Right to purchase ‘airtime’ is not a vested right

In an unanimous decision, the California Supreme Court held that the plaintiffs in Cal Fire Local 2881 v. CalPERS, 2019 DJDAR 1819, have no vested right to purchase airtime, but declined to address the "California Rule."

One of the few provisions in the Public Employees' Pension Reform Act that affected all employees, including those referred to as "classic members" by the California Public Employees' Retirement System, is Government Code Section 7522.46, which prohibits the purchase of nonqualified service credit (additional retirement service credit, or "airtime," for CalPERS purposes) on or after Jan 1, 2013. "Airtime" is credit that is not attributed to actual work performed, but it is counted for purposes of calculating retirement benefits. Previously, CalPERS permitted eligible members to purchase up to five additional years of airtime, but eliminated this option to conform with the reforms.

Cal Fire Local 2881 challenged CalPERS' actions, seeking to compel CalPERS to continue permitting classic members who otherwise meet the service credit eligibility requirements to purchase airtime. Seeing this as a challenge to one of former Gov. Jerry Brown's signature pieces of legislation, the state intervened to defend the reforms.

The plaintiffs argued that the elimination of the option to purchase airtime constituted an impermissible impairment prohibited by the contracts clause of the California Constitution. The trial and appellate courts rejected this argument, finding that there was no indication the Legislature intended to confer a vested right to the purchase of airtime, which was necessary in order to overcome the legal presumption against the creation of a vested right. Furthermore, even if a vested right had been created, the change was materially related to the theory and successful operation of a pension system, as it eliminated an option that was unrelated to the performance of services, and did not result in any disadvantage to plaintiffs.

The California Supreme Court considered two issues: Whether the option to purchase airtime was a vested right and, if so, did the elimination of that option constitute an unconstitutional impairment of the vested right. On the first issue, the court said the terms and conditions of public employment are generally considered to be statutory rather than contractual -- i.e., not protected by the contracts clause. However, a vested right to a term and condition of employment can arise in two circumstances: (1) when there is evidence of a legislative intent, whether express or implied, to create a vested right; or (2), when the nature of the term and condition of employment is such that a vested right is implied even in the absence of clear legislative intent. The latter exception has been expressly extended by the court to the earned salary and pension rights of public employees. However, the court cautioned that this does not mean that the implied contract clause protection could not be extended to other types of public employment benefits, as an appellate court did with longevity benefits in California League of City Employee Associations v. Palos Verdes Library Dist., 87 Cal. App. 3d 135 (1987).

The court concluded that there was no indication, express or implied, that the Legislature intended to confer a vested right to purchase airtime. In enacting the statute granting the option to purchase air time, the Legislature did not engage in any activities that would suggest an intent to create a vested right -- for example, the ratification of a contract reflecting the terms for the purchase of airtime or the incorporation of language in the legislation that suggested such an intent.

The plaintiffs also argued that the option to purchase airtime should be afforded protection under the implied contract clause in the same way as pension rights. Pension rights are constitutionally protected even in the absence of manifest legislative intent because they constitute deferred compensation earned in exchange for services rendered, which does not become payable until some later date -- typically upon retirement. But the court said the option to purchase airtime was not a form of deferred compensation; unlike pension benefits, airtime was not earned by an employee's work. The plaintiffs argued that the requirement that they perform five years of service before becoming eligible to purchase airtime demonstrated that the option was tied to actual service rendered and, consequently, constituted a form of deferred compensation. But again, the court said there were reasonable explanations for the imposition of the five year service requirement that demonstrated that the availability of the option to purchase airtime was not tied to actual service rendered by an employee. This included satisfying federal requirements applicable to the CalPERS plan and excluding CalPERS members who were ineligible for a service retirement from purchasing airtime. In other words, the opportunity to purchase airtime was not granted in exchange for the five years of service and, therefore, did not constitute deferred compensation.

The court found no other basis to extend implied contract clause protection to the option to purchase airtime. It rejected the argument that the Legislature had created a unilateral contract that had to remain available for the duration of their employment. Even if a unilateral contract had been created, the court said the Legislature had revoked it prior to acceptance -- which required both an election to purchase airtime and payment for such purchase. The court also was not persuaded that the option to purchase airtime should be accorded constitutional protection because it became a part of an employee's pension benefit once exercised. It noted that a term of employment is not accorded constitutional protection simply because it affects the pension benefit. To illustrate, the court referred to earlier decisions upholding a reduction in the mandatory age of retirement (Miller v. State of California, 18 Cal. 3d 808, 813 (1977)) and a reduction to a limited offer of enhanced retirement benefits (Creighton v. Regents of University of California, 58 Cal. App. 4th 237 (1997)). Although the changes in Miller and Creighton affected pension benefits, both changes were found to be permissible as neither implicated a vested right.

The court concluded that the Legislature had the authority to modify, or even eliminate, the option at its discretion. It declined to address whether there was an unconstitutional impairment of a vested right, despite the fact that the parties and interested stakeholders on both sides of the issue urged the court to address the vested rights doctrine, widely referred to as the California Rule.

In a concurring opinion, Justice Leondra Kruger stressed that the court's decision turned on the fact that airtime did not constitute deferred compensation because it was not acquired in exchange for services rendered but, rather, as a result of an employee's investment of funds to obtain the benefit.

The Supreme Court's ruling did not come as a surprise, as many expected that it would decide Cal Fire on the first question. However, Cal Fire provides us with a good rubric to determine whether a term or condition of employment constitutes a vested right that is afforded protection under the contract clause of the California Constitution. We will have to wait for the court's decisions on Alameda County Deputy Sheriff's Association v. Alameda County Employees' Retirement Assn. et al. (S247095) and Marin Association of Public Employees v. Marin County Employees' Retirement Association et al. (S237460), two of five cases pending before the Supreme Court that involve the California Rule, to learn whether the Court has an appetite for modifying the California Rule.