Clashing Appellate Court Decisions on Public Pension Reductions Set up Supreme Court Showdown

On January 8th, the California Court of Appeal for the First Appellate District, Division Four, issued a decision in Alameda County Deputy Sheriff’s Assn. v. Alameda County Employees’ Retirement Assn., concerning the vesting of public pension rights. In Alameda County, the Court of Appeal specifically considered whether active employees who were employed prior to the January 1, 2013 effective date of the Public Employee Pension Reform Act of 2013 (PEPRA), commonly referred to as "legacy" or "classic" members, have a vested right to pensions calculated according to the law in effect before PEPRA was enacted.

The instant case concerns the County Employees Retirement Law (CERL), which governs public employees in the counties of Alameda, Contra Costa, and Merced (Counties). In Alameda County, the court held that it had insufficient information to perform the individualized balancing tests mandated by the Supreme Court’s vested rights jurisprudence and remanded the case back to the trial court to perform those tests.

Procedural Background
PEPRA modified Cal. Govt. Code § 31461(b) to exclude a variety of items from the calculation of "compensation earnable" when determining pension amounts. The Counties conformed their retirement systems to the new law, excluding items from compensation earnable for all employees retiring after PEPRA’s January 1, 2013 effective date.

Various employees and employee associations sued the Counties, alleging the pension calculation changes unlawfully impaired the pension rights of employees hired before PEPRA went into effect. The plaintiffs alleged that they had vested rights to pension benefits, which could not be altered.

These lawsuits were consolidated into one case. After the Superior Court ruled on the legal issues, the plaintiffs appealed.

PEPRA’s Changes
The Court of Appeal considered four types of compensation that PEPRA excluded from pension calculations pursuant to the revised version of Govt. Code § 31461(b): leave cash-outs, terminal pay, pay outside of normal working hours, and enhancement payments.

As it relates to leave cash-outs and terminal pay, the Court of Appeal held that PEPRA merely clarified existing law and did not change it. Specifically, both before and after PEPRA, leave cash-outs were included in a member’s pensionable compensation as long as the right to sell the leave was earned during the final compensation period in question. Similarly, the Court of Appeal held that terminal pay was always excluded because it only accrued after retirement and, therefore, always fell outside the final compensation period. Since PEPRA did not change the law as to these items, the analysis ended there.

With respect to pay outside normal working hours and enhancement payment, the Court of Appeal determined that PEPRA had changed existing law. For example, on-call or standby pay, which had previously been included in compensation earnable under CERL when required as part of an employee’s regular work assignment, is now expressly excluded by PEPRA. Similarly, PEPRA expressly prohibits any compensation intended to enhance a member’s retirement benefit from being included in compensation earnable; whereas, under CERL an employer’s intent in providing compensation was irrelevant in establishing whether the compensation was pensionable.

Vested Rights Analysis
After concluding that PEPRA had substantively changed CERL with respect to on-call pay and pension enhancements, the court looked at whether the changes constituted a reasonable modification to prior law or whether they impaired the vested contractual rights of public employees. Public pensions are protected under both the United States and California Constitutions, which prohibit laws "impairing the obligation of contracts."

Alameda County discussed a similar case – Marin Association of Public Employees v. Marin County Employees’ Retirement Association. The Marin County court held that PEPRA’s changes did not unconstitutionally impair the vested rights of Marin County’s employees, because a public employee is only entitled to a "reasonable" pension.

The Alameda County court agreed with the Marin County holding, but disagreed with its analysis as too general. The Alameda County court stated that in order to determine whether pension modifications are constitutional, a court must conduct individualized balancing tests for each pension system and each affected employee. These tests involve specifically analyzing the changes effected by the new law; considering the impact of these changes on legacy or classic members; and evaluating the legislative rationale for the change. The appellate court remanded the vested rights analysis to the trial court, instructing it that in order to allow PEPRA to modify pensionable compensation of employees hired before PEPRA’s effective date, the trial court must find compelling evidence that PEPRA’s changes concerning on-call and enhancement benefits bear a material relation to the theory of a pension system and its successful operation.

Equitable Estoppel
Lastly, the court looked at whether some employees were entitled to their pensions based on the principle of equitable estoppel. This principle precludes people or entities from denying certain facts if they have intentionally led others to believe these facts are true and if others have relied on the belief to their detriment. For government actions, the injustice resulting from failure to uphold an estoppel must be "of sufficient dimension."

In order to resolve pension-related disputes, Merced County authorities had promised to include terminal pay as part of their employees’ pensionable compensation, even though this was not authorized by CERL or PEPRA. The appellate court concluded the Merced County employees had a valid estoppel claim allowing them to include terminal pay in compensation earnable, to the limited extent such pay was designated as pensionable by their settlement agreements.

Effect on Employers
There are now conflicting appellate decisions concerning the depth of the vested rights analysis that must be conducted – Alameda County’s individualized balancing test versus Marin County’s more generalized approach. Until the Supreme Court issues a decision clarifying this conflict, employers are bound by the rulings of their district’s appellate court.