This post was authored by Frances Rogers and Brett A. Overby

A California Court of Appeal recently issued a decision with implications that can affect all public employers in California and in contrast to a decision by another Court of Appeal just over a year ago.  The decision issued in Alameda County Deputy Sheriff’s Assn. v. Alameda County Employees’ Retirement Assn. on January 8, 2018 addressed the issue of whether pension systems governed by the County Employees Retirement Law of 1937 (CERL) can apply changes to compensation earnable under the Public Employee Pension Reform Act of 2013 (PEPRA) for employees hired before PEPRA’s January 1, 2013 effective date.  In addition, the Court addressed the Constitutional protections afforded, and the limits of, “vested rights” to immutable pension benefits.  CERL and CalPERS employers take notice.

Public Employee Pension Reform Act of 2013

Governor Jerry Brown signed PEPRA (AB 197) into law to address the significant, statewide underfunding of public pension systems. PEPRA, among other things, amended the pension systems governed by CERL.  Most significantly, PEPRA added express exclusions to CERL’s long-standing definition of compensation earnable, codified at Government Code section 31461, for those hired prior to PEPRA’s effective date (“Legacy Members”).

In response, Alameda County Employees’ Retirement Association (ACERA), Contra Costa Employees’ Retirement Association (CCCERA), and Merced County Employees’ Retirement Association (MCERA) (collectively, “Boards”) excluded certain previously included pay items from compensation earnable for Legacy Members in compliance with PEPRA.

Trial Court Decision in Alameda

Subsequently, labor organizations representing employees of CERL systems in Alameda, Contra Costa, and Merced Counties each filed writs of mandate challenging the constitutionality of the Boards’ exclusion of previously included pay items from compensation earnable. The petitioners alleged that the Legacy Members had a “vested right” to pension benefits under pre-PEPRA law and the Board violated the state and federal contract clauses in the respective Constitutions by altering their vested rights.  The three lawsuits were consolidated into one action.  In separate judgments for each of the three Boards, the trial court denied the petitioners’ request to declare the new section 31461 an unconstitutional impairment of the Legacy Members’ vested rights except to the extent the revised statute excluded the value of certain on-call payments from the Legacy Members’ compensation earnable.  In addition, the trial court made findings on the inclusion of certain compensation items in the compensation earnable of Legacy Members.  Numerous parties on both sides filed Notices of Appeal.

First District Court of Appeal Review

The First District Court of Appeal granted review in one consolidated action. The Court addressed (1) whether retirement boards have discretion to include pay items in compensation earnable not listed in CERL’s statutory categories; (2) whether the PEPRA amendment to Government Code section 31461 modified CERL or merely clarified existing law; (3) whether the Boards are bound by a Settlement Agreement to include terminal pay in compensation earnable for Legacy Members; and (4) whether PEPRA unconstitutionally impaired Legacy Members vested pension rights.

A CERL Retirement Board’s Discretion on Compensation Earnable

First, the Court held that retirement boards do not possess discretion to include additional pay items in compensation earnable beyond those includable under the CERL. An item of compensation is not includable in a member’s pensionable compensation if it fails to fall within one of CERL’s statutory compensation categories.

Interpretation of PERPA’s Statutory Changes

Second, the Court made several determinations regarding the interpretation of the express exclusions in PEPRA’s amendment to section 31461 and addressed whether those exclusions modified CERL or merely clarified existing law. The Court found that PEPRA did not change existing law regarding in-service leave cash-outs and that all leave cashed out during the final compensation period must be included in compensation earnable, regardless of when the underlying leave accrued.  In addition, the Court held that PEPRA’s express exclusion of terminal pay from compensation earnable was not a change in existing CERL law because CERL has always required that final compensation be payable during the final compensation period to be included in compensation earnable.  Furthermore, the Court found that PEPRA’s express exclusion of on-call and standby pay from compensation earnable was a change in existing law because both were includable in pensionable compensation before PEPRA.  Finally, the Court held that PEPRA’s express exclusion from compensation earnable of “any compensation determined by the board to have been paid to enhance a member’s retirement benefit” is a change to prior CERL law because the provision potentially excludes numerous types of pay.  Ultimately, the Court determined that PEPRA made some substantive changes to CERL with respect to on-call and standby pay and pension enhancements.

Revisiting the Impact of the Ventura Settlements

Third, the Court of Appeals addressed whether to require the Boards to continue including terminal pay in compensation earnable for Legacy Members pursuant to a Settlement Agreement executed after the 1997 decision in Ventura County Deputy Sheriffs’ Assn. v. Board of Retirement.  The Court of Appeals found that the Boards made precise and explicit promises to these Legacy Members regarding what their CERL pension included and the Legacy Members organized their work lives in reliance on those promises.  Accordingly, the Court of Appeals held that the Boards are bound by the Post-Ventura Settlement Agreements and all Legacy Members are 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.

Vested Right to Immutable Pension Benefits

Finally, having determined that PEPRA modified CERL with respect to on-call and standby pay and pension enhancements, the Court addressed whether these modifications unconstitutionally impaired the vested pension rights of Legacy Members. In doing so, the Court analyzed the First District Court of Appeals decision in Marin Assn. of Public Employees v. Marin County Employees’ Retirement Assn. issued in 2016 and which is now pending before the state Supreme Court.  Specifically, the Marin decision held that public pension system members are not entitled to an immutable, unchanging pension benefit for the entirety of employment, but are entitled only to a “reasonable” pension.  The Marin court further held that detrimental pension modifications need not always be accompanied by comparable new advantages.  The Marin court focused heavily on the “dire financial predictions necessitating urgent and fundamental changes to improve the solvency of various pension systems” in concluding that PEPRA’s modifications to the CERL definition of compensation earnable for Legacy Members was “reasonable” and therefore, did not impair Constitutionally protected vested rights.

In analyzing various state Supreme Court decisions, the Alameda Court declined to follow Marin, concluding that the Court could not engage in the individualized balancing test mandated by the Supreme Court’s vested rights jurisprudence using the Marin decision.  Ultimately, the Alameda Court found that applying detrimental changes to the pension benefits of Legacy Members is only justified by compelling evidence that the required changes manifest a material relation to the successful operation of the pension system.  The Court determined that this analysis must be done on an individualized basis.  Therefore, the Court remanded the lawsuits back to the trial court to undertake that individualized analysis for each of the three retirement systems.

The Future of Alameda, Marin & Vested Rights Jurisprudence

The state Supreme Court granted review of the Marin case on November 22, 2016, but put the case in abeyance until the First District Court of Appeals reached a decision in the Alameda County case, presumably in order to consolidate both cases should the Supreme Court grant review of the Alameda decision.  However, given the remand to the trial court, it is unclear if, procedurally, the state Supreme Court could potentially review the Alameda decision, in conjunction with its review of the Marin decision, in the near future.  Suffice it to say, we now have two divergent decisions on the fundamental notion of a vested right to immutable pension benefits in the aftermath of PEPRA.

In the meantime, all eyes are currently turned toward the pending state Supreme Court case in Cal Fire Local 2881 v. California Public Employees’ Retirement System where the Court will again consider the so-called “California Rule” which is, generally, the notion that a public employee is vested in the pension benefit promised at the start of employment such that those benefits cannot be modified even for prospective service. That case concerns PEPRA’s termination of the ability of CalPERS members to purchase unqualified service credit (i.e., “airtime”), but the decision may very well have implications for all pension benefits in general, including those at stake in Marin and Alameda

Accordingly, all public employers should be aware of the ever-changing analysis on this issue.