State Supreme Court Agrees to Review Vested Rights Doctrine

GREGG ADAM
Partner
Messing Adam & Jasmine, LLP

The attacks on your pension benefits keep coming. Just as Chuck Reed’s Measure B pension disaster was mercifully put to an end by San Jose voters in the November 8 election, and as the courts began dissecting Carl DeMaio’s parallel efforts in San Diego, a new threat emerged. In August 2016, a three-judge panel of Division Two of California’s First Appellate District Court of Appeal in San Francisco issued a highly controversial decision in Marin Association of Public Employees v. Marin County Employees’ Retirement Association (Case No. A139610). The court ruled that an employer may reduce pension benefits before retirement so long as the pension benefit remains “reasonable.” The court offers no guidelines for what is a reasonable change and what is an unreasonable one.

The Marin Decision

The decision is an undisguised, frontal assault on the so-called “California Rule” (followed by about a dozen other states), which has long protected vested pension rights. Anti-pension advocates are prematurely seizing on this ruling as a game-changer.

The facts of the case are simple. Since the landmark Ventura County Deputy Sheriffs’ Association v. Board of Retirement case in 1997, the Marin County Employees’ Retirement Association (MCERA) has included standby pay, administrative response pay, call-back pay and cash-in-lieu pay as “compensation earnable” under Government Code Section 31461. Both employees and the County employer-paid contributions based upon the inclusion of these premiums.

After the Legislature passed the California Public Employees’ Pension Reform Act of 2013 (PEPRA), however, MCERA determined that it would no longer include those premiums as compensation earnable for existing and new employees.

Multiple Marin County labor unions filed suit. Everyone accepts that pension benefits may be reduced, or even eliminated, for new employees, before they begin work. However, a venerable body of California court decisions going back at least six decades has universally held that pension benefits for existing employees cannot be changed once they start work unless the pension plan specifically allows for such change. Relying on this unbroken line of cases, the Marin unions argued that MCERA could not discontinue the inclusion of the various premiums as compensation earnable for classic employees. A central tenet of vested pension law is that if a change in the pension system results in a disadvantage to employees, it “must be accompanied by comparable new advantages.” The lower court disagreed and ruled in favor of MCERA and respondents on a demurrer. Petitioners appealed.

The Court of Appeal’s three-judge panel upheld the lower court’s ruling. It ignored the narrow arguments made by MCERA and the California Attorney General’s Office (which intervened to defend PEPRA) and broadly declared that the body of law that we have all understood for decades protects your pension is a misunderstanding of historical precedents and the government’s power to change laws. The panel concluded that public employee pensions may be modified before retirement so long as the pension benefit remains “reasonable.” Nothing need be offered in return for a modification. The only limit the panel believes existed was that the pension benefit could not be destroyed prior to an employee’s retirement. If permitted to stand, the ruling could be used to decimate defined benefit pensions.

Overwhelming Response

Your representatives responded overwhelmingly to this attack. We immediately filed a petition asking the California Supreme Court to review and overturn the decision. We were supported by numerous LDF panel law firms, including Silver, Hadden, Silver & Levine; Rains Lucia Stern; Mastagni Holstedt; and LDF’s corporate counsel, Beeson, Tayer & Bodine. In all, 20 amicus curiae (friend of the court) letters were submitted in favor of the Supreme Court taking and overturning the case. None were filed in support of the case.

Among the luminaries supporting review were the labor councils of Alameda County, Contra Costa County and the South Bay; AFSMCE; SEIU; California Professional Firefighters and CalSTRS (the state teachers’ retirement system); as well as hundreds of public safety and PORAC agencies.
These groups focused not only on the ultimate error of the panel’s decision but also on the chaos it would bring to the predictability of pensions if not overturned. That chaos would extend to employees, whose retirement plans could be upended at any time, and also to retirement professionals such as actuaries, who have structured pension contributions and investments based on the certainties that have long flowed from how the vested rights doctrine has been traditionally treated.

Review Granted

On November 22, 2016, all seven justices of the California Supreme Court agreed to review the Marin case. Before it does so, it will await another pension ruling by a different division of the First Appellate District Court of Appeal. That case involves a parallel challenge to PEPRA by employees in Alameda, Contra Costa and Merced counties. At issue in those consolidated cases are premiums like those in the Marin case, as well as terminal pay, which employees receive at the point of separation from employment. Those cases are fully briefed and are likely to be argued by the middle of the year. This means briefing in the Supreme Court on the Marin case may not occur until the second half of 2017. The law is indeed a slow-moving beast.

What the Supreme Court Will Decide

The Supreme Court has not yet submitted the precise issue that it wants the parties to address. One thing that makes the case unusual is that so far no one supports the reasoning of the Court of Appeal. MCERA and the Attorney General argue that the premiums at issue need not be included in “compensation earnable.” But they do so on very narrow grounds that would not upset conventional understandings of vested rights protections.

The California Supreme Court has addressed the question of whether pension rights may be modified on six occasions since 1955. 
Allen v. City of Long Beach (1955) 45 Cal.2d 128 first stated the rule: “To be sustained as reasonable, alterations of employees’ pension rights must bear some material relation to the theory of a pension system and its successful operation, and changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages.”

Applying this rule, the court determined that a city charter amendment “substantially decreases plaintiffs’ pension rights without offering any commensurate advantages,” and bore no “material related to the integrity or successful operation of the pension system established by … the charter.” So the court invalidated the charter amendment as applied to exist employees.

Three years later, in Abbott v. City of Los Angeles (1958) 50 Cal.2d 438, the court reiterated that “changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages.” It further explained that in applying the rule, “[I]t is the advantage or disadvantage to the particular employees … by which modifications to pension plans must be measured.” The court invalidated charter amendments that reduced pension payments to pensioners who had been employed before the amendments.

The court next revisited the issue of modifications to pension benefits in Betts v. Board of Administration of the Public Employees’ Retirement System (1978) 21 Cal.3d 859. A statutory amendment that withdrew pension benefits the former state treasurer had been promised during employment were invalidated because no new comparable advantages offset the detriment he suffered. The Supreme Court reiterated that “[t]he comparative analysis of disadvantages and compensating advantages must focus on the particular employee whose own vested pension rights are involved … offsetting improvement must also ‘relate generally to the benefit that has been diminished.’”

Soon afterward, in Olson v. Cory (1980) 27 Cal.3d 532, the court again invalidated legislative changes that violated vested rights. A new statute limited cost-of-living increases for retired judges whose benefits were based on the salary of current judges but failed to provide any offsetting comparable advantages. The court concluded: “Such modification of pension benefits works to the disadvantage of judicial pensioners by reducing potential pension increases and provides no comparable new benefit. Again, we conclude that defendants have failed to demonstrate justification for impairing these rights or that comparable new advantages were included and that Section 68203 as amended is unconstitutional as to certain judicial pensioners.”

Olson v. Cory is a particularly helpful case when applied to PEPRA because it highlights that a statute may be constitutional to some employees but unconstitutional to others, depending upon what rights existed during the employees’ employment. The unions in the Marin case never disputed the validity of the PEPRA changes as applied to new employees — only their application to existing employees.
In Allen v. Board of Administration (1983) 34 Cal.3d 114, the court reemphasized that “disadvantage to employees must be accompanied by comparable new advantages.”

Notably, while the court ruled against the pensioners in that case, it did not disturb its “offsetting advantage” rule. The petitioners lost because they sought increases in benefits that had not existed during their employment.

Finally, in Legislature v. Eu (1991) 54 Cal.3d 492, the Supreme Court ruled that a statewide measure that impaired state legislators’ pensions violated the contracts clause. Differing starkly from the opinion in the Marin case, the court emphasized the “strict limitation[s] on the conditions which may modify the pension system in effect during employment.” The court rejected an argument that redirecting legislators’ pension funds to the federal Social Security system operated as a “comparable new advantage” because legislators already had the right to join Social Security,
and the anticipated federal benefits were less than those provided by the legislators’ current pension system.

It is not only these six decisions that the Supreme Court will look to in determining how to address Marin. Our intermediate courts have issued at least 13 decisions that are consistent with them. Perhaps the best example was just last year, when a different panel of the First District Court of Appeal (the same district that decided the Marin case) in Protect Our Benefits v. City and County of San Francisco held that a charter amendment that eliminated a supplemental cost-of-living adjustment for retirees was unconstitutional. That panel restated the rule that if a change in the pension system results in a disadvantage to employees, it “must be accompanied by comparable new advantages.”

Suffice it to say that the panel’s decision in Marin is totally at odds with existing California law. However, that is not the end of the story by any means. The Supreme Court could have just as easily ordered the Marin case depublished, which would have prevented the case from being relied on by other courts. Public employee pensions, unfunded liabilities, and the costs to public entities and employees of funding them raise significant issues of public policy. As our state grapples with these issues, it will be in that context that the Supreme Court weighs up whether or not to allow greater flexibility to employers or legislators to modify pension benefits in the future.

About the Author

Gregg Adam is a partner at Messing Adam & Jasmine LLP, based in San Francisco. He has been an LDF panel attorney for 17 years. Gregg is counsel for the Marin County Firefighters and Management Employees’ union in MAPE v. MCERA. Case information about MAPE v. MCERA is available at majlabor.com/pepra.