court to decide the issue.

The Court held the County could be held liable for its promises to employees, regardless of whether it expressly adopted them through an ordinance.  The Court reasoned employees could hold their employer accountable for the implied terms of a contract, such as the duration of a benefit.  As a result, the Court concluded, "[w]hether an implied term creates vested rights... is a matter of the parties' intent" and general contract principles apply to determine the intent.

The Court went on to reject the County's argument that vesting should be treated differently, noting "[n]either County nor amici curiae [] offer any legal authority for this distinction."  As a result, the Court concluded, "[v]esting remains a matter of the parties' intent."  Once intent is established, the implied terms are treated as part of the contract and are protected by the Contract Clause of the California and federal constitutions.

Labor-Backed Pension Reform Wins, Adachi Initiative Fails in San Francisco

On Tuesday, San Franciscans considered two voter initiatives about public employees' pensions: Measure C, backed by local labor unions, and Measure D, the so-called Adachi Initiative.  Measure C passed with 68% of the vote and Measure D failed, attracting only 33%.

Measure C requires employees to pay a small portion of their salaries to offset healthcare costs and requires most employees pay 7.5% of their salaries to the pension system until the system's investments recover from the recession.  Measure C was endorsed by labor, including the San Francisco Police Officers Association and San Francisco Fire Fighters, IAFF Local 798.

San Francisco's Public Defender, Jeff Adachi, spearheaded Measure D, which would have taken even more away from San Francisco's public employees and targeted public safety professionals in particular.  Measure D would have required most employees pay at least 7.5% and police and fire 10% of their salaries even after the pension system recovers.  It would also have reduced pension benefits.  Adachi's previous attempt to slash pension failed in 2010.

Governor Releases "Twelve Point Pension Reform Plan"

On October 27, 2011, Governor Edmund G. Brown Jr. released his 12 proposed major reforms for state and local pension systems. The governor stated the proposals “would end system-wide abuses and reduce taxpayer costs by billions of dollars over the long term” and cut in half the cost to tax payers of state employee pensions.

The “Twelve Point Pension Reform Plan” and its explanation are set forth as follows:

1. Equal Sharing of Pension Costs: All Employees and Employers: Will require that all new and current employees transition to a contribution level of at least 50 percent of the annual cost of their pension benefits.

2. “Hybrid” Risk-Sharing Pension Plan: New Employees: The “hybrid” plan will include a reduced defined benefit component and a defined contribution component. The hybrid plan will be combined with Social Security to provide an annual retirement benefit of about 75 percent of an employee’s salary. The 75 percent target is based on 30 years for safety employees and 35 years for non-safety.

3. Increase Retirement Ages: New Employees: For most new employees, retirement ages will be set at the Social Security retirement age, now 67. The retirement age for new safety employees will be less than 67, but commensurate with the ability of those employees to perform their jobs.

4. Require Three-Year Final Compensation to Stop Spiking: New Employees: Eliminates one-year rule to discourage efforts in the last year of employment to increase the compensation used to determine pension benefits.

5. Calculate Benefits Based on Regular, Recurring Pay to Stop Spiking: New Employees: Will require that compensation be defined as the normal rate of base pay, excluding special bonuses, unplanned overtime, payouts for unused vacation or sick leave, and other pay perks.

6. Limit Post-Retirement Employment: All Employees: Will limit all employees who retire from public service to working 960 hours or 120 days per year for a public employer. It also will prohibit all retired employees who serve on public boards and commissions from earning any retirement benefits for that service.

7. Felons Forfeit Pension Benefits: All Employees: Will require that public officials and employees forfeit pension and related benefits if convicted of a felony in carrying out official duties, in seeking an elected office or appointment, or in connection with obtaining salary or pension benefits.

8. Prohibit Retroactive Pension Increases: All Employees: Will eliminate unfunded liability from increased pension benefits.

9. Prohibit Pension Holidays: All Employees and Employers: Will prohibit all employers from suspending employer and/or employee contributions necessary to fund annual pension costs to avoid repeat of past where many public employers stopped making annual pension contributions during wall street boom years.

10. Prohibit Purchases of Service Credit: All Employees: Will avoid the investment risk associated with allowing purchase of service credit for time not actually worked.

11. Increase Pension Board Independence and Expertise: Will add two “independent” persons with financial expertise to the CalPERS Board and require that persons and their family are not eligible for CalPERS pension. Will also replace State Personnel Board representative on the CalPERS board with the Director of the California Department of Finance. Intended to achieve greater independence and greater sophistication.

12. Reduce Retiree Health Care Costs: State Employees: New state employees will be required to work for 15 years to become eligible any retiree health care and required to work for 25 years to become eligible for the maximum state contribution. Will encourage local governments to make similar changes.

These proposals will have to be debated and passed by the California Legislature before Governor Brown can sign them into law.

Assembly Commits to Study Pension Reform in Future Legislative Sessions

The California State Assembly passed Senate Bill 827 to declare its intent to study pension reform in future sessions. The bill provides in its entirety:

"It is the intent of the Legislature to convene a conference committee to craft responsible, comprehensive legislation to reform state and local pension systems in a manner that reflects both the legitimate needs of public employees and the fiscal circumstances of state and local governments."

The current legislative session ends at midnight tonight.

Court of Appeal Limits Exposure of Retirees' Private Information

In Sonoma County Employees’ Retirement Association v. Superior Court (August 26, 2011, A130659) 2011 WL 3795212, the Court of Appeal found Sonoma County’s retirement system did not have to disclose the ages of retirees. The case is the latest in a series of cases where newspapers have used the Public Records Act to identity retirees by name and pension amount. In reaching its decision, the Court focused on language exempting “individual records of members” from disclosure. The retirement system argued this language protected retirees' names, but the Court found the public’s interest in knowing the names and pension amounts of retirees outweighed their privacy interests. However, the court drew the line at disclosure of the retirees' ages, finding retirees' dates of birth and ages at retirement are protected from disclosure under the statute.

Little Known Group Seeks to Ban Collective Bargaining, Slash Pensions in California

A Santa Barbara-based organization calling itself the California Center for Public Policy recently announced it has submitted three proposed California constitutional amendments to the California Attorney General to begin the process for qualifying for the ballot. The first amendment would prohibit public sector collective bargaining in California, the second amendment would increase taxes on retired public servants receiving more than $100,000 in pension benefits and the third amendment would raise the CalPERS retirement age to 65 for most employees and 58 for public safety employees. It would not make any change to the retirement age in systems organized under the County Employees Retirement Law of 1937 (CERL). The little known group is not widely believed to have the resources to successfully qualify these initiatives for the ballot.

Court of Appeals: Individuals' Pension Benefits Public Record

The Third District Court of Appeals ruled today that the California Public Records Act requires county retirement boards to disclose the names and corresponding pension amounts of its members.  The case arose from a newspaper's public record request to a county retirement board organized under the County Employees Retirement Law of 1937.

Government Code Section 31532 provides “Sworn statements and individual records of members shall be confidential and shall not be disclosed to anyone except insofar as may be necessary for the administration of this chapter or upon order of a court of competent jurisdiction, or upon written authorization by the member.” The court held pension amounts are not construed as part of the phrase “individual records of members.” The court construed the “phrase narrowly to mean data filed with SCERS by a member or on a member’s behalf, not broadly to encompass all data held by SCERS that pertains to a member” and rejected arguments that the privacy interests served by non-disclosure outweigh the public’s interest in disclosure. Retirement system members’ address, phone number, and social security numbers remain confidential.