In the past few years, the courts have made it more difficult to establish a vested right to retiree medical benefits. We now have a decision that greatly reduces employee / retiree defenses that a change in benefits is unconstitutional.  The First District Court of Appeal last week upheld the Marin County Employees’ Retirement Association’s (“MCERA”) decision to prospectively limit the forms of pay and benefits included in the definition of “compensation earnable” and “pensionable compensation” – used to determine an employee’s final compensation for the purpose of determining pension benefits, finding that the change did not substantially impair current employees’ vested rights to a “reasonable” and “substantial” pension. Under this decision, the change was, thus, constitutional under state and federal law.

The Marin County Employees’ Retirement Association’s is subject to the County Employees Retirement Law of 1937 (“’37 Act”).  Following passage of the State’s Pension Reform Act of 2013, MCERA adopted a policy changing the definition of “compensation earnable” and “pensionable compensation,” used to determine an employee’s final compensation for the purpose of determining the employee’s retirement benefit.  Through the policy, MCERA specified new items of pay and benefits that would be excluded from the definition of compensation earnable and pensionable compensation.  Shortly after this change, employees and recognized employee organizations brought suit alleging, among other things, that the value and associated costs of these now excluded payments had been factors in determining the wage and benefits packages offered to MCERA members through collective bargaining.  In short, employees and their unions argued that the Pension Reform Act, and resultant change to MCERA’s compensation earnable and pensionable compensation definition, impaired members’ vested contract rights, in violation of state and federal constitution contract clauses.

The Court rejected the employees’ argument. While affirming that public employees have a “vested right” to a pension, the Court explained that the right is not an immutable entitlement to the “most optimal formula of calculating the pension.”  In reaching this conclusion, the Court relied on prior case law, reiterating that pension rights are a “limited” vested right, and that, until retirement, an employee’s entitlement to a pension is subject to change.  The Court explained that a governing body may make reasonable modifications and changes to a pension before the pension becomes payable. Until that time the employee does not have a right to any fixed or definite benefits but only to a “substantial or reasonable pension.” (Note: The Court’s decision pertained only to current employees and only prospectively. The Court did not address the power of either the state or local employers to decrease the pensions of retired employees.)

To determine whether changes to pension rights are reasonable, courts must look to the facts of “each case,” to assess what constitutes a permissible change.  To meet a “reasonableness” test, alterations of employees’ pension rights must bear some material relation to the theory of a pension system and its successful operation.  In addition, changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantage.  As employees in this matter noted, a 1955 Supreme Court decision (Allen v. City of Long Beach (1955)) indicated that comparable new advantages “must” be provided when changes in a pension plan resulted in a disadvantage to employees. Accordingly, the Court in this matter examined the language of the 1955 Allen decision, and subsequent cases, to determine whether “should” or “must” is the preferred expression. The Court largely relied on an 1983 Supreme Court decision, Allen v. v. Board of Administration, 34 Cal.3d 114, in reaching its conclusion that changes in a pension plan which result in a disadvantage to employees “should,” but are not required to be, accompanied by comparable new advantages.  Regarding the facts specific to MCERA, the Court explained that a reduction in what is considered compensation earnable would invariably result in an increase to the employee’s net monthly compensation (i.e. take home pay) because it would result in lower contributions to MCERA, thus employees were not immediately disadvantaged by the changed plan. Ultimately, the Court found that the Pension Reform Act, and MCERA’s change to the compensational earnable and pensionable compensation definition thereunder, was reasonable, and thus did not violate state or federal constitution.