Chicago Can't Impair Public Employee Pensions

On March 24, 2016, the Illinois Supreme Court declared Chicago Mayor Rahm Emanuel’s pension reductions unconstitutional under state law. (Jonesv. Municipal Employees' Annuity and Ben. Fund of Chicago 2016 IL 119618.)

The sole question before the court was whether a pension reform act violated the pension protection clause of the Illinois state Constitution. Similar to the U.S. Contracts Clause, the Illinois’ Pension Protection Clause prohibits the State or local governments from diminishing or impairing pension benefits.  

The Act reduced the value of annual annuity increases, eliminated them entirely for certain years, postponed the time at which they began, and completely eliminated the compounding component. The Act applied regardless of whether the employee was in active service on or after the effective date of the Act. The court found the modifications “unquestionably” diminished the value of the retirement annuities promised to the employees when they joined the pension system.

Chicago's political leaders, like many throughout the country, responded to the great recession and accompanying revenue reductions by under-funding the pension system.  City leaders then sought to reduce their funding obligations by reducing promised pensions. The City argued the pension cuts were necessary to avoid bankruptcy within 15 years, and therefore did not violate the Illinois Constitution.

The Illinois Supreme Court rejected the argument, stating that it “would lead to an unjust result” because employees have a “legally enforceable right to receive the benefits they have been promised” – not merely the remaining funding after politicians satisfied their more glamorous spending priorities.  

Further, under pension law any detriment to pensioners must be accompanied by an offsetting advantage. The court rejected the City's argument that "by offering a purported 'offsetting benefit' of ... sound funding and solvency in the funds, the legislation merely offers participants in those funds what already is guaranteed to them — payment of the pension benefits in place when they joined the fund." This justification for impairment of contract is frequently raised. The court flatly rejected the argument, stating "thus, the 'guaranty' that the benefits due will be paid is merely an offer to do something already constitutionally mandated by the pension protection clause." 

California courts have also held public employment gives rise to certain vested rights, including pension and retiree medical benefits, under both the United States and California Constitutions.  Our office has successfully vindicated the vested pension and retiree medical rights of public employees in cities as small as Pacific Grove and large as Los Angeles.  Nationally, this ruling sends an important message to public entities that they cannot resolve their budgetary woes on the backs of their employees by breaking promises.

California Attorney General Releases Title and Summary for Pension Busting Initiative

On August 11, 2015, the Office of the Attorney General released its title and summary for former San Jose Mayor Chuck Reed's pension busting initiative. The highly divisive initiative would strip pensions from public employees and allow voters to modify compensation packages at will. Fortunately, the Office of the Attorney General's title and summary highlight the problems with this initiative.

 

All ballot initiatives must be submitted to the Office of the Attorney General prior to being placed on the ballot. The Office of the Attorney General creates a title and summary of the initiative to appear on the actual ballot. 

 

The title the Office of the Attorney General gave Reed's initiative is "Public Employees. Pension and Retiree Healthcare Benefits. Initiative and Constitutional Amendment." The summary aptly states the initiative, "[e]liminates constitutional protections for vested pension and retiree healthcare benefits for current public employees." This language demonstrates how drastic this reform is and how it will prejudice California's public employees. The summary also notes the long term effects of the initiative are unknown and "depend heavily on future decisions made by voters, governmental employers, and the courts."

 

Mastagni Holstedt, APC has used the Contracts Clause in California’s Constitution to protect vested employee benefits in several high profile court battles: Stockton (fiscal emergency declaration does not authorize City to renegotiate a closed labor contract), Los Angeles (fiscal emergency declaration does not permit freezing retiree medical benefits or imposing furloughs), Pacific Grove (Ballot measure capping PERS pension contributions unconstitutional).  Similar rulings were obtained by the police and fire unions in San Jose invalidating in substantial measure Reed’s San Jose pension impairments.

 

This pension "reform" effort is led by Democrat Chuck Reed and his lawyers. As we blogged previously, the initiative amends the California Constitution to allow voters to impair employment contracts. While Reed claims his measure will not impair current employees' pensions, even Daniel Borenstein of the Contra Costa Times has acknowledged "the initiative would amend the state Constitution to give voters the right through an initiative or referendum to reduce the future pension accrual rate for current employees…Reed and DeMaio should be honest about it, or abandon the measure."

 

Additionally, the Constitutional amendment would abolish pensions for employees hired after January 1, 2019 and replace them with a "defined-contribution" system unless changes to benefits are approved in an election.  In a defined-contribution system, employees have to pay in a fixed amount with no guarantee of what their retirement income would be.  As a result, this approach shifts the risk and could prevent thousands of public employees from retiring.

 

The proposal is not limited to retirement benefits.  It provides, "Voters have the right to use the power of initiative or referendum... to determine the amount of and manner in which compensation and retirement benefits are provided to employees of a government employer."  As a result, the Constitutional Amendment would likely be used to pursue local voter initiatives to bypass collective bargaining to reduce public safety compensation or due process rights.

 

The proposal also seriously jeopardizes death and disability benefits for public safety employees. The new proposal states it shall not be “interpreted to modify or limit any disability benefits provided for government employees or death benefits for families.” But death and disability benefits are often an integral part of a pension plan. As noted by the Legislative Analyst's Office, death and disability benefits are usually prefunded through a pension plan's normal cost. If voters can modify, or even eliminate, pensions for public employees, this necessarily means the funding for death and disability benefits will be cut.  The measure does not provide any means of securing those benefits.

 

The proposal also seeks to insulate future measures from legal challenge by eliminating the jurisdiction of the Public Employment Relations Board to hear unfair practice charges regarding future measures which impair vested rights or collective bargaining agreements. 

 

Now that the initiative has a summary, the proponents must furnish the required number of signatures in order to make the November 2016 ballot. You can help stop this initiative by educating your family, friends, and community members about the drastic and detrimental effects of this initiative and encourage them not to sign any petition supporting the initiative. You can help stop future attempts to impair retirement benefits by opposing all candidates who endorse this imitative.

Mastagni Holstedt, APC Protects Retirement Rights in the Court of Appeal

Mastagni Holstedt, APC filed an amicus brief with the California Second Appellate District, Division One. At issue are adjustable retirement health subsidies under the City of Los Angeles’ retirement system. In 2006, the City of Los Angeles passed an ordinance which allowed the Board of the Los Angeles Fire and Police Pension System to provide an adjustable retirement health subsidy. This adjustable rate would allow the City to increase contributions as costs increased over time.

However, in 2011, the City of Los Angeles passed an ordinance freezing future increases to the subsidy. Los Angeles employee organizations brought suit alleging this violated their vested right to a variable subsidy. The trial court agreed and ordered the City to increase the subsidy pursuant to the 2006 ordinance.

The City appealed the decision arguing it had plenary authority to modify the pension subsidy as it was a type of “employee compensation.” In its brief, Mastagni Holstedt, APC argues a pension subsidy is not salary, but is instead a vested benefit. The California courts have already held on numerous occasions a pension benefit, once vested, cannot be revoked. The California Constitution’s Contracts Clause prohibits such an action. Thus, the City cannot arbitrarily revoke a benefit by reforming it as “employee compensation.”

Mastagni Holstedt, APC thanks the employee organizations who joined the firm in fighting back against the destruction of employee benefits.  Mastagni Holstedt attorneys David E. Mastagni, Isaac S. Stevens, and Ian B. Sangster represent the amici in the matter.

Illinois Supreme Court Blocks Attack On State-Funded Pensions

The Illinois Supreme Court blocked an attack on state employees and their pensions when it upheld a lower court ruling on May 8, 2015. In Pension Reform Litigation v. Pat Quinn, the Court struck down a 2013 law aimed at slashing state-funded public employee pensions. The Court ruled the law violated the Illinois State Constitution’s contracts clause.

In 1970, Illinois ratified an amendment to its constitution protecting state-funded pensions. From 1970 until 2013, the funding for the state-funded pensions stagnated, having only 41% of the funding necessary to meet the fund’s liabilities. Conversely, the Illinois Municipal Retirement Fund is funded at 96%. The IMRF is not state funded.

To meet growing concerns with its state-funded pensions and other budgetary issues, the Illinois state legislature passed Public Act 98-599. The heart of PA 98-599 aimed to cut state-funded pensions. The bill sought to delay eligibility for members. It also capped the maximum salary used to calculate benefits. PA 98-599 then tried to effectively reduce base pension amounts for some members. Senator Kwame Raoul, one of PA 98-599’s chief sponsors, characterized the bill as sacrificing state employee pensions to protect state finances.

Former Governor Pat Quinn signed PA 98-599 in 2013. Five separate lawsuits challenging the law’s validity were immediately filed. The lawsuits, all decided in this case, claimed that PA 98-599 violated Illinois’s contracts clause. Just like the California's contracts clause, the Illinois Constitution prohibits the impairment of state pensions. PA 98-599’s proponents characterized the bill as an exercise of the legislature’s emergency police powers. The Illinois Supreme Court disagreed. The Court ruled that the PA 98-599 violates the Illinois Constitution.

The Illinois Supreme Court warned against a slippery slope of unnecessarily using police powers. Writing for the Court, Justice Lloyd Karmeier instructed that emergency police powers must be reserved for true emergencies. If not, “no rights or property would be safe from the State. Today it is nullification of the right to retirement benefits. Tomorrow it could be renunciation of the duty to repay State obligations. Eventually, investment capital could be seized.” Justice Karmeier further explained that “crisis is not an excuse to abandon the rule of law. It is a summons to defend it.” The Court pointed to the possibility of raising taxes to meet the fund’s needs.

The Illinois pension victory represents just one battle in that state’s fight. Though the ruling came from the Midwest, the fallout hits close to home. Just like Chuck Reed here in California, Governor Bruce Rauner wants to amend the Illinois constitution so that he can gut state-funded pensions.

Similar attacks on retiree benefits have failed in California on similar grounds.  In Stockton, the superior court found a fiscal emergency declaration does not authorize City to renegotiate a closed labor contract.  In Los Angeles, a court determined a fiscal emergency declaration does not permit freezing retiree medical benefits or imposing furloughs, and in Pacific Grove the court found a local ballot measure capping PERS pension contributions violated California's contracts clause.  Mastagni Holstedt attorneys David E. Mastagni and Isaac S. Stevens represented the employee groups in Stockton and Los Angeles.  Mastagni Holstedt attorney Jeffrey R. A. Edwards represented the employee groups in Pacific Grove.

California Court of Appeal Strikes Blow to Employee Pension Rights

On January 22, 2015 the California Court of Appeal changed how the Legislature can change pension benefits under a contract.  The Legislature may change current contractual pension benefit formulas for new employees. But, the Legislature may not alter pension contribution requirements under a current contract.

In DeputySheriff’s Association of San Diego County v. County of San Diego the County and Deputy Sherriff's Association had a memorandum of understanding. The contract contained provisions related to pension benefits. The contract's pension formula for members was 3 percent at 55. The contract also required the employer to pay a percentage of the employee’s pension contribution.
 

The California Public Employees’ Pension Reform Act of 2013 went into effect on January 1, 2013. The Act required that new safety members receive less than 3 percent at 55. PEPRA also limits employer contributions. Employers may not cover an employee's required contributions. The DSA argued PEPRA unconstitutionally impaired the contract terms. If a contract is in place then the Legislature cannot alter it until it expires. 
 

The Court of Appeal did not agree with the DSA.  The Court said a benefit vests when the employee begins working under the terms of the contract. Future employees cannot claim a vested benefit until they begin working. Thus, the Legislature could alter the pension benefits for new members.
 

The Court of Appeal also found an impairment of the contributions under the contract. PEPRA's contributions provisions cannot conflict with current contract terms. PEPRA as applied here would change the terms of the agreement.  Therefore, PEPRA would not apply until the agreement expired on June 26, 2014.

Supreme Court Addresses Private Sector Vested Rights

On Monday the Supreme Court struck a blow to vested health-care benefit rights under collective-bargaining agreements in the private sector. Previously, courts assumed health-care benefits in a collective-bargaining agreement vested for life absent language to the contrary. This case changes that presumption. Now, health care benefits will not vest for life unless clearly stated in the collective-bargaining agreement. 

The issue in M&G Polymers USA, LLC v. Tackett is how health-care benefits vest under a collective-bargaining agreement. The Court of Appeals for the Sixth Circuit said health-care benefits are vested unless the collective-bargaining agreement say they are not. This presumption protects the vested benefit right.

The Supreme Court reversed that presumption. The Court said the presumption had no basis in contract law. Thus, when a contract is silent as to the duration of benefits, a court may not infer that the parties intended for those benefits to vest for life. The Court did not reinterpret the contract.  Instead, it asked the Sixth Circuit to review the case under “ordinary principals of contract law.”

This opinion does not reflect California law in the public sector. Article 1, Section 9 of the California Constitution prohibits the legislature from passing a law which impairs the obligation of contracts. The California Supreme Court has clearly stated that once a public employee accepts employment and works for an employer, the employee’s rights are protected by the Contract Clause. (White v. Davis (2003) 30 Cal.4th 528, 566.) Among these protected rights are vested pension rights. (Betts v. Board of Administration of Public Employees’ Retirement System, (1978) 21 Cal.3d 859, 863.)

Additionally, this ruling does not change the presumption in California that a public employee’s right to health benefits may be based on the implied terms of a collective bargaining agreement. (Retired Employees Association of Orange County, Inc. v. County of Orange (2011) 52 Cal.4th 1171.) However, an implied right to health-care benefits will only be inferred if there is a clear basis in the contract or convincing extrinsic evidence supporting the vested right.

Court: Key Parts of San Jose Measure B Unconsitutional

On December 20, 2013, the Santa Clara County Superior Court overturned the heart of Measure B, San Jose's attack on employees' pensions.  In doing so, the court followed the Monterey and Los Angeles superior court which have overturned similar attacks on employees' vested rights.

The court overturned part of Measure B that shifted financial responsibility for unfunded liabilities from the City to employees.  That section would have dramatically increased employees' contributions into the system.  The court found that employees had a vested right to have the City pay that portion.  As a result, Measure B unconstitutionally impaired their vested rights.

The court also overturned a provision that allowed the City council to suspend retirement Cost-Of-Living-Adjustments (COLAs) by "declaring a fiscal emergency."  COLAs are not always vested rights, but the court found that retirees in this system had a vested right to COLAs.  The court overturned this section, noting it is not enough for a city council to declare an emergency.  Instead, there has to really be an emergency.  Further, an impairment to a vested right on emergency grounds has to be temporary.  Since this section did not require a real emergency and impaired vested rights in a permanent way, the court ruled it was unconstitutional.

The court upheld other portions of Measure B related to disability retirement, supplemental payments to retirees, retiree medical, and wage cuts.  The court also found "that the Measure B sections at issue in this case can proceed as to new employees."

Trust Counsel: California Pensions More Secure Than Detroit's

After a Michigan bankruptcy judge opened the door to cutting public employees' pensions as part of the City of Detroit's bankruptcy, some observers suggested the ruling opens the door to similar tactics in California. But as Harvey Leiderman, the well-regarded trust counsel to CalPERS and other retirement systems, recently explained, California's pensions are very different from - and more secure than - Detroit's.

Leiderman explained Michigan's pension system hinges on a contractual relationship between two groups: retirees and employers, making it more vulnerable to impairment in bankruptcy.  That's because bankruptcy courts (unlike employers themselves) have special powers to impair contracts.  California's system, however, has three groups: retirees, employers, and pension trusts, such as CalPERS.

Leiderman explains that California's system includes legal duties between employers and pensions trusts on the one hand, and pension trusts and retirees on the other.  These duties are the product of state laws, not contracts.  He used this chart to illustrate the relationship:

Thus, even without contracts, California public employers have a duty to pay CalPERS and CalPERS has a duty to pay retirees.  Read the full article here.

Mastagni Firm Wins Landmark Decision on Vested Rights in Los Angeles

The Mastagni Firm won a landmark decision from the Los Angeles Superior Court invalidating the City of Los Angeles’ attempt to cap employees’ retiree medical benefits.   In an order issued last week, the court held that the cap impaired Deputy City Attorneys’ vested rights to a retiree medical subsidy. The court granted LACAA’s petition for a writ directing the City to compute and provide the health insurance subsidy without regard to the freeze ordinance. The impact of this decision has been estimated at approximately $71,000,000.  The ruling follows the Mastagni Firm’s similar victories in Pacific Grove and Stockton defending employees’ constitutionally protected vested rights against contract impairments.

In 1973, the City enacted a retiree medical premium subsidy to provide its retirees no-cost or low-cost health insurance.  Over the years, the City amended the program to ensure the subsidy kept pace with increases in retiree medical costs. In 2011, the City froze the retiree medical subsidy at $1,190 per month, claiming employees did not have a vested right to increases and that the savings were needed to address the City’s supposed “fiscal emergency.”

The Los Angeles City Attorneys’ Association (“LACAA”) sought a writ of mandate to prevent the City from enforcing the freeze ordinance and requiring the City to set the subsidy without reference to the freeze. The City denied the existence of any vested right, asserting that it had the legislative authority to make whatever changes to retirement benefits it wanted.   

The court ruled the freeze unconstitutionally impaired a vested right to receive the subsidy. The court found that the City’s Administrative Code “evidence[d] a clear legislative intent to create private contractual rights in the provision of a medical subsidy that covers all or part of the cost of an employee’s medical plan.” The court further found the Administrative Code “create[d] a vested right in a medical subsidy that covers part or all of the costs of a medical plan to eligible employees.”  The court rejected the City’s defense, ruling the “reservation of rights” did not defeat the finding.

To survive constitutional scrutiny, any changes in pension benefits must be materially related to the theory of a pension system, and any change that results in disadvantages to the affected employees must be accompanied by comparable new advantages.

The court found that the freeze resulted in a disadvantage to LACAA’s members because “a fixed benefit system is disadvantageous when compared to fluctuating or fluid benefit system.”  The court then found the freeze ordinance “merely establishes a disadvantage – a frozen subsidy amount of $1,190 – and fails to establish any comparable new advantages.” Rejecting the City’s claim that the disadvantages resulting from the freeze ordinance were offset by the subsidy the City created for employees whose unions agreed to increase their pension contributions, the court noted that “getting the same benefit as before, at the expense of contributing an extra 4%, hardly constitutes a comparable new advantage.”

The court further found that the freeze ordinance was not materially related to the theory of the pension system.  According to the court, “because the apparent goal of the freeze ordinance is to resolve the City’s pending fiscal emergency, the ordinance is not materially related to the theory of a pension/medical subsidy system and its operation.” The court was also troubled that the freeze was not a temporary measure, stating “it is a permanent and progressively more onerous impairment of a vested right to a medical premium subsidy.”

The court affirmed that retirement benefits are constitutionally protected, and cannot be impaired to address fiscal woes.  In these difficult economic times, employee organizations must be vigilant in protecting the benefits their members earned through years of public service. We strongly urge every employee organization to promptly consult qualified legal counsel to determine the legality of any attempt to cut employees’ retirement benefits.

The Los Angeles City Attorneys' Association is the exclusive employee organization representing over 400 attorneys in the City of Los Angeles’ Office of the City Attorney.  Mastagni attorneys David E. Mastagni and Isaac S. Stevens represented LACAA in this litigation.