“California Rule” Survives (For Now) — But “Airtime” Does Not

Today, the California Supreme Court issued its decision in Cal Fire Local 2881 v. CalPERS, and affirmed the underlying trial court and Court of Appeal decisions.  Cal Fire is one of four cases addressing the “California Rule,” which generally provides that employees are forever entitled to the pension benefits that were promised to them on the first day that they began their service.  The California Rule poses significant problems for fiscally limited agencies because the rule essentially prevents decreases in an employee’s pension benefit.  Although it was initially presumed that Cal Fire would provide the California Supreme Court with an opportunity to address the continued application of the California Rule, the decision makes such an analysis unnecessary as the California Supreme Court determined that the elimination of the opportunity for public employees to purchase additional retirement service (“ARS”) credit was not a vested right; therefore, there was no need to consider the validity of the California Rule.

Cal Fire Local 2881 v. CALPERS

 This case involves the Public Employees’ Pension Reform Act of 2013 (PEPRA).  In part, PEPRA eliminated the opportunity to purchase ARS credit unrelated to any actual service — a benefit that the Legislature first offered to employees in 2003.  Under Government Code section 20909, public employees could purchase five years of ARS credit so long as they did the following: (1) provide at least five years of service for a public agency, and (2) pay for both the employee and the employer share of the full present cost of the pension benefit.

Effective January 1, 2013, PEPRA eliminated employees’ right to purchase ARS credit, subject to a 12-week grace period for current employees.  Employees who had already purchased ARS credit or did so within the grace period were not affected.

The California Supreme Court’s Holding

The case addressed the constitutionality of one of the changes affected by PEPRA – i.e., the elimination of the opportunity for public employees to purchase ARS credit.  The parties presented two issues for decision.  The first is whether the opportunity to purchase ARS credit was a “vested right” protected by the federal and state contract clauses.  The second is whether the Legislature’s elimination of that benefit constituted an unconstitutional impairment of a public employees’ vested right.  The second issue would only be addressed if the opportunity to purchase ARS credit was determined to be a vested right.

The California Supreme Court held that the opportunity to purchase ARS credit was not a vested right; therefore, it was not protected by the federal or state contract clauses.  As a result, it could be changed or eliminated at the Legislature’s discretion.  Because it reached this conclusion, the California Supreme Court did not have to address the second issue of whether this change was an unconstitutional impairment of a public employees’ vested right.

In deciding this case, the California Supreme Court considered and rejected the Union’s various arguments.  First, it concluded that there was no express indication that the Legislature intended to create a contractual right to purchase ARS credit when it originally enacted section 20909.  In rejecting this argument, the California Supreme Court determined that the Legislature had simply enacted a statute that granted the opportunity to purchase ARS credit.  It reasoned that such statutes, which merely announce a policy rather than create a contract, are subject to revision and repeal at any time.

Second, the California Supreme Court considered and rejected the Union’s argument that an implied contractual right had been created because the opportunity to purchase ARS credit was a form of deferred compensation.  In this regard, the California Supreme Court determined that there was no basis for concluding that the opportunity to purchase ARS credit was granted as deferred compensation because the opportunity was not tied to actual service.  The California Supreme Court also rejected this implied contract theory as a form of unilateral contract because it determined that the Legislature would still be entitled to revoke such an offer as to those who had not yet performed the required conditions – i.e., making a written election and the required payment.  By enacting PEPRA, the Legislature had done just that.  The California Supreme Court also noted that the required performance was unrelated to actual public service.

Third, the California Supreme Court rejected the claim that the opportunity to purchase ARS credit was entitled to constitutional protection simply because it involved the pension system.  In reaching this conclusion, the California Supreme Court reasoned that the increase in pension benefits resulting from the purchase of ARS credit is a return on funds used to make the purchase as opposed to compensation for actual public employment.

Finally, the California Supreme Court also went on to address and reject the Union’s arguments relating to the application of Olson v. Cory, as well as their contention that employees were entitled to rely on a CalPERS publication, which characterized the opportunity to purchase ARS credit as a vested right.  With respect to the former argument, the California Supreme Court factually distinguished the case and emphasized that applying Olson to this situation would undercut the general proposition that “the terms and conditions of public employment are [not] protected by the contract clause merely because of their existence.”  With regard to CalPERS, the California Supreme Court noted that CalPERS’ interpretation of the state Constitution is not entitled to deference.

Conclusion:

As we predicted in December 2018 after oral argument, the California Supreme Court did rule in favor of CalPERS and the State of California.  We anticipated that the California Supreme Court’s ruling would be limited by relying exclusively on the determination that the opportunity to purchase ARS credit was not a vested right and, therefore, was not protected by the federal or state contract clauses.  We believe that the California Supreme Court will eventually address the California Rule when it considers the three remaining cases – Marin Assn. of Public Employees v. Marin County Employees’ Retirement Assn.; Alameda Deputy Sheriff’s Assn., et al. v. Alameda County Employees’ Retirement Assn., et al.; and Hipsher v. Los Angeles County Retirement Association.  While there are significant differences in the appellate court holdings, we think it likely that the California Supreme Court will ultimately limit the California Rule, such that changes can be made to pension benefits under appropriate circumstances.

Subscribe

Other AALRR Blogs

Recent Posts

Popular Categories

Contributors

Archives

Back to Page