Alameda County Dep. Sheriff's Assn. v. Alameda County Emp. Ret. Assn.

Filed 1/8/18
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION FOUR
ALAMEDA COUNTY DEPUTY
SHERIFF’S ASSOCIATION et al.,
Plaintiffs and Appellants,
v.
ALAMEDA COUNTY EMPLOYEES’
RETIREMENT ASSN. AND BD. OF THE
ALAMEDA COUNTY EMPLOYEES’
RETIREMENT ASSN. et al., A141913
Defendants and Respondents; (Contra Costa County
SERVICE EMPLOYEES Super. Ct. No. MSN12-1870)
INTERNATIONAL UNION, LOCAL
1021 et al.,
Interveners;
BUILDING TRADES COUNCIL OF
ALAMEDA COUNTY et al.,
Interveners and Appellants.
This consolidated action arises out of the tension between two undeniably valid,
and yet fundamentally opposed, public interests: the interest of the government in
maintaining the flexibility to alter statutes to conform to current needs and the interest of
public employees in a stable and predictable pension, earned through years of public
service. On September 12, 2012, Governor Brown—faced with a statewide crisis
involving the significant underfunding of public pension systems—signed into law the
Public Employee Pension Reform Act of 2013 (PEPRA or the Pension Reform Act) in an
1
attempt to curb what were seen as pervasive abuses in public pension systems throughout
California, including those governed by the County Employees Retirement Law of 1937
(CERL), Gov. Code, § 31450 et seq. 1 (§ 7522 et seq.; Stats. 2012, chs. 296 & 297; see
Marin Assn. of Public Employees v. Marin County Employees’ Retirement Assn. (2016) 2
Cal.App.5th 674, 680-683 (Marin), review granted Nov. 22, 2016, S237460.) Various
public employees and public employee organizations in Alameda, Contra Costa, and
Merced Counties (collectively, the Three Counties) subsequently challenged the
constitutionality of PEPRA as it applied to certain CERL plan members who were hired
prior to PEPRA’s effective date (legacy members). We conclude that the trial court’s
detailed analysis of PEPRA’s effects on the pensions of legacy members was incorrect in
certain respects and also improperly failed to include a necessary vested rights analysis.
We therefore affirm in part, reverse in part, and remand this matter for further
proceedings in accordance with this opinion.
I. FACTUAL AND PROCEDURAL BACKGROUND
A. Some History of CERL and Section 31461
The Three Counties are among the 20 counties that maintain employee retirement
plans under CERL. (See Irvin v. Contra Costa County Employees’ Retirement Assn.
(2017) 13 Cal.App.5th 162, 169 & fn. 6 (Irvin).) 2 Each county plan is administered by its
own retirement board, which is tasked with the management of the retirement system.
(§ 31520.) The total pensionable costs of each county system are intended by CERL to
be actuarially accounted for in advance and funded by employer and employee
contributions, as well as returns on investment. (See, e.g., §§ 31453-31454.6, 31520.2;
see also In re Retirement Cases (2003) 110 Cal. App. 4th 426, 438-439 [CERL mandates
that “the funds for the pensions contain both employer and employee contributions and
1
Statutory references are to the Government Code unless otherwise indicated.
2
The remaining 38 counties operate independent retirement systems or contract with the
state system—the California Public Employees’ Retirement System (PERS)—which is
governed by the Public Employees’ Retirement Law (PERL), § 20000 et seq. (See Irvin,
supra, 13 Cal.App.5th at p. 169 & fn. 6.)
2
that the level of funding be based on actuarial valuations”]; id. at pp. 461-462 [discussing
importance of investment income to system].) Thus, “[u]nder CERL an employee’s
pension is a combination of a retirement annuity based on the employee’s accumulated
contributions supplemented by a pension established with county contributions sufficient
to equal a specified fraction of the employee’s ‘final compensation.’ ” (Ventura County
Deputy Sheriffs’ Assn. v. Board of Retirement (1997) 16 Cal. 4th 483, 490 (Ventura).)
In order to calculate the specific amount of employee pensions under CERL, the
administering retirement board is “ ‘required to determine whether items of remuneration
paid to employees qualify as “compensation” under section 31460 and “compensation
earnable” pursuant to section 31461, and therefore must be included as part of a retiring
employee’s “final compensation” (§ 31462 or § 31462.1).’ ” (Marin, supra, 2
Cal.App.5th at p. 680.) Since the definitions contained in these statutes are central to the
proper administration of any CERL system and crucial to the resolution of the many
issues we here consider, we set them out in detail.
Section 31460 defines “ ‘compensation’ ” as “the remuneration paid in cash out of
county or district funds, plus any amount deducted from a member’s wages for
participation in a deferred compensation plan . . . , but does not include the monetary
value of board, lodging, fuel, laundry, or other advantages furnished to a member.” 3
Under the pre-PEPRA version of section 31461, “ ‘compensation earnable’ ” for a CERL
member “means the average compensation as determined by the board, for the period
under consideration upon the basis of the average number of days ordinarily worked by
persons in the same grade or class of positions during the period, and at the same rate of
pay.” (§ 31461, subd. (a).) In making this calculation, “[t]he computation for any
absence shall be based on the compensation of the position held by the member at the
beginning of the absence.” (Ibid.) Moreover, “[c]ompensation, as defined in Section
3
For purposes of CERL, “ ‘ “Member” means any person included in the membership of
the retirement association’ (§ 31470), which in turn ‘means an association of all persons
who may qualify as annuitants or beneficiaries’ under CERL (§ 31474).” (Marin, supra,
2 Cal.App.5th at p. 683, fn. 4.)
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31460, that has been deferred shall be deemed ‘compensation earnable’ when earned,
rather than when paid.” (Ibid.)
Once a member’s “compensation earnable” is established by the retirement board,
section 31462 defines “ ‘final compensation’ ” as “the average annual compensation
earnable by a member during any three years elected by a member at or before the time
he or she files an application for retirement, or, if he or she fails to elect, during the three
years immediately preceding his or her retirement.” (§ 31462, subd. (a).) Section
31462.1 is substantially the same as section 31462, differing only in that it sets the
relevant time period as any single year elected by a member. (§ 31462.1, subd. (a)(1).) 4
1. Relevant Statutory Amendments and Judicial Interpretations pre-PEPRA.
For many years, the most important case interpreting CERL’s definition of
compensation earnable was Guelfi v. Marin County Employees’ Retirement Assn. (1983)
145 Cal. App. 3d 297 (Guelfi), disapproved on various grounds by Ventura, supra, 16
Cal.4th at pp. 496-505. In that case, two retired police officers argued that their CERL
retirement board did not possess the authority to exclude overtime pay, educational
incentive pay, and uniform allowances that they had earned during their chosen final
compensation periods from its calculation of their final compensation. (Guelfi, supra,
145 Cal.App.3d at pp. 299-301.) The Guelfi court—Division Two of this District—
disagreed. It first concluded, relying largely on a case interpreting PERL, that uniform
allowances must be included in the “other advantages furnished to a member” for
purposes of section 31460, and therefore did not constitute compensation under CERL.
(Guelfi, supra, 145 Cal.App.3d at pp. 303-304.) It next held that, while overtime and
educational incentive pay did fit the definition of “compensation” for purposes of section
31460, they nevertheless must be excluded from compensation earnable under the
4
These statutes setting a member’s final compensation period are no longer operative for
any member who is subject to PEPRA “for all or any portion of his or her membership in
the county retirement system.” (§§ 31462, subd. (b); 31462.1, subd. (b).) Instead, final
compensation is calculated based on compensation earned during a period of at least 36
consecutive months. (§ 7522.32, subd. (a).) The application of this statute to legacy
members is not addressed by the parties.
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language of section 31461. (Guelfi, supra, 145 Cal.App.3d at pp. 304-307.) Specifically,
the Guelfi court opined, educational incentive pay did not constitute compensation
earnable under CERL because not all employees in the same grade or class of position
qualified for this pay as mandated by section 31461. (Guelfi, supra, 145 Cal.App.3d at
pp. 303-306.) Similarly, the appellate court concluded that, given the express language
of section 31461, compensation earnable must be based on the “number of days
‘ordinarily’ worked by others of the same rank,” thereby necessarily excluding extra
hours worked as overtime. (Guelfi, supra, 145 Cal.App.3d at pp. 306-307.)
With the Guelfi decision as a backdrop, the Legislature enacted several statutes in
the early 1990s that impacted CERL’s definitions of compensation and compensation
earnable. First, in 1990, the Legislature added section 31460.1 to CERL, which provided
that “ ‘[c]ompensation’ shall not include employer payments, including cash payments,
made to, or on behalf of, their employees who have elected to participate in a flexible
benefits program, where those payments reflect amounts that exceed their employees’
salaries.” (Stats. 1990, ch. 142, § 1.) The section was only operative for counties in
which the board of supervisors resolved to make it applicable. (Ibid.) Shortly, thereafter,
however, in 1992, the Legislature repealed this statute, stating that it had been
misconstrued by some retirement boards to require inclusion of flexible benefits in
compensation absent a board of supervisors’ election to the contrary. (Stats. 1992, ch.
45, § 3.) In making its decision to repeal section 31460.1, the Legislature cited Guelfi,
stressed the role of county retirement boards in determining which items of compensation
are includable in compensation earnable, and acknowledged the “long-standing practice
of the Legislature of not intruding into the county decisionmaking process regarding
compensation determinations with respect to those county retirement systems.” (Stats.
1992, ch. 45, § 3.)
Next, in 1993, the Legislature made several changes to the definition of
compensation earnable applicable only to counties of the first class—i.e., Los Angeles
County. (Stats. 1993, ch. 396.) That legislation amended the definition of compensation
earnable in section 31461 by including the concept (solely for Los Angeles) that
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“compensation that has been deferred shall be deemed ‘compensation earnable’ when
earned, rather than when paid.” (Id., § 3.) It also added section 31461.1 to CERL, which
allowed the Los Angeles County Board of Supervisors, at its election, to exclude from
compensation and compensation earnable cafeteria or flexible benefit plan contributions,
transportation allowances, car allowances, and/or security allowances. (Id., § 4.; see also
§ 31461.1, subd. (b).) Section 31461.1 was made applicable only to employees who
became members after the effective date of the board of supervisors’ resolution opting
into the statute. (Stats. 1993, ch. 396, § 4; see also § 31461.1, subd. (c).) Memorandums
of understanding executed prior to the effective date of the legislation, as well as
retirement board determinations made before that date, were also expressly excluded
from the statute’s purview. (Stats. 1993, ch. 396, § 4; see also § 31461.1, subds. (e) &
(f).) According to the Governor’s signing message, this legislation was enacted to allow
Los Angeles County to curb pension abuse based on the inclusion of flexible benefits and
allowances in pensionable compensation. (Governor’s signing message to Assem. on
Assem. Bill 1659 (Sept. 7, 1993) Stats. 1993, ch. 396.) Although the Governor urged
clean-up legislation to make the exclusion applicable uniformly, this was never done.
(Ibid.; see § 31461.1.)
Finally, in 1995, the Legislature amended section 31461 to make its statement
about deferred compensation applicable to all counties. (Stats. 1995, ch. 558, § 1.) As
detailed above, this sentence has remained part of section 31461, and applicable to all
counties, up to and through the enactment of PEPRA. According to the legislative
history, this change was made to ensure proper funding for deferred benefits under CERL
by requiring the funding for that benefit to commence when it is first earned by a
member. (Sen. Pub. Employees & Retirement Com., Analysis of Sen. Bill No. 226
(1995-1996 Reg. Sess.), p. 3.)
After these relatively minor legislative tweaks, the CERL pension landscape was
dramatically altered in 1997 by the Supreme Court’s landmark decision in Ventura,
supra, 16 Cal. 4th 483. The Ventura court considered a challenge made by a county
deputy sheriff’s association and three retirees to a county retirement board’s decision to
6
exclude from final compensation under CERL various payments made over and above
the basic salary paid to all employees in the same job classification, including: county
contributions to an employee’s deferred compensation plan; bilingual premium pay; a
uniform maintenance allowance; educational incentive pay; additional compensation for
remaining on-call during meal periods for designated employees; pay in lieu of annual
leave accrual; holiday pay; a motorcycle bonus; a longevity incentive; and a field training
officer bonus. (Ventura, supra, 16 Cal.4th at pp. 487-489.) Based on the “language and
legislative history of the pertinent CERL provisions,” the Ventura court first determined
that the Legislature did not intend that county contributions to an employee’s deferred
compensation plan be included in compensation for purposes of CERL. (Ventura, supra,
16 Cal.4th at p. 487.) In this regard, the high court found dispositive the fact section
31460 only includes in its definition of compensation contributions to a deferred
compensation plan that are deducted from a member’s wages. (Ventura, supra, 16
Cal.4th at pp. 494-495.) The Supreme Court, however, went on to conclude that all of
the other “disputed premiums” were compensation under CERL, and further held that,
“[w]ith the exception of overtime pay, items of ‘compensation’ paid in cash, even if not
earned by all employees in the same grade or class, must be included in the
‘compensation earnable’ and ‘final compensation’ on which an employee’s pension is
based.” (Ventura, supra, 16 Cal.4th at p. 487.) Thus, Ventura expressly rejected Guelfi’s
exclusion of uniform allowances from compensation under CERL as well as its
conclusion that compensation must be received by all employees in the same grade or
class in order to be included in compensation earnable for pension purposes. (Ventura,
supra, 16 Cal.4th at pp. 495-497, 499-505.)
In Ventura, the county had argued that it would face practical problems in
adequately funding its retirement system if the Supreme Court departed from the
certainty of Guelfi’s narrow construction of section 31461. (Ventura, supra, 16 Cal.4th at
p. 507.) Noting that it was not bound by the decision of the lower court in Guelfi,
however, the Ventura court soundly rejected this argument, declaring: “There may be
unanticipated costs to Ventura County if the pensions of the individual plaintiffs and the
7
employees the association represents must be recalculated and adjusted upward. If so, to
comply with the financial provisions of CERL (§ 31580 et seq.) and accommodate future
increases, the county may have to make a supplemental appropriation and adjust the
future annual appropriation for its contribution to the pension fund to cover the increase
in future retiree pensions that results from inclusion of additional items of ‘compensation’
in ‘compensation earnable.’ Past experience should enable the county to anticipate the
number of employees who will receive premium pay, however, and adjustments of this
nature are contemplated by CERL. (See § 31453, 31454.) Nothing in this record
suggests that the burden on the county fisc justifies either perpetuation of an erroneous
construction of the applicable statutes or denying these plaintiffs the benefit of our
decision.” (Ventura, supra, 16 Cal.4th at p. 507, italics added.)
Because Ventura County was the only county before the Supreme Court, the
Ventura decision expressly left open the question of whether its holding applied
“retroactively to any other county.” (Ventura, supra, 16 Cal.4th at p. 507.) After
numerous writ petitions were filed statewide on behalf of CERL member-employees
seeking a determination that the retroactive application of Ventura was required, the
cases were coordinated and the question was squarely addressed and resolved in 2003 by
In re Retirement Cases, supra, 110 Cal.App.4th at pp. 434-435. In short—after
considering at length issues of fairness and public policy, the hardships imposed on the
parties by retroactivity, the potential impairment of vested contractual rights, and the
applicability of federal precedent—Division Two of this District saw no reason not to
apply to Ventura the settled rule “that ‘a decision of a court of supreme jurisdiction
overruling a former decision is retrospective in its operation and that the effect is not that
the former decision was bad law but that it never was the law.’ ” (In re Retirement
Cases, supra, 110 Cal.App.4th at pp. 442, 445-468.) The court in In re Retirement Cases
additionally confirmed that, when dealing with the practicalities of Ventura’s retroactive
application, retirement boards had the discretion to collect arrears contributions and
interest from plan members (even beyond the three-year limitations period), but that they
8
were not required to do so. (In re Retirement Cases, supra, 110 Cal.App.4th at pp. 469-
472.)
In re Retirement Cases is also notable for determining whether three specific types
of employee-related payments were required to be included in final compensation under
CERL. (In re Retirement Cases, supra, 110 Cal.App.4th at pp. 472-482.) For instance,
as we discuss at length below, the appellate court concluded that cash-outs by employees
of unused leave upon retirement (terminal pay), did not constitute pensionable
compensation because, under the unambiguous language of CERL, a member’s final
compensation period may extend up to, but does not include, retirement. (In re
Retirement Cases, supra, 110 Cal.App.4th at pp. 473-476.) The court further held that
cash payments made by employers to purchase benefits on behalf of their employees do
not qualify as compensation under section 31460, limiting such compensation to cash
actually received by the employee. (In re Retirement Cases, supra, 110 Cal.App.4th at
pp. 477-481.) And, it also determined that employer pick-ups of an employee’s
retirement contributions are not includable in compensation for similar reasons. (Id. at
pp. 481-482.) Shortly thereafter, in Salus v. San Diego County Employees Retirement
Assn. (2004) 117 Cal. App. 4th 734 (Salus), the Fourth District opined, based on the
analysis set forth in In re Retirement Cases, that certain negotiated sick leave payouts
made after retirement were not includable in final compensation. (Salus, supra, 117
Cal.App.4th at pp. 739-742.)
2. Post-Ventura Changes to Compensation Earnable in the Three Counties.
In the years after Ventura, and before the appellate court decisions in In re
Retirement Cases and Salus, CERL counties scrambled to determine how compensation
earnable should be calculated to include the many items of premium pay that had
previously been excluded from pensionable compensation under a Guelfi analysis, but
were now required to included under Ventura’s construction of CERL. “Retirement
boards began to include a variety of cash payments in their computations for
‘compensation earnable’ that they had not included earlier, but they restricted these
modified calculations to ‘compensation’ earned on or after October 1, 1997, the date the
9
Supreme Court declined to rehear Ventura.” (In re Retirement Cases, supra, 110
Cal.App.4th at p. 436.) This led to a spate of lawsuits arguing that the Ventura holding
must be applied retroactively in all CERL counties, litigation which, as stated above, was
subsequently coordinated and resolved by In re Retirement Cases. (In re Retirement
Cases, supra, 110 Cal.App.4th at pp. 433-434, 436.) However, “[a]t different points in
time, before and during the coordinated proceedings, various counties and retirement
boards settled with their plan members and/or voluntarily resolved to implement Ventura
retroactively.” (Id. at p. 436, fn. 6.) This included all of the Three Counties and their
CERL retirement boards (Boards): the Contra Costa Employees’ Retirement Association
(CCCERA), the Alameda County Employees’ Retirement Association (ACERA), and the
Merced County Employees’ Retirement Association (MCERA).
Thus, for example, in 1999, Contra Costa County, CCCERA, various cities and
districts, and representatives of a class of members who retired on or before September
30, 1997, entered into a court-approved settlement agreement pursuant to which
compensation earned by all retired and active members prior to September 30, 1997,
would be subject to specific agreed upon inclusions in, and exclusions from,
compensation earnable. While the settlement was being negotiated, CCCERA had, by
resolution in 1998, applied the same inclusions and exclusions to all active members.
Compensation items deemed pensionable included on-call pay; the annual sale of
vacation leave; and terminal pay, to the extent accrued in the final compensation period.
Thereafter, effective for all new members of CCCERA on or after January 1, 2011, new
limitations on compensation earnable were adopted. Specifically, pensionable in-service
leave cash-outs and terminal pay were limited to amounts that were both earned and
cashable in the final compensation period. In addition, any conversion of in-kind benefits
to cash during the final compensation period was excluded from pensionable
compensation. 5
5
Given this change, with respect to terminal pay and certain in-kind conversions, legacy
members of CCCERA include only those active employees who were employed prior to
January 1, 2011.
10
In a similar fashion, in June 1999, Alameda County, ACERA, representative of
active and retired members, and several employee organizations entered into a court-
approved settlement agreement establishing “new definitions” of compensation earnable
and final compensation in the wake of Ventura, applicable to all retired members and all
active members whose effective dates of retirement occurred on or after October 1, 1997.
Pursuant to the terms of the settlement, compensation earnable was defined as “all items
of remuneration paid . . . in cash for services rendered or special skills,” including, among
other things, “pay premiums that recognize special duties” and “leave paid as salary or as
lump sum(s) in lieu of paid leave.” However, the definition of final compensation was
expressly limited such that “vacation leave and/or sick leave paid as a lump sum shall be
recognized as final compensation only to the extent that it is earned during the final
compensation period and, in the case of a three-year final compensation period, shall be
the annual average of the leave earned.”
Finally, MCERA, Merced County, a local district, and several employees—“on
behalf of all other individuals who are current, future, retired, or deferred retirement
members” of MCERA—entered into a court-approved settlement agreement in June 2000
which, among other things, allowed for the inclusion in compensation earnable of a
maximum of 160 hours of terminal pay. For a number of years thereafter, MCERA staff
included in compensation earnable both terminal pay up to 160 hours and certain annual
in-service leave sell backs occurring during members’ final compensation periods.
MCERA ultimately repudiated this practice, arguing that its settlement agreement capped
all pensionable leave cash-outs at 160 hours, whether cashed out in service or at
termination. Litigation ensued, and the trial court concluded that, under the terms of the
settlement, up to 160 hours of terminal pay was pensionable in addition to any authorized
in-service leave sell backs permitted during a member’s final compensation period.
(Board of Retirement v. Baker (Super. Ct. Merced County, 2007, No. 149970) (Baker).)
While it acknowledged the holding in Salus, the court found its construction of the
agreement to be consistent with Ventura and the intent of the parties at the time of the
settlement. (Baker, supra, Super. Ct. of Merced County, 2007, at pp. 5-6.)
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For purposes of this opinion, we refer to all of the settlements described above as
Post-Ventura Settlement Agreements.
B. The Pension Reform Act (PEPRA)
After resolution of the many issues involved in applying the Ventura holding to
CERL pension calculations, pension practices in the Three Counties remained essentially
stable for over a decade, as the corresponding CERL Boards determined pensionable
compensation in accordance with the Post-Ventura Settlement Agreements. However,
during this same timeframe, the unfunded pension liability crisis became increasingly
significant at both the state and national level. (See Marin, supra, 2 Cal.App.5th at
pp. 680-687.) In particular, concern focused on so-called pension “spiking”—“attempts
by an employee to inflate a component of the retirement formula in order to receive
higher retirement benefits over his or her lifetime.” (Mason v. Retirement Board (2003)
111 Cal. App. 4th 1221, 1226 (Mason).) The Legislature responded in 2012 by passing
Assembly Bill No. 340 (AB 340), which enacted the Pension Reform Act. (See § 7522 et
seq.; Stats 2012, ch. 296.) 6
1. Statutory Changes.
For purposes of the dispute here at issue, the most important change to CERL
effected by the Pension Reform Act was that legislation’s amendment of CERL’s long-
standing definition of compensation earnable. The Pension Reform Act took the old
version of that definition and made it subdivision (a) of section 31461. It then added a
new subdivision (b) to the statute, expressly delineating the many things “compensation
6
We take this opportunity to note that whatever labels have been created—or moral
judgments made—with respect to the pension practices at issue in this appeal, they are
entirely irrelevant to our determination of the case. We express no opinion on the
judiciousness of the changes to section 31461 made by PEPRA; nor do we judge the
wisdom of the statutory structure in place prior to its enactment. Rather, our sole task at
hand is to interpret CERL both before and after the Pension Reform Act to determine
whether the challenged benefits were properly includable in compensation earnable under
the pre-PEPRA version of section 31461 and whether the Pension Reform Act changed
this status quo.
12
earnable” is not. Specifically, according to new subdivision (b) of section 31461, as
enacted by PEPRA, “ ‘compensation earnable’ does not include, in any case, the
following:
“(1) Any compensation determined by the board to have been paid to enhance a
member’s retirement benefit under that system. That compensation may include:
“(A) Compensation that had previously been provided in kind to the member by
the employer or paid directly by the employer to a third party other than the retirement
system for the benefit of the member, and which was converted to and received by the
member in the form of a cash payment in the final average salary period.
“(B) Any one-time or ad hoc payment made to a member, but not to all similarly
situated members in the member’s grade or class.
“(C) Any payment that is made solely due to the termination of the member’s
employment, but is received by the member while employed, except those payments that
do not exceed what is earned and payable in each 12-month period during the final
average salary period regardless of when reported or paid.
“(2) Payments for unused vacation, annual leave, personal leave, sick leave, or
compensatory time off, however denominated, whether paid in a lump sum or otherwise,
in an amount that exceeds that which may be earned and payable in each 12-month
period during the final average salary period, regardless of when reported or paid.
“(3) Payments for additional services rendered outside of normal working hours,
whether paid in a lump sum or otherwise.
“(4) Payments made at the termination of employment, except those payments that
do not exceed what is earned and payable in each 12-month period during the final
average salary period, regardless of when reported or paid.” 7
7
At the same time the Legislature passed the Pension Reform Act, it also enacted
Assembly Bill 197 (AB 197), with the declared purpose to exclude from CERL’s
definition of compensation earnable “ ‘any compensation determined by the [county
retirement] board to have been paid to enhance a member’s retirement benefit.’ ” (Marin,
supra, 2 Cal.App.5th at p. 683, fn. omitted.) There is no material difference between the
versions of section 31461, subdivision (b), codified by AB 340 and AB 197. (Marin,
13
2. Implementation by the Boards.
In the wake of PEPRA, the Boards in the Three Counties all took action to
conform their retirement systems to the new law, excluding certain previously included
pay items from compensation earnable. These changes were made not just for new
hires—which no party disputes is permissible—but also for employees retiring after
PEPRA’s January 1, 2013, effective date. CCCERA, for instance, adopted a new policy
excluding from compensation earnable and final compensation—for all members retiring
after January 1, 2013—terminal pay that was not both earned and payable during the
member’s final compensation period. Additionally excluded were payments for being on
call or on standby.
Similarly, ACERA adopted a number of exclusions from compensation earnable,
including any vacation or sick leave sold back at termination; on-call and call-back pay;
pay for performance benefits; recruitment bonuses and other one-time payments; and
various in-lieu payments. MCERA determined, based on the new law, that terminal pay
could only be included in compensation earnable to the extent it was earned and payable
during a legacy member’s final compensation period. In addition, MCERA excluded on-
call pay from compensation earnable for legacy members.
C. Litigation in the Trial Court
Disagreeing with the Boards’ application of PEPRA’s new rules to the calculation
of retirement benefits for legacy members, various employee-members of CERL systems
and impacted employee associations in each of the Three Counties (petitioners) filed
supra, 2 Cal.App.5th at p. 684, fn. 5.) Rather, as our colleagues in Division Two recently
noted with respect to revised section 31461, the only difference between the two versions
enacted by AB 340 and AB 197 is that AB 197 “also added section 31461, subdivision
(c) to codify the caveat noted by the Senate Rules Committee: ‘The terms of subdivision
(b) are intended to be consistent with and not in conflict with the holdings in Salus,
[supra,] 117 Cal. App. 4th 734 and In re Retirement Cases, [supra,] 110 Cal. App. 4th 426.’
(Stats. 2012, ch. 297, § 2.)” (Marin, supra, 2 Cal.App.5th at p. 684, fn. 5.) For purposes
of this opinion, we will follow the custom of referring to both legislative enactments as
AB 197, and that designation, along with the Pension Reform Act and PEPRA, will all be
used interchangeably. (Cf. ibid.)
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writs of mandate challenging the Boards’ implementation actions as an unlawful
impairment of legacy members’ constitutionally protected pension rights. States are
prohibited by the United States Constitution from passing a law “impairing the obligation
of contracts.” (U.S. Const., art. I, § 10.) Article I, section 9 of the California
Constitution states a parallel proscription: “A . . . law impairing the obligation of
contracts may not be passed.” Thus, petitioners specifically alleged that legacy members
had acquired a “vested” right to pension benefits based on the pre-PEPRA state of the
law, which could not be altered to their detriment without running afoul of both state and
federal contract clauses. 8 After numerous parties intervened—including the State to
defend the constitutionality of AB 197—the litigation involving the Three Counties was
eventually consolidated into this action.
In addressing the many issues raised by the consolidated cases, the trial court
decided to handle the litigation in phases. Thus, the court limited the “Phase One”
briefing to purely legal issues focused on whether the pay items expressly excluded from
compensation earnable by AB 197 were includable under prior CERL law and whether, if
not, legacy members could nevertheless obtain a vested right to such inclusion. Given
the trial court’s conclusions as described in detail below, the litigation never advanced
beyond this initial phase.
Rather, after seven hearings held from October 2013 through April 2014, the trial
court issued its final statement of decision with respect to the Phase One issues on May
12, 2014 (SOD), resolving the matter. The court identified the overarching question
presented in this case as whether legacy members—generally all active employees who
8
A benefit is deemed “vested” when “the employee acquires an irrevocable interest in the
benefit. The ‘vesting’ of retirement benefits must be distinguished from the ‘maturing’ of
those benefits, which occurs after the conditions precedent to the payment of the benefits
have taken place or the benefits are otherwise within the control of the employee.”
(Retired Employees Assn. of Orange County, Inc. v. County of Orange (2011) 52 Cal. 4th
1171, 1189, fn. 3 (County of Orange).)
15
were employed prior to the effective date of AB 197 (January 1, 2013) 9—have a vested
right to have their pensions calculated upon their retirements in accordance with the pre-
PEPRA version of section 31461. After detailing the history of “compensation earnable”
under CERL, the specifics of each County’s implementation of section 31461, and the
procedural posture of the case, the court made legal determinations with respect to three
distinct issues.
The trial court first addressed what it dubbed the “timing issue”—whether
compensation must have been both earned and payable in the final compensation period
under the pre-PEPRA version of CERL in order to be included in compensation earnable.
As stated above, section 31461, as amended by AB 197, currently excludes from
compensation earnable all leave cash-outs, whether paid in the final compensation period
or at termination, other than those “that do not exceed what is earned and payable in each
12-month period during the final average salary period, regardless of when reported or
paid.” (§ 31461, subd. (b)(2) & (4).) If—as the State asserts and as we discuss further
below—leave cash-outs were always so limited, it is difficult to argue that members
hoping to include larger leave accruals in compensation earnable possess a vested right to
take advantage of what was, in essence, an illegal practice.
The trial court determined that cash-outs of leave that were not earned in the final
compensation period could not lawfully be included in a calculation of compensation
earnable, even before AB 197’s express statements to that effect. Next, relying on In re
Retirement Cases and Salus, the trial court further opined that compensation that is not
payable in the final compensation period (so-called terminal pay) was also not a proper
component of compensation earnable under the pre-PEPRA version of section 31461.
However, although it concluded that, even before PEPRA, compensation had to be both
earned and payable in a member’s final compensation period to be included in
compensation earnable, the trial court nevertheless determined that—for certain subsets
9
As noted above, with respect to certain pay items, legacy members of CCCERA include
only those active employees who were employed prior to January 1, 2011.
16
of legacy employees in Contra Costa and Merced—principles of equitable estoppel
required the relaxation of this rule in the context of both in-service leave cash-outs and
terminal pay.
The second legal issue addressed by the trial court involved the effect on CERL of
AB 197’s amendment excluding from compensation earnable “[p]ayments for additional
services rendered outside of normal working hours, whether paid in a lump sum or
otherwise.” (§ 31461, subd. (b)(3).) This would, of course, exclude overtime pay from
any calculation of compensation earnable, a state of affairs that all seem to agree was in
existence prior to PEPRA. (Ventura, supra, 16 Cal.4th at pp. 487, 500, fn. 20; Guelfi,
supra, 145 Cal.App.3d at pp. 306-307.) However, it also calls into question numerous
variations of “on-call” or “standby” pay that arguably, under Ventura, were properly
included in compensation earnable prior to AB 197’s amendments. (See Ventura, supra,
16 Cal.4th at pp. 487-489 & fn. 5.)
With respect to such on-call pay, although the trial court never expressly analyzed
the vested rights issue, it appears to have concluded that legacy employees do have a
limited vested right to the continued inclusion of certain types of on-call pay in
compensation earnable. Specifically, the trial court directed the Boards to continue to
include on-call compensation in compensation earnable for legacy members “in those
limited circumstances where the pay category was previously included and the amount to
be included was both earned and required of the employee during his or her final
compensation period.” 10 The trial court further limited legacy members’ vested rights
with respect to this form of compensation to situations “regularly applicable to the class
of employees” and not designed “to ‘enhance’ the pension.”
The third change to CERL effected by AB 197 which was considered by the trial
court in its SOD was new subsection (b)(1) of section 31461which, as stated above,
10
According to the SOD, the State appeared “prepared to agree” below that, in these
limited circumstances, members may have a vested right to the inclusion of such on-call
pay in compensation earnable, to the extent earned in the final compensation period.
And, indeed, the State does not appear to challenge this holding on appeal.
17
excludes from compensation earnable “[a]ny compensation determined by the board to
have been paid to enhance a member’s retirement benefit.” According to the trial court,
the parties did not dispute that this subsection represents new law for purposes of a vested
rights analysis. Rather, petitioners argued that the Boards could not categorically exclude
certain one-time payments on this basis without complying with new section 31542,
which requires each Board to establish a procedure for determining whether an element
of compensation was paid to enhance a member’s retirement benefit, including a process
for the presentation of contrary evidence by the employer or member. The trial court
denied any relief on this basis “without prejudice,” concluding it was “pure speculation”
to assume that any issues would ever even come up under this general enhancement
provision, given the other express exclusions added to CERL by AB 197.
On the same day it filed its SOD, the trial court entered judgments specific to each
of the Three Counties (Judgments) and ordered issuance of related writs of mandate to
CCCERA, ACERA, and MCERA (Writs). Based on the analysis in the SOD, all three
Judgments denied petitioners’ request to have new section 31461 declared an
unconstitutional impairment of the vested rights of legacy members, except to the extent
the revised statute excluded the value of certain types of on-call payments from such
legacy members’ compensation earnable. The Contra Costa and Merced Judgments
further established an “Estoppel Class,” the members of which must be allowed to
include in their compensation earnable certain leave cash-outs in excess of those
permitted by new section 31461. Finally, the Three Judgments all established 60-day
“Stay Periods” following the entry of the Judgments during which legacy members who
retired would be entitled to have their compensation earnable calculated in accordance
with pre-PERPA policies and practices. The Writs then commanded each of CCCERA,
ACERA, and MCERA to implement their policies and practices in a manner consistent
with their applicable Judgment.
Notices of Appeal were subsequently filed by a number of the petitioner employee
organizations and member-employees representing each of the Three Counties. In
addition, both the State and the Central Contra Costa County Sanitary District (Sanitary
18
District) filed their own notices of appeal and cross-appeal. After briefing by these
litigants—as well as by CCCERA, ACERA, and MCERA—numerous challenges to the
trial court’s decision below are now before us for resolution.
II. DISCUSSION
A. Standards of Review and Board Discretion
1. Standards of Review.
As a general matter, the many issues presented in this appeal involve questions of
law subject to our de novo review. (Ghirardo v. Antonioli (1994) 8 Cal. 4th 791, 799
[when “decisive facts” are not disputed, an appellate court is confronted with a question
of law]; Mason, supra, 111 Cal.App.4th at p. 1227 [issues of statutory interpretation
subject to de novo review]; see also Redevelopment Agency v. County of Los Angeles
(1999) 75 Cal. App. 4th 68, 74 [questions of constitutional and statutory construction
subject to de novo review, “ ‘independent of the trial court’s ruling or reasoning’ ”].)
This is true even though we are reviewing the trial court’s ruling on a writ of mandate
under Code of Civil Procedure section 1085. Under such circumstances, “ ‘the appellate
court is ordinarily confined to an inquiry as to whether the findings and judgment of the
trial court are supported by substantial, credible and competent evidence. This limitation,
however, does not apply to resolution of questions of law where the facts are undisputed.
In such cases, as in other instances involving matters of law, the appellate court is not
bound by the trial court’s decision, but may make its own determination.’ ” (Pacific Gas
& Electric Co. v. Department of Water Resources (2003) 112 Cal. App. 4th 477, 491; see
also Salus, supra, 117 Cal.App.4th at p. 738.)
When construing statutes on appeal, our function “ ‘is simply to ascertain and
declare what is in terms or in substance contained therein, not to insert what has been
omitted, or to omit what has been inserted; and where there are several provisions or
particulars, such a construction is, if possible, to be adopted as will give effect to all.’ ”
(Ventura, supra, 16 Cal.4th at p. 492.) Where the language of a statute is ambiguous—as
Ventura declared sections 31460 and 31461 to be in many respects—our “primary
responsibility” when engaging in judicial construction “is to carry out the intent of the
19
Legislature to the extent possible.” (Id. at p. 493.) In addition—since the task of
statutory interpretation here at hand involves the pension rights of legacy members of
CCCERA, ACERA, and MCERA—we must keep in mind that “ ‘ “[p]ension legislation
must be liberally construed and applied to the end that the beneficent results of such
legislation may be achieved.” ’ ” (Irvin, supra, 13 Cal.App.5th at p. 170.) Thus, while
our judicial construction “must be consistent with the clear language and purpose of the
statute,” it is also true that “[a]ny ambiguity or uncertainty in the meaning of pension
legislation must be resolved in favor of the pensioner.” (Ventura, supra, 16 Cal.4th at
p. 490.)
On the other hand, since appellants here claim that the application of AB 197 to
the calculation of their retirement benefits violates their vested contractual rights under
both state and federal contract clauses, they have the burden of “ ‘mak[ing] out a clear
case’ ” that such a constitutional violation has occurred. (Deputy Sheriffs’ Assn. of San
Diego County v. County of San Diego (2015) 233 Cal. App. 4th 573, 578 (San Diego
Deputy Sheriffs).) Moreover, as the State points out, there is also a presumption at play
in these proceedings that the amendments to section 31461 effected by AB 197 are
constitutional: “ ‘ “If there is any doubt as to the Legislature’s power to act in any given
case, the doubt should be resolved in favor of the Legislature’s action. Such restrictions
and limitations [imposed by the Constitution] are to be construed strictly, and are not to
be extended to include matters not covered by the language used.” ’ ” (California
Redevelopment Assn. v. Matosantos (2011) 53 Cal. 4th 231, 253.)
2. Board Discretion.
As an additional matter, we cannot ignore the fact that the pension determinations
here at issue are the result of the implementation of CERL by the Boards, who have been
vested with the authority to manage each of their respective pensions systems. (§ 31520;
see also Cal. Const., art XVI, § 17 [“the retirement board of a public pension or
retirement system shall have . . . sole and exclusive responsibility to administer the
system in a manner that will assure prompt delivery of benefits and related services to the
participants and their beneficiaries”].) Both CCCERA and ACERA assert on appeal that
20
it is their responsibility to determine which items of compensation are pensionable under
CERL; that they are entitled to judicial deference with respect to their interpretation of
AB 197; and that the trial court should not have ordered them to change their
implementation of the new law without finding that they had abused their discretion in
taking the actions that they did. Under these circumstances, they argue, we should
conclude that the trial court erred in substituting its interpretation of AB 197 for that of
the Boards.
In Irvin, this District recently considered at length the extent to which our review
of board decisions interpreting CERL should be deferential. (Irvin, supra, 13
Cal.App.5th at pp. 171-173.) The Irvin court began with a discussion of Yamaha Corp.
of America v. State Bd. of Equalization (1998) 19 Cal. 4th 1 (Yamaha), in which the
Supreme Court “addressed the weight to be given to the interpretation of a state statute by
‘ “an administrative agency charged with its enforcement and interpretation.” ’ ” (Irvin,
supra, 13 Cal.App.5th at p. 171, quoting Yamaha.) Applying Yamaha, the Irvin court
concluded that the CERL board’s statutory interpretation in its case was entitled to “ ‘due
consideration,’ ” but not deference. (Id. at p. 172; see also Lanquist v. Ventura County
Employees’ Retirement Assn. (2015) 235 Cal. App. 4th 186, 192-193 (Lanquist) [finding
by Second District that a county retirement board’s interpretation of a CERL provision is
entitled to “due consideration”].)
Importantly, the Irvin Court went on to note that “it is not entirely clear
that Yamaha applies at all. That decision was concerned with interpretive annotations in
a business tax law guide published by the Board of Equalization, a state agency with
exclusive regulatory authority over the laws concerned. The [CERL board], in contrast,
does not have an exclusive grant of authority; it is but one of 20 county retirement
boards, all of which have responsibility for administering CERL within their
jurisdictions.” (Irvin, supra, 13 Cal.App.5th at p. 172; see also Purifoy v. Howell (2010)
183 Cal. App. 4th 166, 182-183 [rejecting use of deference where many local public and
private agencies may have inconsistent interpretations]; California Highway Patrol v.
Superior Court (2006) 135 Cal. App. 4th 488, 501 [rejecting argument that the Legislature
21
should be deemed to have approved a particular statutory interpretation applied by some
municipalities for many years because, “[w]hile this principle may apply when a state
agency is charged with administering a particular statutory scheme, it has dubious
application when numerous cities and counties are charged with applying state law”].)
Under these circumstances—where deference could lead to inconsistent interpretations
among CERL retirement systems—the Irvin court found it “unwise” to defer to the
statutory interpretation of a single CERL board. (Irvin, supra, 13 Cal.App.5th at pp. 172-
173.) We agree. Indeed, even under Yamaha, we would find this issue dispositive, given
the fundamental nature of the questions of statutory interpretation here at issue and their
importance to ongoing pension administration for all CERL counties. We thus join our
colleagues in Irvin and Lanquist in giving the Board decisions in this case “due
consideration,” but not deference.
Before we proceed, however, we must also address another issue regarding Board
discretion which is fundamental to our resolution of the questions presented in this
case—that is, appellants’ repeated and strenuous assertion, based on section 31461 and
Guelfi, that the Boards have broad discretion to include additional pay items in
compensation earnable, over and above those that are required to be included under the
definitional parameters found in CERL. According to section 31461, “ ‘[c]ompensation
earnable’ by a member means the average compensation as determined by the board . . .”
(italics added). (§ 31461, subd. (a).) As discussed above, this District considered in
Guelfi whether overtime, educational incentive pay, and uniform allowances were
required to be included in compensation earnable under section 31461. (Guelfi, supra,
145 Cal. App. 3d 297.) After the Guelfi court resolved that they were not, it concluded its
opinion by placing the following admonition in its now-famous footnote six: “Nothing in
this opinion should be taken as barring either the inclusion of uniform allowance,
educational incentive pay and overtime in the calculation of benefits should the Board
decide to do so, or the right of a retired member to continue to receive benefits according
to such calculation once established. Our conclusion is only that CERL does not require
inclusion of those items of remuneration for retirees.” (Id. at pp. 303-307 & fn. 6, italics
22
added.) Thus began the argument that has informed the CERL pension debate over the
last 30 years—that section 31461 merely identifies the minimum pay items that must be
included in compensation earnable, but does not otherwise limit the discretion of CERL
boards to include additional pay items in the calculation of pension benefits if, in their
discretion, they choose to do so.
Admittedly, no case or legislative action since Guelfi has expressly debunked this
notion. And, indeed, through its language, the Legislature has, at times, encouraged it.
Thus, for instance, when the Legislature repealed section 31460.1 in 1992, as discussed
above, it noted that, since its enactment in 1937, CERL has “conferred upon the county
retirement boards the duty and power to determine which of the items of compensation
paid to county employees who are members of the county retirement associations or
systems would constitute ‘compensation earnable,’ which, in turn, generally determines
the amounts of the retirement allowances of retiring members.” (Stats. 1992, ch. 45, § 3.)
In making this statement, the Legislature expressly cited to specific sections of Guelfi,
including footnote 6. (Ibid.) Thus, this Legislative action could certainly be viewed as
an endorsement of the type of Guelfi discretion advocated by appellants.
Several years later, in 1997, the Ventura court further muddied the waters with
respect to the possible existence of Guelfi discretion. In summarizing Guelfi’s analysis
and holdings regarding the benefits at issue in that case, Ventura expressly referenced the
statement in footnote six that “[t]he retirement board was free to include those benefits in
its retirement calculation if it elected to do so, but CERL did not require that they be
included.” (Ventura, supra, 16 Cal.4th at p. 492.) The Ventura court then went on to
reject the bulk of Guelfi’s analysis with respect to the three benefits Guelfi considered
(overtime, uniform allowances, and educational incentive pay), especially the appellate
court’s general conclusion that “an item of compensation must be received by all
employees in the applicable grade or class of position if it is to be part of a retiring
employee’s ‘compensation earnable.’ ” (Ventura, supra, 16 Cal.4th at pp. 499-505, 500.)
In resolving the case before it, however, the Ventura court did not directly address the
continuing validity or import of Guelfi’s footnote six. Rather, it stated only that “the
23
premiums in dispute are ‘compensation earnable’ within the meaning of [section 31461]
and must be included when [plaintiffs’] pensions are calculated. To the extent that Guelfi
is inconsistent with this conclusion, it is disapproved.” (Ventura, supra, 16 Cal.4th at
p. 505.) Arguably, then, Ventura could be read as leaving in place Guelfi’s conclusion
that section 31461 merely establishes a floor with respect to which items of compensation
must be included in compensation earnable, but does not impose a ceiling on the pay
items a CERL board may, in its discretion, deem pensionable. 11
Subsequent appellate court decisions construing section 31461—In re Retirement
Cases and Salus—also did nothing to dispel the idea that CERL boards have the ability to
include otherwise excludable pay items in compensation earnable “should [they] decide
to do so.” (Guelfi, supra, 145 Cal.App.3d at p. 307, fn. 6.) In re Retirement Cases, for
example, clearly recognized the issue, but declined to address it. Ultimately, the
appellate court in that case held that disputed pay items at issue were not required under
CERL to be included in the calculation of pension benefits. (In re Retirement Cases,
supra, 110 Cal.App.4th at pp. 476, 481-482.) However, the court clarified its holding by
stating: “Because we are considering what must be included under the statute and we
conclude that the items requested by plan members do not have to be included under
CERL, we need not consider L.A. County’s argument that these items cannot be included
. . . .” (Id. at p. 472, fn. 20, italics added.) Further, while Salus was clear that certain sick
leave cash-outs payable upon retirement “were not final compensation under CERL,” it
also phrased its holding in terms of what was not mandated rather than what was
prohibited, stating: “Because the sick leave payments were not final compensation, [the
county retirement association] was not required to include the sick leave payments in
calculating appellants’ retirement benefits.” (Salus, supra, 117 Cal.App.4th at p. 736,
11
Of course, Ventura could as easily be understood as an affirmation of the principal that
the statutory language of CERL alone governs which items of compensation may be
deemed compensation earnable for pension purposes. (See, e.g., Ventura, supra, 16
Cal.4th at p. 490 [citing section 31455 in support of the proposition that it is CERL’s
definitions which “govern construction of CERL”].)
24
italics added.) Finally, although our Division Two recently touched on the concept of
CERL board discretion in Marin, supra, 2 Cal.App.5th 674, 705, fn. 22, it focused largely
on post-PEPRA law and did not directly address Guelfi. In sum, no court has yet
definitively laid to rest the argument for expanded Guelfi discretion embraced by
appellants in this case. We therefore take this opportunity to do so. 12
Initially, we point out that the language in footnote six of Guelfi was completely
unnecessary to the resolution of the issues in that case, and is therefore nonbinding. (San
Diego Deputy Sheriffs, supra, 233 Cal.App.4th at p. 580 [“ ‘[i]ncidental statements of
conclusions not necessary to the decision are not to be regarded as authority’ ”].) Indeed,
the statement is not even a legal conclusion or an opinion, but is instead merely a
clarification of the issues that the court was not deciding. More fundamentally, however,
we reject the idea of Guelfi discretion, because, quite simply, it makes no sense given the
plain language of CERL.
As Guelfi itself acknowledged, CERL “set[s] out a clear sequence for computing
retirement benefits, beginning with a fairly broad definition of ‘compensation’ (§ 31460)
and progressing through the narrowing definition of ‘compensation earnable’ (§ 31461)
to arrive at ‘final compensation’ (§ 31564.1).” (Guelfi, supra, 145 Cal.App.3d at p. 303.)
Thus, the language of CERL does not suggest a statutory structure setting forth a
threshold for compensation earnable, while allowing additions at the discretion of the
board beyond those required minimums. Instead, it prescribes a required series of
definitional hurdles, all of which must be cleared in order to make a particular pay item
pensionable. Thus, for instance, if footnote 6 is interpreted as appellants suggest, the
uniform allowance Guelfi held was not compensation (a legal conclusion later reversed
by Ventura) would nevertheless be pensionable at the discretion of the CERL boards.
(Guelfi, supra, 145 Cal.App.3d at pp. 303-304; Ventura, supra, 16 Cal.4th at pp. 495-
12
We note that the trial court below did reject appellants’ claim, concluding that the
language of section 31461 was not “intended by the Legislature to give each board carte
blanche authority to add whatever items it wished to the calculation. By ordinary
meaning the Legislature simply directed each board to make the mathematical or related
determination of ‘average’ compensation.”
25
497.) Yet section 31461 defines compensation earnable as “the average compensation as
determined by the board, for the period under consideration . . . .” (§ 31461, subd. (a),
italics added.) Thus, under the plain language of CERL, a pay item must be
compensation in order to qualify as compensation earnable. Indeed, Guelfi, itself,
acknowledges as much. (Guelfi, supra, 145 Cal.App.3d at p. 303 [“[u]nder the statutory
framework, only items of ‘compensation’ as defined in section 31460 are to be
considered in the Board’s determination of ‘compensation earnable’ ”].)
Similarly, the inclusion of overtime in compensation earnable, as suggested by
Guelfi’s footnote six, would, as all parties seem to agree, run afoul of the express
language of section 31461, which bases compensation earnable off of “the average
number of days ordinarily worked by persons in the same grade or class of positions
during the period.” (§ 31461, subd. (a).) And, as a final example, In re Retirement Cases
held, based on the unambiguous language of CERL, that terminal pay cannot be deemed
compensation earnable because it does not meet the definition of final compensation. (In
re Retirement Cases, supra, 110 Cal.App.4th at pp. 473-476.) If CERL boards
nevertheless possessed expanded discretion under Guelfi to include terminal pay in
compensation earnable, such discretion would be in direct contravention of the CERL
statutes defining final compensation. In short, appellants’ position is not supportable
under the language of CERL.
Moreover, if CERL boards did possess some undefined discretion to include
additional pay items in compensation earnable, it is hard to see where that seemingly
limitless discretion would end. Could a board, for instance, decide to include the
monetary value of in-kind advantages provided to members in compensation earnable,
despite the language of section 31460? Or items of compensation earned many years
before the final compensation period just because it wanted to? The answer seems,
obviously, to be no. In the end, we believe that the correct understanding of board
discretion under CERL lies somewhere in between the expanded notion of Guelfi
discretion espoused by appellants and the constrained, arithmetical approach endorsed by
the trial court. Indeed, an appropriate formulation of this more limited board discretion
26
under CERL is located in the body of Guelfi, itself, where, in response to the argument
that section 31461 “merely calls upon the [b]oard to make a rudimentary calculation of
average compensation based on the year selected by the retiree,” the appellate court
opined: “appellant’s argument must be rejected and section 31461 be read as vesting the
[b]oard with authority to determine, according to the guiding language contained therein,
which elements of compensation constitute ‘compensation earnable’ for purposes of
inclusion or exclusion from the calculation of ‘final compensation.’ ” (Guelfi, supra, 145
Cal.App.3d at pp. 304-305.) This language was also referenced by the Legislature in its
repeal of section 31460.1. (Stats. 1992, ch. 45, § 3.)
For all of these reasons, we reject appellants’ argument that the Boards possess
Guelfi discretion—that is, the ability to include additional pay items in compensation
earnable, unmoored by the language of CERL. An item of compensation is either
includable in compensation, compensation earnable, and final compensation under the
CERL statutes, or it is not. If it fails to satisfy any one of these statutory litmus tests, it
may not be included in a member’s pensionable compensation under CERL.
Cognizant that our appellate review of this matter must necessarily be colored by
all of the many standards here articulated, we next turn to the issues of statutory
interpretation before us.
B. Interpretation of Section 31461
As all of the parties to this dispute acknowledge, whether the changes to section
31461 effected by AB 197 unconstitutionally impair the vested pension rights of legacy
members of CCCERA, ACERA, and MCERA depends, at least as an initial matter, on
whether those changes actually modified CERL, or were merely clarifying amendments
and thus declarative of existing law. If no substantive changes were made, it is difficult
to argue that the legislation impermissibly impacted vested rights. This is the position of
both the State and the Sanitary District on appeal. Appellants, in contrast, argue that AB
197 drastically altered the existing CERL landscape. As set forth above, the four
statutory amendments at issue are all contained in separate subdivisions of new
subsection (b) of section 31461, and each expressly excludes a particular type of
27
employee benefit from compensation earnable. We therefore address the impact of each
new exclusion in turn.
1. Leave Cash-Outs Under Subdivision (b)(2).
We first consider PEPRA’s treatment of in-service leave cash-outs as a component
of compensation earnable. Under AB 197’s amended version of section 31461,
compensation earnable expressly excludes “[p]ayments for unused vacation, annual
leave, personal leave, sick leave, or compensatory time off, however denominated,
whether paid in a lump sum or otherwise, in an amount that exceeds that which may be
earned and payable in each 12-month period during the final average salary period,
regardless of when reported or paid.” (§ 31461, subd. (b)(2).) The State argues, and the
trial court below agreed, that the addition of subdivision (b)(2) to section 31461 does not
constitute a change in the law because, under the prior version of the statute,
compensation earnable was always limited to compensation that was both earned and
payable in the final compensation period. Appellants, unsurprisingly, strongly disagree.
On appeal, they argue that the trial court erred in its interpretation of the pre-PEPRA
version of section 31461 because: (1) under Guelfi, supra, 145 Cal. App. 3d 297, the
Boards had the discretion to include items in compensation earnable regardless of when
earned or paid; (2) the trial court’s interpretation of the final sentence of section 31461
was incorrect; (3) leave cash-outs are not “earned” for purposes of CERL until a member
earns the right to convert unused leave time to cash; and (4) the scope of compensation
earnable under PERL is not relevant to the interpretation of CERL in this context, since
the two statutes have evolved in significantly different ways. We have already disposed
of appellants’ misapprehension with respect to so-called Guelfi discretion. For purposes
of our analysis of in-service leave cash-outs, we will address appellants’ other
contentions to the extent they focus on whether compensation must be earned during the
final compensation period in order to be pensionable.
As the State argues on appeal, the essential elements of CERL’s definition of
compensation earnable have remained unchanged since its codification in 1947—that is,
that compensation earnable means “the average compensation as determined by the
28
board, for the period under consideration upon the basis of the average number of days
ordinarily worked by persons in the same grade or class of positions during the period,
and at the same rate of pay.” And that “[t]he computation for any absence shall be based
on the compensation of the position held by the member at the beginning of the absence.”
(§ 31461, subd. (a).; cf. § 31461 as added by Stats. 1947, ch. 424, § 1.) In Ventura, our
high court interpreted this language to mean “the average pay of the individual retiring
employee computed on the basis of the number of hours worked by other employees in
the same class and pay rate—that is the average monthly pay, excluding overtime,
received by the retiring employee for the average number of days worked in a month by
the other employees in the same job classification at the same base pay level.” (Ventura,
supra, 16 Cal.4th at p. 504, italics added.)
Although the Ventura court described compensation earnable as a narrowing of
the broader definition of compensation (Ventura, supra, 16 Cal.4th at pp. 493-494), its
interpretation of the statutory definition shows that the concept is really a legal fiction,
with the potential to both expand and contract the actual compensation otherwise earned
by the retiring employee. Thus, compensation earnable may narrow a retiring
employee’s compensation by excluding any overtime pay that he or she earned during the
final compensation period, while at the same time expanding such compensation to
account for any unpaid absences that the employee may have taken during that same
timeframe. Regardless of these possible adjustments, however, the touchstone for
calculating compensation earnable is still the compensation that was actually earned by
the retiring employee “in the period under consideration.” (See § 31461, subd. (a).)
This basic tenet is made even clearer when one considers the wording of the
predecessor to section 31461 contained in the original 1937 Act. Section 8.5 of article 1
of CERL as it was enacted in 1937 defines “ ‘[c]ompensation earnable’ by a member” to
mean: “the compensation as determined by the retirement board, which would have been
earned by the member had he worked throughout the period under consideration, the
average number of days ordinarily worked by persons in the same grade or class of
positions as the positions held by him during such period, and at the rates of
29
compensation attached to such positions, it being assumed that during any absence he
was in the position held by him at the beginning of such absence.” (Stats. 1937, ch. 677,
§ 8.5, pp. 1898-1899, italics added.) As the Ventura court noted with respect to the 1947
codification of the 1937 Act: “The 1947 statute was enacted as part of Senate Bill No.
1117 (1947 Reg. Sess.) which codified and consolidated laws related to counties. A
Legislative Counsel’s report on Senate Bill No. 1117 advised that the bill ‘makes no
substantive changes in existing law, but rearranges and restates in simplified language the
substance of existing laws, and repeals obsolete and superseded statutes.’ ” (Ventura,
supra, 16 Cal.4th at p. 502, fn. omitted.) That the 1947 restatement of compensation
earnable was meant to be substantively the same as the 1937 formulation—which was
clearly based on the compensation that an individual member could earn—lends further
support to the premise that compensation must be earned in the final compensation period
in order to be pensionable, and we adopt that position.
This determination, however, does not end our analysis of the in-service leave
cash-outs here at issue. Rather, the question remains whether in-service leave cash-outs
are earned when the leave at issue is accrued or when the employee earns the right to sell
that leave in return for cash. The trial court below concluded that a leave benefit is
earned when the employee accrues the leave time—that is, at the point when the
employee earns the right to be paid without work, and the State endorses this position on
appeal. Appellants, in contrast, cite both Ventura and In re Retirement Cases for the
proposition that such leave cash-outs are only earned for purposes of CERL when an
employee earns the right to receive cash in-lieu of accrued time.
As stated above, Ventura holds that, in addition to base pay, premiums paid to
employees in cash “even if not earned by all employees in the same grade or class” are
items of compensation that must be included in compensation earnable and thus in final
compensation under CERL. (Ventura, supra, 16 Cal.4th at p. 487.) Among the various
premiums considered by Ventura were cash payments in lieu of annual leave accrual and
as longevity incentives. Specifically, with respect to leave cash-outs, the employees at
issue could elect to receive pay in lieu of up to 40 hours of annual leave accrual and, on
30
accruing 400 hours, could elect to be paid for another 40 hours. (Id. at pp. 488, 489,
fn. 6; see also id. at p. 489 & fn. 12 [describing a similar premium for certain
unrepresented employees, although it “differed in the number of hours that had to be used
and in the amount that could be redeemed”].) The longevity incentive was similar in that
it credited employees who had at least five years of service with eight hours of annual
leave for each year of service in an amount not to exceed 104 hours. The employee had
the option of accruing the additional leave or taking it in cash. (Id. at p. 489 & fn. 11.)
Under these circumstances, the Ventura court determined that “both the longevity bonus
and cashed-out accrued vacation are remuneration under section 31460 and, since neither
is an excluded ‘advantage,’ both are ‘compensation.’ ” (Id. at p. 497.)
It is true that Ventura did not squarely address the timing issue presented in this
case. Indeed, given the limited facts disclosed, it is not impossible that a Ventura
employee could have accrued the maximum number of annual leave hours permitted to
be converted into cash in the same final compensation period as the actual cash-out.
However, we find the high court’s underlying analysis of the issue telling. The Ventura
court first noted that CERL differs from PERL in its exclusion of in-kind benefits from
pensionable compensation. (Ventura, supra, 16 Cal.4th at p. 497.) Specifically, “even
though a noncash ‘advantage’ may be ‘remuneration’ for the employee’s services, the
Legislature has relieved CERL counties of the obligation to assign a cash value to in-kind
advantages provided to employees and of including that amount in ‘compensation’ for
pension purposes.” (Ibid.) The high court, however, found significant the fact that the
Legislature did not create a similar exclusion for “cash payments made in lieu of
providing the same advantages in kind.” (Ibid.) Thus, “[w]hen paid in cash, the payment
is remuneration and, as it is not excluded, it is ‘compensation’ under section 31460.”
(Ibid., italics added.) 13
13
The Ventura court’s analysis of in-kind benefits makes clear that PERL and CERL
developed independently with respect to this issue. More generally, we agree with
appellants that PERL and CERL have diverged for many years with respect to
compensation earnable, with PERL adding more and more exclusions from pensionable
31
Applying these general tenets regarding in-kind benefits in the context of annual
leave accrual, the Ventura court acknowledged that annual leave that is received as time
off does not qualify as either compensation or compensation earnable under CERL.
(Ventura, supra, 16 Cal.4th at p. 497.) Rather, it is the later receipt of regular wages
without the necessity of actually working that is the relevant remuneration which is
compensation and thus pensionable. (Ibid.) Similarly, “[w]hen an employee elects to
receive cash in lieu of accrued vacation,” it is receipt of that cash that is the remuneration
constituting compensation under CERL. (Id. at pp. 497-498.) In In re Retirement Cases,
this District acknowledged and endorsed this analysis, holding that if employees “do not
or cannot cash out their time prior to retiring, they have received an ‘in-kind’ benefit, not
to be calculated as part of their ‘final compensation.’ ” (In re Retirement Cases, supra,
110 Cal.App.4th at p. 475.) The clear implication of the analysis in both cases is that it is
the employee’s election to turn an otherwise in-kind benefit into cash—either through a
leave cash-out or by choosing to receive vacation pay without working—that creates the
“remuneration paid in cash” that is pensionable compensation under CERL. (See
§ 31460.) 14
compensation while CERL’s definition remained essentially intact. Indeed, the fact that,
prior to PEPRA, the State had imposed limits on compensation earnable in its own
retirement system but not under CERL systems is consistent with the Legislature’s stated
“long-standing practice . . . of not intruding into the county decisionmaking process
regarding compensation determinations with respect to those county retirement systems.”
(Stats. 1992, ch. 45, § 3(4).) Moreover, the fact that the Ventura court found PERL
instructive when construing the initial intent behind CERL’s use of the term
compensation earnable does not contradict this conclusion, especially given that it had no
difficulty distinguishing PERL when appropriate. (See Ventura, supra, 16 Cal.4th at p.
497.)
14
The parties spend considerable time, as did the trial court below, arguing the relevance
of the last sentence of subdivision (a) of section 31461 to the issue of leave cash-outs.
That sentence provides: “ ‘Compensation, as defined in Section 31460, that has been
deferred shall be deemed “compensation earnable” when earned, rather than when
paid.’ ” It seems fairly clear that the Ventura court viewed this reference to deferred
compensation in section 31461 as referring to funds deferred in connection with
participation in a deferred compensation plan. (See Ventura, supra, 16 Cal.4th at
32
Thus, in the end, we endorse the trial court’s conclusion that new subdivision
(b)(2) of section 31461 does not change existing law with respect to in-service leave
cash-outs, while at the same time rejecting its conclusions regarding when such cash-outs
are earned for purposes of CERL. In sum, leave cash-outs must be included in a
member’s pensionable compensation—regardless of when the leave time was accrued—
to the extent that member exercises his or her employer-granted option to convert the
leave into cash during the final compensation period. In reaching this conclusion, we are
aware that the trial court appeared very concerned that permitting leave cash-outs to be
pensionable would improperly distort a member’s final compensation. For instance, the
court characterized the question before it not as whether public employers could allow
multiple years of accrued leave to be cashed out in a single year, but instead as “whether
or not the law allows that entire cash-out payment to be ‘spiked’ into the employee’s
lifetime retirement payment.” Similarly, the court opined that section 31461 was
unambiguous and that a “clear purpose of both the full statute and its last sentence is to
prevent the ‘spiking’ that is here at issue.”
However, as the Supreme Court made clear in Ventura, CERL anticipates
variation in final compensation based on the inclusion of earned premiums and incentives
in an individual member’s compensation earnable, even when those cash payments are
“not earned by all employees in the same grade or class.” (Ventura, supra, 16 Cal.4th at
p. 487.) Moreover, many such premiums and incentives—including the in-service leave
cash-outs here at issue—can be understood simply as increased salary payments,
specially designed by employers to encourage certain employee behaviors, such as
longevity, foregoing time away from work, and the development of special employment-
enhancing skills. (See Ventura, supra, 16 Cal.4th at pp. 488-489, 498.) Thus, for
pp. 491, 494-495, 505-506.) However, since we have concluded that accrued leave is not
compensation for purposes of section 31460 until such time as an employee incurs the
right to receive cash in payment for that time, we need not resolve this dispute. In short,
if accrued leave is not compensation pursuant to section 31460 (being an in-kind benefit),
it cannot be “[c]ompensation . . . that has been deferred” for purposes of the last sentence
of subdivision (a) of section 31461.
33
instance, the Ventura court opined that the longevity incentive at issue in that case—
which allowed for the provision to longtime employees of additional cash or vacation
days—was “equivalent to increased pay that often accompanies seniority.” (Ventura,
supra, 16 Cal.4th at p. 498.) So too, an annual leave cash-out can be viewed as increased
pay—different from the accrual of the vacation time, itself—which compensates long-
term employees who sacrifice time off. We further note that there is no evidence in this
record that, at least with respect to in-service leave cash-outs, employers in the Three
Counties were allowing excessive amounts to be cashed out annually prior to PEPRA. 15
And, indeed, if it is seen as a problem, the public employers can always negotiate to stop
offering the benefit. Finally, as detailed above, whatever deal is struck between
employers and employees with respect to a member’s overall compensation package, the
total pensionable costs of that package are intended by CERL to be actuarially accounted
for in advance and funded by employer and employee contributions. (See, e.g.,
§§ 31453-31454.6; In re Retirement Cases, supra, 110 Cal.App.4th at pp. 438-439.)
Under such circumstances, we find the trial court’s obvious concerns regarding pension
“distortion” to be over-stated, at least with respect to the in-service leave cash-outs here
at issue.
2. Terminal Pay Under Subdivision (b)(4).
We next address PEPRA’s express exclusion of so-called terminal pay from
compensation earnable. As set forth above, AB 197 added subdivision (b)(4) to section
31461, which excludes from compensation earnable “[p]ayments made at the termination
of employment, except those payments that do not exceed what is earned and payable in
each 12-month period during the final average salary period, regardless of when reported
or paid.” The trial court concluded that this provision did not amount to a change in
15
For instance, MCERA appears to have allowed an annual vacation sellback of up to 80
hours for certain employees. Leave cash-outs for ACERA members were limited to the
amount of leave a member could accrue in the final compensation period. And,
according to appellants, the vast majority of rank-and-file workers included in
CCCERA’s membership were unable to cash out any leave in service.
34
existing CERL law, because—contrary to ongoing practice in both Contra Costa and
Merced—CERL has always required that compensation must be payable during the final
compensation period to be included in compensation earnable. 16 We agree. Indeed,
under prior CERL precedent, we find the exclusion for terminal pay relatively
straightforward.
Specifically, in the wake of the Supreme Court’s decision in Ventura, this District
addressed the issue of terminal pay as a component of compensation earnable in In re
Retirement Cases, supra, 110 Cal. App. 4th 426. In that litigation, the appellants argued
that one-time cash payments for accrued but unused leave made to plan members upon
retirement were essentially indistinguishable from the annual in-service leave cash-outs
which Ventura held were includable in compensation earnable. (Id. at p. 473.) The
appellate court disagreed, relying on the plain language of section 31462.1 which defines
final compensation under CERL as “the average annual compensation earnable by a
member during any year elected by a member at or before the time he or she files an
application for retirement, or, if he or she fails to elect, during the year immediately
preceding his or her retirement” (italics added). (See also § 31462 [using similar
language in describing the three-year final compensation period].) In the court’s view,
this language was unambiguous and clearly excluded from final compensation leave
cash-outs that were only payable upon separation from service. (In re Retirement Cases,
supra, 110 Cal.App.4th at pp. 474-475.) In reaching this decision, the court made clear—
as discussed above in connection with in-service leave cash-outs—that “ ‘[w]here an
16
Pursuant to the Baker decision, legacy members of MCERA were able to include up to
160 hours of terminal pay in compensation earnable. Similarly, Contra Costa’s Post-
Ventura Settlement Agreement and related Board policy make pensionable terminal pay
in an amount not to exceed the vacation time accrued by a legacy member in the final
compensation period. ACERA, in contrast, appears to have permitted legacy members to
cash-out vacation and sick leave up to the amount accrued in the final compensation
period either during that period or at termination. Since such a cash-out is both earned
and payable in the final compensation period, it is not terminal pay, even if a member
elects to actually receive the cash after retirement. To the extent ACERA only allowed
portions of this leave cash-out as terminal pay, ACERA legacy members should be
included in the estoppel class discussed below.
35
employee cannot or does not elect to receive cash in lieu of the accrued time off prior to
retirement, the benefit remains one of time rather than cash.’ ” (Id. at p. 475.) Under
such circumstances, the accrued leave never becomes compensation under section 31640.
Rather, for purposes of determining compensation (and thus compensation earnable), the
critical moment is when the right to receive cash for accrued leave arises. (Ibid.) If it
arises only after retirement, it cannot be included in compensation earnable.
One year later, in Salus, supra, 117 Cal. App. 4th 734, the Fourth District
essentially adopted the analysis from In re Retirement Cases in holding that certain
negotiated sick leave payouts made after retirement were not includable in final
compensation. (Salus, supra, 117 Cal.App.4th at pp. 739-742.) In doing so, the Salus
court distinguished the sick leave payouts from certain lump sum incentive payments
which were includable in compensation earnable, because the incentive payments “were
at all times cash compensation earned before retirement.” (Id. at p. 741.) We agree with
both In re Retirement Cases and Salus that, even prior to PEPRA, the plain language of
CERL excluded terminal pay from compensation earnable for pension purposes.
Pursuant to section 31461, compensation earnable is “the average compensation . . . for
the period under consideration” (italics added) and that period—either the one-year
period established by section 31462.1 or the three-year period set forth in section
31462—plainly excludes compensation that is not earned and payable prior to retirement.
(Accord Mason, supra, 111 Cal.App.4th at pp. 1227-1228 [under city retirement system,
where unused vacation and sick leave “has no cash value” until it can be exchanged for
cash after retirement, inclusion in average final compensation for pension purposes is
improper].) 17
17
Although, admittedly, the word “payable” was not expressly included in CERL prior to
the AB 197 amendments, we believe that, in this context, it is essentially a synonym for
“earned.” Compensation for CERL purposes is defined as “remuneration paid in cash.”
(§ 31460.) Remuneration is pay for work or services. (Cambridge Dictionary
http://dictionary.cambridge.org/us/dictionary/english/remuneration [as of January 4,
2018].) Thus, if compensation is “earned” during the final compensation period, the
employee earns the right to be paid for work in cash—that is, the cash becomes payable.
36
Appellants nevertheless argue that, because the rights of legacy members to
include terminal pay in compensation earnable are contained in the Post-Ventura
Settlement Agreements, which pre-dated the appellate decisions in In re Retirement
Cases and Salus, they must be judged by judicial precedent existing at the time those
rights were created. Moreover, appellants assert, since making terminal benefits
pensionable was “plainly legal” at the time the relevant contract rights were created,
subsequent precedent cannot eliminate those rights. As the trial court correctly
recognized, however, the weight of authority is contrary to appellants’ claims.
Indeed, although the shoe was essentially on the other foot, the court in In re
Retirement Cases considered and rejected a similar argument. In that case, the counties
and the CERL boards argued that applying Ventura retroactively would
unconstitutionally impair their contract expectations, given that counties and plan
members had “entered into employment arrangements based on pre-Ventura rules of
law.” (In re Retirement Cases, supra, 110 Cal.App.4th at pp. 446-447.) In addressing
this claim, the appellate court opined that existing law did include “decisions of the
appellate courts interpreting statutes” and noted that the trial court had “specifically
found that retirement boards and counties relied on the law as stated in Guelfi.” (In re
Retirement Cases, supra, 110 Cal.App.4th at pp. 446-447.) Nevertheless, the court
soundly rejected the counties’ vested rights argument, determining that the law in effect
at the time plan members accepted employment was not Guelfi, it was CERL. (In re
Retirement Cases, supra, 110 Cal.App.4th at p. 453; see also id. at pp. 453-454 [when
members entered into employment contracts they “agreed to have their ‘compensation
earnable’ and ‘final compensation’ calculated pursuant to CERL”].) Under such
circumstances, the fact that CERL boards had mistakenly provided pension benefits
based on Guelfi’s flawed construction of CERL law was insufficient to create a vested
Under such circumstances, we view PEPRA’s insertion of the term “payable” in section
31461 to be simply a clarification that, once the right to compensation is earned in the
final compensation period it is includable in compensation earnable, even if it happens to
be actually paid at a later time. This is consistent with the pre-PEPRA version of CERL
as discussed above.
37
right in the continuation of that erroneous practice. (In re Retirement Cases, supra, 110
Cal.App.4th at pp. 452-454.) Thus, assuming that the high court ultimately endorses the
statutory analysis of terminal pay set forth in In re Retirement Cases—an eventuality we
see as extremely likely—appellants cannot rely on the prior lack of dispositive precedent
characterizing terminal pay as non-pensionable in making their statutory vested rights
argument. Rather, the inclusion of terminal pay in compensation earnable was not
“plainly legal” at the time the Post-Ventura Settlement Agreements were entered into,
because the relevant law was, and continues to be, CERL.
In addition, appellants cannot successfully argue that the characterization of
terminal pay as compensation earnable pursuant to the Post-Ventura Settlement
Agreements created a vested right under those contracts to treat such pay as pensionable.
Indeed, it is fairly clear that a contract that attempts to characterize an item of
compensation in a manner contrary to statute cannot, itself, create a vested right. Oden v.
Board of Administration (1994) 23 Cal. App. 4th 194 (Oden), for example, dealt with the
characterization of employee pension contributions under PERL. In that case, the
appellate court agreed with the general position of the PERS board that contributions
made as employee-paid salary deductions should be treated as compensation for pension
purposes, but contributions made through employer-paid salary additions should not. (Id.
at pp. 199-200, 202-209.) The PERS board, however, recognized an exception to this
general rule for a few public agencies who had stipulated in collective bargaining
agreements to treat employer paid contributions “ ‘as if’ ” they were a part of an
employee’s base salary and therefore compensation. (Id. at pp. 200-201.) The Oden
court rejected this approach, stating: “The Board’s distinction among employer-paid
member contributions rests entirely upon the characterization elected in bargaining
agreements and is untenable because public agencies are not free to define their employee
contributions as compensation or not compensation under PERL—the Legislature makes
those determinations. Statutory definitions delineating the scope of PERS compensation
cannot be qualified by bargaining agreements.” (Id. at p. 201.)
38
Similarly, in Medina v. Board of Retirement (2003) 112 Cal. App. 4th 864
(Medina), several employees of a local retirement system were erroneously classified as
safety members for many years until the mistake was discovered and corrected. (Id. at
pp. 866-868.) Since safety members are entitled to greater pension benefits than general
members, the employees filed a petition for writ of mandate, arguing, among other
things, that they had obtained a vested right to continue to be classified as safety
members. (Id at pp. 866-867.) The Medina court rejected this assertion, stating that
“[t]he contract clause does not protect expectations that are based upon contracts that are
invalid, illegal, unenforceable, or which arise without the giving of consideration.” (Id. at
p. 871.) Since “[a]ny purported contract to give appellants the pension benefits of safety
members was invalid, . . . the vested rights doctrine [did] not apply.” (Id. at p. 872
[characterizing the board’s mistake as “the equivalent of attempting to form an
unauthorized contract”]; see also County of Orange, supra, 52 Cal.4th at p. 1183
[“[w]here the relationship [is] governed by contract, a county may be bound by an
implied contract (or by implied terms of a written contract), as long as there is no
statutory prohibition against such an agreement,” (italics added)]; City of San Diego v.
San Diego City Employees’ Retirement System (2010) 186 Cal. App. 4th 69, 80 [rejecting
retirement board’s attempt to charge city for underfunding of certain pension liabilities as
contrary to the pension system’s enabling statutes; “it is not within [the board’s] authority
to expand pension benefits beyond those afforded by the authorizing legislation”].) In
short, precedent dictates that no vested pension rights can be created by contracts that are
inconsistent with the governing pension statutes.
3. Pay “Outside of Normal Working Hours” Under Subdivision (b)(3).
The third express exclusion from compensation earnable articulated by the AB
197 amendments is found in subdivision (b)(3) of section 31461, which establishes that
“[p]ayments for additional services rendered outside of normal working hours, whether
paid in a lump sum or otherwise” may not be included in compensation earnable. No
party argues that overtime pay was ever a permissible component of compensation
earnable under CERL. However, the parties strongly dispute whether on-call, standby
39
and similar pay items—designed to compensate employees for time outside of their
regular working hours during which they must remain available to be called back to
work—should be included in pensionable compensation. Once again, this question
hinges on whether such payments were properly included in compensation earnable
under the pre-PEPRA version of CERL (and are therefore subject to a vested rights
analysis), or whether they have always been, and continue to be, properly excluded from
pensionable compensation under that statute.
The trial court appears to have concluded that a limited vested right does exist
with respect to certain on-call payments, because, although it did not engage in a vested
rights analysis, it directed the Boards to continue to include these types of compensation
in compensation earnable for legacy members to the extent that: the pay category at issue
was previously included in compensation earnable; the amount to be included was both
earned and required of the employee during his or her final compensation period; the
form of compensation was “regularly applicable to the class of employees”; and the
payment was not designed “to ‘enhance’ the pension.” In order to determine the
appropriateness of the trial court’s order, we must first articulate what was permissible
under the prior version of section 31461 with respect to on-call pay. We must then
consider whether AB 197 effected a change in that law. As will become apparent, the
answer to both of these questions is not entirely clear.
We start with Ventura, as one of the premiums and incentives at issue in that case
was a form of on-call pay ($60 biweekly) used to compensate certain deputy sheriffs,
senior deputy sheriffs, pilots, and crew chiefs for remaining subject to call during meal
periods. (Ventura, supra, 16 Cal.4th at p. 488 & fn. 5.) The Ventura parties agreed that
this pay was furnished uniformly to all sheriff’s pilots and was therefore compensation
earnable for that group of employees. Similar pay for the other employee classifications,
however, remained in dispute. (Ibid.) Presumably, the benefit was not provided
uniformly to all of the employees in those classes. The Ventura court described on-call
pay as “specified payments in lieu” of overtime pay and concluded that the payments
were remuneration for services and thus compensation under CERL. (Id. at pp. 488 &
40
fn. 5, 498.) In addition, as discussed above, the court ultimately determined that—with
the exception of employer contributions to an employee’s deferred compensation plan—
all of the disputed premiums at issue in that case were includable in compensation
earnable and thus pensionable, even if not earned by all employees in the same grade or
class. (Id. at p. 487.) However, there is no specific analysis in the opinion regarding on-
call pay as a component of compensation earnable. (Id. at pp. 499-506.) Thus, although
it can be inferred from Ventura that the on-call pay at issue in that case—pay for being on
call during meal periods—constituted compensation earnable pre-PEPRA, even if it was
not earned by all employees in the same grade or class, the bases and parameters for this
conclusion are not readily apparent. 18
In the end, although Ventura’s discussion of CERL’s pre-PEPRA treatment of on-
call pay is helpful as far as it goes, we believe a more comprehensive treatment of the
issue is necessary in order to resolve the present dispute. In this regard, we find this
District’s decision in Shelden v. Marin County Employees’ Retirement Assn. (2010) 189
Cal. App. 4th 458 (Shelden) instructive. Shelden involved a disagreement over whether a
deputy sheriff’s overtime pay for participation in an arrest warrant service team
constituted compensation earnable under CERL. (Id. at pp. 460-462.) Pursuant to the
pre-PEPRA version of section 31461.6, compensation earnable expressly excluded
“overtime premium pay other than premium pay for hours worked within the normally
scheduled or regular working hours that are in excess of the statutory maximum
workweek or work period applicable to the employee under Section 201 and following of
Title 29 of the United States Code.” Thus, the question before the court was “whether the
overtime hours Shelden worked on the arrest warrant service team were within his
‘normally scheduled or regular working hours.’ ” (Shelden, supra, 189 Cal.App.4th at
p. 464.)
18
It seems unlikely that these payments were excluded from compensation earnable as
overtime under Ventura, given that the Ventura court left in place the parties’ agreement
that the on-call payments provided uniformly to sheriff’s pilots were properly
characterized as compensation earnable. (Ventura, supra, 16 Cal.4th at p. 488 & fn. 5.)
41
The Shelden court concluded that the overtime hours at issue were properly
excluded from compensation earnable. The court acknowledged that Shelden performed
the work “regularly (once a week) and for a long period of time (about four years).”
(Shelden, supra, 189 Cal.App.4th at p. 464.) Nevertheless, it found the work to be
excludable overtime because: Shelden performed the work on what he characterized as
his day off; he was not required to perform the work, but instead volunteered to do it; he
was not required to take a sick day or vacation leave if he could not complete the shift; he
did not pay into the retirement system for the time; and the sheriff considered the work to
be outside of regular working hours. (Ibid.) While the on-call premiums at issue here are
not technically overtime (the Ventura court characterized them as payments “in lieu” of
overtime pay), we believe they bear some relationship to an employee’s regular work
schedule. Thus, while not directly relevant, we find Shelden useful in its articulation of
what was and was not considered overtime under pre-PEPRA CERL.
Indeed, our own reading of the pre-PEPRA version of section 31461—as informed
by both Ventura and Shelden—leads us to the conclusion that on-call, standby and similar
payments were includable in compensation earnable prior to AB 197 to the extent that
they constituted remuneration for on-call services provided by an employee as part of his
or her regular work assignment. Thus, if an employee was required to be on-call for a
certain number of hours each work period as part of his or her normal duties, any
premium pay received in connection with that assignment was includable in
compensation earnable under CERL as it existed prior to AB 197. If, in contrast, an
employee volunteered for additional on-call hours, any payments received in connection
with that extra work would be akin to overtime premium pay and excludable from
compensation earnable on that basis. This appears to have been CCCERA’s position pre-
PEPRA and, in fact, the State has not really challenged it, focusing instead—in both the
trial court and on appeal—on the problem of compensation for voluntary on-call shifts.
Moreover, although this matter was not directly addressed in Ventura, it seems highly
likely that the employees at issue in that case were receiving on-call pay because they
42
were required to remain subject to call during lunch as part of their regularly scheduled
work assignment. Thus, our holding does not conflict with that precedent.
The harder question is whether, prior to AB 197, CERL only permitted on-call
payments to be pensionable to the extent that they were received by others in the same
grade or class. The trial court concluded that any vested right of legacy members to treat
on-call payments as pensionable was limited to situations where such pay was “regularly
applicable to the class of employees.” PERS contains a similar restriction. (See § 20636,
subd. (c)(2) [for purposes of compensation earnable “[s]pecial compensation” is limited
to “that which is received by a member pursuant to a labor policy or agreement or as
otherwise required by state or federal law, to similarly situated members of a group or
class”].) Nevertheless, based on Ventura, we must reach the opposite conclusion. In
short, the Ventura court was clearly focused on compensation earned by the individual
employee, not the class; it expressly held that compensation paid in cash, other than
overtime, was compensation earnable “even if not earned by all employees in the same
grade or class”; and it included in compensation earnable the on-call pay received by the
deputy sheriffs at issue in that case, even though the benefit was apparently not furnished
uniformly to all deputy sheriffs. (Ventura supra, 16 Cal.4th at pp. 487-488 & fn. 5, 499-
505.) Under these circumstances, we must conclude that any pre-PEPRA right to the
inclusion of on-call pay in compensation earnable is not limited to those on-call
premiums received by employees in the same group or class. 19
19
As stated above, the trial court also limited the vested right it crafted for legacy
members with respect to on-call payments to situations where the “pay category was
previously included” in compensation earnable and the on-call compensation was not
received to “ ‘enhance’ the pension.” We reject both of these additional limitations. Any
vested right legacy members possess to have their pensions calculated in accordance with
CERL as it existed prior to AB 197 is not limited by the applicable pay codes in existence
prior to the change in the law. Rather, the right is based on the statute, itself, and thus
necessarily encompasses any form of compensation that would have been pensionable
under the prior version of CERL, whether currently offered by a particular employer to a
particular employee or not. Thus, while the current pay structure is obviously the place
to start, new or modified on-call benefits added to legacy members’ compensation prior
to retirement might also be pensionable under a vested rights analysis. In addition and as
43
Since we have concluded that legacy members were previously entitled to the
inclusion of on-call pay in the calculation of their pension benefits (to the extent the
related on-call duty was part of their regular work assignment), we must next determine
whether AB 197’s addition of subdivision (b)(3) to section 31461 changed the law with
respect to the treatment of on-call premium pay. The trial court implicitly concluded that
it did, as there would otherwise have been no reason to recognize a vested right in this
area for legacy members. And, indeed, it is difficult to argue that the amendment of
section 31461 to expressly exclude from compensation earnable “[p]ayments for
additional services rendered outside of normal working hours” was not intended to
exclude all on-call pay from pensionable compensation under CERL. (§ 31461,
subd. (b)(3).)
In fact, the “normal working hours” language of new subdivision (b)(3) was lifted
directly from the corresponding definition of compensation earnable under PERL. (See
§ 20636, subd. (c)(7)(B) [defining special compensation for purposes of compensation
earnable as expressly excluding “[p]ayments made for additional services rendered
outside of normal working hours, whether paid in lump sum or otherwise”]; see also § id.,
subd. (c)(3) [same].) This, at the very least, evinces an intent on the part of the
Legislature to treat the two retirement systems similarly with regard to on-call pay.
(Ventura, supra, 16 Cal.4th at p. 504 [noting that “[t]he Legislature is presumed to be
aware of other statutes on the same or analogous subject matter in which the same
language is used”].) Indeed, appellants concede as much. Moreover, at the time AB 197
was drafted, PERS apparently took the position that, based on this “normal working
hours” language, on-call pay was not reportable compensation for retirement purposes
under PERL. (See City of Pleasanton v. Board of Administration (2012) 211 Cal. App. 4th
522, 528-529 (City of Pleasanton).) And, shortly after AB 197 was approved by the
discussed further below, prior to AB 197, pay items that otherwise would have been
includable in compensation earnable could not be excluded based on any subjective intent
behind the payment. Thus, whether the on-call benefits were meant to “enhance” a
legacy member’s pension is irrelevant to our vested rights analysis.
44
Governor in September 2012 (see Stats. 2012, ch. 297, § 2), this District expressly held
that on-call or standby pay was not special compensation under PERL because it was not
compensation for services rendered during normal working hours. (City of Pleasanton,
supra, 211 Cal.App.4th at pp. 537-540.) Thereafter, based on PERL and City of
Pleasanton, the Boards concluded post-PEPRA that “the Legislature sought to abandon
the ‘required overtime’ analysis for such pay items” set forth in Shelden, and, as a result,
excluded all on-call pay from compensation earnable.
Were we writing on a clean slate, we believe an argument could be made that the
“normal working hours” language now contained in both PERL and CERL should be
read broadly enough to permit the inclusion of on-call pay that is part of an employee’s
required work assignment in compensation earnable. Although perhaps rendered outside
of a standard 40-hour workweek, on-call pay for services required to be provided as part
of a particular job would seem to be akin to additional salary—albeit salary that is
calculated at a rate which recognizes that being on-call, while restrictive, is not as
onerous as being fully on duty. (But see City of Pleasanton, supra, 211 Cal.App.4th at
p. 539 [concluding that on-call duty was not part of a normal workweek where the
employee was only being compensated “at a small fraction of his base salary”].) Thus,
such pay appears analytically similar to the many other premiums found pensionable by
Ventura. However, given the historical construction of this language under PERL, it
would seem that the Legislature’s intent in adding the restriction to CERL was otherwise.
Since we conclude that AB 197 meant to exclude from compensation earnable the types
of on-call and standby pay here at issue—and because we have also determined that
certain of those pay items were includable in pensionable compensation prior to
PERPA—we address below whether legacy members possess a vested right to the
calculation of their pension benefits under the prior version of section 31461 with respect
to on-call pay.
45
4. Enhancement Payments Under Subdivision (b)(1).
The final subdivision of new subsection (b) of section 31461 at issue in this appeal
is subdivision (b)(1), which excludes from compensation earnable “[a]ny compensation
determined by the board to have been paid to enhance a member’s retirement benefit.”
The subdivision goes on to provide a number of non-exclusive examples of possible
enhancement benefits, including: cash payments made during the final compensation
period for benefits previously received in kind (§ 31461, subd. (b)(1)(A)); one-time
payments received by a member, but not by others in that member’s class (§ 31461, subd.
(b)(1)(B)); and payments made solely due to termination of employment, even if received
while still employed, to the extent they are greater than amounts earned and payable
during the final compensation period (§ 31461, subd. (b)(1)(C)). According to the trial
court, there was no dispute below that subdivision (b)(1) is new law “insofar as it places
upon the board of CER[L] retirement associations the obligation to determine whether
specific compensation has been paid to a new retiree ‘to enhance a member’s retirement
benefit.’ ” Moreover, the trial court found that at least one Board had proactively
changed its policies in response to this new requirement, uniformly excluding certain
one-time payments from compensation earnable. 20 Despite these circumstances,
however, the trial court refused to find that legacy members had a vested right to
calculation of their retirement benefits free from the impact of subdivision (b)(1).
Instead, it took a wait-and-see attitude, opining that it was unclear that any issues would
ever even come up under this new statute.
Predictably, appellants now challenge on appeal the trial court’s refusal to reach
the merits of the vested rights issue with respect to subdivision (b)(1). They further claim
that the trial court should have ordered, at least for legacy members, the restoration of
any one-time payments prematurely excluded from compensation earnable in response to
this new statutory requirement. In contrast, the State makes a relatively strained
20
Specifically, based on the addition of subdivision (b)(1) to section 31461, ACERA
reportedly excluded from compensation earnable for all members various one-time
payments, employee of the month payments, and “Share the Savings” payments.
46
argument on appeal that payments made to enhance pension benefits as described by
subdivision (b)(1) have always been excluded from compensation earnable under CERL.
In particular, the State appears to maintain that, since pension enhancements were always
required to be excluded from pensionable compensation, subdivision (b)(1) merely places
on CERL boards the express obligation to ferret out any of these unlawful inclusions.
We have little difficulty determining that appellants have the better argument here
with respect to subdivision (b)(1). Clearly, prior to PEPRA, there was no provision in
CERL allowing a CERL board to look behind an employer’s provision of compensation
to its employees to determine that employer’s subjective intent, much less was any such
intent ever considered dispositive when determining whether a particular item of
compensation was pensionable. Rather, as emphasized in Ventura, with the exception of
overtime, items of compensation paid in cash, “even if not earned by all employees in the
same grade or class, must be included in the ‘compensation earnable’ and ‘final
compensation’ on which an employee’s pension is based.” (Ventura, supra, 16 Cal.4th at
p. 487, italics added.)
While this is obviously not the forum for an exhaustive examination of every
possible item of compensation potentially subject to subdivision (b)(1) to determine
whether that item was properly included in compensation earnable under the pre-PEPRA
version of CERL, several examples are telling. For instance, Ventura clearly holds with
respect to in-kind payments that, “[w]hen paid in cash, the payment is remuneration and,
as it is not excluded, it is ‘compensation’ under section 31460.” (Ventura, supra, 16
Cal.4th at p. 497, italics added.) Moreover, Ventura concluded that such cash payments
must also be included in compensation earnable and therefore in a member’s final
compensation. (Id. at p. 487.) It would thus appear that, prior to PEPRA, if an
employee-member had the option of receiving an in-kind benefit in cash and chose to do
so during the final compensation period, that benefit must have been included in
compensation earnable, regardless of the intent of any party and contrary to subdivision
(b)(1). Similarly, Ventura holds that any premiums received by an employee—over and
above base salary and excluding overtime—are properly included in compensation
47
earnable, “even if not earned by all employees in the same grade or class.” (Ventura,
supra, 16 Cal.4th at p. 487.) Under these circumstances, any number of premium
payments, even if provided on a one-time basis and not to all class members, would
appear to have been compensation earnable pre-PEPRA, regardless of any implication to
the contrary found in subdivision (b)(1). Thus, the addition of this new subdivision to
section 31461 clearly effected a change in CERL law. 21
Additionally, we agree with appellants that, should they possess a vested right to
have their pensions calculated without reference to subdivision (b)(1), this includes the
right to inclusion in compensation earnable of any one-time or other “enhancement”
payment previously authorized by CERL, irrespective of whether a Board has
subsequently adopted a wholesale exclusion of such payments based on its interpretation
of the new statute. Indeed, new section 31542, which details the procedure to be
followed when making an enhancement determination under subdivision (b)(1)—
including the right to present contrary evidence and judicial review of individual
enhancement decisions—argues against the automatic exclusion of any particular type of
compensation under subdivision (b)(1), even for new hires who are clearly subject to
PEPRA. (See § 31542, subds. (a) & (b); see also Marin, supra, 2 Cal.App.5th at pp. 692-
21
We are not persuaded that the State’s citation to Hudson v. Board of Administration
(1997) 59 Cal. App. 4th 1310 (Hudson) supports the contrary position. In Hudson, a city
allowed its employees to convert certain employer-paid benefits—such as insurance,
automobile allowances, and PERS member contributions—to salary increases if they
agreed to retire within 12 months. (Id. at pp. 1316-1317.) The express purpose of the
conversions was to increase the appellants’ final compensation so that they would receive
higher pensions. (Id. at p. 1316.) The Hudson court concluded that these benefit
conversions did not constitute compensation earnable under PERL, based on a specific
exclusion in PERL for “final settlement pay.” (Id. at pp. 1318-1324; see also former
§ 20022, subd. (b)(8) [excluding as final settlement pay “ ‘any pay in excess of salary
granted or awarded in connection with a separation from employment . . .’ ”].) Thus,
Hudson obviously has no relevance to our interpretation of pre-PEPRA CERL, which
contained no such exclusion. Moreover, even under PERL, Hudson does not stand for
the proposition that all of the benefits potentially includable in subdivision (b)(1) as
impermissible enhancements must be excluded from pensionable compensation.
48
693 [recognizing that section 31542 was “intended to govern individual determinations”
and “ ‘requires an analysis specific to the particular member’ ”] 22.)
The trial court may ultimately be correct that, going forward, pension disputes
based on the addition of subdivision (b)(1) to CERL will be rare. At least as an initial
matter of statutory interpretation, however, we believe that this new requirement has the
potential for broad application to many different types of compensation. Indeed, an
argument can be made that every item of compensation received by a CERL employee is
paid, at least to some extent, to enhance that member’s pension. Thus, in theory,
subdivision (b)(1) could significantly impair the stability and predictability of a
member’s anticipated pension benefit, as any particular item of compensation received
22
The Marin court ultimately opined that Marin CERA had not impermissibly excluded
whole categories of compensation from compensation earnable on the basis of
subdivision (b)(1) without making the findings required by the new statute. (Marin,
supra, 2 Cal.App.5th at p. 693.) To the contrary, the court concluded that section 31542
was only meant to be applied to legacy members when they put in for retirement and that
the construction of the statute that the plaintiffs were seeking “would initiate the
calculation process for every employee affected by the change,” which would “entail a
massive expenditure of administrative resources devoted to an individualized inquiry that
would be pointless for all employees not on the cusp of retirement.” (Marin, supra, 2
Cal.App.5th at p. 693.) In our view, however, that is exactly the point, as argued by both
the Marin plaintiffs and appellants here. If CERL boards decide to prophylactically
remove various types of compensation from compensation earnable without any
individualized inquiry on the basis of (b)(1), that compensation will automatically be
excluded from a member’s pension calculation and no retirement contributions will be
collected with respect to it. It is unclear whether new subdivision (b)(1) allows for this
type of global process, instituted potentially years before a member’s actual retirement
and/or receipt of the “enhancement” benefits at issue. At the very least, if CERL boards
desire to adopt such a procedure in response to AB 197, it seems that they would need to
make specific findings regarding employer intent and then, at least at some point, send
notice to all potentially affected employees, who would then have individualized rights
under section 31542 to contest the decision as it relates to them. In the end, since we are
here focused on the rights of legacy members and have concluded that subdivision (b)(1)
constitutes new law for purposes of a vested rights analysis, we need not reach this issue.
Instead, we confine ourselves to the conclusion that, if appellants have a vested right to
have their pensions calculated free from the requirements of subdivision (b)(1), this
would encompass the right to have included in their compensation earnable any pay items
that have been uniformly excluded in response to that new statute.
49
during that member’s final compensation period could be subject to an after-the-fact re-
characterization as an impermissible enhancement. We believe that the trial court erred
in refusing to determine whether legacy members have a vested right to be free from this
uncertainty. In sum, since we conclude that subdivision (b)(1) represents a change to
prior CERL law, it must be subjected to a vested rights analysis to determine whether
legacy members have the right to have their pensions calculated without reference to its
new prescriptions.
C. Vested Rights
Having concluded that AB 197 did in fact make some substantive changes to
CERL (with respect to on-call pay and so-called pension enhancements), we are faced
squarely with the question of whether those changes constitute a reasonable modification
to prior CERL law or whether their effect is to impair the vested contractual rights of
CCCERA, ACERA, and MCERA legacy members. Recently, our colleagues in Division
Two addressed this same issue with respect to legacy members of the Marin County
Employees’ Retirement Association (Marin CERA) and concluded that the amendment of
section 31461 did not amount to an unconstitutional impairment of vested pension rights.
(Marin, supra, 2 Cal.App.5th at pp. 693-709.) As this issue is crucial to the resolution of
our case, we will discuss the Marin holding in some detail. Preliminarily, however, we
review precedent, specific to our high court, delineating the scope of a public employee’s
vested pension rights.
1. Supreme Court Jurisprudence on Vested Pension Rights.
In California, the modern law of public pensions begins with Kern v. City of Long
Beach (1947) 29 Cal. 2d 848 (Kern). In that case, the City of Long Beach (Long Beach),
pursuant to a provision of its city charter, offered a pension to city employees after 20
years of service in an amount equal to 50 percent of their annual salaries. (Id. at p. 850.)
Approximately 32 days before petitioner Kern completed his required 20 years of service,
Long Beach amended its charter to eliminate pensions for all persons not then eligible to
retire. (Ibid.) The Supreme Court concluded that Kern had acquired a vested right to a
50
pension which Long Beach could not abrogate without impairing its contractual
obligations, and thus the repeal was ineffective as to Kern. (Id. at p. 856.)
In reaching this conclusion, the Kern court noted that, where services are rendered
under a pension statute, “ ‘the pension provisions become part of the contemplated
compensation for those services and so in a sense a part of the contract of employment
itself.’ ” (Kern, supra, 29 Cal.2d at p. 852.) Thus, “ ‘[t]hey are in effect pay withheld to
induce long-continued and faithful services.’ ” (Ibid.; see also Id. at p. 856 [stating that
“one of the primary objectives in providing pensions for government employees . . . is to
induce competent persons to enter and remain in public employment”].) Moreover,
although “an employee does not earn the right to a full pension until [he or she] has
completed the prescribed period of service,” that employee “has actually earned some
pension rights as soon as [he or she] has performed substantial services” for the public
employer. (Id. at p. 855, italics added.) Under such circumstances, the fact that the
pension benefits are deferred and may be dependent on certain contingencies (such as
continued employment), “does not prevent a contract from arising, and the employing
governmental body may not deny or impair the contingent liability any more than it can
refuse to make the salary payments which are immediately due.” (Ibid.)
The Kern court acknowledged, however, that “pension systems must be kept
flexible to permit adjustments in accord with changing conditions and at the same time
maintain the integrity of the system and carry out its beneficent policy.” (Kern, supra, 29
Cal.2d at pp. 854-855.) Although it was unnecessary for the high court to consider the
“permissible scope” of changes to pension provisions given the facts of the case before it,
it summarized the vested pension rights of public employees generally in the following
oft-quoted language: “[A]n employee may acquire a vested contractual right to a pension
but that . . . right is not rigidly fixed by the specific terms of the legislation in effect
during any particular period in which [he or she] serves. The statutory language is
subject to the implied qualification that the governing body may make modifications and
changes in the system. The employee does not have a right to any fixed or definite
benefits, but only to a substantial or reasonable pension. There is no inconsistency
51
therefore in holding that [the employee] has a vested right to a pension but that the
amount, terms and conditions of the benefits may be altered.” (Id. at p. 855, italics
added.)
Over the next 60 years, the high court was forced to address the question it had left
unanswered regarding the permissible scope of pension modifications. In doing so, it
fleshed out its own particular views on the parameters of the vested public pension rights
it had recognized in Kern. Thus, for example, in Packer v. Board of Retirement (1950)
35 Cal. 2d 212 (Packer), the Supreme Court found permissible a pension modification
which permitted a “widow’s pension” only if the husband agreed to take a lesser pension
for himself. (Id. at pp. 213-214.) The court was influenced by the fact that the change
was part of a “substantial revision” to the retirement law which, under certain
circumstances, actually gave county peace officers greater benefits than they had before.
(Id. at pp. 214, 218.) In contrast, in Wallace v. City of Fresno (1954) 42 Cal. 2d 180
(Wallace), the Supreme Court rejected a pension modification which gave the pension
board discretion to terminate an employee’s pension if the recipient was convicted of a
felony. (Id. at pp. 181-182.) Wallace was convicted of a felony after he retired as the
city’s chief of police. (Id. at p. 181.) The change was unreasonable because “[t]he
termination of all pension rights upon conviction of a felony after retirement does not
appear to have any material relation to the theory of the pension system or to its
successful operation.” (Id. at p. 185.)
In 1955, the Supreme Court revisited Long Beach’s retirement obligations in Allen
v. City of Long Beach (1955) 45 Cal. 2d 128 (Allen I). After offering no pension benefits
to policemen or firemen hired between March 29, 1945, and 1950, Long Beach had
contracted with the State to make these post-1945 employees members of the State’s
retirement system. Thereafter, in 1951, Long Beach amended its charter to alter the
pension rights of the policemen and firemen employed prior to March 29, 1945 (pre-1945
employees). (Id. at p. 130.) According to Long Beach, the changes were made to
“ ‘somewhat equalize’ ” the compensation paid to the pre-1945 and post-1945
employees, as they were performing like services. (Id. at p. 133.)
52
The Allen I court acknowledged that vested contractual pension rights may be
modified prior to retirement “to permit adjustments in accord with changing conditions
and at the same time maintain the integrity of the system.” (Allen I, supra, 45 Cal.2d at
p. 131.) However, the court opined that any “[s]uch modifications must be reasonable,
and it is for the courts to determine upon the facts of each case what constitutes a
permissible change. To be sustained as reasonable, alterations of employees’ pension
rights must bear some material relation to the theory of a pension system and its
successful operation, and changes in a pension plan which result in disadvantage to
employees should be accompanied by comparable new advantages.” (Ibid., italics
added.) Applying this new test to the modifications at issue, the Allen I court concluded
the changes were not reasonable as applied to the pre-1945 employees because they were
all detrimental and were instituted without any corresponding increase in benefits. (Id. at
pp. 131-133.) Moreover, and on the other side of the coin, there was no indication that
Long Beach would have any difficulty meeting its pension obligations to the pre-1945
employees under the prior system and the rationale for the changes bore “no relation to
the functioning and integrity of the pension system” established for those employees. (Id.
at p. 133.)
Abbott v. City of Los Angeles (1958) 50 Cal. 2d 438 (Abbott), thereafter
underscored that “it is advantage or disadvantage to the particular employees whose own
contractual pension rights, already earned, are involved which are the criteria by which
modifications to pension plans must be measured.” (Id. at p. 449, italics added, see also
id. at p. 453.) In finding a change from a fluctuating to a fixed pension system
unreasonable, the Abbott court rejected as “speculation” the argument that rising costs
might otherwise cause the pension system to cease to exist. Specifically, the court
opined: “Rising costs alone will not excuse the city from meeting its contractual
obligations, the consideration for which has already been received by it. Moreover, it is
not to be assumed that the city would have attempted to abolish its pension system by
reason thereof, especially since such systems are almost universally essential in order to
attract qualified employees.” (Id. at pp. 445, 455.)
53
In 1977, the Supreme Court considered a change in the mandatory retirement age
for state employees from 70 to 67. (Miller v. State of California (1977) 18 Cal. 3d 808,
811.) Distinguishing the terms and conditions of public employment from the potential
pension implications of that employment, the court concluded that the plaintiff had no
“vested contractual right to continue in employment beyond the time or contrary to the
terms and conditions fixed by law.” (Id. at pp. 813-814.) Since no modification to the
plaintiff’s pension rights had occurred, there was no need for an analysis under Allen I or
Abbott. (Id. at p. 818.)
A year later, the high court clarified that a public employee is entitled to the
benefits resulting from positive changes to the pension system made at any time during
employment—such benefits become a part of the vested rights of employees when
conferred. (Betts v. Board of Administration (1978) 21 Cal. 3d 859.) Thus, “[a]n
employee’s contractual pension expectations are measured by benefits which are in effect
not only when employment commences, but which are thereafter conferred during the
employee’s subsequent tenure.” (Id. at p. 866.) Given these circumstances, “ ‘benefits
conferred under a pension system by changes which are made from time to time prior to
the adoption of an amendment imposing a detriment “have no bearing upon the
reasonableness” of the detriment so imposed.’ ” (Id. at p. 867.) In making these
determinations, the Betts court emphasized that “there is a strict limitation on the
conditions which may modify the pension system in effect during employment.” (Id. at
pp. 863-864.)
After Betts, the high court considered vested pension rights again in Allen v. Board
of Administration (1983) 34 Cal. 3d 114 (Allen II), which involved an “ ‘historically
unique’ ” set of facts related to constitutional revisions in 1966 that turned state
legislators from essentially part-time employees making approximately $500 per month
to full-time public servants with an annual salary of $16,000. Although pre-1967 retirees
had been entitled to a fluctuating pension, the constitutional amendments expressly stated
that such retirees could not use the new, substantially increased legislative salary when
computing their retirement benefits. (Id. at pp. 117-118, 123.) The high court concluded
54
that these changes did not unconstitutionally impair the vested rights of the pre-1967
retirees under a federal contracts clause analysis because those retirees could not have
reasonably expected “under the terms of their employment contract to obtain retirement
allowances computed on the basis of the unique salary increase accomplished by the
constitutional revision of 1966 which expressly negated such expectations.” (Id. at
pp. 119, 124-125.) In this way, Allen II underscores the notion that it is the employee’s
reasonable expectations during employment that should define the scope of his or her
vested pension rights. In addition, Allen II clarified that the test for judging pension
modifications is a balancing one, which requires the reconciliation of constitutionally
protected contract rights against the “ ‘ “ ‘essential attributes of sovereign power.’ ” ’ ”
(Id. at p. 119.) Thus, “for example, ‘[m]inimal alteration of contractual obligations may
end the inquiry at its first stage. Severe impairment, on the other hand, will push the
inquiry to a careful examination of the nature and purpose of the state legislation.’ ”
(Ibid.)
Thereafter, in Legislature v. Eu (1991) 54 Cal. 3d 492, the Supreme Court
elaborated that vested pension benefits include both the right to receive any such benefits
upon retirement and the “collateral right to earn future pension benefits through
continued service, on terms substantially equivalent” to those offered at the
commencement of employment. (Id. at pp. 528-530.) Thus, a statewide proposition that
purported to terminate the rights of incumbent state legislators to earn additional pension
benefits through continued state service, where no comparable new advantage was
offered, was found to be an impermissible modification of their vested pension rights.
(Ibid.) Finally, City of Huntington Beach v. Board of Administration (1992) 4 Cal. 4th
462 (Huntington Beach) involved the question of whether detention officers qualified for
local safety member status under PERS. (Id. at p. 464.) The high court concluded that
they did not and thereafter considered the argument that the affected employees might
nevertheless have a vested right to such status under a prior statutory scheme. (Id. at
pp. 471-472.) After reaching the same result under prior law, the high court rejected the
55
contract clause argument, opining that “the jailers in this case have no vested right in
previous erroneous classifications by the PERS Board.” (Id. at p. 472, fn. omitted.)
Before applying these teachings to the case at hand, we consider our colleagues
recent vested rights discussion in Marin.
2. Vested Rights Analysis in the Marin Case.
As stated above, Division Two recently concluded that the changes to CERL’s
definition of compensation earnable effected by PEPRA did not amount to an
unconstitutional impairment of the vested pension rights of the legacy members of Marin
CERA. (Marin, supra, 2 Cal.App.5th at pp. 693-709.) Shortly after the Legislature
enacted PEPRA, Marin CERA adopted a policy implementing the amendments to section
31461, similar to the policies promulgated by CCCERA, ACERA, and MCERA that are
at issue in this case. (Id. at pp. 685-686.) In particular, the board determined that—for
members retiring after January 1, 2013—numerous pay items previously included in
compensation earnable would be excluded, and Marin CERA would no longer collect
retirement contributions based on those items. (Id. at p. 686.) The new exclusions from
pensionable compensation applied only to that portion of the retiring member’s final
compensation period that occurred on or after January 1, 2013, and included among the
newly-impermissible benefits: standby, administrative response, and call back pay
(whether overtime or otherwise); certain in-kind benefits converted to cash; terminal pay;
and certain lump sum and bonus payments. (Id. at p. 687.)
In response to the board’s actions, several individual employee members of Marin
CERA, together with a number of affected employee organizations, brought suit
challenging the retirement board’s implementation of PEPRA—in particular, as in this
case, its application to legacy members, those employees who were hired prior to January
1, 2013. (Marin, supra, 2 Cal.App.5th at pp. 679, 687, 689-690.) The complaint appears
to have raised many of the same issues we have before us in this case, including whether
AB 197 was declarative of existing law; whether wholesale exclusion of certain benefits
under subdivision (b)(1) of section 31461 without a determination that they had been paid
to enhance a member’s pension was improper; and whether application to legacy
56
members of the changes to compensation earnable effected by AB 197 unconstitutionally
impaired their vested rights. (Marin, supra, 2 Cal.App.5th at pp. 688, 691, fn. 14.) After
the State intervened to defend the constitutionality of PEPRA, Marin CERA filed a
general demurrer, claiming that the plaintiffs had failed to state a cause of action because
AB 197 was constitutional and Marin CERA was required by law to implement it. (Id. at
p. 689.)
The trial court ultimately granted Marin CERA’s demurrer without leave to
amend. (Marin, supra, 2 Cal.App.5th at p. 689.) “In its entirety, the trial court’s order
read: ‘Respondents’ Demurrer to the Verified Writ Petition is sustained without leave to
amend. The court finds the Respondents’ actions implementing Govt. Code § 31461, as
amended effective January 1, 2013, are proper and that the Public Employees’ Pension
Reform Act of 2013 is constitutional. The Respondent Board of Retirement has the
exclusive authority and responsibility to determine its members “compensation earnable,”
which is used to calculate members’ retirement allowance, pursuant to Gov. Code
§ 31461. (See Howard Jarvis Taxpayers’ Ass’n. v. Bd. of Supervisors of Los Angeles
County (1996) 41 Cal. App. 4th 1363, 1373, and In re Retirement Cases[, supra,] 110
Cal. App. 4th 426, 453.) A statute, once duly enacted, is presumed to be constitutional.
[¶] SO ORDERED.’ ” (Marin, supra, 2 Cal.App.5th at p. 690.)
In reviewing the trial court’s demurrer decision, the Marin court eschewed
analysis of the many issues of statutory construction with which we have wrestled here,
instead conducting a purely constitutional inquiry into the vested rights implications of
AB 197. (Marin, supra, 2 Cal.App.5th at pp. 690-693 & 691, fn. 14.) After detailing
much of the same law with respect to vested pension rights that we have summarized
above, the Marin court focused on the question of whether, to be reasonable, the
elimination or reduction of an anticipated pension benefit must be counterbalanced by a
comparable new advantage. (Id. at pp. 694-700.) In Allen I, the high court opined that
for a pension modification to be sustained as reasonable, any detrimental change “should
be accompanied by comparable new advantages.” (Allen I, supra, 45 Cal.2d at p. 131,
italics added.) Almost 30 years later, in Allen II, the Supreme Court changed the
57
formulation of its reasonableness test, holding that, although the vested pension rights of
active employees may be modified to their detriment prior to retirement, any such change
“must be accompanied by comparable new advantages.” (Allen II, supra, 34 Cal.3d at
p. 120, italics added.) After tracing the origin of the “must” language to a 1969 appellate
court decision and establishing that it has never again been reiterated by the Supreme
Court, Marin makes, we feel, a convincing argument that the use of “must” in Allen II
was not “intended to herald a fundamental doctrinal shift.” (Marin, supra, 2 Cal.App.5th
at pp. 697-699.) Thus, according to Marin, the high court’s vested rights jurisprudence
generally requires only that detrimental pension modifications should (i.e., ought) to be
accompanied by comparative new advantages—in effect, “ ‘a recommendation, not . . . a
mandate.’ ” (Id. at p. 699.)
Applying this analysis to the facts before it, the Marin court had little difficulty
concluding that the changes effected by AB 197 did not unconstitutionally impair the
vested rights of Marin CERA’s legacy members. (Marin, supra, 2 Cal.App.5th at
pp. 700-709.) Returning repeatedly to the notion that a public employee is entitled only
to a “ ‘reasonable’ ” pension (id. at pp. 702, 704, 706-707), the Marin court highlighted
the language of Allen II quoted above that requires consideration of the “ ‘ “ ‘essential
attributes of sovereign power’ ” ’ ” when determining whether an impairment of vested
rights is constitutionally permitted. (Marin, supra, 2 Cal.App.5th at p. 700; see also id. at
p. 701 [“ ‘ “ ‘not only is the existing law read into contracts in order to fix their
obligations, but the reservation of the essential attributes of continuing governmental
power is also read into contracts as a postulate of the legal order’ ” ’ ”].) Thereafter—
without determining what the changes to section 31461 effected by PEPRA actually
are—the court noted that they constitute “only one aspect” of how Marin CERA
employee-members are compensated and are “quite modest.” (Marin, supra, 2
Cal.App.5th at p. 704.) In contrast, the court described the catalyst for PEPRA as “dire
financial predictions necessitating urgent and fundamental changes to improve the
solvency of various pension systems, including CERL.” (Marin, supra, 2 Cal.App.5th at
pp. 704-705.) Indeed, the court spent significant time in its opinion detailing the severity
58
of the unfunded pension liability crisis at both the state and national level, and
additionally cited evidence specific to Marin CERA suggesting that unfunded pension
liability was a looming problem for that particular CERL system as well. 23 (Id. at
pp. 680-687.) Balancing the amendments to section 31461 against the significance of the
problem they were designed to address, the Marin court concluded that “[i]n light of the
unquestionable need for change, . . . this one was reasonable.” (Marin, supra, 2
Cal.App.5th at p. 706.) 24
Much of Marin’s vested rights analysis—including its rejection of the absolute
need for comparable new advantages when pension rights are eliminated or reduced—is
not controversial, and we do not disagree with it. However, we must respectfully part
23
For instance, in 2011, the Marin County Civil Grand Jury reported that “ ‘During the
financial fiasco of 2008 and 2009, the Marin County Employees’ Retirement
Association’s [Marin CERA’s] net assets . . . declined by . . . 25.5% . . . due to
investment losses. Employer pension costs have increased dramatically . . . . [¶] . . .
Although it is tempting to suggest that the cause of the budget problem is high total
employee compensation, that is not the acute problem. . . . . [T]he acute problem is
unpredictable, rapid variation in compensation—caused at this time by increasing
pension costs.’ ” (Marin, supra, 2 Cal.App.5th at p. 685, fn. 7.) By 2015, the grand jury
opined that the granting of “ ‘pension enhancements . . . contributed to the increase of the
unfunded pension liability of [Marin CERA]; this unfunded liability increased from a
surplus of $26.5 million in 2000 to a deficit of $536.8 million in 2013. This increase
. . . may place the future financial viability of the pension plans at significant risk.’ ” (Id.
at p. 686, fn. 7.)
24
Although its holding appears to be based on the reasoning summarized above, the
Marin court also makes the relatively brief suggestion that PEPRA does, in fact, provide
a new advantage to legacy members. (Marin, supra, 2 Cal.App.5th at pp. 699-700.)
Specifically, the court posits, that—if Marin CERA members continue to receive the
benefits excluded from compensation earnable from their employers without having to
front any retirement contributions with respect to those monies—they will end up with
more cash in hand every month, a new advantage. (Ibid.) We do not find this dicta
particularly persuasive. As a fundamental matter, pension systems are premised on the
assumption that it is more advantageous for employees to forego the current use of their
total compensation in order to ensure a predictable and sufficient income stream after
they retire. If this were not the case, we would likely not be here, faced with the need to
resolve these knotty pension disagreements. Thus, while additional monthly income may
be considered some sort of an advantage, it can hardly be described as comparable.
59
ways with our colleagues in Division Two when it comes to their application of the law
to this specific dispute. Part of the problem may be the difference in procedural posture
between our litigation and Marin’s. As the Marin court acknowledged, since its case
never cleared the pleading stage, the court was “in effect deciding an odd hybrid—
whether the Pension Reform Act is unconstitutional on its face as it applies to the claimed
vested contractual rights of [Marin CERA] employees. That is a limited issue of
legislative power considered in an undisputed factual context.” (Marin, supra, 2
Cal.App.5th at p. 708.)
Nevertheless, we believe that the Marin court improperly relied on its general
sense of what a reasonable pension might be, rather than acknowledging that the Supreme
Court has expressly defined a reasonable pension as one which is subject only to
reasonable modification. Thus, an employee’s right to a reasonable pension can only be
judged in the context of the balancing analysis established by Allen I. This error appears
to have been compounded when, in considering the disadvantages imposed on legacy
members by AB 197, the Marin court—once it determined that comparative new
advantages must not absolutely be provided—too quickly dismissed what could amount
to significant financial disadvantages to legacy members as “quite modest.” (Marin,
supra, 2 Cal.App.5th at p. 704.) In fact, as the Marin court, itself, acknowledged, should
does not mean “don’t have to.” It means “really ought to.” (See id. at p. 699.) Thus,
when no comparative new advantages are given, the corresponding burden to justify any
changes with respect to legacy members will be substantive. (See Allen II, supra, 34
Cal.3d at p. 119.)
Admittedly, total pension system collapse may be a sufficiently weighty concern
to meet this standard. However, there is no indication in the Marin decision that, in
considering the fiscal justification for application of the pension modifications at issue to
legacy members, the court specifically weighed the financial implications for Marin
CERA if legacy members were exempted from those modifications, rather than
impermissibly focusing on the unfunded pension liability crisis in general. (Cf. Abbott,
supra, 50 Cal.2d at pp. 445, 455 [rejecting as “speculation” a general argument that rising
60
costs might otherwise cause the pension system to cease to exist].) In the end, we simply
do not think that it is possible to engage in the individualized balancing test mandated by
the Supreme Court’s vested rights jurisprudence—and thereby determine whether it is
reasonable to apply the pension modifications at issue to legacy members—without a
specific analysis of the changes that have been effected by the new law; consideration of
the impact of those changes on the legacy members at issue; and an evaluation of the
legislative rationale for the change in the context of the facts of each specific CERL
system. We therefore decline to follow Marin.
3. Vested Rights in this Case.
We have concluded that AB 197 modified CERL and therefore potentially
impacted the vested pension rights of legacy members in two distinct ways—by
removing certain on-call and related payments from pensionable compensation and by
allowing CERL boards to look to the intent behind particular items of compensation that
would otherwise be deemed compensation earnable to determine whether they
nevertheless constitute impermissible “enhancement” benefits. Applying our view of the
Supreme Court’s vested rights jurisprudence as described above, we believe that the
reasonableness of these PEPRA amendments must be judged independently in each of the
Three Counties, so that the impact of applying the changes to legacy members can be
evaluated in the context of each county’s particular CERL system. Although it implicitly
found a vested rights violation with respect to on-call pay, the trial court below never
conducted the systematic vested rights analysis needed. Nor did it consider the impact of
both detrimental changes we have identified. Moreover, the parties have not had the
opportunity to brief and argue these issues. We are therefore without sufficient
information to resolve these vested rights disputes on appeal and must remand the matter
for further consideration in light of the guidance provided in this opinion.
When considering whether the vested rights of legacy member in each of
CCCERA, AECRA, and MECRA have been unconstitutionally impaired, the trial court
should recognize that—since no corresponding new advantages have been provided with
respect to the detrimental changes to compensation earnable effected by PEPRA—the
61
application of the detrimental changes to legacy members can only be justified by
compelling evidence establishing that the required changes “bear a material relation to the
theory . . . of a pension system,” and its successful operation. (Allen II, supra, 34 Cal.3d
at p. 120; see Allen I, supra, 45 Cal.2d at p. 131; see also Wallace, supra, 42 Cal.2d at
p. 185.) Moreover, this analysis must focus on the impacts of the identified
disadvantages on the specific legacy members at issue. (Abbott, supra, 50 Cal.2d at
p. 449, 453.) And, if the justification for the changes is the financial stability of the
specific CERL system, the analysis must consider whether the exemption of legacy
members from the identified changes would cause that particular CERL system to have
“difficulty meeting its pension obligations” with respect to those members. (Allen I,
supra, 45 Cal.2d at p. 133.) In this regard, mere speculation is insufficient. (See Abbott,
supra, 50 Cal.2d at pp. 445, 455.) Moreover, generally speaking “[r]ising costs alone
will not excuse the city from meeting its contractual obligations, the consideration for
which has already been received by it.” (Id. at p. 455; see also Ventura, supra, 16 Cal.4th
at p. 507 [noting, in requiring that pension benefits required by CERL be provided
retroactively to Ventura pensioners, that “[n]othing in this record suggests that the burden
on the county fisc justifies either perpetuation of an erroneous construction of the
applicable statutes or denying these plaintiffs the benefit of our decision”].) Under this
analysis, and contrary to the holding in Marin, the fact that the modifications here at issue
may be relatively modest looking at a system’s pension costs as a whole may actually
argue in favor of finding an impairment, as the continuation of such benefits solely for
legacy members may not have a significant impact on the system, especially if such
benefits have been already actuarially accounted for and treated as pensionable.
D. Estoppel
As a final matter, we must determine whether the trial court erred in concluding
with respect to leave cash-outs that certain legacy members—while failing to prove
impairment under a vested rights analysis—nevertheless are entitled to relief based on
principles of equitable estoppel. Since we have opined that, even under AB 197, all leave
cashed out during the final compensation period must be included in compensation
62
earnable, regardless of when the underlying leave accrued, we need not address the trial
court’s estoppel treatment of in-service leave-cash-outs. In contrast, we have confirmed
that terminal pay was never pensionable under CERL. Thus, the application of estoppel
to this type of compensation remains at issue. Below, the trial court generally refused to
apply estoppel principles to permit continued treatment of terminal pay as compensation
earnable for legacy members because it found that a member’s expectation that such pay
would be pensionable did not “rise to the level necessary to establish an ‘injury’
sufficient to bring the doctrine of equitable estoppel into play.” With respect to Merced
members only, however, the trial court made an exception because it was convinced that
reliance on the litigated judgment in Baker—which interpreted the Merced Post-Ventura
Settlement Agreement as including in compensation earnable up to 160 hours of terminal
pay—was sufficient to trigger the application of equitable estoppel for those members.
On appeal, the State and the Sanitation District contend that the trial court’s estoppel
determination is too broad, while appellants aver it is too narrow.
We recently had occasion to review the law relating to estoppel in the public
pension context and summarized it as follows: “The doctrine of equitable estoppel is
founded on notions of equity and fair dealing and provides that a person may not deny the
existence of a state of facts if that person has intentionally led others to believe a
particular circumstance to be true and to rely upon such belief to their detriment.
[Citation.] ‘ “Generally speaking, four elements must be present in order to apply the
doctrine of equitable estoppel: (1) the party to be estopped must be apprised of the facts;
(2) he must intend that his conduct shall be acted upon, or must so act that the party
asserting the estoppel had a right to believe it was so intended; (3) the other party must be
ignorant of the true state of facts; and (4) he must rely upon the conduct to his injury.” ’ ”
(City of Oakland v. Oakland Police & Fire Retirement System (2014) 224 Cal. App. 4th
210, 239 (City of Oakland).) “Where, as here, a party seeks to invoke the doctrine of
equitable estoppel against a governmental entity, an additional element applies. That is,
the government may not be bound by an equitable estoppel in the same manner as a
private party unless, ‘in the considered view of a court of equity, the injustice which
63
would result from a failure to uphold an estoppel is of sufficient dimension to justify any
effect upon public interest or policy which would result from the raising of an estoppel.’ ”
(Id. at p. 240; see Long Beach v. Mansell (1970) 3 Cal. 3d 462, 496-497 (Mansell);
Driscoll v. City of Los Angeles (1967) 67 Cal. 2d 297, 306 [“doctrine of equitable estoppel
may be applied against the government where justice and right require it”].) Finally, as
we acknowledged in City of Oakland, “there is a line of cases holding that estoppel
cannot lie to contravene any statutory limitation on an agency’s authority.” (City of
Oakland, supra, 224 Cal.App.4th at pp. 243-244 [citing cases]; but see Mansell, supra, 3
Cal.3d at pp. 496-499 [declining to decide the issue but positing that this line of cases
may be included within its general analysis and rule].) 25
Both the State and the Sanitary District argue strenuously on appeal that the trial
court’s estoppel order was improper because CERL boards never had the authority to
treat terminal pay as pensionable. Thus, they claim, allowing the continued inclusion of
terminal pay in compensation earnable for legacy members on estoppel grounds would
impermissibly force a governmental agency to act outside of its statutory authority. (See
Longshore v. County of Ventura (1979) 25 Cal. 3d 14, 28 (Longshore) [noting that “no
court has expressly invoked principles of estoppel to contravene directly any statutory or
constitutional limitations”]; Medina, supra, 112 Cal.App.4th at p. 870 [“estoppel is
barred where the government agency to be estopped does not possess the authority to do
what it appeared to be doing”].) We are not convinced.
It is undeniably true, as we have discussed at length, that CERL boards do not
have the power to include terminal pay in compensation earnable as a matter of
discretion. However, under both statutory and constitutional law, such boards have
plenary authority with respect to the administration of their respective CERL systems.
(§ 31520 [“the management of the retirement system is vested in the board of
25
Where the underlying facts are undisputed, whether equitable estoppel applies is a
question of law subject to our de novo review. (City of Oakland, supra, 224 Cal.App.4th
at p. 240.) “Moreover, where the issues require a weighing of policy concerns, they too
present a question of law.” (Ibid.)
64
retirement”]; Cal. Const., art. XVI, § 17 [retirement board of a public pension system has
“plenary authority and fiduciary responsibility for investment of moneys and
administration of the system”]; id., § 17, subd. (a) [retirement board has “sole and
exclusive responsibility to administer the system in a manner that will assure prompt
delivery of benefits and related services to the participants and their beneficiaries”]; id.,
§ 17, subd. (b) [members of retirement board shall discharge their duties to, among other
things, defray “reasonable expenses of administering the system”].) Surely, this broad
administrative mandate must include the power to settle litigation in order to defray legal
expenses and ensure the prompt and certain delivery of benefits to their members. And
this was precisely the impetus behind the Post-Ventura Settlement Agreements in each of
the Three Counties.
In the wake of Ventura, CERL boards were faced with a somewhat unprecedented
situation, which included: a Supreme Court ruling greatly expanding the types of pay
items that they had previously understood to be includable in compensation earnable;
litigation by CERL members statewide, seeking to reap the benefits of the Ventura
decision; the prospect of significant and ongoing costs of litigation; the lingering (albeit
incorrect) notion that CERL boards possessed discretion under Guelfi to include
additional pay items, over and above those mandated by Ventura, in compensation
earnable; and the constitutional requirement that they promptly and efficiently deliver
benefits to their members. In light of these myriad factors, we believe the CERL boards
acted within their statutory powers to settle the claims against them. The critical
distinction here is between a CERL board’s ability, by contract, to create a vested pension
right contrary to statute (they cannot as discussed above), and the power of that same
board to settle a pension dispute in such a way that the board may be equitably estopped
from denying the impacted employees the benefit of their bargain. Under such
circumstances, any pension amounts to be paid to members that were later determined to
be in excess of specific statutory authority, would simply be costs of achieving certainty
in the administration of the system. We therefore conclude that estoppel is not barred in
65
this case based on a lack of statutory authority for the CERL boards to do what they
did. 26
Moreover, after weighing the interests at stake in this case, we conclude that “the
injustice which would result from a failure to uphold an estoppel is of sufficient
dimension to justify any effect upon public interest or policy which would result from the
raising of an estoppel.” (Mansell, supra, 3 Cal.3d at pp. 496–497.) As we recognized in
City of Oakland, “[c]ases which have applied the doctrine of equitable estoppel in the
area of public employee pensions have emphasized the ‘unique importance’ of pension
rights to the well-being of the holders of those rights.” (City of Oakland, supra, 224
Cal.App.4th at p. 242.) In Longshore, our high court elaborated: “The cases which have
applied estoppel to the narrow area of public employee pensions, have emphasized the
unique importance of pension rights to an employee’s well-being, and have frequently
arisen after employees were induced to accept and maintain employment on the basis of
expectations fostered by widespread, long-continuing misrepresentations by their
employers. In each of these instances the potential injustice to employees or their
dependents clearly outweighed any adverse effects on established public policy.”
(Longshore, supra, 25 Cal.3d at p. 28.) It is beyond doubt that this is a case in which
there have been widespread and long-continuing misrepresentations by both employers
26
In making this determination, we recognize that the Post-Ventura Settlement
Agreement in Contra Costa County only applied to retirees and that CCCERA voluntarily
extended its terms to active members by resolution. Under the facts of this case,
however, this appears to be a distinction without a difference. In the post-Ventura
climate, all impacted members, both active and retired, were litigating their entitlement to
Ventura benefits. Had CCCERA refused to apply the settlement terms to its active
members, it would almost certainly have faced another lawsuit. Thus, we deem the threat
of litigation presented under these circumstances to be sufficient to bring active members
within the purview of CCCERA’s settlement power. We additionally acknowledge that
Marin appears to have reached the opposite conclusion with respect to the availability of
estoppel on these facts. However, it did so in the context of finding no abuse of
discretion in the trial court’s refusal to grant leave to amend to add an estoppel claim.
(Marin, supra, 2 Cal.App.5th at pp. 708-709, fn. 24.) Here, in contrast, we have had the
benefit of full briefing on the estoppel argument by the parties, as well as a decision by
the trial court reaching the merits of the issue.
66
and the Boards regarding the ability of legacy members to include terminal pay in
pensionable compensation.
Arguments raised on the other side of this balancing analysis, in contrast, are not
persuasive. The State and the Sanitary District, for instance, suggest that allowing the
continued inclusion of terminal pay in compensation earnable for legacy members
constitutes an impermissible gift of public funds. But public agencies are clearly allowed
to expend settlement monies without running afoul of this constitutionally-enshrined
public policy. (See Cal. Atty. Gen. No. 99-907, 83 Ops.Cal.Atty.Gen. 45, 46-47 (2000)
[early retirement annuities offered in exchange for releases of employment-related claims
which would allow for litigation expense savings not a gift of public funds].) The State
additionally argues that “invoking estoppel would allow for the known and continued
spiking of employee pensions, contravening the purpose of CERL.” However, all new
members will be governed by the restrictions on spiking imposed by AB 197, and we are
not convinced that this “anti-spiking” intent was evident in CERL prior to PEPRA.
Rather, we think the legislative history before the enactment of AB 197 more reasonably
evinces a “long-standing practice of the Legislature of not intruding into the county
decisionmaking process regarding compensation determinations with respect to [CERL]
retirement systems.” (Stats. 1992, ch. 45, § 3(4).) In addition, the terminal pay
authorized in the Three Counties by the Post-Ventura Settlement Agreements is fairly
circumscribed. As stated above, any such terminal pay for CCCERA and ACERA legacy
members is limited to the amount of leave accrued in the final compensation period,
while MCERA’s terminal benefit is limited to 160 hours. Further, these benefits have
reportedly been recognized and actuarially accounted for by all three CERL systems. We
therefore conclude that the equities in this case tip decidedly in favor of allowing an
estoppel claim to proceed.
Finally, with respect to the specific elements needed to support equitable estoppel,
the Sanitary District argues that these requirements have not been proven on an
individual basis by each legacy member as required, while the State focuses on an alleged
lack of justifiable reliance by legacy members based on the Board’s promises.
67
Appellants dispute these claims, and additionally argue that the trial court erred by
selectively applying estoppel to only certain legacy members, due to a too-narrow view
of the injury required under the estoppel doctrine. Again, we believe that appellants have
the stronger argument. Legacy members in all Three Counties entered into and remained
in employment based, at least in part, on the promise that they would receive a pension as
authorized by CERL. (In re Retirement Cases, supra, 110 Cal.App.4th at pp. 453-454
[when members entered into employment contracts they “agreed to have their
‘compensation earnable’ and ‘final compensation’ calculated pursuant to CERL”]; see
also Kern, supra, 29 Cal.2d at p. 856 [stating that “one of the primary objectives in
providing pensions for government employees . . . is to induce competent persons to enter
and remain in public employment”].) For many years, through their court-approved Post-
Ventura Settlement Agreements, the Boards in each of the Three Counties made precise
and explicit promises to these legacy members as to what such a statutorily authorized
CERL pension would include. (See West v. Hunt Foods, Inc. (1951) 101 Cal. App. 2d
597, 604-605 [noting in the context of a definite and precise promise that “ ‘[a] promise
which the promisor should reasonably expect to induce action or forbearance of a definite
and substantial character on the part of the promisee and which does induce such action
or forbearance is binding if injustice can be avoided only by enforcement of the
promise’ ”].) Presumably and reasonably, all legacy members organized their work lives
accordingly. Thus, while the Boards may ultimately have been proven incorrect with
respect to the pensionability of terminal pay, such that a vested rights analysis is not
appropriate, we believe that their actions in this case were sufficient to establish the
necessary elements of estoppel for all impacted legacy members. 27 Thus, unlike the trial
27
In this regard, we note that “ ‘[t]he fact that the advice may have been given in good
faith does not preclude the application of estoppel. Good faith conduct of a public officer
or employee does not excuse inaccurate information negligently given. [Citations.] In a
matter as important to the welfare of a public employee as his pension rights, the
employing public agency ‘ “bears a more stringent duty” ’ to desist from giving
misleading advice. [Citation.]’ ” (City of Oakland, supra, 224 Cal.App.4th at p. 241,
68
court, we see no meaningful difference between MCERA and the other two Boards based
on the existence of the Baker judgment. Nor do we believe that estoppel in this case
should be limited to those legacy employees who had accumulated a certain amount of
banked leave by a particular date. Rather, all legacy members should be entitled to
include terminal pay in compensation earnable to the limited extent such pay was
designated as pensionable by their relevant Post-Ventura Settlement Agreement.
III. DISPOSITION
The Judgments are affirmed in part and reversed in part, the related Writs are
vacated to the extent inconsistent with this decision, and the matter is remanded for
determinations, in accordance with the analysis set forth herein, as to the reasonableness
of PEPRA’s detrimental changes when applied to the vested rights of legacy members in
each of CCCERA, ACERA, and MCERA. Each party to bear its own costs.
quoting Crumpler v. Board of Administration (1973) 32 Cal. App. 3d 567, 582
(Crumpler); see also Mansell, supra, 3 Cal. 3d 462, 491 [“[e]specially in cases where the
party to be estopped has made affirmative representations . . . knowledge of the true facts
will be imputed to one who, in the circumstances of the case, ought to have such
knowledge”].) Moreover, whether the Boards’ representations with respect to terminal
pay are characterized as statements of fact or law is not dispositive. (City of Oakland,
supra, 224 Cal.App.4th at pp. 240-241, fn. 15.) Rather, where, as here, a confidential
relationship exists among the parties, estoppel can be applied based on the
representations made, and advice given, to legacy members regarding their substantive
rights. (Ibid. [collecting cases].) “Under such circumstances, the court considers a
variety of factors focused on the culpability of the public agency and the impact of the
advice on the claimant, including (1) whether the advice was negligent at the time it was
made; (2) whether the agency acted in bad faith; (3) whether the agency purported to
‘advise and direct’ the claimant rather than merely ‘inform and respond’; (4) whether the
agency acted with certitude in dispensing the advice; (5) whether a confidential
relationship exists; (6) whether the right asserted was one of ‘great magnitude’; and (7)
whether the claimant purports to have no knowledge or training while the agency
purports to be informed and knowledgeable. [Citation.] Any one of these factors can be
determinative under the facts of a particular case. [Citation.]” (City of Oakland, supra,
224 Cal.App.4th at p. 240, fn. 15, citing Driscoll, supra, 67 Cal.2d at pp. 306-311.)
69
_________________________
REARDON, J.
We concur:
_________________________
RUVOLO, P. J.
_________________________
RIVERA, J.
A141913 Alameda County Deputy Sheriff’s v. Alameda County Employees’ Retirement
70
Trial Court: Contra Costa County Superior Court
Trial Judge: Hon. David B. Flinn
Counsel for Appellant: Isaac S. Stevens
Mastagni, Holstedt, Amick, Miller & Associates
Timothy K. Talbot
Rockne A. Lucia
Rains, Lucia & Willinson
W. David Holsberry
Holsberry, Stemerman & Holsberry
Counsel for Respondent: Harvey L. Leiderman
Reed Smith
Rei Onishi
Ashley K. Dunning
Nossaman
Robert L. Gaumer
Alameda City Employees’ Retirement Association
Counsel for Intervenor: Anne I. Yen
Vincent A. Harrington, Jr.
Weinberg, Roger & Rosenfeld
Peter W. Saltzman
Leonard Carder LLP
Vishtasp Soroushian
Andrew H. Baker
Teague P. Paterson
Beeson, Tayer & Bodine
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Robert Bonsall
Beeson, Tayer, Silbert & Bodine
Katwyn T. DeLaRosa
Bennett & Sharpe, Inc.
William I. Corman
Bogatin, Corman & Gold
Christopher E. Platten
Wylie, McBride, Platten & Renner
Paul Q. Goyette
Goyette &Associates
Arthur W. Liou
Leonard Carder
Robert J. Bezemek
Wright Lassiter, III
Mark Friedman
Brian E. Washington
Michael E. Kyle
Randick, O’Dea & Tooliatos
Rod A. Attebery
Neumiller & Beardslee
Richard D. PioRoda
Kenton Alm
Meyers, Nave, Riback, Silver & Wilson
James D. Maynard
Maynard Law
David J. Larsen
Silver & Wright
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Thomas L. Geiger
Contra Costa County Counsel
Lyle R. Nishimi
Judicial Council of California
Marie D. Hanson
Hanson Bridgett
Barbara Fee
Carl P. Nelson
Bold, Polisner, Maddow, Nelson & Judson
Robert Leete
William D. Ross
Craig Downs
Martin T. Snyder
Snyder, Cornelius & Hunter
Sue Casey
Barry J. Bennett
Bennett, Sharpe, Delarosa, Bennett & Licalsi
Counsel for Intervenor Anthony P. O’Brien
and Respondent Office of the Attorney General
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