Appellate Court Ruling: Absent a “Clear Showing,” the Presumption Is That a Memorandum of Understanding Does Not Create a Vested Right

09.01.2017

On August 22, 2017, a California appellate court ruled that a Memorandum of Understanding ("MOU") between the Vallejo Police Officers Association ("Police Association") and the City of Vallejo ("City") did not provide a vested right to a retiree medical benefit that covered insurance premiums up to the full cost of a Kaiser health plan. Vallejo Police Officers Association v. City of Vallejo, 2017 WL 3600572. In reaching this conclusion, the appellate court determined that the Police Association failed to present sufficient evidence of the City’s intent to create such a vested right. In other words, the Police Association did not sufficiently show that the City intended the promise relating to retiree medical benefits to survive beyond the MOU’s specified period. This ruling reinforces the California Supreme Court’s holding in Retired Employees Association of Orange County, Inc. v. County of Orange (2011) 52 Cal.4th 1171, 1182 ("REAOC"), that a party asserting that contract rights are vested rights must overcome the presumption that an MOU does not create vested rights.

Background
In May 2008, the City filed for bankruptcy relief. At the time, under an existing labor agreement with the Police Association, the City paid the full cost of any medical plan offered by CalPERS for employees and retirees. In June 2008, the City filed a motion asking the bankruptcy court to set aside its agreement with the Police Association. Before this motion was heard, the City negotiated with the Police Association to change the labor agreement. In January 2009, the Police Association and the City agreed on a new contract ("2009 Agreement"), which reduced the City’s contribution to health insurance benefits from full coverage for any CalPERS plan to coverage capped at 100% of the rate for comparable Kaiser coverage.

In June 2012, the Police Association and the City began negotiating a replacement for the 2009 Agreement. From the start, the City told the Police Association that it wanted to reduce its liability for retiree medical costs by reducing the City’s retiree medical premium contribution to $300 per month. However, the Police Association refused to agree to this change, and argued that current employees and retirees had a vested right to the retiree medical benefits identified in the 2009 Agreement.

After extended discussions and negotiations, the City declared impasse and gave its "last, best and final offer," which included the reduction in retiree medical premium contribution to $300 per month.

In response, the Police Association filed a petition asking the superior court to declare that its members had "a vested constitutional right to a defined retirement medical benefit" for the entire cost of the member’s retirement medical premium up to the cost of the "Kaiser rate." The superior court denied the Police Association’s petition. The Police Association appealed.

Analysis
The Police Association argued that the 2009 Agreement and other evidence represented the City’s promise to pay the entire cost of each member’s retirement medical premiums up to the cost of the comparable Kaiser coverage, thereby creating a vested right. As a preliminary matter, the appellate court noted that the legal assumption is that an MOU does not create a vested right. In order to overcome this presumption against vested rights, a party must provide a "clear showing" of the entity’s intent to create such a right from clear contractual language or convincing extrinsic evidence. In this case, the appellate court concluded that the 2009 Agreement’s language did not explicitly create a vested right to retiree medical benefits in the amount of the Kaiser rate, and did not provide a clear basis for implying such a vested right.

As an alternative argument, the Police Association claimed that the parties’ previous agreements and bargaining history demonstrated the City’s intent to create a vested right. However, the appellate court rejected this argument for two reasons: 1) the Police Association was not able to cite any specific language in the previous agreements demonstrating the creation of a vested right to full coverage for a basic health plan; and 2) even if such a right had been created, it was eliminated by the 2009 Agreement in which the Police Association and the City agreed to change that benefit.

The Police Association also presented declarations from people who signed the 2009 Agreement, wherein they described their subjective understanding of the 2009 Agreement’s intent. However, the appellate court rejected these declarations as insufficient because they did not represent the City’s intent. The City’s intent must be demonstrated by admissible evidence such as statements made by the City staff or others to the City Council before its approval of the 2009 Agreement. Since the Police Association was not able to identify any statement made to or by the City Council in approving the 2009 Agreement, it did not carry its burden to show clear evidence that the City Council intended to confer a vested right to the full Kaiser rate.

Next, the Police Association asserted that the negotiations over the 2009 Agreement constituted convincing evidence of a vested right to the full Kaiser rate. The Police Association pointed to a proposed revision it submitted that purportedly guaranteed funding for the full Kaiser rate. The appellate court denied this claim based on the City’s rejection of the Police Association-proposed language, which it cited as evidence that the City did not intend to create a vested right.

The Police Association also argued that the City’s past practice of paying the costs created a vested right; however, the appellate court held "that the fact that the City paid the full cost of retiree medical premiums over a period of years does not imply a right that such payments will continue, absent a showing of legislative intent."

Finally, the Police Association claimed that the City informed employees that they would receive fully-paid medical benefits upon retiring; however, the Police Association was unable to identify any such statements by people authorized to bind the City. Therefore, the appellate court rejected this argument.

Importance of this Case
Although this case is presently unpublished, it reinforces the court’s holding in REAOC that the presumption against vesting of benefits applies to MOUs and other labor agreements that contain language limiting the applicable time period. In other words, including a retirement benefit in an MOU does not automatically create a vested right to that benefit. There still must be a clear showing of legislative intent to have the right survive beyond the agreement’s term.