O'Neal v. Stanislaus County Employees' Retirement Assn. CA5 ( 2021 )

Filed 12/8/21 O’Neal v. Stanislaus County Employees’ Retirement Assn. CA5
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIFTH APPELLATE DISTRICT
MICHAEL R. O’NEAL et al.,
F079201
Plaintiffs and Appellants,
(Super. Ct. No. 648469)
v.
STANISLAUS COUNTY EMPLOYEES’ OPINION
RETIREMENT ASSOCIATION,
Defendant and Respondent;
COUNTY OF STANISLAUS,
Intervener and Respondent.
APPEAL from a judgment of the Superior Court of Stanislaus County. Robert F.
Moody, Judge. (Retired Judge of the Monterey Sup. Ct. assigned by the Chief Justice
pursuant to art. VI, § 6 of the Cal. Const.)
Law Office of Michael A. Conger and Michael A. Conger; Richard H. Benes for
Plaintiffs and Appellants.
Reed Smith, Harvey L. Leiderman and Maytak Chin; Damrell, Nelson, Schrimp
and Fred A. Silva for Defendant and Respondent.
Hanson Bridgett, Raymond F. Lynch, Adam W. Hofmann, and Matthew J. Peck
for Intervener and Respondent.
-ooOoo-
OVERVIEW
Michael R. O’Neal (O’Neal), Rhonda Biesemeier (Biesemeier), and Dennis J.
Nasrawi (Nasrawi) (collectively, appellants), appeal following a bench trial in which the
trial court entered judgment denying their claims. Appellants are members of the
retirement system operated by respondent Stanislaus County Employees’ Retirement
Association (StanCERA) through their retirement board (the board). The intervener in
this case, County of Stanislaus (County), is one of several employers required to fund the
StanCERA retirement system.
This is the third time this case has come before this court. In the prior two
instances, we reversed decisions made by the trial court that dismissed the case prior to
trial, finding that appellants had properly stated a claim for relief and that factual issues
precluded a grant of summary judgment. Our prior published opinion on this matter,
O’Neal v. Stanislaus County Employees’ Retirement Association (2017) 8 Cal.App.5th
1184 (O’Neal) provides a detailed overview of the case, its procedural history, the
relevant core legal principles, and the factual allegations underlying the action. The
parties here are also intimately familiar with the facts. Accordingly, we generally limit
ourselves in this opinion to reciting general facts relevant to the case, including more
specific factual detail as we work through the multitude of issues raised by appellants.
Amid the recession and its aftermath that spanned at least 2009 through 2011, both
StanCERA and County experienced substantial financial effects. StanCERA through a
loss on investments, and County through a loss of tax revenue. At around the same time,
StanCERA discovered errors in its prior actuarial calculations that indicated it had failed
to identify and collect necessary payments from County in the two years leading up to
June 30, 2008. Based on the legal structures governing retirement systems, StanCERA
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was required to account for those mistakes and losses and recalculate County’s payment
obligations accordingly. This recalculation created an inevitable consequence given the
financial situation of the time. At a point when County’s resources were substantially
reduced, StanCERA’s legal obligations created a substantial increase in the amount of
money County was required to provide to cover StanCERA’s unfunded liabilities.
County informed StanCERA that the increased financial burden was not feasible
from its standpoint and requested relief. It informed StanCERA that a failure to act could
result in layoffs that would affect StanCERA members along with other consequences. It
implied that something must be done.
Based on this request, and over the course of three years, StanCERA made five
disputed financial transactions that effectively eliminated nonvested benefits for certain
members that had been funded for decades with nonvaluation reserves. StanCERA also
adjusted both the period over which unfunded liabilities must be repaid and the manner in
which those payments were calculated in a way that resulted in substantial periods of
negative amortization of those debts.
When reduced to its essence, this case presents a straightforward question: Why
did the board authorize those actions? StanCERA argues the board acted to protect its
members and the overall health of the system in a time of crisis. Appellants contend the
board acted to protect County at the expense of its own members in an effective raid on
the pension funds.
The trial court examined the evidence and concluded both that appellants could
not prove the board placed County’s interest ahead of its members and that the evidence
affirmatively supported StanCERA’s claim it was acting to protect its members and the
retirement system in a time of crisis. The court further found the board acted with proper
prudence when making these decisions.
On appeal, appellants raise several issues. Initially, they attack many of the trial
court’s evidentiary rulings. Appellants argue these rulings left them without critical
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evidence while providing StanCERA the opportunity to introduce irrelevant facts that
benefited StanCERA’s case. Both interspersed with and following these evidentiary
arguments are multiple claims that the facts support only one finding – that the board’s
actions breached their fiduciary duties as a matter of law. Included in these claims is a
request that we reassess one of the cases underlying our opinion in O’Neal which held
that a retirement board may consider potential job losses within the ambit of their
members’ interests. Finally, appellants present a claim that substantial evidence fails to
support the trial court’s judgment.
For the following reasons we find no reversible error affecting the trial court’s
judgment. We therefore affirm. Ultimately, the trial court’s position as trier of fact
leaves it with the responsibility to determine which analysis of the facts is most credible.
Although acknowledging that fair arguments can be made that appellants’ perspective
can find support in the evidence, we find no fault with the trial court choosing the equally
legitimate perspective presented by StanCERA.
FACTUAL AND PROCEDURAL BACKGROUND
The record at trial in this case consisted of a series of exhibits comprising the
various meetings at which StanCERA made the contested decisions, deposition
transcripts from witnesses that did not appear, live testimony from various witnesses and
experts, and additional exhibits consisting of financial information and other
miscellaneous supporting materials. Based on our opinion in O’Neal, the focus of the
trial was on whether any one of five contested financial actions constituted a breach of
the board’s fiduciary duties. (O’Neal, supra, 8 Cal.App.5th at pp. 1217-1222.) These
five contested actions were: (1) the 2009 decision to adopt a 30-year level percent of pay
amortization schedule for unfunded actuarial accrued liability (UAAL) and subsequent
conduct resulting in continuing negative amortization rates; (2) the 2009 decision to
transfer $50 million from nonvaluation reserves to valuation funds; (3) the 2009 decision
to transfer $10 million from nonvaluation reserves to offset required employer
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contributions related to UAAL; (4) the 2010 decision to transfer $21.4 million from
nonvaluation reserves to offset required employer contributions related to UAAL; and
(5) the 2011 decision to transfer $14.3 million from nonvaluation reserves to offset
required employer contributions related to UAAL. The core facts relevant to this appeal
come from the evidence relating to the purposes and motivations underlying these
contested actions. We begin by reviewing that evidence.
I. PUBLIC RECORD FOR THE FIVE CONTESTED ACTIONS
StanCERA’s retirement fund has, for many decades, generally been a successfully
run plan. As far back as the early 1980’s, the fund was able to generate nonvaluation
reserve funds that were used to pay supplemental benefits to retirees. Although there
have been past periods of UAAL, the board and County have worked together to reduce
or eliminate those amounts. As one example, County issued pension obligation bonds in
the mid-1990’s, totaling over $100 million to reduce then-existing UAAL, that required
continuing payments through 2013. In addition, County and the board have worked
together to provide other benefits to members, including a pooling arrangement for
medical insurance. As late as 2006, County and the board agreed to a five-year extension
of that agreement.
Between 2006 and 2008, however, the fund suffered actuarial investment losses as
part of the financial crisis occurring during that time. These included an investment
income loss of more than $120 million in the year ending June 30, 2008. In addition,
StanCERA learned that its prior actuary had utilized incorrect assumptions, causing an
underpayment over the preceding two years of nearly $40 million. Thus, at the time
StanCERA began evaluating its plan and determining actuarily required employer
contributions in 2009 – action based on numbers dating to 2008 – unfunded liability in
the plan had jumped from roughly $40 million to roughly $280 million, corresponding to
a drop in funding ration from 96.6 percent to 81.8 percent, relative to 2006. These
changes resulted in an expected increase in County’s employer contribution of more than
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$22 million from the year before, which included contribution ranges of roughly 16
percent to 29 percent.
County responded to this increase by writing a letter to StanCERA in April 2009.
The letter explained County’s concern that it was being asked to increase its payments by
$22.7 million in a year where it projected a decrease in discretionary revenue of over $17
million. County further explained that it had planned for a smaller increase and, even
doing so, had a $34 million deficit in their budget, which they were attempting to balance
by implementing a budget reduction strategy and utilizing $8 million in reserve funds
over each of the next three years. The proposed increase would increase County’s
obligations an additional $9.2 million. County explained such a result would result in
“deeper cuts to Departments and the services they perform” and that existing “County
employees will lose their jobs.” County was concerned such actions could also increase
retirement rates in the next year.
County further explained that it was seeking ways to further reduce its costs within
the confines of its existing negotiated labor agreements. County asked StanCERA to
consider postponing supplemental benefits and noted that in the last two years County
had “issued layoffs, implemented hiring freezes, and reduced services” to balance its
budget. County expressed concern with the expectation that contribution rates would
continue to increase over the next few years and noted its past acts in issuing pension
obligation bonds and working with StanCERA on issues such as the medical insurance
pooling agreement. County thus asked StanCERA to consider the impacts its current
funding requirements would have and to ask its actuaries several questions, including
about how funding requirements might change if nonvaluation reserves were moved to
valuation reserves and what the impact of a 30-year amortization period might be. Draft
questions also included one noting that anecdotal evidence suggested members were
planning to delay retirement due to the current stock market and economic downturn and
one that asked what ways the impact on County could be reduced.
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StanCERA then held four public meetings over the next month during which they
discussed the issues raised in County’s letter and the current funding situation. The first
occurred on April 8, 2009, and was focused on the draft actuarial report then pending.
Unlike normal meetings where only a handful of people attended, the record shows
estimates of between 200 and 250 people attending this meeting. The meeting began
with Harvey Leiderman of Reed Smith providing an overview of fiduciary
responsibilities held by the board. Leiderman explained the fact that assets are held
“exclusively for the benefit of the members and beneficiaries of this retirement system”
and a duty of loyalty is owed to those individuals. Leiderman further explained that these
individuals included “not only . . . today’s retirees, but . . . today’s active members of the
system . . . who are to become retirees tomorrow,” a balance that could cause some
friction but required considering both. Leiderman also noted the duty to act prudently.
This meant, among other things, “to provide for a sound actuarial-based funding of the
system” and to consider all factors then pending. Leiderman specifically noted “that
circumstances today are not the circumstances economically when the United States and
the State of California, the County of Stanislaus are not the same today as they were last
year or the year before” noting that the current situation should be taken into account and
expressing that “[t]hings have indeed changed.”
In response to a question from the board, Leiderman provided additional advice
that the first priority is assuring payment of promised vested benefits. Leiderman
expressed that paying benefits was akin to a zero-sum game, thus paying nonvested
benefits would necessarily reduce funds available for vested benefits in some way,
requiring the board to balance what it was choosing to do to follow its fiduciary
responsibilities.
Leiderman’s overarching advice was to identify all relevant factors affecting
funding decisions, including effects on County and other employers, and work to balance
them as best as possible. This was particularly important because some actuarial
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assumptions may not come to pass if salary freezes occurred or there were changes in
payroll expectations. In line with this, Leiderman advised the board could consider
County’s difficulty in making payments but should not merely take County’s word for it.
Leiderman further noted the board could consider the ability to meet future obligations
and noted that “the market went into the tank” in October 2008, after the cut-off date for
the actuarial report.
Following Leiderman’s presentation, the board heard from its actuaries Graham
Schmidt and Robert McCrory. Schmidt provided the board with a summary of the
actuarial valuations contained in the actuarial report and noted above. This included a
detailed discussion of the errors the prior actuaries had made. During this discussion,
McCrory explained that the actuarial mistakes were another example of the rule that “[i]f
you don’t pay now, you pay later with interest,” meaning that “every dollar you don’t
contribute now, is a dollar that you will have to contribute with interest at some point in
the future.” In further discussions, Schmidt explained that there had been a 16 percent
return on investment in 2007, resulting in funds moving to the nonvaluation reserves, but
a “significantly lower” return in 2008 leaving an average return of 6.3 percent and an
actuarial loss in the system. Schmidt also explained that continuing losses meant the
actuarial value of the plan’s assets at the time were higher than their market value,
meaning higher contributions would be required in the next year.
The actuaries went on to discuss charts showing projected funding over the next
20 years, highlighting the amount needed to ensure there were enough funds to cover
currently inactive – meaning essentially retired or no longer employed – members. And
they specifically discussed various amortization policies and how those compared to the
plan’s then-current utilization of a 20-year rolling level-dollar amortization. In this
discussion, McCrory explained that certain projections showing a 10 percent loss could
result in increases in required contributions up to 30 percent of pay while the fund still
decreased to less than a 70 percent funding ratio under the current system. In doing this,
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McCrory noted that it was not unreasonable to think there may be a 25 percent or worse
loss between June 2008 and June 2009, which would raise employer contributions above
36 percent. McCrory noted that these losses were happening to all plans and were things
“you pretty much couldn’t control.” McCrory then explained the actuaries would be
reviewing current funding policies “trying to identify those that can [be] modified, that
should be modified to balance the interest of all the stakeholders and still maintain the
actuarial solvency of the plan.” McCrory hoped all could work together on resolving the
current funding issues and finding “the best balance of solutions that we can” because the
situation was “not so much a decision as it is a dilemma. Anything that you choose to do
will have advantages and a long, long list of disadvantages. So it’s something that we
just have to do the best we can in very difficult circumstances.”
Following the actuaries, County’s then-chief executive officer, Rick Robinson,
spoke to the board. Generally following the point of County’s letter, Robinson stated that
keeping the current employer contributions given County’s budget issues would result in
“employee layoffs, furloughs and unprecedented service level reduction for the residents
of Stanislaus County.” County’s position was that a fund as underfunded as StanCERA
should not be keeping nonvaluation reserves for purposes other than funding vested
benefits. Robinson noted that nearly 4,000 active employees relied on the system to
ensure their future retirement. Robinson requested the board add all nonvaluation
reserves into the valuation calculation, consider the possibility of a loss of nearly 30
percent the next year, and continue to work with County to come to a workable solution
to the funding issues.
The meeting continued with several additional speakers and comments, including
additional comments from McCrory about the difficulties of an excess earnings policy
when the long-term goal of a system is to meet an average earning mark and as “one of
the things we’ve learned to our sorrow of the past year is that the market can go down a
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lot and quickly.” The board then agreed to reconvene on April 24, 2009, to further
discuss the issues.
The second meeting, involving the Retiree Benefits Committee, was held on
April 14, 2009. At that meeting, O’Neal spoke to raise the possibility of directly
offsetting County shortfalls, rather than transferring all nonvaluation funds out, to “keep
the [nonvaluation] fund intact so that we can live on to fight another day.” O’Neal
explained that once the fund was gone “it’s gone forever” but that they could try to hold
on until things got better in an attempt to protect their supplemental benefits. Leiderman
provided similar comments, explaining that there were many options available to deal
with the funding issues and that the transfer of nonvaluation funds need not be an all or
nothing event. Other comments from the board chairperson and other board members
highlighted the difficulty of the current situation, the substantial losses the system was
facing and the need to act for the stability of the fund generally.
The third meeting, again involving the full board, occurred on April 24, 2009. At
this meeting, the board heard from members of the public and others with concerns or
statements about the funding issues, including one comment that supported a direct
transfer of nonvaluation assets to offset liabilities and a 30-year amortization period in
order to avoid removing all funds. The board then heard again from its actuaries who
noted a likely 25 percent loss in 2009, resulting in a “significant immediate increase in
County contribution” requirements. The actuaries and the board then discussed several
potential scenarios for future losses and how those would affect assets and funding ratios,
along with multiple amortization options. In these discussions, the actuaries spoke about
the possibility of utilizing long amortization periods and level percent of pay, even noting
such choices would bring required contributions as low as possible, lower the funding
ratio, and result in periods of negative amortization. The actuaries also discussed the
effects of moving nonvaluation funds to valuation funds, explaining each dollar moved
reduces employer cost by about 10 cents.
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The board also heard from Jeffrey Reiger, a lawyer working with Leiderman.
Reiger presented a series of options involving the transfer of nonvaluation funds to
valuation funds, explaining they should be considered and used as reserves against
deficiencies. These options included general transfers of the funds and more specific
offsets of UAAL payments. Reiger told the board that all options were considered to be
within the board’s discretion. After a series of public comments, Reiger also informed
the board that if it were to use nonvaluation funds as an offset, it must do so only to offset
UAAL, in other words, as a contingency against deficiencies and not as an offset to
normal cost contributions. Reiger then reiterated that additional problems may be
coming in future years and the board did not need to engage in an all or nothing course of
conduct with respect to transfers.
At the conclusion of the meeting, then-County Chief Executive Officer Robinson
addressed the board and reiterated County did not seek a bailout, but only that all funds
be counted in the actuarial calculations. As a partial response to Robinson’s comment,
board member Ford noted that an article in the Modesto Bee, comments at the Board of
Supervisor’s meetings, and general knowledge, confirmed that County had already laid
employees off and that there would likely be additional layoffs in the 2009-2010 fiscal
year regardless of the board’s actions. Additional board comments noted County was not
at fault for the funding issues and that low funding ratios were affecting all funds at the
time, even strong ones.
In the course of various comments from the public and board members, and the
resulting discussions with the actuaries, the board was informed that it maintained assets
well above those needed to pay vested benefits for several years. In addition, one of the
commenters proposed something close to the package adopted, a 30-year amortization
schedule, a $50 million transfer to valuation reserves, and a $20 million offset.
The final meeting occurred on April 28, 2009. The board received an update that
confirmed current investment returns were down 28.8 percent, in line with the 25 percent
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loss concern discussed in previous meetings. When the board moved to the actuarial
study, the retirement administrator, Tom Watson, recommended adopting the report and
noted there had been substantial cost increases for the employers, significant reductions
in revenue, a poor economy, and a poor market. Watson noted that even mitigation in the
range of $10 to $15 million would result in up to 50 percent increases in employer costs.
After comments from the public, several board members, actuary Schmidt, and
counsel Reiger, a motion was made to move all nonvaluation reserves to the valuation
funds. This motion was defeated. Following this vote, a second motion was made to
move $50 million from nonvaluation reserves to the valuation funds, change the
amortization period to a 30-year percentage of pay system, and use an additional $10
million in nonvaluation reserves as an offset for County UAAL obligations. This motion
passed, resulting in the first three contested transfers.
In 2010, a similar process occurred. As the planning began, retirement
administrator Watson wrote to the board noting the draconian and unprecedented
investment losses that had occurred and explaining that County was currently suffering
from a revenue problem, having one of the 10 lowest revenues for California counties at
the time. In addition, the board received two letters from employers. County again
informed the board of its financial situation. Seeing another proposed increase in
employer contributions, County explained it projected another shortfall in its budget, this
time of $20 million. County again noted it had previously had to conduct layoffs and
hiring freezes and was planning its current budget through portions of 2012. This time,
County requested a $12 million annual offset to increased contributions through 2014, a
transfer of all remaining nonvaluation reserves to valuation funds, and a continuation of
the 30-year amortization schedule. The second letter came from the City of Ceres
(Ceres), which explained that general fund reserves had fallen almost 20 percent over the
last two years and, as a result, Ceres had reduced expenditures accordingly, including by
eliminating jobs and freezing salaries. Ceres was concerned that its contribution rate was
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more than doubling, to 23.21 percent of pay under the current proposals and asked for
both a phase in period as well as offsets and an adjustment of Ceres’s amortization period
to match County’s.
StanCERA again held public meetings on these issues. During these meetings,
then-County Chief Executive Officer Robinson informed the board that it had negotiated
5 percent salary reductions with most of its labor groups. Another board member noted
County employees were receiving no cost-of-living adjustment and significant
reductions. Then-City Manager Brad Kilger, on behalf of Ceres, noted that in addition to
the information contained in the letter, Ceres would be asking for a 10 percent
compensation reduction from all its staff. This time however, upon a proper motion, the
board chose to shorten the current amortization period to 25 years and transfer $21.4
million from nonvaluation reserves to valuation funds as an offset to increasing UAAL
payments, with $20 million to County’s costs and $1.4 million to Ceres and other
districts’ costs.
In 2011, the process repeated. County again sent a letter noting a general fund
shortfall of $28 million and repeating the efforts it had made at cost reduction. This time
County requested an offset of $12.6 million. In addition, the Stanislaus County Superior
Court sent a letter stating that a lack of offset would be financially devastating for the
court. After a public meeting at which the board reviewed how other retirement plans
had been dealing with the financial downturn and it was noted the retirement system now
had 1,000 fewer employees, the board readopted a 25-year amortization period for UAAL
and, in line with recommendations from retirement administrator Watson, approved
another $14.3 million offset transfer from nonvaluation reserves to valuation funds to
provide County with the $12.6 million it requested.
II. TRIAL TESTIMONY
As additional support for their claims, appellants called several witnesses,
including appellants O’Neal, Nasrawi, and Biesemeier, former County Chief Executive
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Officer Stan Risen, and retirement administrator Tom Watson. Appellants each
expressed their recollection of the board’s actions, stating they saw little to no meaningful
investigation of the claims made by County or no benefit for retired members. Within
Nasrawi’s testimony was also an acknowledgment of the financial situation of the time.
Nasrawi stated he knew of layoffs and furloughs occurring after 2009, County could not
reduce salaries unilaterally but could utilize layoffs under their collective bargaining
agreements, that there was a major decline in housing prices, and that property taxes were
a major source of revenue for County.
Risen testified to the steps County had taken or not taken leading up to and
through the 2009 to 2011 period. Risen explained that the main funding for the
retirement funds comes out of County’s general fund. The general fund also pays many
County salaries, which are generally set by collective bargaining agreements. This
portion of County’s budget is primarily funded through sales and property taxes, which
can make up to 90 percent of the funding. Risen noted that County saw the leading edge
of the recession around 2007 when there was a roughly $10 million dip in sales taxes. In
2008, that dip turned into “fall off[s]” in both property and sales tax revenues. County
eventually became a “foreclosure capital[]” in the nation, which caused a property price
reduction that triggered property tax reviews under Proposition 13, further reducing
revenue and leaving County with the third lowest revenue from property taxes in the
state. Ultimately, County’s general fund decreased from roughly $180 million to roughly
$140-$145 million between 2007 and 2012.
Risen identified several steps taken by County to manage this budgetary change.
In the 2008-2009 fiscal year, County implemented a hiring freeze, curtailed benefits, and
required a 3 percent reduction in County costs across all departments. This was followed
in the 2009-2010 fiscal year by an additional 5 percent cost reduction to public safety
departments and a 12 percent reduction to nonpublic safety departments. In the 2010-
2011 fiscal year, another 9 percent reduction in net County costs was required. These
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reductions required the elimination of roughly 1,000 positions across the county,
including a reduction in the actual workforce of around 380, and additional losses
through attrition. In addition, County negotiated and its employee organizations agreed
to, a furlough policy in 2009, which included a 5 percent salary cut for all employees in
exchange for 13 furlough days, at a savings of roughly $5.5 million a year for the general
fund.
Risen conceded that there was no formal quantification of the number of jobs lost
in the recession, that County never considered bankruptcy proceedings, and that it did not
consider additional pension obligation bonds or borrowing to pay for the increasing
retirement contributions. Risen also noted that board member Ford was County’s
treasurer between 2008 and 2012, the same period of time he was serving on
StanCERA’s board.
The main testimony supporting appellants’ case, though, came from their expert,
William Sheffler. Sheffler testified as an expert in the field of public and private pension
plans and the actuarial aspects thereof. He detailed the importance of timely payments to
pension systems, explaining that funding comes from employer and employee
contributions as well as investment returns. Of these, investment earning generally
constitute 70 to 80 percent of a plan’s funding. Accordingly, late payments into a system
reduce investment earnings and cause funding issues.
Sheffler was tasked with reviewing the five contested transactions for actuarial
soundness and whether the board acted responsibly when implementing them. In his
testimony, Sheffler ultimately agreed there were factual circumstances in which the
actions taken by the board could satisfy their fiduciary duties, particularly where short-
term actions taken in a crisis ensure long-term stability. He further conceded there was
no indication that StanCERA would fail to pay vested benefits at any point in the future.
However, Sheffler’s opinion on the five actions in this case was that each constituted a
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breach of fiduciary duty because the board had failed to confirm that the factual
circumstances which could warrant such actions existed at the time they acted.
To support his position, Sheffler pointed primarily to advice provided to the board
by its fiduciary counsel and actuaries. In that advice, the board was told that it was
acceptable to consider employer conditions, but “don’t just take their word for it. Ask
questions. If you’re told that the County’s benefit is X, Y, or Z, get a copy of the budget.
Look at it. Ask questions about it. Ask the assessor what’s happen [sic] to the assessed
value in the county. Is this really going to be a substantial disruption in what’s going
on?” Similarly, as noted by Sheffler, StanCERA’s actuaries, Schmidt and McCrory
wrote to the board in 2009 that, “[i]f a policy decision results in a reduced current
contribution by the employer, there should be a reasonable explanation why this decision
will help the plan, not just the employer.”
Taking this advice as a critical explanation of what should have happened, but did
not, Sheffler opined that he could find no substantial inquiry in the record which showed
the board investigating County’s claims of financial difficulty and that the board had
failed to identify any way in which the actions it took benefited anyone other than
County. Sheffler also opined that he could find no indication in the record that County’s
payroll was dropping to a point of endangering the plan. He further attacked the
implementation of a negative amortization schedule by noting that such a change had
neither been requested by County nor proposed by StanCERA’s actuaries and appeared to
benefit only County. Sheffler noted that from 2009 to 2017 the plan had averaged a
10.79 percent return, above its expected rates, yet the current shortfall is still $674
million.
For StanCERA’s part, aside from the public record, StanCERA generally relied on
its own experts, including StanCERA’s actuary, Schmidt, at trial. Schmidt testified both
as a percipient witness and as an expert. Schmidt provided a detailed overview of
actuarial practices and how they are utilized in his work as StanCERA’s actuary.
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Schmidt also provided explanations regarding the meaning of plan funding ratios,
actuarial soundness, and the effect of employers not paying their contributions.
Ultimately, Schmidt opined that the board’s actions were actuarially sound and that he
would have disclosed any actuarial concerns he had with the board’s actions if any had
arisen.
In addition to Schmidt, StanCERA called Peter Mixon, an attorney with
experience in advising public pension plans, to opine on whether StanCERA’s actions
satisfied their fiduciary duties. Mixon’s qualifications and opinions, which generally
concluded that StanCERA did not breach its fiduciary duties of loyalty or prudence when
taking the five contested actions, are the subject of appellants’ evidentiary arguments and,
thus, are recited in greater detail below.
III. THE TRIAL COURT’S STATEMENT OF DECISION
On January 23, 2019, the trial court issued its “Tentative Statement of Decision
After Trial.” (Some capitalization omitted.) In response, appellants filed a “Request for
Statement of Decision and Specification of Principal Controverted Issues of Fact and
Law” (some capitalization omitted) containing 126 alleged issues of fact and law that it
believed the trial court needed to address. StanCERA objected to these requests, arguing
the Tentative Statement of Decision adequately addressed the relevant issues and, directly
or indirectly, resolved the points made in appellants’ request. On February 22, 2019, the
trial court issued its “Statement of Decision After Trial” (some capitalization omitted),
adopting without meaningful change the Tentative Statement of Decision After Trial.
On March 1, 2019, appellants filed objections to what they deemed the court’s
proposed statement of decision and, shortly thereafter, informed the court that the
California Supreme Court had issued an opinion in Cal Fire Local 2881 v. California
Public Employees’ Retirement System (2019) 6 Cal.5th 965 (Cal Fire). On March 8,
2019, the trial court issued an order explaining that its Tentative Statement of Decision
was, by definition, its proposed statement and, thus, its Statement of Decision had been
17.
its final order. Regardless, the court noted it had reviewed appellants’ objections and
would not modify its Statement of Decision. The court further found that Cal Fire was
not controlling in this case. It then affirmed it would enter judgment against appellants.
The court’s statement of decision spans 58 pages. It deals with some evidentiary
objections and provides a general overview of the law and facts. The statement reflects
the court’s determination that appellants failed to meet their burden “of proving by a
preponderance of the evidence that the Board breached its fiduciary duties owed its
members as a result of the five challenged actions.” Upon its review of the evidence, the
court found that “when faced with what amounted to a ‘five-alarm fire’, the Board
properly exercised due diligence, considered its options (as presented to it by its actuarial
and fiduciary/legal advisors), and acted as cautiously and conservatively as possible to
insure the certainty that its members would receive all vested benefits over time.”
After taking judicial notice of the existence of the “ ‘fact or proposition’ that the
‘Great Recession’ was a large financial shock” and a discussion of relevant legal
principles, the court identified a series of “Findings of Fact” (boldface omitted)
supporting its determination. The court began by noting its opinion “that there was
actually no clear evidence which tended to prove the Board’s actions were taken solely or
primarily to benefit the County or any third party or to place the County’s interests ahead
of the plan beneficiaries, and a plethora of evidence to show the Board’s actions were
taken with the specific intent to benefit members.” The court then provided a laundry list
of factual conclusions supporting its determination.
These conclusions included the history of the board and County working together
to provide generous benefits for retirees, a history within StanCERA to provide
maximum benefits to members, including by members of the board who voted for the
contested action at the time, and a lack of evidence of “ ‘new blood’ ” on the board that
might change this philosophy. They also included a lack of evidence of any motive to aid
County or act in its interest except when doing so would benefit the StanCERA members
18.
and a lack of evidence of threats against the board if it did not act. It included financial
conclusions such as the substantial loss of assets and revenue for both County and
StanCERA, including a $10 million revenue loss in 2008 and an additional $59 million
loss in 2009 for County, a substantial increase in actuarial projections for County
contributions due to the identified actuarial errors and fund’s losses, a limited ability for
County to utilize budget funds to cover these increases, and a history of reasonable steps
on County’s part, which included hiring freezes, zero bonuses, reduction of funds to
departments, mandatory furloughs, elimination of allocated positions and parttime
employees, and negotiated salary decreases. With respect to the board’s knowledge, the
finding included conclusions such as advisement of the funding issues to StanCERA by
County’s chief executive officer and its retirement administrator, the board’s
understanding of its own financial issues and its reliance on public analysis by actuarial
experts suggesting its planned actions were feasible options “to weather the current storm
and achieve long term stability in plan funding,” and indications the board was aware of
the substantial financial issues then existing based on its public comments and attempts to
find solutions. Looking more toward intent, the conclusions included finding of a lack of
indication from fiduciary counsel that the board’s actions were improper, the fact the
board expressed interest in future supplemental payments under stricter conditions and,
ultimately, left $20 million in reserve funds, and an overall view that, while there were
disputes over how best to act, the record showed no indication of a belief that no action at
all should be taken.
The court then analogized the case to Claypool v. Wilson (1992) 4 Cal.App.4th
646 (Claypool) and Bandt v. Board of Retirement (2006) 136 Cal.App.4th 140 (Bandt).
In doing so, the court stated it found support for its conclusions that no breach of
fiduciary duty occurred and made a few additional findings of fact. First, it found the
board did not breach a fiduciary duty by increasing the amortization schedule of the
plan’s unfunded liabilities stating the evidence showed negative amortization was not
19.
actuarially unsound and, on and after April 28, 2009, the board took action to shorten the
amortization period significantly resulting in higher employer contributions. The court
noted the board did not “ ‘roll over’ the 30-year amortization period for even one year”
and “immediately reduced the amortization period from 30 years in the 2008 valuation to
25 years in the 2009 valuation.” Second, it found that, although appellants attempted to
establish County did not have to lay off active members in the association (employees),
the evidence demonstrated that the number of active members actually decreased by 486
between June 30, 2009, and June 30, 2011. Third, it found it to be legitimate that the
board concerned itself with the potential job losses of its active membership as well as
with protecting the interests of its members who are beneficiaries. Fourth, it found the
board, in making its “five challenged decisions,” did not place the interests of County
over the interests of the members of StanCERA. The board allowed short-term County
contribution relief during extreme circumstances “which served the interests of its
members by saving jobs of active members and by spreading out a large, unavoidable
UAAL over a sufficient number of years to bring stability and actuarial soundness to a
troubled system.”
The court concluded its review of the facts and its conclusions by noting that it
found no breach of fiduciary duty based on “intergenerational equity.”1 Noting that
many current retirees had been negatively affected by the board’s actions, the court noted
that the interests of active employees were equally relevant and that all participants
suffered some downside from the actions, even if the overall goal of those actions were to
shore up the long-term viability of the plan. In this regard, the court noted again that the
1 The court quoted Bandt defining “intergenerational equity.” It is “ ‘calculating
and receiving during each fiscal year contributions which, expressed as percents of active
member payroll, will remain approximately level from the present generations of citizens
to future generations of citizens.’ ” (Bandt, supra, 136 Cal.App.4th at p. 160, italics
omitted.)
20.
financial downturn here was significant. It pointed out that the plan was sufficiently
funded as “ ‘late’ ” as 2007.
The court then briefly reviewed its views of the various experts’ testimony
provided in the case before expressly finding “that the StanCERA Board as
representatives of the members of the retirement association were true to their
Constitutional, statutory, and common law fiduciary duties” to appellants, warranting
judgment in StanCERA and County’s favor.
This timely appeal followed.
DISCUSSION
I. THE TRIAL COURT’S EVIDENTIARY RULINGS
In advance of and during trial, the court made several evidentiary rulings that
appellants contend on appeal warrant reversing the court’s final judgment. With respect
to requested discovery, appellants argue they were improperly precluded from taking
depositions of individual board members and the lawyers who provided them with public
advice. With respect to trial decisions, appellants contend the trial court admitted and
considered improper expert testimony from both Schmidt and Mixon, while excluding
proper and relevant testimony from McCrory. Appellants also contend the trial court
wrongly admitted evidence of County’s financial conditions that was not specifically
placed before the board during its decisionmaking process. We consider each argument
in turn.2
2 Appellants have raised the trial court’s failure to take judicial notice of the ballot
arguments regarding Proposition 162 as an error and requested this court take judicial
notice of those materials. Upon review, we find no prejudice in the trial court’s decision
not to take express notice of the requested material. Regardless, we will take judicial
notice of the materials identified by appellants. Appellants’ motion for judicial notice
filed April 27, 2020, is thus granted. We further grant in part and deny in part
StanCERA’s May 21, 2020 motion for judicial notice. This court will only take judicial
notice of its opinion O’Neal v. Stanislaus County Employees’ Retirement Association
(Feb. 23, 2017, F070605).
21.
A. Board Deposition Requests
Appellants argue the trial court wrongly granted a protective order preventing
appellants from deposing various members of the board. Contending the court
incorrectly applied the deliberative process privilege to the discovery sought, appellants
state evidence of the reasons for a trustee’s actions is both material and discoverable in a
case alleging a breach of fiduciary duty. Appellants further insist that the error in this
case was prejudicial because it prevented appellants from obtaining direct evidence for
the board’s actions, evidence appellants consider the best evidence available.
1. Standard of Review and Applicable Law
“We review a trial court’s discovery orders for an abuse of discretion. ‘ “ ‘The
trial court’s determination will be set aside only when it has been demonstrated that there
was “no legal justification” for the order granting or denying the discovery in question.’ ”
[Citation.]’ [Citation.] Moreover, when a plaintiff does not seek writ review of the trial
court’s discovery rulings and instead appeals from the judgment, he or she must ‘show
not only that the trial court erred, but also that the error was prejudicial’; i.e., the plaintiff
must show that it is reasonably probable the ultimate outcome would have been more
favorable to the plaintiff had the trial court not erred in the discovery rulings.”
(MacQuiddy v. Mercedes-Benz USA, LLC (2015) 233 Cal.App.4th 1036, 1045
(MacQuiddy).)
“ ‘Under the deliberative process privilege, senior officials of all three branches of
government enjoy a qualified, limited privilege not to disclose or to be examined
concerning not only the mental processes by which a given decision was reached, but the
substance of conversations, discussions, debates, deliberations and like materials
reflecting advice, opinions, and recommendations by which government policy is
processed and formulated.’ ” (Citizens for Open Government v. City of Lodi (2012) 205
Cal.App.4th 296, 305.) “ ‘Not every disclosure which hampers the deliberative process
implicates the deliberative process privilege. Only if the public interest in nondisclosure
22.
clearly outweighs the public interest in disclosure does the deliberative process privilege
spring into existence. The burden is on the [one claiming the privilege] to establish the
conditions for creation of the privilege. The trial court’s determination is subject to de
novo review by this court, although we defer to any express or implied factual findings of
the superior court.’ ” (Id. at p. 306.) Further, the privilege is limited in nature, focusing
generally upon decisions “undergoing direct review by a court” where the “court’s
function is to review the decision, not the reasoning underlying it; therefore, inquiry into
the mental process of the decision maker is irrelevant and inefficient and thus
prohibited.” (RLI Ins. Co. Group v. Superior Court (1996) 51 Cal.App.4th 415, 437,
438.)
2. Appellants Fail to Demonstrate Prejudice
Upon review, we conclude that appellants have failed to demonstrate actual
prejudice from the trial court’s ruling in this instance. There is no dispute that evidence
existed and was presented which reflects the full scope of public information before the
board. Appellants refer to none of this evidence as indicating additional discovery into
the specific mindset of any StanCERA board member was warranted, let alone that
enough of the board were influenced by non-public information to indicate that the vote
by the board may have been tainted by improper motives. Rather, appellants rely on a
bald assertion that the “true” reason for the board’s actions could not be discovered
because the alleged error in precluding discovery prevented appellants from “obtaining
either direct or additional circumstantial evidence of the reasons for the board’s disputed
actions.” Highlighting the speculation underlying appellants’ position, they go so far to
assert that the error prevented them from knowing “whether StanCERA’s board took the
disputed actions because its trustees were bribed or threatened.”
There is no rule of inherent prejudice arising from a civil order denying discovery.
(Soule v. General Motors Corp. (1994) 8 Cal.4th 548, 579.) Rather, the party seeking
reversal has the burden of demonstrating actual prejudice arose resulting in a miscarriage
23.
of justice. (Ibid.) The evidence admitted in this case allowed for contrary interpretations
regarding why the board took the actions it did. This included evidence regarding the
alleged budget crisis suffered by County and the possibility of layoffs arising therefrom.
While specific statements from each board member regarding their intent in adopting the
contested measures may have been helpful to appellants, it is equally likely that it may
have confirmed that no improper intent was present. To choose one interpretation of the
potential evidence over the other in this circumstance requires pure speculation. Like
MacQuiddy, appellants’ “prejudice argument on appeal is that the categories of
information and documents he sought were relevant, and the discovery requests may have
turned up admissible evidence. This is insufficient.” (MacQuiddy, supra, 233
Cal.App.4th at p. 1046.) Appellants chose to proceed to trial on the evidence gathered
and, in doing so, were able to clear summary judgment based on that same evidence. To
demonstrate a miscarriage of justice, then, appellants must find greater support for their
claim than a claim that they were prevented from obtaining relevant evidence which may
or may not have shed additional light on their claims.
B. Attorney Deposition Requests
In an argument like that for the board deposition requests, appellants claim they
were improperly prevented from deposing the lawyers who provided publicly disclosed
advice to StanCERA during their board meetings. Appellants’ arguments with respect to
this order break down into two general arenas. In the first, appellants argue the public
testimony constituted a general attorney-client privilege waiver of all related advice
given. In the second, appellants narrow their claims to argue that, at a minimum, the
public testimony meant that appellants should have had the right to depose the witnesses
on their public statements and the bases therefore.
Considering the claim that a selective privilege waiver required the trial court
grant the deposition request, we note that argument is foreclosed under the law of the
case. In the unpublished portion of O’Neal, this court concluded that the presentation of
24.
that advice did not constitute a selective waiver of privilege because the public testimony
was not privileged in the first instance. Thus, the presence of additional advice given
subject to an attorney-client privilege is neither appropriate for discovery based on the
existence of public testimony nor evidence of additional evidence that could have
affected the case.
Regardless, both arguments also fail under the same logic as appellants’ argument
that the trial court wrongly precluded depositions of board members, appellants have
failed to affirmatively demonstrate prejudice. Appellants’ argument for prejudice spans
little more than a page and essentially argues they were precluded from obtaining
potentially relevant evidence, stating they could not discover “evidence of the true
reasons for the StanCERA board’s disputed actions” or “whether there was other advice
provided and whether the board followed the advice given to it by its attorneys.” The
record contains substantial evidence regarding the advice publicly given and the
discussion of that advice in the context of the board’s decisionmaking process. As with
the prior argument, appellants cannot point to any evidence that the information they
were allegedly precluded from discovering would have added anything to their case.
Rather, as before, they merely state they were precluded from obtaining relevant evidence
and speculate that evidence would have supported their case. Such an unsupported claim
is insufficient to meet their affirmative burden to demonstrate prejudice.
C. Testimony from Graham Schmidt
Appellants next argue that testimony provided by StanCERA’s actuary, Graham
Schmidt, was improperly admitted. Appellants contend that the contested testimony was
expert opinion that had not been properly disclosed in discovery and thus should have
been excluded. StanCERA and County contest this claim on various grounds, including
that the trial court correctly concluded the testimony was not expert in nature.
Ultimately, we agree with the trial court and find no error in the admission of Schmidt’s
contested testimony.
25.
1. Factual and Procedural History
In preparation for their case in chief, appellants retained and disclosed the use of
an expert, William Sheffler. As part of his role, Sheffler reviewed StanCERA’s actions
and opined that they violated various constitutional principles because the actions were
actuarily unsound. Consistent with this planned use and testimony, appellants properly
disclosed Sheffler as an expert witness prior to trial and indicated he would opine on “the
actuarial soundness of actions taken by StanCERA.” At trial, Sheffler generally testified
in a manner consistent with his disclosed opinions, although he additionally came to
opine that the language used by StanCERA’s actuary to certify the plan’s finances
implied “that the plan is on an unsound basis” in a way that would not be noticed by “the
general public or . . . anyone else reading it . . . that . . . was not knowledg[e]able.”
In response to appellants’ disclosures and in support of its defense, StanCERA
identified their actuary Schmidt as an expert witness. Notably, according to appellants,
Schmidt’s expert designation did not state he would opine on “ ‘the actuarial soundness
of actions taken by StanCERA’ ” but, rather, vaguely stated he would testify “regarding
the actuarial calculations” he had prepared at counsel’s request and would be
“sufficiently familiar with the pending action to submit to a meaningful oral deposition
concerning the specific testimony, including the opinions and the bases for those opinions
that he is expected to give at trial.” At his expert deposition, Schmidt responded to some
questions about his planned testimony by stating he did not have any opinions that he was
prepared to discuss, although that was clarified slightly, that he generally was prepared to
answer questions asked of him, and that the only other topics he may discuss at trial were
his work with StanCERA as a consulting actuary.
At trial, StanCERA’s counsel asked Schmidt about his work as an actuary for
StanCERA and his related actuarial certifications. During this testimony, various lines of
questioning drew objections from appellants that Schmidt was providing undisclosed
expert opinions. The first arose when counsel asked about the meaning of 100 percent
26.
funding, questioning whether such a system could continue paying benefits if that
employer disappeared. When counsel then asked if it was correct that an 80 percent
funded plan did not mean it was paying out only 80 percent of funded benefits, another
objection was made. In response to this objection, counsel argued his questions were not
seeking expert testimony but rather the understanding of StanCERA’s actuary from a
percipient witness standpoint. A discussion followed, with appellants’ counsel arguing
that Schmidt’s testimony was exceeding the bounds of lay witness testimony and
StanCERA’s counsel arguing that an actuary can properly describe the meaning of
statements they made in their duty as an actuary. Ultimately, the trial court concluded the
testimony fell “in between the strict rules of expert witness testimony and the rules
surrounding lay testimony,” overruling the objection because the witness was “part and
parcel of the creation of some of the documents in the case.” The court then granted
appellants a continuing objection to similar testimony.
Despite this, appellants’ counsel again specifically raised their expert disclosure
objection when StanCERA’s counsel asked whether it was “relevant to the actuarial
soundness of [the] system to help an employer make it through a difficult financial time.”
This objection was again overruled, with the court stating, “his position as the actuarial
adviser for a party to the case entitles him to render opinions concerning the actuarial
soundness of the plan that we’re dealing with.”
Based on this ruling, Schmidt went on to testify about the types of factors an
actuary looks at when certifying results, including potential planning abilities of entities
whose budgets are affected by the actuarial calculations. Schmidt was then asked to
discuss the meaning of the actuarial certifications he made after providing evaluations for
StanCERA. When asked if he could certify a report that required actuarially unsound
employer contributions, Schmidt stated he could but would need to disclose that the plan
would not be able to fund the benefits as promised. Schmidt confirmed none of his
reports had ever made such a disclosure and, when asked if this meant the plans were
27.
actuarially sound, stated his signature meant that if the assumptions made were met, “the
contributions designated for the employer and the employees will be able to fund the
benefits as promised.” To Schmidt, this is what actuarial soundness meant. Accordingly,
Schmidt answered affirmatively when asked whether the plan was actuarially sound and
confirmed that there were no actuarial rules against implementing negative amortization
schedules.
Ultimately, in issuing its final ruling, the trial court relied in part on Schmidt’s
testimony, writing, it “found persuasive Mr. Schmidt’s opinion that the actions of the
Board that he certified were actuarially sound were just that, and that if they were not, he
would have had to disclose that fact and show them why that particular action would
threaten the payment of benefits. His testimony was that he had no actuarial concerns
whatsoever about the Board’s challenged actions.”
2. Relevant Law
“If a witness is not testifying as an expert, his testimony in the form of an opinion
is limited to such an opinion as is permitted by law, including but not limited to an
opinion that is:
“(a) Rationally based on the perception of the witness; and
“(b) Helpful to a clear understanding of his testimony.” (Evid. Code, § 800.)
“The decision whether to permit lay opinion rests in the sound discretion of the
trial court.” (People v. Bradley (2012) 208 Cal.App.4th 64, 83.)
“Matters that go beyond common experience and require particular scientific
knowledge may not properly be the subject of lay opinion testimony.” (People v.
DeHoyos (2013) 57 Cal.4th 79, 131.) For such matters, expert opinion may be admitted
provided the expert and their opinions are properly disclosed. (See Evid. Code, § 801
[requirements of an expert opinion]; Code Civ. Proc., § 2034.260 [disclosure
requirements].) Expert opinions which have not been properly disclosed should generally
28.
be excluded at trial. (Code Civ. Proc., § 2034.300; Kennemur v. State of California
(1982) 133 Cal.App.3d 907, 917.)
3. The Testimony Was Not Expert Opinion
Although StanCERA provides several arguments that even if the contested
testimony is expert opinion it was properly disclosed and admitted, it also argues in line
with the trial court’s actual holding that the testimony offered was not expert opinion but
rather percipient witness testimony regarding the meaning of statements Schmidt made or
did not make in his actuarial certifications. We thus begin with whether Schmidt’s
testimony constituted expert opinion at all. We conclude it does not.
Upon review of the relevant questions and answers provided by Schmidt, in
context the questioning focuses upon actions Schmidt took or should have taken in his
duties as StanCERA’s actuary and his understanding of actuarial principles relevant to his
work. This is particularly true of the questions concerning Schmidt’s actuarial
certification of his work. The questions and answers here sought to elicit Schmidt’s
personal understanding, through his work experience, of how he would act if improper
funding decisions were made. Although these questions utilized language that had been
adopted by appellants’ expert to claim the system was “actuarially unsound,” their import
was not to elicit an expert opinion on the soundness of the system but rather to factually
detail how Schmidt would act were the types of errors alleged by appellants found in the
system. We thus find no error arose when the trial court permitted these questions and
answers.
We note one or two questions do hew closer to the side of opinion – whether lay
or expert – than those detailing Schmidt’s understanding of his work and his expected
conduct when conducting his work. The strongest example arises at the conclusion of the
contested evidence where Schmidt is specifically asked whether StanCERA’s employer
contributions were actuarially sound during the period in which he served, to which
Schmidt responded, “Yes.” Although this question and answer summarizes the points
29.
made above, and thus may rightly be categorized as legitimate lay opinion, our
conclusion would not change were they categorized as improperly disclosed expert
opinion. (See People v. Bradley, supra, 208 Cal.App.4th at p. 83 [lay witness permitted
to use phrase designed to convey accounting principles].) The trial court’s statement of
decision indicates that it relied not on any unsupported opinion provided by Schmidt but
upon acceptance of his properly admitted statements that he would have been required to
report any “actuarially unsound” practices had he identified them and that he did not
make any such disclosures. Thus, even if appellants could demonstrate improper opinion
testimony was introduced, the trial court’s reliance on the properly disclosed practices of
a percipient witness precludes appellants from demonstrating injury sufficient to reverse.
(See Osborn v. Mission Ready Mix (1990) 224 Cal.App.3d 104, 112 [review of
discretionary ruling requires showing of injury which, for improper questioning, is often
mitigated by existence of cross-examination].)
D. Testimony from Peter Mixon
Appellants challenge the testimony provided by StanCERA’s expert, Peter Mixon.
Appellants contend both that Mixon was not properly qualified as an expert and that his
expert testimony cannot constitute substantial evidence that StanCERA did not breach its
fiduciary duties. On this latter point, appellants argue Mixon’s opinions were both based
on false assumptions of the facts and contradicted by the evidence admitted. We do not
agree.
1. Factual and Procedural History
During discovery, StanCERA designated Mixon as an expert in public retirement
fund fiduciary duties who would opine that StanCERA’s actions did not violate its
fiduciary duties. Mixon is an attorney who had previously served for 11 years as general
counsel to the California Public Employees’ Retirement System (CalPERS). In that role,
Mixon regularly provided legal advice to the governing board on their fiduciary
responsibilities among other matters. Mixon further served on the governance
30.
committee, which focused on best practices for the governing board when making
decisions and provided fiduciary training. Finally, Mixon was a member of the National
Association of Public Pension Plan Attorneys through which he provided additional
training and attended presentations on relevant fiduciary duties. Mixon conceded,
however, that he had never personally served as a trustee of a public pension system.
Prior to trial, appellants moved in limine to exclude expert testimony from Mixon.
After briefing, the trial court denied appellants’ motion and permitted Mixon to testify.
In doing so, it specifically noted Mixon would “not be permitted to opine as to the
legality of StanCERA’s actions” but that he could “render opinions as to whether the
Board’s actions abused their discretion or constituted a breach of fiduciary duty.” At
trial, appellants renewed their motion in limine, arguing Mixon’s failure to serve as a
trustee in a public pension system left him unqualified. This argument was rejected.
At trial, Mixon provided several relevant opinions, which he formed after
reviewing the records of public board meetings held by StanCERA between 2009 and
2011, the actuarial reports provided, and the record in the case. The first was that the
board’s transfer of $50 million in April 2009 was consistent with their fiduciary duties.
Mixon opined the board “followed a prudent process” by hiring well-qualified and
appropriate experts, including an actuarial firm and outside fiduciary counsel, holding
public meetings, and ultimately relying on their expert’s advice and opinions. He further
opined that the decision satisfied the board’s duty of loyalty. On this point, Mixon
focused on the nature of the nonvaluation reserves and the fact the money did not fund
earned benefits and thus was spent at the discretion of the board. Mixon opined that
moving these funds to support earned benefits fulfilled the purposes of the StanCERA
trust in part by enhancing the security of the vested benefits, was in the best interests of
the members and the beneficiaries, and thus satisfied the duty of loyalty. Mixon
acknowledged that the transfer had the collateral benefit of lowering employer
contributions but opined that such collateral effects are not violations of the duty of
31.
loyalty. He compared the effect to regularly accepted practices like asset smoothing,
where losses are averaged over multiple years to aid with employer planning, and limited
partnership investments, where returns may be split between the plan and a general
partner.
Mixon next opined that the $10 million, approximately $21 million, and roughly
$15 million employee payment offsets made between 2009 and 2011 were also consistent
with the board’s fiduciary duties. Mixon provided the same basis for his opinion, that the
use of nonvaluation funds to support earned, rather than unearned, benefits is entirely
consistent with the purpose of the StanCERA trust.
Turning briefly to whether StanCERA could, consistent with their duty of loyalty,
consider members’ jobs when decisionmaking, Mixon opined such considerations were
proper. Mixon noted that he was aware of County’s statements that it was having budget
issues and would have to resort to layoffs. Mixon pointed out that all fulltime employees
are members of the retirement system and, thus, should have their interests considered.
Relatedly, Mixon opined that considering County’s potential credit worthiness if action is
not taken would also be appropriate. If the board’s actions resulted in County refusing or
being unable to pay its employer contributions, members’ interests would be harmed.
Finally, Mixon opined that adopting a 30-year level percent of pay amortization
schedule was also consistent with the board’s fiduciary duties. For this opinion, Mixon
focused primarily on the fact the board retained and followed the advice of an expert
actuarial firm in making its decision.
On cross-examination, Mixon acknowledged that none of the reserve funds had
been utilized to minimize employee contributions. Mixon further conceded that he could
not be sure he saw all the legal advice given to StanCERA but affirmed that he had
reviewed all the public advice contained in the record. In later questioning, Mixon
affirmed that the board was acting based on a request from County for contribution relief
and stated he did not believe the board was required, under its fiduciary duties, to
32.
question or further investigate claims made by County about potential job losses when
making decisions.
2. Relevant Law
“Expert testimony is admissible to prove custom and usage in an industry.
[Citations.] But such testimony is subject to foundational challenges. For example, the
lack of foundation of an expert’s testimony can be as to the expert being qualified, the
validity of the principles or techniques upon which the expert relied, or as to the
reliability and relevance of the facts upon which the expert relied. [Citation.]” (Howard
Entertainment, Inc. v. Kudrow (2012) 208 Cal.App.4th 1102, 1114 (Kudrow).)
“Evidence Code section 720, subdivision (a) provides, ‘A person is qualified to
testify as an expert if he has special knowledge, skill, experience, training, or education
sufficient to qualify him as an expert on the subject to which his testimony relates.
Against the objection of a party, such special knowledge, skill, experience, training, or
education must be shown before the witness may testify as an expert.’ ‘[T]he
qualifications of an expert must be related to the particular subject upon which he is
giving expert testimony.’ ” (Kudrow, supra, 208 Cal.App.4th at p. 1115.)
“The foundation required to establish the expert’s qualifications is a showing that
the expert has the requisite knowledge of, or was familiar with, or was involved in, a
sufficient number of transactions involving the subject matter of the opinion. [Citations.]
‘Whether a person qualifies as an expert in a particular case . . . depends upon the facts of
the case and the witness’s qualifications.’ [Citation.] ‘[T]he determinative issue in each
case is whether the witness has sufficient skill or experience in the field so his testimony
would be likely to assist the jury in the search for truth.’ ” (Kudrow, supra, 208
Cal.App.4th at p. 1115.) Notably, the “ ‘calling of lawyers as “expert witnesses” to give
opinions as to the application of the law to particular facts usurps the duty of the trial
court to instruct the jury on the law as applicable to the facts, and results in no more than
a modern day “trial by oath” in which the side producing the greater number of lawyers
33.
able to opine in their favor wins.’ ” (Amtower v. Photon Dynamics, Inc. (2008) 158
Cal.App.4th 1582, 1598-1599.)
3. Mixon was Properly Qualified as an Expert
Appellants raise two claims regarding why Mixon should not have been qualified
as an expert. Both revolve around Mixon’s status as a lawyer. First, appellants state that
Mixon’s testimony interfered with the court’s own judicial functions because his
testimony arose from the fact he had previously given legal advice to CalPERS. Second,
appellants point to the fact that Mixon had not previously served as a trustee for a public
pension system as demonstrating he was not sufficiently qualified to testify as an expert
on trustee’s actions in those systems. We reject both assertions.
The trial court’s express ruling that Mixon would not be permitted to provide
opinions on legal issues demonstrates it was aware of the risk that permitting an attorney
to testify as an expert could raise regarding the court’s role in identifying the proper legal
principles to apply. Upon review of the record, the court strongly protected this role,
specifically rejecting attempts by both parties to have Mixon discuss case law in the field.
With respect to the testimony permitted, Mixon’s opinions focused upon whether the
actions taken by StanCERA’s board, as reflected in the record provided, breached their
fiduciary duties. The issue of breach is a factual point, not a legal point. If Mixon were
thus properly qualified to discuss this factual point, his status as an attorney would not
preclude him from testifying.
On this latter point, we find no reason why Mixon would not qualify as an expert
on retirement board fiduciary duties and their breach. As the record shows, Mixon had
extensive experience in researching, advising, and teaching on the subject. And his
overall credentials were more than adequate. Appellants’ primary focus is not upon
Mixon’s overall expertise, but rather on the fact he had not served in the exact role
related to his testimony. We are aware of no requirement that an expert actually work in
the area of their expertise if their credentials are otherwise sufficient to demonstrate their
34.
expertise. Indeed, the case law shows that sufficient expertise can be gained from
education in the course of other work. (People v. Catlin (2001) 26 Cal.4th 81, 131-133
[noting qualifications other than a license to practice medicine may qualify a witness to
give a medical opinion and affirming expert against claim he was not trained in proper
field based on extensive experience and training in contested issue].) Appellants’
complaints go to the weight to be given Mixon’s opinions, not his qualifications to
provide them in the first place.
4. Mixon’s Opinions were Properly Considered
Appellants also raise two issues related to the admissibility of Mixon’s testimony.
In the first, argued in conjunction with the claim Mixon is not a qualified expert,
appellants contend the trial court should not have permitted Mixon to testify the board
followed the legal advice they were provided because StanCERA withheld privileged
communications between the board and their lawyers from Mixon and appellants. In the
second, appellants argue Mixon’s testimony was based on false assumptions of fact.
Appellants contend the record shows the board did not follow the advice of its fiduciary
counsel and actuary because it never requested or received recommendations on how to
proceed and failed to ask certain questions of County that its counsel thought worthy of
highlighting.
We do not agree. Looking first at the advice of counsel claims, we note that
Mixon’s testimony was not so broad as to suggest all advice from counsel had been
followed. Rather, Mixon indicated he had reviewed the public statements from counsel,
conceding he was not privy to confidential information, and opined that the board had
met its fiduciary duties by hiring and hearing from competent counsel then adopting that
advice. As we concluded above, the trial court correctly rejected a request to produce the
privileged documents appellants now claim Mixon should have reviewed. As such, and
given the specific nature of Mixon’s opinion, we see no basis to exclude his testimony
based on the fact certain documents were not produced or reviewed.
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We next turn to the claim Mixon’s opinions were predicated on false facts and,
thus, cannot be viewed as substantial evidence supporting StanCERA in this case. This
argument suffers from the same flaw as the prior one, it relies on a characterization of
Mixon’s testimony that is not supported by his opinions. Appellants rely on deposition
evidence stating that the board did not request specific recommendations on whether or
not to make the various monetary transfers from its actuary. But there is substantial
evidence in the record, as Mixon noted, that the actuaries reviewed various proposals in
the context of their effect on the plan if adopted, particularly with respect to amortization
changes but also with respect to the effect of transferring nonvaluation reserves to
valuation funds. Mixon’s opinion the board sought and adopted advice from its actuary
thus readily fits with the evidence presented, as Mixon noted in his testimony that the
board was not bound to follow any specific proposal provided it reasonably reviewed the
advice provided from its experts. Similarly, that the board received suggestions that it
should, ideally, fully fund the plan or that it should ask for collateral against future
contributions but did not follow them is not an indication that Mixon’s opinion is based
on flawed facts. Mixon never opined that a breach did not occur because the board
followed each and every suggestion made to it. Rather, Mixon opined that the board
followed proper procedures by hiring competent experts and that its ultimate decisions
utilized the advice given to it by those experts. We see nothing in the purported conflicts
between the facts and Mixon’s opinions in this case that would warrant a conclusion
Mixon did not base his opinions on true facts. Accordingly, we reject appellants’ claims
to that effect.
E. Exclusion of Robert McCrory’s Testimony
Appellants allege the trial court erroneously excluded portions of Robert
McCrory’s deposition testimony. McCrory was another of StanCERA’s actuaries and
had been disclosed as a potential expert. During his work on the case, McCrory
calculated the amount of money that the trust corpus had lost based on the actions taken
36.
by StanCERA’s board. When appellants attempted to play deposition testimony
discussing this calculation, StanCERA objected, claiming the evidence was irrelevant and
unnecessary given that the trial court had previously bifurcated the issue of damages.
The trial court agreed, explaining that it did not “see the point in going into questions of
the degree of money that would have been in the system under this circumstance or that
circumstance where it is stipulated that the degree of money would be substantially less.”
The court further explained that “the overall question is always going to remain as to
whether these actions breached or were an abuse of the discretion of a breach of fiduciary
duty of the board” and concluded that spending “a lot of time trying to ascertain the exact
numbers of how much of a diminution of cash flow into this overall system would have
been at this phase of the trial seems to me to be not relevant, not helpful, and not a
productive use of the Court’s time.”
Appellants contend that damages are an essential element of a breach of fiduciary
duty claim and, thus, exclusion of damages evidence prejudiced their case. However, it is
uncontested that the issue of damages in this case had been bifurcated. While it is correct
that the full claim of breach of fiduciary duty requires proof of (1) the existence of a
fiduciary relationship, (2) its breach, and (3) damage proximately caused by that breach,
these elements are generally independent of each other. (O’Neal, supra, 8 Cal.App.5th at
p. 1215.) The fact that damages arose does not prove the board breached its fiduciary
duties nor is the lack of damages proof that no breach occurred. We thus see no error in
the trial court’s conclusion that issues related to the scope of damages were irrelevant to
the current phase of the proceedings. (See Grappo v. Coventry Financial Corp. (1991)
235 Cal.App.3d 496, 504 [noting trial court’s broad discretion to determine order of proof
in the interests of judicial economy under relevant statutory law].)
F. Evidence of County’s Financial Condition
Appellants challenge the trial court’s admission of County’s documents purporting
to show the financial distress County suffered from 2009 through 2011. Appellants
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contend the evidence was irrelevant because these documents were not before the board
at the time it made its decisions. StanCERA responds that the evidence was properly
admitted, at least in part, to contradict appellants’ claim that County misrepresented its
financial condition to the board.
Evidence Code section 351 states that “[e]xcept as otherwise provided by statute,
all relevant evidence is admissible.” Evidence Code section 210 defines “relevant
evidence” to be, inter alia, “evidence . . . having any tendency in reason to prove or
disprove any disputed fact that is of consequence to the determination of the action.” We
review a court’s decision to admit evidence for an abuse of discretion. (Donlen v. Ford
Motor Co. (2013) 217 Cal.App.4th 138, 148.)
We find no error in the trial court’s ruling. Whether the documents were before
the board or not, the financial status of County was certainly an issue of consequence to
the determination of the action. The record shows that County raised the issue of
financial difficulty and its potential impact on StanCERA members, resulting in
StanCERA taking the contested actions. Evidence County was correctly reporting the
need to act was probative of the board’s purported knowledge of County’s circumstances
and of the basis for the board’s acceptance of County’s statement.
II. THE TRIAL COURT’S DECISION
Having considered appellants’ evidentiary objections, we turn to appellants’
concerns regarding the trial court’s decision in this case. Appellants raise a series of
issues in the context of arguing that substantial evidence does not support the trial court’s
decision. We first consider those issues before turning to whether the trial court’s
decision is supported by the evidence. We then briefly consider appellants’ claim, raised
in reply, that the trial court’s statement of decision is sufficiently flawed to require
reversal. Finally, we conclude with appellants’ contention that the cumulative effect of
errors in this case requires reversal.
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A. Appellants’ Request to Review Bandt
As part of their arguments on appeal, appellants raise a direct attack on Bandt,
supra, 136 Cal.App.4th at page 159 and its statement that a retirement board could
consider the effect of its conduct on current members’ jobs when making decisions
because a member’s interest as an employee is related to their interest as a beneficiary.
Although this court reviewed Bandt extensively in O’Neal and ultimately “agree[d] with
that analysis,” in part because a “trier of fact could view conduct preserving current jobs
as good for current retirees who rely on continuing contributions to ensure the viability of
their retirement” (O’Neal, supra, 8 Cal.App.5th at p. 1219), appellants contend not only
that Bandt was wrongly reasoned, but that it has been overruled by Cal Fire, supra, 6
Cal.5th 965. Appellants extend their position to argue that this court’s review in O’Neal
should not be considered the law of the case based on the “ ‘unjust decision’ ” and
“ ‘intervening clarifying law’ ” exceptions to that doctrine. The crux of appellants’
argument is that Cal Fire confirmed that public pension employees have no vested right
to employment and, thus it would be improper for a retirement board to consider
protecting those nonvested rights over existing members’ vested rights or existing
supplemental benefits. We do not agree.
Cal Fire only touched on the right to employment in an ancillary manner. It was a
contracts clause dispute under the California Constitution that arose because certain
employees had been granted a statutory opportunity to purchase up to five years of
additional retirement service (ARS) credits before the state modified the statutory scheme
to remove that option. (Cal Fire, supra, 6 Cal.5th at p. 970.) Certain employees sued,
claiming that the ARS credit was a “vested right protected by the contract clause of the
California Constitution.” (Id. at p. 976.) Our Supreme Court took the case and
concluded the statutory opportunity to purchase ARS credits was not a vested right and
therefore could not trigger the protections of the California Constitution’s contract clause
because there was no intent to form a contract that created an irrevocable right to
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purchase these credits. (Cal Fire, supra, 6 Cal.5th at pp. 980-983.) The high court then
contrasted this finding with the implied contractual rights afforded to the deferred
compensation system contained in California’s pension laws. (Id. at pp. 983-986.) The
court then engaged in a final review of reasons why, even if the purchase opportunity was
an offer of a unilateral contract, its revocation was both proper and not constitutionally
protected. (Id. at pp. 986-994.) It was in that context that the court briefly discussed the
concept of employment rights with respect to pension system members. (Id. at pp. 990-
992.) In that discussion the court explained that the opportunity to purchase ARS credit
was not constitutionally protected “solely because it involved the pension system.”
(Cal Fire, supra, 6 Cal.5th at p. 990, italics omitted.) The court reviewed two cases
dealing with employment changes that affect future pension rights: Miller v. State of
California (1977) 18 Cal.3d 808, which considered whether one could be forced to retire
prior to reaching the age of full pension benefits; and Creighton v. Regents of University
of California (1997) 58 Cal.App.4th 237, which considered whether a program offering
additional benefits for early retirement could be modified to reduce the benefits offered
for those that had not yet accepted. (Cal Fire, supra, 6 Cal.5th at pp. 990-992.) These
cases stood for the principle that “a term and condition of public employment that is
otherwise not entitled to protection under the contract clause does not become entitled to
such protection merely because it affects the amount of an employee’s pension benefit.”
(Id. at p. 992.)
From this principle, appellants extrapolate that because one’s term of employment
is not a vested right, it cannot be deemed a member “interest” that can be considered
when a retirement board makes decisions under their fiduciary duties, and certainly not
when the board reduces existing benefits or employer contributions. We, however, do
not see such a sweeping claim within the Supreme Court’s analysis, nor would such a
conclusion logically follow.
40.
A vested right, such as pension benefits being paid to retired members, is one
protected by California’s Constitution. (Cal Fire, supra, 6 Cal.5th at p. 972, fn. 3.) It
generally cannot be modified or changed based on these protections. Nothing in
Cal Fire, our own review of the law, or logic suggests that a vested right is the only type
of right or interest that can be considered under the fiduciary duties owed by a retirement
board to its members. Indeed, such a concept would run contrary to at least part of
appellants’ case, as the supplemental benefits provided until the nonvaluation funds were
fully exhausted in this case are neither argued to be nor properly considered as vested
rights under the California Constitution. As we noted in O’Neal those benefits are
statutorily defined as discretionary. (O’Neal, supra, 8 Cal.App.5th at p. 1201.)
Moreover, as we noted when discussing trust law in O’Neal, the duty to administer
the trust solely in the interest of the beneficiaries is often seen as breached when a trustee
acts to benefit a third party or advance an objective other than the purposes of the trust.
(O’Neal, supra, 8 Cal.App.5th at p. 1209.) Contrary to appellants’ focus on considering
only vested rights – such as deferred compensation payments to retired members – such a
scope would more naturally imply that a trustee has a fiduciary duty to fully consider the
purpose of the trust and seek to take actions across all available avenues that may
ultimately support that purpose. We concluded in O’Neal, and reaffirm here, that these
considerations may include consideration of current members’ potential job losses, their
effect on members’ future interest in a pension, and their effect on the overall ability of
the plan to continue paying benefits to those already retired provided the interests of the
trust are not subordinated to any other interests. (Id. at pp. 1218-1219.) Nothing in
Cal Fire requires us to reconsider that position.
B. No Facts Show Breach as a Matter of Law
Throughout their briefing, appellants make several assertions that functionally
allege they have proven a breach of fiduciary duties as a matter of law. In the first,
appellants contend a breach of the duty of loyalty occurred because StanCERA used trust
41.
assets to offset actuarially required employer contributions. In the second, relying
partially on their view on the viability of Bandt discussed above, appellants contend a
breach of fiduciary duty occurred because StanCERA’s claim that it granted relief to save
jobs was pretextual. In the third, appellants argue the adoption of a negative amortization
rate benefits only employers and thus constitutes a fiduciary breach. And in the fourth,
appellants argue that ceasing the nonvested but statutorily authorized benefits and
adopting a policy that precluded such benefits in the future, to minimize employer
contributions, constituted a breach of fiduciary duty.
Our analysis of Cal Fire’s lack of relation to Bandt and our continued adherence
to O’Neal readily resolve appellants’ claims with respect to the first and third assertions.
In O’Neal this court considered and rejected appellants’ claims that they were entitled to
summary judgment based on the actions noted in the first and third assertions.
The first assertion falls within this court’s prior discussion as to why appellants
were not entitled to summary judgment on their improper transfer claims, as it relied on a
claim that transferring nonvaluation reserves to valuation reserves was improper under
the circumstances of the case. At the time, this court noted there were two types of
transfers involved, one that converted nonvaluation funds to valuation funds and thereby
proportionally reduced the employers’ required contributions, and one that replaced
required employer contributions with portions of the nonvaluation funds. Focusing on
this second type of transfer, appellants assert they have proven a breach of fiduciary duty
because the board failed to require the full actuarially required payments to be made by
employers. However, as we explained in O’Neal, neither type of transfer necessarily
broke the law. (O’Neal, supra, 8 Cal.App.5th at p. 1211.) Rather, such transfers are
permissible if the board acts for the benefit of the trust’s interests and not the employer’s
interests. (Id. at p. 1213.) We further noted that under prevailing law, breach of
fiduciary duty was an issue of fact. Appellants’ assertion relies upon the premise that any
transfer which directly reduces required employer contributions violates the fiduciary
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duty of loyalty. But this premise is exactly what we rejected when we concluded that
facts supported the inference that such transfers, while reducing employer contributions
in the short term, could also benefit the trust in both the short and long term by preserving
members’ jobs and the stability of the system as a whole. (Id. at pp. 1217-1219.)
The same is true for appellants’ third assertion, which relies on the premise that a
negative amortization rate can only benefit the employer and, thus, must constitute a
breach of fiduciary duty if utilized. As we noted in O’Neal, there is generally no legal
bar to the adoption of negative amortization rates, save for the fiduciary duties binding
the decision makers. (O’Neal, supra, 8 Cal.App.5th at pp. 1215, 1220.) As this court
noted in the summary judgment context, perpetual underfunding was a substantial fact in
appellants’ favor, but a fact finder could look at the potential for job protection and find
that no breach occurred. (Id. at p. 1221.) Appellants’ claim that adopting a negative
amortization schedule could benefit only the employer is not legally sustainable
considering our prior determination that a fact finder could conclude that it could benefit
employees, at least through job retention results. Moreover, other benefits, such as
reduced volatility and increased preservation of employer contributions in a time of
financial crisis could also demonstrate both short- and long-term benefits to the trust.
Appellants’ second and fourth assertions also fail. As noted above, the second
assertion maintains that any claim of job preservation is pretextual in this case.
Appellants base this on an alleged lack of diligent investigation and lack of facts, like a
contract specifically protecting jobs or the insurance arrangement in force at the time.
The fourth assertion contends a specific course of conduct on the part of StanCERA –
eliminating current nonvested benefits and adopting a policy that effectively precludes
reintroducing them in the future – is a breach of fiduciary duty. Appellants argue that
“StanCERA managed the system to put the provision of statutorily authorized benefits
out of reach” and thereby “gave preference to the County’s interest in reducing its
required employer contributions rather than providing benefits to its members.” Both
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assertions, however, require this court to accept appellants’ framing of the underlying
logic of StanCERA’s actions. For the second assertion, this court would have to accept
that a lack of relevant research into the number of jobs saved necessarily means
StanCERA was not acting in its members’ interests. This court would have to conclude
that, because appellants can frame the resulting actions as poor financial decisions, no
aspect of the financial downturn, no claims of substantial budget shortfalls potentially
affecting jobs in the county, and no concern about the long-term fundamentals of the trust
based on the downturn, motivated StanCERA to act. Similarly, the fourth assertion
requires this court to ignore any possibility that StanCERA was protecting the vested
benefits of the entire plan through job protection and efforts to smooth the effect of the
financial downturn through elimination of nonvested benefits and modifications that
ensured future excess earnings were used to further support vested benefits rather than be
diverted to pay nonvested benefits. Here, appellants seemingly argue that any “benefit”
loss, whether vested or discretionary, is a legal violation; a point we rejected in O’Neal.
(O’Neal, supra, 8 Cal.App.5th at p. 1213.)
We see no basis to reject the possibility that additional inferences can be made
when reviewing the evidence cited by appellants. This type of factual dispute formed the
basis of O’Neal’s determination that neither side was entitled to summary judgment. The
issue of fiduciary breach is not one that turns purely upon whether job losses were
calculated properly, or contracts were entered to protect interests, or funds used for
payments to one type of member are diverted to protect other members. Rather, as we
noted in O’Neal, the inquiry asks whether the board placed the interests of County above
the interests of its members. (O’Neal, supra, 8 Cal.App.5th at p. 1219.) This highly fact-
sensitive inquiry is not one that can be eliminated by pointing to flawed results or less
than ideal planning. Rather, it requires a wholistic analysis of the current situation, the
actions taken, and the interests at stake. Nor is it one that permits a party to seek a
second summary judgment or directed verdict analysis without moving for one below.
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Indeed, such analyses, even if proper, generally require there be no substantial evidence
supporting the defense to succeed. (See Design Built Systems v. Sorokine (2019) 32
Cal.App.5th 676, 686 [directed verdict for plaintiff only proper where claim is supported
and no substantial support is given to the defense alleged].) Although appellants spend
extended time on their claims that they have definitively proven breach, they
acknowledge there are some substantial evidence concerns to resolve, writing at the
conclusion of their fourth assertion, “we will show in the next section, there was no
substantial evidence presented at trial that any of StanCERA’s challenged actions
benefitted any members, including active employees, or that its actions saved any jobs.”
We thus consider that claim.
C. Substantial Evidence Supports the Judgment
Appellants claim there is no substantial evidence to support an inference that
StanCERA acted with the intent to benefit its members and, the argument goes, the
inferences drawn by the trial court are so irrational that they must be rejected as a matter
of law. We do not agree.
1. Relevant Law
“We review the trial court’s factfinding for substantial evidence. This traditional
standard of review is highly deferential. It has three pillars. First, we accept all evidence
supporting the trial court’s order. Second, we completely disregard contrary evidence.
Third, we draw all reasonable inferences to affirm the trial court. These three pillars
support the lintel: We do not reweigh the evidence.” (Schmidt v. Superior Court (2020)
44 Cal.App.5th 570, 581.) “Where, as here, it is the plaintiff asserting on appeal that a
defense verdict is not supported by the evidence, it is the plaintiff’s burden to show on
appeal that there is no substantial evidence to support that defense verdict, and not merely
that substantial evidence would have supported a verdict in her favor.” (Flores v. Liu
(2021) 60 Cal.App.5th 278, 297, italics omitted.)
45.
2. Discussion
As detailed extensively above, the record contains substantial evidence that
County and StanCERA were suffering from a significant financial downturn between
2009 and 2011. In dealing with this downturn, County wrote to StanCERA to highlight
problems in its budget and how those problems may affect StanCERA and its members.
StanCERA took that information and engaged its experts, both actuarial and legal, to
determine what course of action it could take in response to those concerns. StanCERA
was provided with options for reducing County’s required contributions in the short term,
a result that would stabilize the system by reducing the massive employer contribution
increases and thereby reduce the risk of job losses. It held public meetings and decided
upon the contested actions after hearing from its experts, its members, and the public.
At trial, StanCERA brought forth an expert witness who testified StanCERA’s
board met their duty of prudence by utilizing and following the advice of qualified
experts and who testified StanCERA’s board was both aware of and met their duty of
loyalty by considering the potential to save members’ employment while making
actuarially sound decisions on how to ensure those members’ employers were still
contributing to the system. StanCERA also presented evidence demonstrating County’s
statements of financial difficulty were objectively true, requiring substantial cost-saving
efforts on County’s part and concessions from employee groups in bargained contracts.
It further showed that the downturn and its effect on County was a matter of public
knowledge.
Appellants argue that any inference the board acted in its members’ interests is
impossible to support under the record made in this case. They allege there was no
confirmation on the exact number of jobs saved and that there was no evidence job
reductions would hurt the trust. They contend the financial records show County
eliminated mostly unfilled positions when they did conduct layoffs. They note that the
failure to collect the most funds possible at the time appears to have resulted in a
46.
substantial loss of assets as the market appreciated after the downturn. They wonder why
no collateral was required or why no contracts to ensure jobs were not eliminated were
signed.
None of these points, however, demonstrates the trial court could not look at the
record evidence as a whole and draw an inference that the board was working to preserve
potential job losses or otherwise respond to the current financial crisis’ overall effect on
the retirement fund and not working to solve County’s budget concerns. Rather, these
points generally contend either that the board may have made an error in assessing the
situation before it, or that it made what ultimately resulted in less than optimal financial
decisions. But, as we noted above when discussing O’Neal and appellants’ related
assertions, such decisions were within the board’s authority provided it acted in line with
its fiduciary responsibilities. A decision made under the proper fiduciary responsibilities
does not morph into an improper action merely because, in hindsight, it was not the best
decision available.
Ultimately, the inference drawn by the trial court is not unreasonable given the
facts. Faced with a substantial financial downturn affecting both the trust’s assets and the
financial condition of employers paying into the trust, StanCERA’s board was
approached by those employers and informed that there were significant financial issues
which could affect members’ jobs if no relief on increases in required funding were
found. StanCERA’s board investigated actions it could take to provide short-term relief
to employers and implemented steps to gradually move nonvaluation funds from prior
excess earning into the valuation funds, thereby eliminating certain long-standing
nonvested benefits, while also extending the period in which the ballooning UAAL
would be paid back. Notably, its chosen course of action did not mirror the requests
made by County, which initially asked for an immediate transfer of all nonvaluation
reserves. Instead, it showed a considered decisionmaking process that attempted to
47.
preserve nonvaluation reserves while working to ease the effects of the financial
downturn and actuarial errors that were driving employer contribution requirements.
From these actions, competing inferences can be drawn as to whether StanCERA’s
board acted to benefit County at the expense of members receiving additional benefits or
to benefit those members facing potential job loss at the expense of retired members
receiving additional benefits. “ ‘ “When an inference is supported by the evidence and is
not opposed to human experience and reason it cannot be disturbed by an appellate
court.” ’ ” (People v. Berti (1960) 178 Cal.App.2d 872, 876.) Here, the trial court could
choose from competing inferences derived from the evidence presented – neither of
which were precluded by law – and find the notion that StanCERA’s board acted within
the bounds of its fiduciary duties to protect current members was the more likely. As
substantial evidence supports this conclusion, we find no error.
We likewise find substantial evidence supports the trial court’s conclusion that the
board’s acts did not violate its fiduciary duty of prudence. Here, appellants’ claims
generally assert that the board failed to sufficiently verify County’s assertions of need,
failed to specifically identify the number of jobs saved, and failed to take steps to ensure
future repayment of funds through loan agreements, collateral, or the like. Again, these
arguments focus more on the weight to give the evidence showing the board knew of and
considered County’s position. The record is replete with evidence that the board was
aware of both the ongoing financial crisis and its effect on both the real estate and the
investment markets. The board’s actuaries regularly reported on ongoing losses, the state
of the market, and how those major events were affecting employer contribution
numbers. And StanCERA’s expert specifically opined that the board met its fiduciary
duties under the facts then present.
Even if this was all the evidence available, it would generally show knowledge,
awareness, and a reasonable explanation for not seeking a detailed and specific
breakdown of County’s losses. The need to act to stabilize the overall system was
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patently obvious. However, there was also evidence that board members had direct
knowledge of County’s condition through their dual positions and through evidence
confirming that County had been taking substantial steps to reduce costs. In this specific
factual scenario – where a generationally relevant recession is occurring – it is not
unreasonable for the trial court to conclude the board met its general duties of prudence
in seeking to reduce employer contributions while making direct transfers of
nonvaluation funds in the hope of preserving those benefits if the financial situation
changed more quickly than expected.
D. The Trial Court’s Statement of Decision
In their reply brief, appellants add a factual recitation and argument that suggests
the trial court’s statement of decision was defective because it failed to adhere to
California Rules of Court, rule 3.1590, was demonstrably incomplete, and did not
specifically address the “126 issues identified by the appellants” as principal or
controverted issues. Appellants state the “defective statement of decision requires
reversal.” We do not agree.
Issues not raised in the opening brief are deemed forfeited. (Golden Door
Properties, LLC v. County of San Diego (2020) 50 Cal.App.5th 467, 518, 554-555.)
Further, we see no obvious error in the trial court’s actions. Although the trial court
considered its “Tentative Statement of Decision After Trial” (some capitalization
omitted) to constitute a “proposed statement of decision” as authorized under California
Rules of Court, rule 3.1590(c), the record shows it also recognized appellants’ attempts to
file objections as if the court had issued a tentative ruling and proposed statement of
decision separately, ultimately reviewing appellants’ objections and determining no
further changes were necessary. This is a sufficient procedure. (See Thompson v. Asimos
(2016) 6 Cal.App.5th 970, 983 [“Even where proper procedure . . . has been followed
punctiliously, ‘[t]he trial court is not required to respond point by point to the issues
posed in a request for statement of decision. The court’s statement of decision is
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sufficient if it fairly discloses the court’s determination as to the ultimate facts and
material issues in the case.’ ”].) We can thus readily reject appellants’ assertion that the
trial court “flung down and danced upon” the relevant rules while appellants “strictly
followed the procedure” to obtain a ruling.
E. Cumulative Error
Finally, appellants argue that the cumulative effect of all the errors identified in
their briefing warrants reversal, even if no single error alone does. Upon review of the
multitude of issues raised, this court has found no error warranting reversal and no
demonstration of prejudice in any assumed errors. Upon review, nothing in appellants’
arguments convinces this court that the cumulative results of a series of erroneous rulings
resulted in a miscarriage of justice. (See Dam v. Lake Aliso Riding School (1936) 6
Cal.2d 395, 399 [rejecting claim the cumulative effect of minor errors deprived appellant
of a fair trial].)
DISPOSITION
The judgment is affirmed. Costs are awarded to Stanislaus County Employees’
Retirement Association and County of Stanislaus.
DETJEN, J.
WE CONCUR:
POOCHIGIAN, Acting P. J.
MEEHAN, J.
50.