It could be a while before we get vested pension rights answers

The closely watched and long-awaited decision in the case consolidating actions in Alameda, Contra Costa and Merced counties challenging the implementation of Assembly Bill 340 -- Alameda County Deputy Sheriff's Association v. Alameda County Employees' Retirement Association, 2018 DJDAR 309 -- was issued Jan. 8.

The case arises from one of the few pension reform measures in AB 340, the bill that enacted the California Public Employees' Pension Reform Act of 2013, which applies to employees that established membership in a retirement system before Jan. 1, 2013. AB 340, as amended by AB 197 (collectively, AB 340), amended Section 31461 of the Government Code, a provision of the County Employees Retirement Law of 1937 that applies only to county retirement systems. As amended, Section 31461 excludes numerous items of compensation from "compensation earnable" -- compensation used to determine pension benefits -- which had been deemed includable under the holding in Ventura County Deputy Sheriffs' Association v. Board of Retirement, 16 Cal. 4th 483 (1997).

After the enactment of AB 340, the retirement boards of the retirement systems in Alameda, Contra Costa and Merced counties moved to implement the provisions of AB 340, including those that applied to employees that established membership in a retirement system subject to the County Employees Retirement Law prior to Jan. 1, 2013, also known as "legacy members." In implementing AB 340, the retirement boards' actions resulted in the exclusion of amounts that had previously been deemed includable in compensation earnable under Ventura. For example, Contra Costa and Merced excluded payments that were not both earned and paid during the final compensation period and payments for on-call or standby services. Alameda excluded a number of items, including in-lieu payments, one-time payments such as bonuses, and on-call and call-back pay.

At the trial court level, the plaintiffs argued that legacy members had a vested right to the continued inclusion of payments formerly included in compensation earnable and that, as a result, the amendments made by AB 340 to Section 31461 constituted an impairment of vested rights. The trial court disagreed except with respect to certain types of on-call payments. It also established an estoppel class with respect to the Contra Costa and Merced cases such that certain members were permitted to include specified leave cash outs, in excess of those permitted under the amended Section 31461, in compensation earnable. Finally, the trial court created a 60-day period following its decision during which legacy members would have their retirement benefits calculated in accordance with practices in place immediately preceding AB 340.

Numerous parties on both sides appealed the trial court's ruling. In considering the appeal, the court first recognized that decisions made by the retirement boards should be afforded due consideration rather than deference to avoid inconsistent interpretations of the County Employees Retirement Law by county retirement systems. The court also found it necessary to dispel the notion that retirement boards have broad authority to include additional items of pay in compensation earnable beyond those required by that law concluding that an item of pay must meet the requirements of the law in order to be includible in compensation earnable.

The court then turned to whether the AB 340 amendments to Section 31461 constituted an impairment of a vested right. First, it considered whether such amendments actually modified the County Employees Retirement Law or were merely a declaration of existing law. If it was the latter, then the vested rights analysis would be unnecessary. The court concluded that the amendments to Section 31461 were declarative of existing law with respect to the exclusion of leave cash-outs that were not earned and payable during the final compensation period and amounts that became payable after separation from service, so called "terminal pay." However, it clarified that leave cash-outs are earned when an employee earns a right to receive cash in-lieu of accrued time rather than when the leave is accrued. On the question of whether settlement agreements agreed to by the retirement boards post Ventura could create a vested right to the inclusion of terminal pay in compensation earnable, the court found that "a contract that attempts to characterize an item of compensation in a manner contrary to statute cannot, itself, create a vested right." However, the court concluded that the exclusion of on-call payments received for services rendered by an employee as part of a regular work assignment, even if not received by employees in the same group or class, and compensation determined by a retirement board to have been paid to enhance a retirement benefit constituted a modification of the County Employees Retirement Law.

Second, the court considered whether the substantive changes made to Section 31461 by AB 340 with respect to on-call pay and pension enhancements were a reasonable modification to prior CERL law or an impairment of a vested right. In doing so, it discussed the holding in Marin Association of Public Employees v. Marin County Employees' Retirement Association, 2 Cal. App. 5th 674 (2016), which held, in part, that while public employees have a vested right to a pension, a right that is secured at the time of employment, such a right is not to a fixed or definite pension but to a reasonable pension. The Marin court also found that the provision of a comparable new advantage was permissive and not mandatory. While the court agreed with the Marin court on the permissive nature of the comparable new advantage element of the vested rights analysis, it diverged from Marin by opining that the absence of a comparable advantage meant that the burden of justifying changes in pension benefits for legacy members would be higher. Moreover, the court disapproved of the Marin court's failure to consider the California Supreme Court's position that a reasonable pension is one which is subject only to reasonable modification. Finding the decision in Marin deficient in its vested rights analysis, the court declined to follow it.

Instead, the court remanded the case back to the trial court for further consideration of the impact of the modifications made to Section 31461 by AB 340 to each of the retirement systems and application of the vested rights analysis to determine whether those changes were reasonable. It instructed the trial court to consider the following. First, in the absence of a comparable new advantage to offset the detrimental changes imposed by AB 340, the retirement boards had to provide compelling evidence that changes made to their respective retirement systems to conform to AB 340 were reasonable. Second, the effect of the changes on the impacted legacy members. Third, if the justification for the changes was the fiscal viability of the retirement system, then the trial court would have to consider whether the exemption of legacy members from the changes would cause said retirement system to have difficulty meeting its obligations to those same legacy members.

Finally, the court considered the trial court's application of the equitable estoppel to conclude that legacy members in Merced and Contra Costa were entitled to the inclusion of terminal leave cash-outs in compensation earnable. The retirement boards' argued that an estoppel claim could not result in a retirement system providing a benefit that was otherwise precluded by statutory law. However, the court noted that despite any statutory limitation, legacy member boards have plenary authority to administer their respective retirement systems, including the authority to settle litigation. Thus, if the inclusion of certain payments in compensation earnable is the result of the settlement of an actual or threatened lawsuit, retirement boards could be equitably estopped from denying the beneficiaries of that settlement the benefit of their bargain. The court found that the elements of estoppel had been met and, therefore, an estoppel claim with respect to the inclusion of terminal pay in compensation earnable could proceed against Merced, Contra Costa and Alameda retirement systems.

The California Supreme Court granted review of the Marin decision in November 2016, but stayed consideration of the decision pending a decision in Alameda County. Since the court has remanded the matter back to the trial court for further consideration, we are in for a longer wait than anticipated before the Supreme Court considers this new wave of vested rights cases. However, in light of the court's disapproval of Marin, we are unlikely to see a groundbreaking shift in the vested rights doctrine.