Nothing less than the future of public pensions at stake

Following the recent decision by the 1st District Court of Appeal in Alameda County Deputy Sheriff's Association v. Alameda County Employees' Retirement Association, 2018 DJDAR 309 (Jan. 8, 2018), the California Supreme Court is tasked with nothing less than determining the fate of California's public pension systems.

In Marin Association of Public Employees v. Marin County Employees' Retirement Association, 2 Cal. App. 5th 674 (2016), Division 2 of the 1st District held that public employees subject to the County Employees Retirement Law (Gov. Code Section 31450 et seq.) are entitled only to a "reasonable" pension, and thus there is no obligation to offset the reduction or elimination of vested pension rights by providing "comparable new advantages." Division 3 of the 1st District reached the same conclusion in Cal Fire Local 2881 v. California Public Employees' Retirement System, 7 Cal. App. 5th 115 (2016), with respect to public employees subject to the Public Employees Retirement Law (Gov. Code Section 20000 et seq.).

In late 2016 and early 2017, the California Supreme Court accepted review of Marin and Cal Fire, respectively. In granting review in Marin, the California Supreme Court announced that briefing and further action in that matter was deferred pending issuance of another decision by Division 4 of the 1st District. That decision -- the Alameda County case -- was issued earlier last week.

Following the 2008 economic crisis, California's public pension systems experienced a substantial rise in unfunded liabilities resulting from shortcomings in investment returns on retirement funds and rising costs. What the Marin court described as "dire financial predications necessitating urgent and fundamental changes to improve the solvency of various pension systems" set the stage for a legislative overhaul to the public pension system. In a partial response to the pension crises, the California Legislature enacted the California Public Employees' Pension Reform Act of 2013, which imposed, in part, the specific pension changes at issue in Marin, Cal Fire and Alameda County.

In Marin, the retirement board for the Marin County Employees' Retirement Association adopted a policy implementing the pension reform act and the amended provisions of Section 31461, excluding several items from employees' final compensation. Marin county employees filed suit, asserting that the retirement association had assured them that the now-excluded pay items would be included in their pension calculations. Some employees claimed that they had accepted lower wages in exchange for these benefits. The plaintiffs further alleged that because pension benefits are a form of deferred compensation for work already performed, the association's policy infringed upon their vested right to their pensions.

In Cal Fire, the pension reform act eliminated an option provided under Section 20909 of the Public Employees Retirement Law that permitted eligible public employees the option to purchase at cost up to five years of non-qualifying service credit (commonly referred to as "airtime"). The plaintiffs were a group of professional firefighters who were eligible to, but did not purchase, airtime service credit before the elimination of this option. They asserted that the option to buy airtime service credit was a vested contractual right. The plaintiffs filed a petition for writ of mandate and injunctive relief to compel the California Public Employees' Retirement System to continue to enforce Section 20909 by allowing eligible employees to continue to purchase airtime.

In Alameda County, similar to Marin, the counties at issue conformed their respective retirement systems to the pension reform act by excluding items from compensation earnable for all employees retiring after Jan. 1, 2013. Various employees and employee associations sued the counties, alleging that the pension calculation changes unlawfully impaired the pension rights of employees hired before the reform act went into effect. The plaintiffs alleged they had vested rights to pension benefits, which could not be altered.

The Court of Appeal decision in Alameda County does not dispute the fundamental holding of Marin and Cal Fire that the reduction or elimination of vested pension benefits need not always be offset by comparable new advantages. In fact, the Alameda County court states that "much of Marin's vested rights analysis -- including its rejection of the absolute need for comparable new advantages when pension rights are eliminated or reduced -- is not controversial, and we do not disagree with it."

On this issue, the California Supreme Court appears likely to accept the unanimous view of the Marin court, also followed by Cal Fire and Alameda County, that "the high court's vested rights jurisprudence generally requires only that detrimental pension modifications should (i.e., ought) to be accompanied by comparative new advantages -- in effect, "'a recommendation, not ... a mandate.'" To hold otherwise would place California's public pension systems in an impossible financial bind.

Where the Alameda County court disagrees with Marin is in the extent to which a court must scrutinize an employer's decision to eliminate or reduce vested rights. Thus, while the allegations in Marin were dismissed on demurrer, the court in Alameda County held that where "no comparative new advantages are given, the corresponding burden to justify any changes with respect to legacy members will be substantive," and remanded the case to the trial court for a detailed consideration of the relevant facts.

The dividing line between Marin and Alameda County is whether the impending financial collapse of California public employee pension systems is sufficient cause to justify the reduction or elimination of vested pension rights without need for fact-specific employee-by-employee scrutiny.

In contrast to the holdings in Marin and Cal Fire, the Alameda County court plainly does not view the pension liability crisis, in and of itself, as sufficient grounds to eliminate or reduce vested rights, and in fact chided the Marin court for failing to conduct a "specific analysis of the changes that have been effected by the new law; consideration of the impact of those changes on the legacy members at issue; and an evaluation of the legislative rationale for the change in the context of the facts of each specific CERL system."

The Alameda County court does acknowledge that "total pension system collapse may be a sufficiently weighty concern to meet this standard." Nevertheless, the Alameda County court directed that the trial court analyze the specific pension rights at issue "focus[ing] on the impacts of the identified disadvantages on the specific legacy members at issue" and must consider whether "that particular CERL system [will] have 'difficulty meeting its pension obligations' with respect to those members" instead of "impermissibly focusing on the unfunded pension liability crisis in general."

In short, the Alameda County decision sets a high bar, which, if endorsed by the California Supreme Court, would subject almost every decision to reduce or eliminate a vested pension right to fact-specific litigation focusing on the affected retirees and financial status of the pension system. In light of the undisputed fiscal crisis facing public pension systems statewide, this test would seem to swallow the general rule announced in Marin -- and ostensibly endorsed by the Alameda County court -- that detrimental pension modifications need not be accompanied by "comparative new advantages."

It is unclear whether the Alameda County decision is fully relevant to employers subject to the Public Employees Retirement Law. The county employers subject to the County Employees Retirement Law have individual discretion to administer benefits that is not available to employers subject to the Public Employees Retirement Law. Likewise, the Alameda County court observed that while the public employees law has "for many years" included "more and more exclusions" from pensionable compensation, the county employees law evolved differently, and does not contain comparable exclusions -- in other words, the Alameda County court found that prohibitions against pension spiking are not "baked in" to the County Employees Retirement Law. Thus, the California Supreme Court should consider whether Alameda County involves considerations unique to agencies subject to that law.

If the test articulated in Alameda County survives, it is also unclear how agencies subject to the County Employees Retirement Law -- who played no direct role in the passage of the pension reform act -- will be able to individually justify pension changes that they did not devise. If the Alameda County test is applied to the Public Employees Retirement Law, on the other hand, any litigation would presumably involve CalPERS as a party, in which CalPERS may be hard pressed to describe the specific impact on individual retirees.

While Marin is broadly favorable to both California's public pension systems and the taxpayers who may ultimately fund any pension fix, Alameda County sets the bar so high as to call into question the legality of most or all pension modifications. In order to save California's public pension systems, the California Supreme Court may ultimately need to allow lower courts to balance the harm averted by addressing the pension crisis "in general" against the detriment to individual employees.