California Supreme Court Grants Review in Landmark Vested Rights Case

By Mastagni Holstedt, APC

The California Supreme Court has granted review in ACDSA v. Alameda County Employees Retirement Association (ACSDA), setting the stage for a landmark series of high court rulings on vested pension rights. Mastagni Holstedt, APC, which represents the ACDSA in the appeal, has filed friend of the court briefs in two other significant pension cases before the Court, Marin Association of Public Employees v. Marin County Employees Retirement Association (MAPE) and Cal Fire Local 2881 v. California Public Employees Retirement System (Cal Fire).

On behalf of the ACDSA, Mastagni Holstedt sued the Alameda County Employees Retirement Association (ACERA) in December 2012, after ACERA announced plans to exclude forms of leave cash-out and other pay items from ACDSA members’ pension calculations pursuant to the Public Employees’ Pension Reform Act (PEPRA). The lawsuit alleged that, by excluding these pay items from members’ pension benefits, PEPRA infringed on members’ vested pension rights. The lawsuit also alleged a claim for promissory estoppel, on the grounds that ACERA promised employees their pension benefits would be based on compensation that included terminal pay and the other disputed pay items. The case was eventually consolidated with cases from Contra Costa County and Merced County asserting similar claims.

The trial court largely ruled against employees and unions in the case. The trial court ruled there was no vested right to pension benefits that included terminal pay and found there was no basis for using the doctrine of promissory estoppel to require ACERA to continue including terminal pay in retirees’ pension benefits. Mastagni Holstedt appealed that ruling.

While the case was pending in the First District Court of Appeal, the appellate court issued two significant rulings in other pension reform lawsuits. Like the ACDSA case, Marin Association of Public Employees v. Marin County Employees Retirement Association (MAPE) challenged PEPRA’s changes to the definition of compensation earnable. In ruling PEPRA did not impair employees’ vested rights, the First District struck a major blow against the so-called California Rule, a decades-old doctrine that protected pension rights from being reduced. For decades, courts applying the California Rule required any detrimental change to vested pension benefits be: 1. material to the theory of a pension, and 2. accompanied by a new, offsetting advantage. In MAPE, the First District parsed the language of the Supreme Court’s ruling in Allen v. City of Long Beach, claiming detrimental changes to pension benefits did not have to be offset by new advantages to survive scrutiny. The MAPE court ruled PEPRA did not unconstitutionally impair employees’ pension benefits, because employees still received a reasonable pension after the reductions. This represented a significant departure from decades of case law and made pension benefits vulnerable to future reductions.

The First District then issued its ruling in Cal Fire. The Cal Fire case challenged PEPRA’s elimination of “air time,” a benefit that allowed employees to purchase service time toward their retirement. The appellate court adopted the MAPE court’s interpretation of the California Rule, further eroding the constitutional protections for public employee pension benefits. In so doing, the court found that PEPRA did not impair employees’ vested rights.

The California Supreme Court granted petitions for review in MAPE and Cal Fire while the ACDSA case was still on appeal. Acknowledging the similarities between MAPE and the ACDSA case, the Court deferred further proceedings in the MAPE case until the ACDSA case was decided. The appellate court decided the ACDSA case in January of this year.

The appellate court in the ACDSA case continued the First District’s assault on the California Rule, agreeing with the MAPE court’s assertion that the Constitution did not require detrimental changes to pension benefits be offset by comparable new advantages. The ACDSA court went so far as to say MAPE’s abolition of the offsetting advantage requirement was “not controversial.” Additionally, the court ruled ACDSA members did not have a vested right to have terminal pay included in their pensionable income. According to the court, the pre-PEPRA retirement law did not permit the inclusion of such pay in employees’ pension benefits.

Nevertheless, the court found that employees could be entitled to include such pay in their benefits under a theory of promissory estoppel. Essentially, the court found that a settlement agreement ACERA entered with employees and the County of Alameda after the Supreme Court’s decision in Ventura gave rise to estoppel. As a result, employees had the right to have terminal pay included in their pensionable income.

The State of California appealed the ACDSA decision, challenging the court’s application of promissory estoppel. The court’s decision to apply promissory estoppel to employees’ pension calculations conflicts with the First District’s recent ruling in McGlynn v. State of California. In that case, the court ruled that promissory estoppel could not be used to contravene statutory authority. As such, the ACDSA case affords the Court an opportunity to rule on the applicability of promissory estoppel to pension calculation issues and resolve the conflict between the ACSDA case and McGlynn.

ACDSA appealed the decision as well, on the grounds that the appellate court misconstrued the California Rule. By petitioning for review on this issue, ACDSA ensured it would not be limited to arguing over the estoppel portion of the decision. (See People v. Villa (2009) 45 Cal.4th 1063 (appellant forfeited arguments in Supreme Court by failing to raise them in his petition for review.)) The Court granted review, ensuring the ACDSA has an opportunity to defend the California Rule in our Supreme Court.

In addition to appealing the ACDSA decision, Mastagni Holstedt filed friend of the court briefs in MAPE and Cal Fire, in furtherance of its efforts to protect the California Rule and public employees’ pension rights. These briefs, along with our appeal in the ACDSA case, represent the latest in a string of challenges our office has brought seeking to invalidate unconstitutional impairments of vested rights.

In Stockton POA v. City of Stockton, Mastagni Holstedt successfully challenged the City’s use of purported fiscal emergency powers to impair the POA’s closed labor contract before eventually filing bankruptcy. Although the Stockton POA damages were ultimately adjusted in the bankruptcy proceeding, the action established that a declaration of emergency cannot force open a closed labor contract.

Next, Mastagni Holstedt successfully challenged the furloughs imposed by the City of Los Angeles in federal court in Association of Los Angeles City Attorneys v. City of Los Angeles (C.D. Cal., 2012). After ruling in favor of the association’s Contract Clause claims in a 12(b)(6) motion, Judge Morrow ordered a settlement conference before a magistrate judge, which eventually resulted in a substantial settlement.

In a companion case heard in Superior Court, Los Angeles City Attorneys Association vs. City of Los Angeles, Mastagni Holstedt obtained one of the only judgments in recent years finding an impairment of vested retiree medical rights. In that case, the City of Los Angeles took away employees’ retiree medical benefit, which was adjusted annually to keep up with rising costs, and replaced it with a flat monthly payment, without any provision for future adjustments. The court found our clients had a vested right to an adjustable subsidy and ruled the City substantially impaired that right.

In Pacific Grove Police Officers Association v. City of Pacific Grove, Mastagni Holstedt won a vested rights case challenging the City of Pacific Grove’s attempt to cap its CalPERS contributions. This would have effectively pulled the employees out of CalPERS. The Court found the employees had a vested right to a pension administered by CalPERS, where they would pay a fixed percentage of their salary, and the City would pay the remaining portion of their contributions. The court found that capping the employer’s contributions substantially impaired the employees’ vested pension rights. PORAC’s Legal Defense Fund funded this appeal on behalf of the Pacific Grove POA.

The Supreme Court’s ruling on the California Rule issue in the ACDSA, MAPE and Cal Fire cases will have far-reaching impacts for public employees statewide. If the Court agrees with the First District’s analysis on the California Rule, agencies will no longer have to offset any detrimental changes to pension benefits with new advantages. This means state and local agencies could reduce pension benefits and use the savings to fund other projects, instead of using it to provide new pension benefits. Governor Brown has already said he plans to use pension reform to meet the state’s next budget crisis. If the Court rejects the First District’s analysis, its decision will likely prevent agencies from balancing their budgets on the backs of employees’ pension benefits for years to come.

Mastagni Holstedt, APC is the general counsel for LAAPOA. The firm provides legal services in the following areas for our members: workers’ compensation, personal injury, criminal defense, civil litigation defense and retirement law.