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California Supreme Court Leaves The California Rule Largely Intact in Highly Anticipated Opinion Concerning Public Employee Pension Rights
On July 30, 2020, the California Supreme Court issued its decision in Alameda County Deputy Sheriff’s Assn. v. Alameda County Employees’ Retirement Assn. (Alameda). It was anticipated that the Court would address the continuing viability of the “California Rule.” Under the California Rule, a public employee is vested in a pension benefit at the start of employment. Under the traditional expression of the California Rule, benefits cannot be reduced even for prospective service, except in very limited circumstances. The modification of a pension benefit “must bear some material relation to the theory of a pension system and its successful operation,” and any modification that results in disadvantages to employees must be accompanied by comparable new advantages. While the Court asserted at the end of the decision that it was not reexamining the California Rule, the decision leaves the current legal framework largely intact, including the California Rule.
Alameda considered whether legislative changes made to the County Employees Retirement Law of 1937 (“CERL”) by the Public Employees’ Pension Reform Act of 2013 (“PEPRA”) unconstitutionally impaired vested pension benefits of public employees employed at the time PEPRA was passed. PEPRA excluded some forms of compensation from the calculation of retirement benefits that had long been included. The exclusions were based on concerns related to pension spiking. Even though these changes had the effect of reducing retirement benefits of the employees impacted, the statute made no provisions for the employees to receive any alternative benefits to make them whole for these reductions. The Court held that the PEPRA changes were constitutionally permissible. However, the Court’s determination that no comparable benefit needed to be provided largely hinged on its determination that eliminating pension spiking is a constitutionally proper purpose that would be defeated by providing a comparable advantage. Consequently, the decision was narrow in scope and does not resolve what other motivations for pension reform will be allowed.
The Court’s ruling largely leaves the traditional California Rule and analysis intact with one deviation. Closely tracking existing case law concerning the California Rule, the Court determined that where pension benefits are protected by the contract clause of the California Constitution, any modification of a constitutionally protected pension benefit must be reasonable in that it “must bear some material relation to the theory of a pension system and its successful operation.” Whereas traditionally, such a modification must be accompanied by other benefits, the Court found that where, as here, providing alternative benefits would be inconsistent with the purpose of the constitutionally proper modification, alternative benefits would not be required.
The Court’s Analysis
Two different disputes were discussed in the decision. First, the Court considered whether the PEPRA amendments violated settlement agreements entered into following previous litigation involving several county retirement boards regarding compensation included in pension benefits. Second, the Court considered whether the PEPRA amendments impaired constitutionally protected rights, which was the issue implicating the California Rule.
Violations of the Settlement Agreements
For this question, the Court observed that the retirement boards’ administrative powers are limited by the enabling legislation. The Legislature has final authority for establishing the provisions governing pensions and the judiciary has final authority to interpret the legislation. The Court concluded that the retirement boards had no authority to act inconsistently with the CERL and cannot disregard such amendments. Employees had no express contractual rights to have benefits calculated in a manner inconsistent with the CERL because the retirement board had no authority to confer benefits beyond those authorized by statute. Therefore, the Court rejected the contention that the settlement agreements precluded the legislative changes. The Court also rejected the plaintiffs’ estoppel argument (i.e., it rejected the contention that equitable or fairness grounds required inclusion of the compensation).
Impairment of Constitutionally Vested Rights
As the PEPRA amendments eliminated compensation that had previously been included in pension benefits for existing employees, the Court easily determined that the issue of constitutionally vested rights had been implicated.
As constitutionally protected rights were implicated and there were disadvantages caused by the modification, the Court turned to the purpose of the modification. The Court discussed the broad preexisting language of the CERL provisions defining what compensation may be included in pension benefits. The Court noted that the Legislature sought to limit pension spiking by eliminating practices that were “arguably” permitted under the previous broad statutory language. The Court determined that the changes in PEPRA were enacted for a constitutionally permissible purpose (i.e., closing loopholes such as spiking that distort pension calculations).
After determining that the modification was the result of a constitutionally proper purpose, the Court turned to whether the modification required the disadvantages to be offset by comparable advantages. The Court concluded that the constitutionally proper objective would be defeated if the California Rule was interpreted to require the pension plans to maintain the loopholes for increasing pension benefits for existing employees, or to provide comparable benefits that would perpetuate the advantages provided by the loopholes that were closed by PEPRA. Thus, the Court concluded that disadvantages did not have to be offset by comparable advantages.
Therefore, the Court held that the modifications to the CERL by the PEPRA amendments were constitutionally permitted and reversed the decision of the Court of Appeal.
Effect of the Decision
The Court’s decision will likely have little immediate impact on public agencies. A positive outcome for public employers is that the Court approved a modification impairing pension benefits without requiring offsetting advantages. However, the decision is limited in its application. The Court does not state explicitly that impairments motivated by cost savings alone would be impermissible, or if permissible, would require alternative benefits. However, the narrow scope of the ruling will require additional litigation should further pension reform impair benefits for purposes of cost savings.