Another Appellate Panel Holds That Public Employers May Make “Reasonable” Modifications to Vested Pension Benefits, without Requiring a “Comparable” New Benefit

Cal Fire Local 2881 et al. v. California Public Employees’ Retirement System, et al. (December 30, 2016),
California Court of Appeal, First Appellate Division, Division Three, Case No. A142793 .

In the coming year, the California Supreme Court is poised to reexamine California’s controversial “vested rights” doctrine. Historically, the doctrine has limited the ability of public employers to alter pension benefits for public employees, even when the benefits became financially unsustainable.

In November 2016, the Supreme Court accepted review of the First District Court of Appeal, Division Two’s decision in Marin Association of Public Employees v. Marin County, 2 Cal.App.5th 674 (2016). In that case, the Court of Appeal held that the decision by the Marin County Employees’ Retirement Association’s (MCERA) to prospectively eliminate pension benefits attributable to “stand by” and other time was “reasonable.” Contrary to plaintiffs’ contentions, the Court found that MCERA was not required to offer a “comparable” new benefit to employees.

In Cal Fire Local 2881, Division Three joined Division Two, and held that the state had the power to eliminate the purchase of “air time” because the modification was “reasonable” and did not require the offer of a “comparable” benefit to employees.

Background – Purchase of “Air Time.”

Under Government Code section 20909, enacted in 2003, eligible public employees had the option to purchase at cost up to five years of service credit. Purchase of this service credit, called “air time,” enabled employees to increase their pensions.

As of 2013, the state legislature eliminated the option to purchase “air time” as part of the Public Employees’ Pension Reform Act of 2013 (PEPRA), designed to strengthen the state’s public pension system by eliminating pension “spiking.”

A number of unions sued, claiming that the elimination of the option to purchase “air time” violated their vested rights under the contracts clause of the California constitution (Cal. Const., art. 1, section 9).

The Court Found No “Clear” Intention To Create A Vested Right To “Air Time”

In Cal Fire Local 288, the Court of Appeal first applied the standards enunciated in Retired Employees Assn. v. Orange County, Inc. v. County of Orange, 52 Cal.4th 1171, 1186, 1189, which held that plaintiffs carry “the heavy burden” of “clearly” proving that the legislature intended to grant a vested right.

The Court of Appeal found that there was “nothing in either the text of the statute … or its legislative history” that unambiguously stated an intent to create a vested benefit. Rather the Court held that Section 20909, “does no more than permit an eligible member” to “elect” to make the additional contributions to purchase airtime. The Court declined “to add to this straightforward reading of this statutory phrase any promise by the Legislature not to modify or eliminate the option to purchase service credit” and stated that the legislature would have “used much clearer language if it had in fact harbored such intent.”

The Court Found A “Reasonable” Modification, With No Requirement To Provide A “Comparable” New Advantage

The Court of Appeal also held that, under Supreme Court standards, a public employer had the right to make “reasonable” modifications to an employee’s pension rights. Quoting Betts v. Board of Administrative, 21 Cal.3d 859, 864 (1978), the Court stated that: “To be sustained as reasonable, alternations of employees’ pension rights must bear some material relation to the theory of a pension system and its successful operation, and changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages.”

Importantly, the Court agreed with Division Two in rejecting the contention that the state was required to prove a “comparable advantage” to offset the loss of the benefit: “We agree with this conclusion reached by our colleagues, and as such, reject plaintiffs’ claim that, absent proof that CalPERS members were granted a comparable advantage, the Legislature’s elimination of the airtime service credit must be deemed constitutionally barred.”

The Court concluded with the affirmation that public employees are entitled “only to a ‘reasonable’ pension, not one providing fixed or definite benefits immune from modification or elimination by the governing body.”

The California Supreme Court will give this topic further consideration when the Court hears the case involving MCERA, already accepted for review by the Court.

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