On June 19, 2018, in the case of Hipsher v. Los Angeles County Employees Retirement Assn., 2018 Cal. App. LEXIS 561, the California Court of Appeal held that California Government Code Section 7522.72 was constitutional as applied to the present case, where Hipsher’s vested retirement benefits were reduced due to his gambling conduct which was committed in the scope of his duties. The Court further held that the Los Angeles County Employees Retirement Association (LACERA) bears the burden of providing Hipsher with the necessary due process protections when determining whether his conviction falls within the scope of the statute.
Background
Tod Hipsher was employed by the Los Angeles Fire Department as a firefighter in 1983. In 2001, Hipsher began an illegal gambling operation in both the Orange and Los Angeles Counties, in which he “routed customer wages and profits through a company based in Costa Rica” and profited by collecting amounts due under the terms of the wager. In 2011, Hipsher unknowingly drafted undercover agents of the Department of Homeland Security and the Orange County District Attorney’s Office to collect past due and/or unpaid gambling debts. These agents used recording devices and Hipsher showed them the room in the fire station where he ran part of his operation.
In 2013, the United States Attorney filed a one-count information alleging Hipsher conducted and owned an illegal gambling business. Two months after the filing of the information, Hipsher retired from the fire department and a year later, was convicted of the charged offense pursuant to his guilty plea. LACERA notified Hipsher that his retirement benefits were going to be adjusted pursuant to Section 7522.72. The letter stated the Los Angeles County Department of Human Resources found that Hipsher’s conviction was job-related based on the investigation reports from the Department of Homeland Security.
Thereafter, Hipsher filed a petition for writ of mandate and complaint for declaratory relief. Hipsher alleged the reduction of his retirement benefits was an unconstitutional ex post facto application of Section 7522.72, a violation of the contract clause of the California Constitution, and was not valid as there was not a connection between his crime and his performance of his official duties. The fundamental issues at trial were whether Hipsher had a due process right to his original retirement benefits and, if so, whether he was given sufficient due process protections prior to their reduction.
The trial court found for LACERA on the claims of contract clause and ex post facto violations, but found for Hipsher on the issue of due process. As such, the trial court issued a peremptory writ of mandate directing LACERA to set aside the reduction of Hipsher’s retirement benefits and return to him the difference between his full pension and that which he received after the reduction. The trial court further ordered the County to reinitiate proceedings under Section 7522.72 to provide Hipsher adequate due process protections. Both Hipsher and the County appealed.
Discussion
The Court of Appeal of California first dealt with Hipsher’s claim that Section 7522.72 was unconstitutional because his vested contractual right to his pension was not subject to reduction, regardless of whether he was convicted of a job-related crime. The Court applied a two-step analysis of contract-clause claims. First, the Court evaluated the nature and extent of any contractual obligation. Second, if the rights were vested, the Court analyzed the “scope of the Legislature’s power to modify” that contractual right. Valdes v. Cory, (1983) 139 Cal. App. 3d 785. In this case, it was undisputed that Hipsher had a vested contractual right to retirement benefits. However, the Court noted, Section 7522.72 was meant to ensure the integrity of public pension systems.
The Court observed that an employee’s vested rights to retirement benefits can be diminished if there is an occurrence of a condition subsequent. Kern v. City of Long Beach, (1947) 29 Cal. 2d 853. The Court of Appeal concluded that Hipsher’s felony criminal conviction stemming from his public service constituted a condition subsequent, thereby allowing a limited forfeiture of vested retirement benefits under Section 7522.72.
Next, Hipsher alleged his benefit forfeiture was barred by Kern and Wallace, in which pension benefits were terminated altogether. Id. at 850. Wallace v. City of Fresno, (1954) 42 Cal. 2d 181. Here, the Court distinguished those cases, finding that LACERA preserved those benefits attributable to service prior to the first commission of Hipsher’s offense, rather than completely eliminating the retirement benefits. Additionally, Section 7522.72 forfeits benefits accrued from the earliest date of the commission of a qualifying offense. The Court of Appeal, therefore, held that application of the forfeiture procedures in Section 7522.72 was not unconstitutional.
The County believed the trial court erred in ordering the County to reinitiate proceedings under Section 7522.72 because the County was not named as a respondent. The County argued that any due process protections were to be provided by LACERA. The Court of Appeal agreed. The Court observed that the California Constitution provides that “the retirement board of each public pension holds the ‘sole and exclusive responsibility’ to administer the system.” Cal. Const. art. XVI, §17. As such, the Court stated that the Board of Retirement for LACERA was responsible for ensuring eligibility and payment of pension benefits to appropriate employees and LACERA must grant Hipsher due process protections in compliance with its administrative procedures. Specifically, the Court stated, “[a]t a minimum, Hipsher was entitled to written notice reasonably calculated to apprise him of the pendency of the Section 7522.72 action, and the right to present his objections before an impartial decision maker.”
Accordingly, the Court of Appeal affirmed the lower court’s holding that Section 7522.72 was constitutionally sound and applicable in the case at hand. The Court of Appeal modified the judgment to hold that LACERA bore the burden of providing Hipsher with suitable due process protections. In compliance with LACERA’s administrative procedures, Hipsher must be given notice of LACERA’s intent to initiate forfeiture of portions of his retirement benefits and the opportunity to present his objections.
HOW THIS AFFECTS YOUR AGENCY
As the Court of Appeal recognized in this opinion, Hipsher was prejudicially denied his constitutionally protected due process rights. He did not have prior notice of LACERA’s intent to initiate forfeiture of portions of his pension benefits, nor was he given an opportunity to contest the allegations that his conviction was job-related. The case makes clear that retirement boards must to provide appropriate due process rights to member/employees in this context. The Court went so far as to add, “the fact that providing constitutional due process is burdensome does not excuse the failure to provide it.”
In addition, the Court of Appeal made the very important determination that Section 7522.72’s forfeiture provisions are constitutional. This decision mirrors determinations made by the Court of Appeal in cases currently pending before the California Supreme Court on the issue of pension rights. Namely, that pension rights may be modified given appropriate circumstances.[1] This issue is one of great significance that will be likely be determined by the Supreme Court in the coming months.
As always, if you wish to discuss this matter in greater detail, please feel free to contact me at (714) 446–1400 or via email at jrt@jones-mayer.com.
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[1] Marin Assn. of Public Employees v. Marin County Employees’ Retirement Assn., (2016) 2 Cal.App.5th 674; Alameda County Deputy Sheriffs’ Assn. v. Alameda County Employees’ Retirement Assn., (2018) 19 Cal. App. 5th 61.