Court Upholds City Council Charter Authority To Modify Retirement Benefits Against Vested Rights Challenge

Fry et al. v. City of Los Angeles (March 7, 2016), B259791, ___ Cal.App.4th ___ [ 2016 WL 861241]

In Fry et al. v. City of Los Angeles, the Court of Appeal rejected a vested rights challenge to a City of Los Angeles ordinance that “froze” the subsidy paid to some retirees towards their medical insurance premiums. The Court of Appeal held that, despite a five-year delegation of authority to a retirement board, and a history of increases to the subsidy, the City Council had the authority, under the City Charter, to take back the delegation and freeze the subsidy. Our firm, Renne Sloan Holtzman Sakai LLP, represented the City of Los Angeles in this case.

Background

Under its Charter authority, the Los Angeles City Council created a subsidy to defray the cost of premiums paid by retired City employees towards their medical insurance. A 2005 Charter amendment provided that the City Council may set the amount of the subsidy or may delegate that role to the Los Angeles Fire and Police Pension (LAFPP) retirement board. Beginning in 2006, the City Council delegated the setting of the subsidy to the retirement board under a formula that capped the increases at the medical inflation rate or 7%, whichever was less. Every year, the board raised the subsidy by the maximum possible amount.

In 2011, the Los Angeles City Council partially “froze” the subsidy (called the “Freeze Ordinance”). The freeze applied only to employees who were still active, as to their future retirement, unless the employees “opted in” to pay an additional 2% retirement contribution.

Contentions in the Lawsuit

A group of City employees and a retirement association challenged the Freeze Ordinance. Petitioners argued that they had a vested right to the board of retirement continuing to administer a “flexible” subsidy. Petitioners did not argue that they had a right to subsidy increases, but rather a right to the continued exercise of discretion by the retirement board under the formula previously established by the City Council. The trial court agreed and issued a writ of mandate that required the retirement board to set the amount of the subsidy, and set aside the Freeze Ordinance.

Court of Appeal Decision

The Court of Appeal rejected Petitioners’ arguments and reversed the trial court decision. The Court based its decision on the principles articulated by the California Supreme Court in the case of Retirement Employees of Orange County, Inc. v. County of Orange (2011) 52 Cal.4th 1171, and other cases. Under these cases, courts presume that “a statutory scheme is not intended” to create vested rights and require a party to show “clear” and “unmistakable” legislative intent to confer vested rights.

Applying these principles, the Court of Appeal carefully analyzed the Charter and Administrative Code sections that governed the subsidy. The Court affirmed the finding by the trial court that there was no vested right to subsidy increases, finding that “the Delegation Ordinance granted the Board the discretion to change the level of the subsidy and placed a cap on the amount of any increase, but did not require that the subsidy increase.” But the Court of Appeal disagreed with the trial court’s holding that the Delegation Ordinance was irrevocable.

First, examining the City Charter, the Court held that the “2005 Charter Amendment eliminated the limits on the Council’s authority to set the subsidy” and also removed any requirement that determination of the subsidy amount be delegated to the retirement board. Second, examining the City’s Administrative Code, the Court held that the Delegation Ordinance “did not state that delegation of authority to the Board was absolute or in perpetuity or that the Council was divesting itself of authority to set the subsidy under other circumstances.” And, in fact, the Court noted that a delegation of authority “to an unelected body requires adequate safeguards such as the revocability of such delegation.”

Based on this careful legislative analysis, the Court of Appeal held that: “By passing the Freeze Ordinance in July 2011, the City Council in effect revoked its delegation of authority to the Board, exercised its own discretion and authority to set the subsidy, and fixed the subsidy at the July 1, 2011 amount. These actions were within the City Council’s authority under the 2005 Charter amendments.”

Practice pointers:

The following practice points are highlighted by the Court of Appeal decision.

(1) Pay careful attention to the statutory scheme. In Fry, the Court of Appeal relied on a careful analysis of the City Charter and City ordinances. Whether a court will find a vested right to a retirement benefit depends on the particular statutes involved. It is often assumed that once a retirement benefit has been granted it cannot be changed, but the legality of any proposed change depends on the legislation or agreements involved. Retiree health benefits, in particular, are subject to varying ordinances, resolutions and memoranda of understanding. Each statutory scheme must be evaluated on its own merits.

(2) Do not assume that a history of benefit increases means that there is a vested right to increases. In Fry, Petitioners relied on a long history of increases in the amount of the subsidy. These increases occurred both before and after the 2005 Charter amendment that gave authority over the subsidy to the City Council. Despite this history, the Court of Appeal held that, under the City Charter, the City Council was not required to either grant increases or continue delegation to the board of retirement, which historically had granted increases.

(3) When granting benefits, be clear on whether the legislative body retains discretion over the benefit or subsidy amount. In Fry, the Court found that the City Council had retained its authority over the amount of the subsidy, and that no permanent delegation to the retirement board had occurred. This holding was based on careful legislative analysis and on well-established legal principles that do not permit the irrevocable delegation of Charter-given authority. But, in drafting any legislation (or MOU), it is best if the document clearly specifies whether the legislative body intends to retain authority over any benefit or subsidy amount. This is often done through a durational clause or a reservation of rights clause. The more specific, the better.

For more information, please contact Linda Ross (lross@publiclawgroup.com, (510) 995-5807)