Yesterday, the California Supreme Court denied the County of Orange’s petition to review the decision in County of Orange v. Association of Orange County Deputy Sheriffs (2011) 192 Cal.App.4th 21.  This means the Court of Appeal’s decision stands holding that the County’s grant of a retroactive enhanced retirement formula for employees “all years of service” is not an unconstitutional gift of extra compensation or a violation of the municipal debt limitation.

Retirement2.pngThe County maintains a retirement pension system pursuant to the County Employees Retirement Law of 1937 (’37 Act).  For many years prior to 2001, the County’s peace officers held a retirement formula of 2% at 50.  On December 4, 2001, the County’s Board of Supervisors approved a tentative MOU which provided an enhanced retirement formula of 3% at 50, which would apply to “all years of service,” including those years served by the bargaining unit employees before the date of the Board’s resolution and before the County and the union’s MOU.  The Board approved and renewed the enhanced formula in subsequent MOUs in 2003, 2005 and 2007.

In 2008, after an actuarial analysis concluded that the past service portion of the increased retirement benefit totaled $187 million, the County passed a resolution stating that the enhanced formula’s application to service performed before the County approved of the increased benefit formula was unconstitutional.  The County then filed a lawsuit in superior court alleging that the retroactive benefit formula violated the California Constitution’s municipal debt limitation in Article XVI, Section 18, and the prohibition of payment of extra compensation to public employees in Article XI, Section 10, and sought to enjoin the County Retirement Board from paying out any benefit increases for service rendered before June 28, 2002.  The case eventually found its way to the California Court of Appeal.

Article XVI, Section 18 of the California Constitution generally provides that a city or county may not incur an indebtedness against its general funds beyond the year’s income without first obtaining the consent of two-thirds of the electorate.  Article XI, Section 10 provides that a local government body may not grant extra compensation or allowance to a public officer, employee, or contractor after service has been rendered or a contract has been entered into and performed in whole or in part.

The Court of Appeal held that the unfunded actuarial accrued liability(UAAL) did not represent a present debt that was immediately payable by the County.  As such, it did not unconstitutionally violate the municipal debt limitation.  The Court also held that the increased benefit formula, as applied to past service, did not offend the California Constitution because the ’37 Act specifically authorizes past service pension benefit increases where a Board of Supervisors, by resolution, makes a benefit formula calculation applicable to service credits earned on and after the date specified in the resolution, which may be earlier than the date the resolution is passed.

The Supreme Court’s decision was disappointing for many local agencies that seek to contain pension costs.  Agencies should carefully consider any agreement to increase or enhance pension benefits for their employees and should perform actuarial studies of any enhancement before agreeing to any enhancement.