In a case handled by LCW attorneys Steve Berliner and Stefanie Vaudreuil, a California Court of Appeal affirmed a judgment by the Los Angeles County Superior Court that the City of South Pasadena did not impair constitutionally-protected vested rights when it modified City contributions to retiree medical insurance for existing employees once the memoranda of understanding between the City and its labor associations expired.

Since 1972, the City provided medical insurance for active and retired employees pursuant to the Public Employees’ Medical and Hospital Care Act (PEMHCA), also known as “CalPERS Medical.”   Prior to 2000, the MOUs for City employees were silent as to City contributions to retiree medical insurance. From 2000 to 2008, MOUs for two of the City’s labor associations stated that the City shall “continue to pay” 100 percent of the medical premium for retirees. All three of the City’s labor associations entered into MOUs effective July 1, 2008 to June 30, 2011 which stated that for employees hired prior to adoption of the MOUs, the “City shall pay 100% of the premium for all retired employees.”  Employees hired after the MOU adoption would receive the same benefit after seven years of continuous City service.  When the associations and the City failed to agree on new MOUs in 2011, the City passed resolutions wherein the City would pay 100 percent of the medical insurance premium for employees who became retired annuitants prior to July 1, 2012.  All employees who retired on or after July 1, 2012 would receive a City retiree medical contribution in compliance with Government Code section 22892, that is, what the City contributed for active employees it would contribute for retired employees.

The associations alleged that fully paid retiree health insurance was a vested benefit protected by the Contracts Clause of the United States and California Constitutions.  The City did not dispute that the MOUs are enforceable contracts during the term of those MOUs. However, the City argued that once the MOUs expired, so did any expectation of retiree medical benefits for employees who had not retired during the term of the MOUs.   In an unpublished opinion, the Court of Appeal agreed, affirming a superior court judgment in favor of the City.

“[C]ontractual obligations will cease, in the ordinary course, upon termination of the bargaining agreement.” (Litton Financial Printing Div. v. NLRB (1991) 501 U.S. 190, 207; International Brotherhood of Electrical Workers, Local 1245 v. City of Redding (2012) 210 Cal.App.4th 1114, 1119.)  When a contract is silent as to the duration of retiree benefits, a court may not infer that the parties intended those benefits to vest for life. (M&G Polymers USA, LLC v. Tackett (2015) 190 L.Ed.2d 809, 820.) An employer’s agreement to vest benefits in perpetuity cannot be presumed: there must be clear and express language in the contract, or convincing extrinsic evidence of an implied term, that benefits will continue after the agreement’s expiration.  (Retired Employees Association of Orange County v. County of Orange (2011) 52 Cal.4th 1171, 1191.)

The Court held that the MOUs did not contain clear and express language that the City’s level of contribution to retiree medical would remain the same after MOUs expired for employees who had not retired during the term of the MOU.  The Court further found a lack of convincing extrinsic evidence that the City’s contribution level was impliedly vested.  The fact that the City had provided 100% fully paid retiree health for many years did not alone create a vested benefit.  Further, no City administrator was shown to have promised employees fully paid retiree benefits forever. No job flyers, postings or handbooks were presented in evidence guaranteeing the benefits in perpetuity. In fact, the evidence showed that the parties treated the City’s contribution to be a negotiable subject with each MOU.  Finally, the Court held that public employee benefits may be modified or reduced under statutory authority. As a participant in PEMHCA, the City could fix the amount of its contribution to health care premiums by resolution, so long as it met the minimum set by statute.

The Court’s decision was a victory for the City and a reminder to all public agencies to take care in the drafting of contract language, employee handbooks, job flyers and the like to prevent an unintentional creation of vested benefits. Employers should always seek legal counsel before modifying retiree benefits whether by agreement with a labor organization, or by unilateral action.

South Pasadena Police Officers Assn., et. al. v. City of South Pasadena (2015) 2015 WL 1094691 [unpublished].

This is an unpublished decision of the Court of Appeal and is therefore not binding precedent on any court.  A request for publication was denied by the Court of Appeal.