Background
The California Supreme Court recently reviewed the validity of the “California Rule” in the context of the case entitled Alameda County Deputy Sheriff’s Ass’n v. Alameda County Employees’ Retirement Ass’n.[1] The Court began its analysis with a discussion of the California Public Employees’ Pension Reform Act of 2013 (“PEPRA”; Stats. 2012, ch. 296, section 1), noting that it substantially revised the laws governing the pension plans of the state’s public employees. In a prior decision, Cal Fire Local 2881 v. California Public Employees’ Retirement System (2019) 6 Cal.5th 965, the Supreme Court of California rejected a constitutional challenge to one change effected by PEPRA, the elimination of the opportunity for public employees to purchase “additional retirement service credit” under Government Code section 20909. At issue in the case facing the Supreme Court here was a provision of PEPRA that amended the County Employees Retirement Law of 1937 (“CERL”; Government Code section 31450 et seq.).
CERL governs the pension systems maintained by many of the state’s counties.[2] Each county system is administered by its own retirement board, which is tasked with implementing CERL’s provisions. Under CERL, the amount of an employee’s pension benefit is determined as a percentage of the “compensation earnable” received by the employee during a representative year of county employment. Even prior to PEPRA, CERL expressly excluded overtime pay from compensation earnable and limited the inclusion of payments from a deferred compensation plan. The PEPRA provision at issue in Alameda amended CERL’s definition of compensation earnable to exclude or limit the inclusion of additional types of compensation in order to prevent perceived abuses of the pension system that resulted in “pension spiking.” Although this amendment applies to the calculation of the pensions of all employees covered by CERL, the parties in the case here agreed that the issues raised here related only to the amendment’s impact on the pensions of persons who were first employed by a county prior to the effective date of PEPRA, referred to as “legacy employees.”
Three separate lawsuits were filed by organizations representing employees of Alameda, Contra Costa, and Merced Counties. Among the plaintiffs in these actions, only those in the Alameda County action petitioned the Supreme Court for review of the First District Court of Appeal’s decision.[3] (For additional background, please see Client Alert Vol. 33, No. 1, which provides extensive information on the First District’s January 2018 decision.[4])
The plaintiffs’ challenge to PEPRA’s amendment of CERL raised two sets of issues. First, the Alameda County Deputy Sheriff’s Association (“Association”) and its co-plaintiffs (collectively, “Plaintiffs”) contended that employees in the three counties involved had a contractual right to receive pension benefits calculated without regard to PEPRA’s changes, a right based either on (1) agreements in effect when PEPRA was enacted or (2) application of the doctrine of equitable estoppel.
The Court observed that, long before PEPRA was passed, employees in each of these counties had entered into litigation settlement agreements with their respective retirement boards that specified the types of compensation included in compensation earnable. In some cases, the provisions added by PEPRA conflicted with the terms of these agreements, excluding or restricting items of compensation that the agreements required to be included in compensation earnable.
Plaintiffs argued that these agreements conferred on existing employees the contractual right to continue to include these items of compensation in their pensionable compensation, notwithstanding their exclusion by the provisions added by PEPRA, or, alternatively, that the counties are equitably estopped from implementing the PEPRA amendment in a manner inconsistent with the agreements. In turn, Central Contra Costa Sanitary District (“District”) and the State of California (“State”) (collectively, “Defendants”) countered that the retirement boards were required to implement the provisions of CERL, including PEPRA’s amendment, notwithstanding any contrary agreements they might have entered into with county employees.[5]
As an entirely distinct argument, Plaintiffs also argued that county employees who began their work prior to PEPRA’s enactment had a constitutional right to receive pension benefits calculated according to the law as it existed prior to PEPRA. Supreme Court precedents since the 1950’s had granted constitutional protection to public employee pension plans. Under the “California Rule,” the contract clause of the California Constitution requires any modification of public employee pension plans to satisfy a standard established in a long line of California Supreme Court decisions, including most prominently Allen v. City of Long Beach (1955) 45 Cal.2d 128 (“Allen I”).
In determining the constitutional validity of a modification to a public employee pension plan, the Court noted that Allen I requires a court first to decide whether the modification imposes disadvantages on affected employees, relative to the preexisting pension plan, and, if so, whether those disadvantages are accompanied and offset by comparable new advantages. Assuming the disadvantages are not offset in this manner, the court must then determine whether the agency’s purpose in making the changes was sufficient, for constitutional purposes, to justify an impairment of pension rights. Public employee pension plans may be modified “for the purpose of keeping [the] pension system flexible to permit adjustments in accord with changing conditions and at the same time maintain the integrity of the system,” but to survive contract clause scrutiny, such changes “must bear some material relation to the theory of a pension system and its successful operation.” (Id. at p. 131.) Finally, assuming the changes occurred for a constitutionally permissible purpose, the Court stated that it interpreted Allen I to require the modification to provide comparable new advantages to public employees unless to do so would undermine, or would otherwise be inconsistent with, that proper purpose.
Plaintiffs contended that under the Constitution’s contracts clause, persons employed by a county at the time of PEPRA’s enactment possessed implied contractual rights in the pre-PEPRA terms of CERL that are protected against impairment. Because PEPRA’s amendment had the practical effect of diminishing some employees’ pension benefits without granting any comparable new advantages, Plaintiffs argued, its application to the pensions of existing employees was precluded by the California Rule. The Defendants responded that (1) PEPRA’s amendment did not trigger constitutional scrutiny because its provisions constituted a clarification, rather than a modification of CERL, and, alternatively, (2) any changes met the requirements of the California Rule.
Discussion
In its lengthy opinion, the Supreme Court of California first examined the ordinary contract issues, stating that county employees have no express contractual right to the calculation of their pension benefits in a manner inconsistent with the terms of the PEPRA amendment. The Court explained that because the county retirement boards are required to implement CERL as enacted by the Legislature, the litigation settlement agreements, which were silent on this issue, must be interpreted to permit the modification of board policies to accommodate statutory changes to CERL. The Court also concluded that Plaintiffs failed to demonstrate the elements necessary for the invocation of equitable estoppel. In particular, the Court found no evidence that the county boards made any representations regarding the continued enforceability of the terms of the settlement agreements in the event of inconsistent legislative changes to the controlling statutory provisions.
Turning to the constitutional question, the Court rejected Defendants’ threshold argument that no constitutional issue was presented here because the exclusions and limitations from compensation earnable imposed by PEPRA did not constitute a change in the law governing CERL pension benefits. Although the inclusion in compensation earnable of the elements of compensation excluded by PEPRA had not been specifically addressed when the amendment was enacted, either in CERL itself or its judicial interpretations, the Court found that the more general law of compensation earnable was sufficiently settled prior to PEPRA to justify treating the amendment as a change in the law for purposes of contract clause analysis.
In addressing the merits of Plaintiffs’ constitutional claim, however, the Supreme Court held that the challenged provisions added by PEPRA did meet contract clause requirements. The Court reasoned that the provisions were enacted for the constitutionally permissible purpose of closing loopholes and preventing abuse of the pension system in a manner consistent with CERL’s preexisting structure. The Court also found that to interpret the California Rule to require county pension plans either to maintain these loopholes for existing employees or to provide comparable new pension benefits that would perpetuate the unwarranted advantages provided by these loopholes would defeat the aforementioned permissible purpose.
The Supreme Court rejected the State and amicus curiae exhortations to conduct a fundamental reexamination of the California Rule. The Court explained that because it concluded that PEPRA’s amendment of CERL did not violate the contract clause under a proper application of the California Rule, the Court had “no jurisprudential reason to undertake a fundamental reexamination of the rule. Thus, the test declared in Allen I, “as explained and applied here,” remains the law of California.
The Supreme Court accordingly reversed the decision of the Court of Appeal and remanded the matter to that court, with directions to remand to the trial court to vacate the judgments entered in each of the three consolidated proceedings and to conduct further proceedings consistent with the Supreme Court’s decision.
HOW THIS AFFECTS YOUR AGENCY
The Alameda decision is probably one of the most important decisions affecting law enforcement in the last 25 years. The decision upholds and clarifies the California Rule. This author previously has opined that, had the Court overturned the California Rule, it would have resulted in mass retirement of those in law enforcement who were in a position to do so. In turn, this would have resulted in the loss of many collective years of experience in the profession, which are needed now more than ever in the trying times we currently are experiencing.
In succinctly stating the California Rule, the Court observed, “the California Rule has two components: The Legislature must act for a proper purpose and the net level of benefits ‘should’ be preserved (Allen I, supra, 45 Cal.2d at p. 131). The logical implication of the latter component is that the contract clause requires the level of pension benefits to be preserved if it is feasible to do so without undermining the Legislature’s permissible purpose in enacting the pension modification.”
The Court also stated, however, that the “PEPRA amendment did not violate the contract clause of our Constitution, notwithstanding the failure of the Legislature to provide new features to offset the financial disadvantages of the PEPRA amendment.” Accordingly, in this particular instance, no commensurate offsetting increases in pension rights were necessary to satisfy the contracts clause and the California Rule. Based upon the analysis of the Court, we can anticipate that circumstances satisfying this rigorous test will be difficult to establish in most cases in which the Legislature attempts to modify pension statutes.
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.
Information on www.jones-mayer.com is for general use and is not legal advice. The mailing of this Client Alert Memorandum is not intended to create, and receipt of it does not constitute, an attorney-client-relationship.
[1] No. S247095 (Cal. July 30, 2020).
[2] Of California’s 58 counties, 20 opted to implement their pension plans under CERL. Because the legislation at issue here applied only to CERL, the pensions of persons employed by counties that do not participate in CERL are not directly affected by the Court’s decision here. (Hereafter, “county” or “counties” will refer to those implementing pension plans under CERL.)
[3] The plaintiffs in the Contra Costa and Merced actions filed respondents’ briefs with the Supreme Court advancing similar positions to those asserted by the plaintiffs here.
[4] Alameda Cnty. Deputy Sheriff’s Ass’n v. Alameda Cnty. Emps.’ Ret. Ass’n, 19 Cal. App. 5th 61 (1st Dist.2018)
[5] In addition to the petition for review filed by the Association, the Supreme Court granted petitions for review filed by both the District and the State. The District had been joined as a defendant in the Contra Costa County action because its employees participate in a CERL pension plan. Although not initially a party, the State was permitted to intervene in all three of the consolidated actions to defend PEPRA.