California Court of Appeal Holds That Longevity Performance Bonus Should Be Excluded from Pension Calculations

06.13.2017

On June 5, 2017, the California Court of Appeal published DiCarlo v. County of Monterey, holding that employees’ stipends that depended on both longevity and performance were properly excluded from the calculation of public pension benefits. The Court of Appeal ruled that this combined bonus was not expressly authorized by the California Code of Regulations; therefore, it was excluded from recognized special compensation.

Background of Case
The County of Monterey ("County") entered into a Memorandum of Understanding ("MOU") with the Monterey County Deputy Sheriffs Association that included a longevity performance stipend ("Stipend"). The Stipend provided that Sheriffs Association members ("Sheriffs") who served the County for 20 years and had a satisfactory or outstanding performance evaluation could receive an additional stipend of up to eight percent. The County has never reported the Stipend to the California Public Employees’ Retirement System ("CalPERS"). Therefore, CalPERS has not included it as compensation in calculating Sheriffs’ retirement benefits.

Several Sheriffs asked the trial court to (1) compel the County to report the Stipend to CalPERS as an item of special compensation; and (2) compel CalPERS to include the Stipend in calculating retirement benefits.

The trial court ruled that the longevity performance stipend was not reportable to CalPERS as an item of special compensation under subsection (a) of the California Code of Regulations, title 2, section 571 ("Section 571"). It granted the County’s motion for summary adjudication of issues and CalPERS’s motion for judgment on the pleadings.

The Sheriffs appealed.

The Appellate Court’s Reasoning
The California Court of Appeal based its ruling on its interpretation of several statutes, its prior decisions, and the intent of legislators and rule makers.

The court first examined Section 571(a), which provides that bonus pay and longevity pay separately constitute items of special compensation that must be reported to CalPERS. Specifically, subsection (a) states in relevant part:

The following list exclusively identifies and defines special compensation items for members employed by contracting agency and school employers that must be reported to CalPERS if they are contained in a written labor policy or agreement:

(1) INCENTIVE PAY

Bonus - Compensation to employees for superior performance such as "annual performance bonus" and "merit pay"…

Longevity Pay - Additional compensation to employees who have been with an employer, or in a specified job classification, for a certain minimum period of time exceeding five years.

The Court of Appeal stated that only items expressly identified in Section 571(a) constitute special compensation that must be reported to CalPERS and included in CalPERS’s calculation of retirement benefits. The court relied on Section 571(c), which states in part: "Only items listed in subsection (a) have been affirmatively determined to be special compensation." It also cited Government Code section 20636, subdivision (c)(7)(C) and the court’s prior holding in City of Pleasanton, 211 Cal.App.4th 522 (Cal. Ct. App. 2012), which provide that special compensation does not include payments that the CalPERS Board has not affirmatively determined to be special compensation.

The court noted that the Stipend at issue is contingent on the Sheriffs meeting two requirements: 20 years of service; and satisfactory or outstanding performance. Although Section 571(a) separately lists bonus pay and longevity pay, it does not list incentive pay that combines bonus pay and longevity pay. Therefore, the appellate court agreed with the trial court that the Stipend at issue did not constitute special compensation under Section 571 that must be reported to CalPERS and included in CalPERS’s calculation of retirement benefits.

The appellate court further relied on legislative and rulemaking history showing:

[T]he Legislature intended that former Government Code section 20023 and its successor statute, Government Code section 20636, would combat pension spiking by, among other things, preventing local agency employers from adding to the items reportable as special compensation. Section 571 was implemented to serve that purpose by clarifying that the items of special compensation that are reportable to CalPERS for the calculation of retirement benefits are only those items included in the "exclusive and specific list" set forth in section 571.

The Court of Appeal also cited the California Supreme Court’s instruction to resolve ambiguities or uncertainties regarding the meaning of pension legislation in favor of the pensioner. It noted, however, the Supreme Court’s caveat that such construction must be consistent with the clear language and purpose of the statute. In this case, the Court of Appeal determined that favoring the pensioners would violate Section 571’s clear language and purpose.

The court concluded that the Stipend did not qualify under Section 571(a) as an item of special compensation reportable to CalPERS. Consequently, it agreed with the trial court that the County did not have a duty to report the longevity performance stipend to CalPERS. It affirmed the trial court’s granting of CalPERS’s motion for judgment on the pleadings and judgment of dismissal in CalPERS’s favor.

What the Case Means for Employers
Employers may note that the Court of Appeal construed special compensation narrowly, despite recognizing the California Supreme Court’s instruction to resolve ambiguities and uncertainties in pension legislation in favor of pensioners. In this regard, employers will not be permitted to expand the items of recognized special compensation identified in Section 571, even if said expansion merely consists of combining separately listed and acceptable forms of special compensation.