City of Los Angeles Prevails in “Vested Rights” Challenge to Health Insurance Freeze

03.29.2016

On March 7, 2016, the California Court of Appeal, Second Appellate District, addressed the following question: When does a public entity create a "vested right" that the United States and California constitutions would then prohibit it from changing through legislative action? In Fry v. City of Los Angeles, the Court of Appeal considered whether the City’s delegation of authority to the Board of the Los Angeles Department of Fire and Police Pension Commissioners ("Board") created a "vested right" that would prevent the City from later issuing an ordinance that froze a health insurance subsidy and required impacted individuals to voluntarily pay additional contributions in order to guarantee the receipt of future increases to the subsidy. The Court of Appeal determined that the City’s delegation of authority to the Board could not restrict the City’s authority and, more importantly, did not create a vested right to a Board-determined subsidy.

Factual Background

In 1974, voters authorized the City to contribute toward health insurance for retired police officers and firefighters in the form of a subsidy. The 1974 amendment put a cap on the amount that the City could contribute, and provided that the Board of Pension Commissioners would administer the program.

In 2005, voters eliminated the cap on the subsidy and authorized the City to establish the maximum contribution. The City passed an ordinance fixing the subsidy at $735.38 per month effective July 1, 2005.

In 2006, the City authorized the Board to make changes to the subsidy amount on an annual basis beginning in 2006 and subject to certain specified limitations. Any change exceeding these limitations had to be submitted to the City for review. If the City rejected a subsidy set by the Board, then the City would determine the amount and adopt it by resolution. Additionally, if the Board failed to timely act or the City wanted to increase the subsidy beyond the Board’s recommendation, the City retained the right to establish the maximum amount. In short, the City reserved the right to make the final decision.

On July 25, 2011, the City passed an ordinance that froze the maximum subsidy. Between June and August 2011, the City entered into several Letters of Agreement that gave union members the option of voluntarily contributing a maximum of 2% of their base salary in order to guarantee receipt of any future increases to the subsidy. Thus, the voluntary contribution was intended to create a vested right to future increases. On October 5, 2011, the City passed another ordinance to confirm that the "freeze" did not apply to any employees that irrevocably opted to make the additional contributions in exchange for vested rights to the increased subsidies.

On November 1, 2012, four City employees and the Los Angeles Retired Fire & Police Association, Inc. filed a petition for writ of mandate. The petition claimed that the 2011 ordinances impaired the employees’ vested contractual rights to receive increases to the subsidy without making additional contributions. On July 28, 2014, after briefing and argument, the trial court rejected the claim that the employees had a vested right to increases in the amount of the subsidy; however, it granted the writ authorizing the Board to exercise its discretion regarding the amount of the subsidy without regard to the freeze. The City appealed this latter part of the decision.

Analysis

A claim concerning the existence and protection of a "vested right" is considered under the contract clause of either the California Constitution or the Federal Constitution, which prohibits the passage of any law that impairs a contractual obligation. The contract clause limits the power of public entities to unilaterally change their own contracts through legislative action. California law treats retirement benefits as an element of compensation that is a vested contractual right.

However, having a vested contractual right to earn a retirement benefit does not mean that all terms governing the retirement benefit become vested. Any analysis of retirement benefits depends on exact what was promised. The documents have to show a clear intention by the public entity to create a contract granting vested rights. Any doubts fall in favor of the public entity and against the creation of a vested right. Therefore, "it is presumed that a statutory scheme is not intended to create private contractual or vested rights and a person who asserts the creation of a contract with the state has the burden of overcoming that presumption." (Retired Employees Assn. of Orange County, Inc. v. County of Orange (2011) 52 Cal.4th 1171, 1185-1186, internal quotations omitted.) In other words, it is presumed that vested rights were not created, and the employees have a heavy burden to overcome this assumption.

Based on these basic concepts, the Court of Appeal determined that the 2005 Charter amendments and the subsequent ordinances did not demonstrate a "legislative intent" to create a vested right to a Board-determined subsidy amount. Instead, it decided that those documents showed the City’s intent to reserve final decision-making power over the subsidy amount. While the City maintains the obligation to review the subsidy, it is not required to increase the subsidy.

Significance

This case is significant because it reinforces the underlying law related to the creation of "vested rights." The key factor remains an analysis of the specific documentation said to have created the contractual obligation cited as the vested right. Any party claiming a vested right must be prepared to identify the specific source and contours of that obligation and must be able to overcome the powerful presumption against the creation of such rights through a statutory scheme such as ordinances or resolutions.