The California Supreme Court Upholds PEPRA’s Changes to “Compensation Earnable,” But Leaves the “California Rule” Intact

08.13.2020

In an important decision with significant implications for California public pension systems, the California Supreme Court (“the Court”) held, in Alameda County Deputy Sheriffs’ Assn. vs. Alameda County Employees’ Retirement Assn., that the longstanding “California Rule” does not prevent the Legislature from limiting “pension spiking” and other forms of pension abuse.

The “California Rule” is a legal framework applicable to vested benefits under public pension systems, which has been adopted by the Court in a series of decisions over more than a 60 year span. The California Rule notably provides that disadvantageous modifications to a pension system should[1] be accompanied by comparable new advantages.

Several public employee unions argued that provisions of the California Public Employees’ Pension Reform Act of 2013 (PEPRA), which eliminated certain forms of “pension spiking” (i.e. by redefining “compensation earnable” to exclude overtime pay, pay for unused leave, and compensation paid to enhance retirement benefits) under the County Employees Retirement Law of 1937 (CERL), unlawfully breached longstanding settlement agreements, violated promises upon which public employees reasonably relied, and violated the California Rule, insofar as no comparable new advantage was provided.

The Court rejected Plaintiff’s argument, and upheld the PEPRA amendments, explaining that while the California Rule generally contemplates that a change in pension benefits should “provide comparable new advantages to offset any financial disadvantages,” this is not a mandate, and no comparable new advantage is required when the Legislature acts with a “constitutionally permissible purpose,” such as closing loopholes and eliminating opportunities for pension abuse.

The Court explained:

Experience with the implementation of a statutory pension system will inevitably reveal the need for change to close loopholes and foreclose opportunities for abuse. The Legislature must have the authority, discretion, and flexibility to address such problems without being required to, in effect, extend the life of the loopholes and the opportunities for abuse for the duration of the careers of current employees by providing comparable advantages.

Applying this analysis, the Court upheld the PEPRA amendments as consistent with this standard.

The Plaintiffs also argued that even if the PEPRA provisions were constitutionally permissible, County employees hired before 2013 should not be subject to the changes because adhering to the PEPRA provisions is inconsistent with preexisting settlement agreements. The Court rejected this argument and explained that the duty of County retirement boards is to administer the CERL as enacted by the Legislature. Counties violate this duty if they adhere to a settlement agreement that is inconsistent with legislative enacted changes to public pension law. The Court explained that county retirement boards “have no authority to disregard such amendments by continuing to pursue a practice that is contrary to” public pension retirement law. The Court went on to say:

As a consequence, any provision in the settlement agreements that would have required the retirement boards to continue to apply the agreed upon characterizations in the face of contrary legislative changes or authoritative judicial interpretations would have been void. The retirement boards had no authority to enter into an agreement that would require them to pursue a policy that conflicts with the governing legislation.

The Plaintiffs also argued that they justifiably relied on promises set out in the settlement agreements; and, therefore, those agreements should be honored under the doctrine of equitable estoppel. The Court rejected this argument, explaining that all parties to the settlement agreements were presumably aware that the CERL, and thus the settlement agreements based on the CERL, were subject to legislative change. The Court determined that the doctrine of equitable estoppel would be applicable in these circumstances only if the agreements included a provision that the county boards would adhere to the terms of the agreement “notwithstanding any change in the governing statute.” Absent any such a clause, settlement agreements are wholly subject to public pension law, which may be modified by the Legislature.

This was the second in a series of decisions involving pension benefits. In Cal Fire Local 2881 v. CalPERS, the Court held that PEPRA provisions limiting employees’ ability to purchase “air time” were lawful. (See “California Rule” Survives (For Now) — But “Airtime” Does Not)

The Court will next address Marin Assn. of Public Employees v. Marin County Employees Retirement Sys., which also deals with the definition of compensation earnable in the context of standby pay, administrative response pay, call-back pay, and cash payments in lieu of health insurance.

Although Alameda County involved pension benefits under CERL, the same principles apply to pension benefits provided by CalPERS and CalSTRS. This decision will also impact cases involving post-retirement medical benefits, as such cases are frequently analyzed by reference to cases involving pension benefits.

[1] The Court rejected Plaintiffs’ contention that the California Rule requires that such changes must be accompanied by comparable new advantages.