On July 27, 2026, the California Supreme Court issued its decision in Ventura County Employees’ Retirement Assn. v. Criminal Justice Attorneys Assn. of Ventura County, holding that leave cashouts exceeding the applicable annual cashout allowance established by a member’s terms of employment must be excluded from “compensation earnable” under the County Employees Retirement Law of 1937 (“CERL”). The decision affirmed the Court of Appeal’s conclusion that Government Code section 31461, subdivision (b)(2) prevents a member from including cashouts above that annual allowance by selecting a final-compensation period that straddles multiple calendar years.
Background
The case stems from a disagreement between the Ventura County Employees’ Retirement Association (“VCERA”), a public retirement system governed by CERL, and the Criminal Justice Attorneys Association of Ventura County and Ventura County Professional Peace Officers’ Association, regarding the amount of leave compensation that may be included in a final compensation calculation for purposes of determining the employee’s retirement allowance. After the California Supreme Court’s decision in Alameda County Deputy Sheriff’s Assn. v. Alameda County Employees’ Retirement Assn., VCERA adopted a Resolution that excluded certain “leave cashouts” from pension calculations when they exceed an employee’s calendar year allowance for leave cashouts. VCERA sought a court declaration confirming this approach was lawful. The trial court concluded that VCERA properly excluded the leave cashouts exceeding what can be cashed out in a year from pension calculations under Government Code section 31461, as amended by the Public Employees’ Pension Reform Act of 2013 (“PEPRA”). The Criminal Justice Attorneys Association of Ventura County and Ventura County Professional Peace Officers’ Association appealed.
VCERA members’ retirement allowances are based on a formula comprised of an employee’s (1) age at retirement, (2) years of service, and (3) final compensation. Leave cashouts refer to payments employees receive for unused accrued annual leave. Before PEPRA, employees could increase their pension benefits by cashing out large amounts of accrued leave during their final compensation period, particularly if they structured that final compensation period to span multiple calendar years.
The California Court of Appeal affirmed the trial court’s ruling that retirement systems must exclude payments for accrued, unused leave that exceed the applicable calendar-year cashout allowance established by the member’s terms of employment. The Court acknowledged that PEPRA was enacted to prevent “pension spiking,” where employees can increase their retirement benefits by increasing compensation that is counted during their final compensation period. The Court explained that allowing employees to cash out leave from multiple years within a single final compensation period and have those payments included in compensation earnable would undermine that goal. The Court of Appeal held that Government Code section 31461, subdivision (b)(2) requires retirement systems to exclude leave cashouts that exceed the amount earnable and payable within a 12-month period. The Court of Appeal concluded that excluding excess leave cashouts ensures that pension calculations reflect compensation ordinarily payable during the relevant annual period, rather than an increased amount generated through the timing of cashouts and selection of a straddling final-compensation period.
Notably, the Court of Appeal rejected the appellants’ argument that the plain language of Government Code section 31461, subdivision (b) makes no mention of a “calendar year” and thus does not limit leave cashouts to what is earned and payable in a “calendar year.” Government Code section 31461, subdivision (b)(2) excludes from compensation earnable leave cashouts “in an amount that exceeds that which may be earned and payable in each 12-month period during the final average salary period.” Because the Court of Appeal found such language ambiguous, it looked to the legislative history of PEPRA and found that it was intended to prevent pension spiking and thus rejected appellants’ argument.
The case concerns “legacy” members—generally, employees who entered a qualifying public retirement system before PEPRA became effective on January 1, 2013. Although these members are not governed by PEPRA’s new-member benefit formula, PEPRA amended CERL’s definition of “compensation earnable” for legacy members by adding the exclusions in Government Code section 31461, subdivision (b). The Supreme Court concluded that applying subdivision (b)(2)’s annual limitation to legacy members is consistent with PEPRA’s purpose of preventing manipulation of compensation during the final-compensation period.
California Supreme Court Decision
The California Supreme Court affirmed the Court of Appeal’s holding that leave cashouts exceeding the applicable annual allowance established by the member’s terms of employment must be excluded from compensation earnable to prevent pension spiking.
The Ventura County Employees’ Retirement Assn. v. Criminal Justice Attorneys Assn. of Ventura County decision is the first California Supreme Court case to definitively decide the issue of whether leave cashouts that exceed the applicable annual allowance established by a member’s terms of employment must be excluded from compensation earnable. In contrast, the primary question in the Court’s prior opinion in Alameda County Deputy Sheriff’s Assn. v. Alameda County Employees’ Retirement Assn. (2020) 9 Cal.5th 1032, was whether Government Code section 31461’s new limits on the inclusion of certain amounts as “compensation earnable” were changes that impermissibly impaired the contractual and constitutional pension rights of legacy employees.
The California Supreme Court confirmed that, for legacy members, “the pension consequences of cashing out accrued leave time are acceptable only if such compensation does not exceed what is ‘earned and payable in each 12-month period during the final average salary period.’” The Court interpreted that language as referring to the annual measurement period and cashout allowance prescribed by the member’s terms of employment.
The decision confirmed what it said in the Alameda County decision, supra, and concluded that:
“Section 31461(b)(2) prevents retiring employees who have designated a final compensation period that straddles calendar years from including in compensation earnable amounts of cashed out leave in excess of the applicable annual allowance for leave cashouts.”
Notably, “[t]he purpose of these limits was to reduce the practice of ‘pension spiking’ — that is, ‘the manipulation of an employee’s pattern of work and pay to produce inflated compensation earnable during the final compensation period’ which, in turn, results in greater pension obligations for participating counties.”
Implications for Public Agencies
The decision clarifies that CERL retirement systems must exclude from a legacy member’s compensation earnable leave cashouts that exceed the applicable annual cashout allowance established by the member’s terms of employment. Although the allowance in this case was measured by calendar year, the Supreme Court recognized that the governing terms could use a fiscal year or another 12-month measurement period.
CERL agencies should review their MOUs, employment agreements, personnel rules, and leave policies to identify applicable annual cashout limits. Agencies should also review their retirement-reporting practices and coordinate with their retirement systems concerning the treatment of cashouts occurring during final-compensation periods that overlap multiple annual measurement periods. The decision addresses legacy members; leave cashouts for PEPRA new members are governed by the separate “pensionable compensation” provisions of Government Code section 7522.34.
Liebert Cassidy Whitmore attorneys are closely monitoring developments in relation to this Special Bulletin and are able to advise on the impact this could have on your organization. If you have any questions about this issue, please contact our Los Angeles, San Francisco, Fresno, San Diego, or Sacramento office.