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November 25, 2014

Court Of Appeal Dismisses Public Employees’ Claims Against The City Of Los Angeles Based On Alleged Vested Pension Rights

On October 29, 2014, the Second District Court of Appeal granted a petition for writ of mandate filed by AALRR on behalf of the City of Los Angeles and in doing so ordered that the trial court should dismiss the lawsuit against the City.

In City of Los Angeles v. Superior Court for the County of Los Angeles, (Case No. B256118), the plaintiffs filed a class action lawsuit on behalf of current and former employees of the City and participants in the Los Angeles City Employee Retirement System (“LACERS”), challenging an increase in the employees’ personal pension contribution rate from 6% of the employees’ salary to 7% of the employees’ salary.  The increase was negotiated in a bilateral Letter of Agreement between the City and its employee unions as part of the City’s efforts to reduce payroll costs in response to the 2008 fiscal crisis.  The cash flow generated by the increase was used to provide long term employees with incentives to retire early.

The lawsuit alleged that by increasing the pension contribution rate, the City violated the California and U.S. Constitution’s prohibition against legislation that impairs vested contract rights.  The lawsuit initially alleged that the pension contribution rate could not be raised without the City providing an equal and comparable advantage back to the employees.  After AALRR was successful in convincing the trial court that the City’s Charter and Administrative Code did not provide any such vested rights, the employees then alleged that it was the City’s use of the funds to pay for the costs of the early retirement program that violated the constitutional provisions.

AALRR, on behalf of the City, challenged the lawsuit in a succession of demurrers, arguing that  the City’s Charter and Administrative Code did not create vested pension rights of the type alleged by the lawsuit.  The City also argued that the Meyers Milias Brown Act (“MMBA”) barred the lawsuit since the pension rate increase was agreed to by a coalition of unions representing the Plaintiffs and was subsequently ratified by the union members.  The trial court overruled the City’s objections and ruled that the Plaintiffs could go forward with their claims.  As a result, the City filed a petition for writ of mandate with the Court of Appeal.

The Second District Court of Appeal granted the writ and ordered the trial court to dismiss the Plaintiffs’ claims without leave to amend.  The Court relied on the principle that “it is elementary that there can be no impairment of a contract by a change thereof effected with the consent of one of the contracting parties.”  (San Bernardino Public Employees Assn. v. City of Fontana (1998) 67 Cal.App.4th 1215, 1223; Mulcahy v. Baldwin (1932) 216 Cal. 517, 525.)  As a matter of law, Plaintiffs are bound by the terms of their collective bargaining agreement and they cannot use a lawsuit as a vehicle to attack the pension changes negotiated and agreed to by their own unions.  The Court noted that “ndeed, the process of government contracting would grind to a halt if mutually agreed-upon change orders were considered unconstitutional impairments of prior contracts.”

The Court then went on to reject Plaintiffs’ argument that the use of the funds from the 1% increase in the pension contribution rate was illegal because it amounted to a “diversion” of the employee’s money to pay for the early retirement program.  As argued by AALRR, the Court noted that all of the employee’s pension contributions vest immediately, earn interest, and are transferrable if the employee leaves his or her employment.  Thus, the use of the funds was not clearly not contrary to law and the Letter of Agreement could not be challenged on that basis.

This decision directly impacts thousands of City employees who participate in the LACERS retirement program, and provides important guidance to many other cities and public agencies that pattern their own pension programs and employment practices after the City’s.  The important public policies behind the MMBA – the resolution of labor disputes in the public sector and the enforceability of concessions such as made here as a product of labor negotiations – would have been stymied if employees were allowed to contest in the courts the agreements reached by their union and subsequently ratified by the City.

Irma Rodriguez Moisa, Nate Kowalski, Paul G. Szumiak, and Jennifer D. Cantrell, handled the lawsuit on behalf of the City.  For more information about this case please contact one of the authors above.

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