The California Supreme Court issued a long-awaited decision in Cal Fire Local 2881 v. CalPERS, a case addressing whether the Legislature’s elimination of “air time” as an optional benefit for members of CalPERS unconstitutionally impaired a vested contractual right. Holding that the air time benefit was not entitled to constitutional protection, the Court took a pass on reviewing a much bigger question: Whether the so-called “California Rule” for modifying pension benefits should remain intact.
In 2003, the California Legislature enacted Government Code section 20909, providing eligible CalPERS members the option to purchase up to five years of non-qualifying service credit. This optional benefit is commonly referred to as “air time.” CalPERS members choosing to exercise this option did so by paying an amount arrived at by actuarial estimates to cover the member and employer’s liability for the additional service credit. The legislative intent was that such a purchase would not impose any cost on the employer, though as time would tell, employers were burdened with additional costs when the amount paid by the member for the purchase was based on faulty actuarial estimates.
Within a decade, the Legislature reversed course, eliminating a member’s option for the air time benefit as part of the California Public Employees’ Pension Reform Act of 2013 (PEPRA). However, the change only applied prospectively, and any member who exercised their option to purchase air time while it was available retained the additional service credit.
In response to PEPRA’s elimination of the air time benefit, state firefighters brought suit through their union, asserting that the opportunity to purchase air time was a vested right protected by the contract clause of the California Constitution and could not be eliminated during their employment. The lawsuit did not challenge the validity of eliminating the option to purchase air time for persons who were not employed by the state at the time of PEPRA’s enactment.
Ordinarily, the protection of the contract clause to statutory terms and conditions of public employment only arises where the statute or ordinance establishing the benefit and the circumstances of its enactment clearly evince a legislative intent to create contractual rights. However, courts of this state historically extended the protection of the contract clause to public employee pension benefits even in the absence of a clear manifestation of legislative intent. Moreover, case law evinces a vested protection not only for pension benefits already earned by the public employee, but also the employee’s expectation that the same pension benefits can continue to be earned for the remainder of employment. This latter part became known as the “California Rule,” which holds that public employee pension benefits vest on the first day of service and cannot be reduced at any time during employment absent the introduction of an equally advantageous benefit.
The Cal Fire case presented two issues. The first issue was whether the opportunity to purchase air time was a constitutionally protected vested right. The second and potentially broader issue was whether PEPRA’s elimination of the air time benefit constituted an unconstitutional impairment of public employees’ contractual rights, if such contractual rights existed in the first instance.
Many were hopeful that in analyzing the second issue, the Court would reexamine the California Rule, either modifying, abandoning, or affirming it. However, the Court did not get that far.
Taking up only the first of the two issues presented, the Court held that the opportunity to purchase air time was not a vested right protected by the constitutional contract clause. The Court found that the 2003 statute did not reflect an intent by the Legislature to create a contractual right for public employees or that the option for air time would not be subject to repeal.
In addition, although public employees may hold an implied vested right to deferred compensation that is attributable to the performance of service, the Court found that the air time benefit was not connected to any actual service. The option for air time was not, unlike ordinary pension benefits, a contractually binding offer to induce an employee’s service to the state. Pension benefits, the classic example of deferred compensation, flow directly from a public employee’s service, and their value is roughly proportional to the time of that service. The Court found no basis to conclude that the opportunity to purchase air time was granted as deferred compensation for an employee’s work during any period of employment prior to an election to purchase the service credit. The amount of additional credit was at the employee’s discretion and not dependent on corresponding service to the state.
In its decision, the Court stated that “[w]e have never held, however, that a particular term or condition of public employment is constitutionally protected solely because it affects in some manner the amount of a pensioner’s benefit.” In doing so, the Court reaffirmed prior decisions holding that “a term and condition of public employment that is otherwise not entitled to protection under the contract clause does not become entitled to such protection merely because it affects the amount of an employee’s pension benefit.”
Because the Court held that the opportunity to purchase air time was not a vested right, it did not reach the issue of whether PEPRA’s elimination of the air time benefit unconstitutionally impaired the contractual rights of public employees. As for the California Rule, the Court held that its holding “precludes such a re-examination.” Therefore, for the time being, the California Rule remains untouched.
A number of additional cases involving the California Rule are awaiting review by the California Supreme Court, including Marin Association of Public Employees v. Marin County Employees’ Retirement Association, Alameda County Deputy Sheriff’s Association v. Alameda County Employees’ Retirement Association, and Hipsher v. Los Angeles County Employees Retirement Association. Although the Court decided the Cal Fire case narrowly, the California Rule may be front and center in a later case.