California Supreme Court Clarifies Law on Vested Pension Rights

Today the California Supreme Court issued its long-awaited decision in Cal Fire Local 2881 v. CalPERS (S239958), which many had anticipated would revisit the so-called “California Rule” that governs when public employee pensions may be modified. Overall, the case signals that the Court is taking a hard look at the vested rights doctrine, and views it to be significantly more limited than the prevailing understanding of the doctrine.

The Supreme Court stated that it was not revisiting the rules regarding when a vested benefit may be altered at this time because it had concluded that there was no “vested right” to the purchase of “air time” – the benefit at issue – in the first place. But the Court (1) clarified the rules governing vested rights in ways very helpful to California’s public employers, and (2) left the door open to future consideration of arguments made by the State and various amici – that the “California Rule” does not prevent modification of benefits tied to future work, not yet performed.

BACKGROUND

Until 2011, when the legislature enacted pension reform, employees enrolled in CalPERS had the option to purchase, at their own expense, up to five years of additional service. As part of pension reform, the state legislature ended that right for employees who had not yet exercised it. In response, Cal Fire Local 2881 claimed that the legislature had violated its members’ constitutional rights, under the state contracts clause, to a pension benefit. They argued that they had a vested right to purchase air-time that had been destroyed by the legislature without providing any comparable new benefit.

In finding no vested right to the option to purchase air-time, the Supreme Court reiterated that: “Contract clause protection of the terms and conditions of public employment historically has been the exception, rather than the rule.” The Court articulated only two rationales for finding pension benefits to be vested rights: (1) “clear” legislative intent to create private rights of a contractual nature, and (2) the rights at issue are deferred compensation.

HEAVY BURDEN TO PROVE “CLEAR” LEGISLATIVE INTENT

First, the Court emphasized the heavy burden faced by any claim to a vested right. The Court held that there is a “legal presumption against the creation of a vested contractual right” and any plaintiff must produce proof that “clearly evince[s] a legislative intent to create private rights of a contractual nature.” The Court made it clear that this standard, articulated in the Court’s opinion in Retired Employees Association of Orange County v. County of Orange (2011) 52 Cal.4th 1171, applied to alleged contracts for all benefits, both express and implied, including pension benefits.

Applying this standard, the Court held that the fact that air-time could be purchased “at any time prior to retirement” was not a guarantee by the state legislature “to make the opportunity” to purchase air-time “available indefinitely.” The Court found no “clear” legislative intent to do so.

PROTECTION FOR “DEFERRED COMPENSATION” ALREADY EARNED

Second, the Court clarified that its prior decisions, finding other pension benefits to be vested, were based on the fact that they were “deferred compensation” – in other words the benefits had already been earned based on service already performed. The Court stated that: “the receipt of pension benefits is granted constitutional protection because the benefits constitute a portion of the compensation awarded by the government to its employees, paid not at the time the services are rendered but at a later time.”

The Court held that the option to purchase “air-time” was not deferred compensation because “the amount of an eligible employee’s service was entirely irrelevant to his or her exercise of the opportunity.” The Court found that the requirement of five years of service “simply precluded” purchase by those “who had not yet established their eligibility for a pension.”

Importantly, the Court’s statements regarding deferred compensation focused on compensation for work already performed. The Court did not foreclose arguments made by the State and many amici that the contracts clause only protects benefits already earned and that the legislature has the authority to change the benefits attached to future work. The Court simply did not consider those arguments at this time.

DEFERENCE TO RETIREMENT SYSTEMS

Finally, the Court made the important statement that the legal opinions of CalPERS did not bind the Court: “Whether the opportunity to purchase [air-time] is a constitutionally protected right is an issue of constitutional law, not pension law. With due respect to CalPERS, its interpretations of the state Constitution are not entitled to the same deference as its interpretations of California’s pension laws.”

WHAT IS A PENSION BENEFIT?

The Court drew a strong distinction between “core” pension benefits and benefits such as air-time that are not earned incrementally through service. As to the latter, the Court suggested they could be changed absent a clear contract or statute indicating a legislative intention to maintain them indefinitely.

OTHER NON-PENSION BENEFITS:

The Court also implied that pension benefits are special, and that other benefits such as retiree health are far less likely to be vested. Which specific benefits qualify as “pension benefits,” however, remains to be seen and may form the next round of cases bubbling up from lower courts.

For further information, please contact:

Jon Holtzman

Jon Holtzman
jholtzman@publiclawgroup.com
415.848.7235

Linda Ross

Linda Ross
lross@publiclawgroup.com
415.848.7239

2019-03-07T10:06:51+00:00March 4th, 2019|