Marin Ass'n of Public Employees v. Marin County Employees' Retirement Ass'n

Filed 8/17/16
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION TWO
MARIN ASSOCIATION OF PUBLIC
EMPLOYEES et al.,
Plaintiffs and Appellants, A139610
v. (Marin County
MARIN COUNTY EMPLOYEES’ Super. Ct. No. CIV 1300318)
RETIREMENT ASSOCIATION et al.,
Defendants and Respondents;
THE STATE OF CALIFORNIA,
Intervenor and Respondent.
The practice known as “pension spiking,” by which public employees use various
stratagems and ploys to inflate their income and retirement benefits, has long drawn
public ire and legislative chagrin. Effective January 1, 2013, the Legislature amended
Government Code1 section 31461, a provision of the County Employees Retirement Law,
with the aim of curtailing pension spiking by excluding specified items from the
calculation of retirement income. A number of individuals currently employed by
various governmental entities in the County of Marin, together with a number of
organizations representing current county employees, brought suit to halt implementation
of the revised formula. The trial court concluded application of the new formula to
current employees did not amount to an unconstitutional impairment of the employees’
contracts, and sustained the pension authority’s general demurrer without leave to amend.
1
Statutory references are to the Government Code unless otherwise indicated.
1
After an extensive independent review, we reach the same conclusion and affirm,
holding that the Legislature did not act impermissibly by amending section 31461 to
exclude specified items and categories of compensation from the calculation of pensions
for current employees. As will be shown, while a public employee does have a “vested
right” to a pension, that right is only to a “reasonable” pension—not an immutable
entitlement to the most optimal formula of calculating the pension. And the Legislature
may, prior to the employee’s retirement, alter the formula, thereby reducing the
anticipated pension. So long as the Legislature’s modifications do not deprive the
employee of a “reasonable” pension, there is no constitutional violation. Here, the
Legislature did not forbid the employer from providing the specified items to an
employee as compensation, only the purely prospective inclusion of those items in the
computation of the employee’s pension. Neither the statutory change, nor the
implementation of that change by the county pension agency, amounts to an impairment
of the employee’s receipt of a “reasonable” pension upon retirement.
BACKGROUND
The Statutory Framework and the Emergence of
the Unfunded Pension Liability Crisis
The County Employees Retirement Law of 1937 (Stats. 1937, ch. 677 (CERL)), as
codified in 1947 (§ 31450 et seq.) allows, but does not require, a county to establish and
operate a retirement plan for its employees. Twenty of the state’s 58 counties have
elected to do so. Each county plan is administered by a retirement board, which, as we
previously characterized it, 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) for purposes of calculating the
amount of a pension.” (In re Retirement Cases (2003) 110 Cal.App.4th 426, 433.)
In the aftermath of the severe economic downturn of 2008–2009, public attention
across the nation began to focus on the alarming state of unfunded public pension
liabilities. (E.g., U. S. Cong., Congressional Budget Off., The Underfunding of State and
2
Local Pension Plans (May 2011) p. 1 [estimating unfunded liabilities as of 2009 at
“between $2 trillion and $3 trillion”]; Report of the State Budget Crisis Task Force
(2012) p. 2 [“Pension funds for state and local government workers are underfunded by
approximately a trillion dollars according to their actuaries and by as much as $3 trillion
or more if more conservative investment assumptions are used”]; Novy-Marx & Rauh,
Public Pension Promises: How Big Are They and What Are They Worth? (2011) 66 J.
Fin. 1206, 1211 [estimating “state employee pension liabilities as of June 2009” at
between $3.2 trillion to $4.43 trillion].) One legal commentator characterized unfunded
pension obligations as the “ticking fiscal time bomb for state and local governments.”
(Beermann, The Public Pension Crisis (2013) 70 Wash. & Lee L.Rev. 3, 13; cf. Rauh,
The Pension Bomb, Milken Inst. Rev. (2011) 28 [“Many pension systems are rapidly
approaching a day of reckoning.”)
As so often occurs, California was in first place: “The state with the biggest
absolute level of underfunding is California, with underfunding of approximately $475
billion.” (Novy-Marx & Rauh, The Liabilities and Risks of State-Sponsored Pension
Plans (2009) 23 J. Econ. Persp. 191, 197–199.) In 2010, the Stanford Institute for
Economic Policy Research, studying only the California Public Employees’ Retirement
System, the California State Teachers’ Retirement System, and the University of
California Retirement System, estimated “the current shortfall at more than half a trillion
dollars.” (Howard Bornstein, et al., Going for Broke: Reforming California’s Public
Employee Pension Systems, SIEPR Policy Brief (April 2010) p. 2; see also Nation, The
Funding Status of Independent Public Employee Pension Systems in California, SIEPR
Policy Brief (Nov. 2010) pp. 1, 13 [examining 24 systems operating under CERL which
“account for approximately 91 percent of the total assets and liabilities for independent
systems” and estimating their “aggregate unfunded liability . . . at nearly $200 billion in
June 2008”].) “The magnitude of the problem in California . . . is staggering” and “is
without peer.” (Hylton, Combating Moral Hazard: The Case for Rationalizing Public
Employee Benefits (2012) 45 Ind. L.Rev. 413, 444.)
3
In 2011, the Little Hoover Commission advised the Governor and the Legislature:
“California’s pension plans are dangerously underfunded, the result of overly generous
benefit promises, wishful thinking and an unwillingness to plan prudently. Unless
aggressive reforms are implemented now, the problem will get far worse, forcing
counties and cities to severely reduce services and layoff employees to meet pension
obligations.” The Commission urged a number of “structural changes that realign
pension costs and expectations of employees, employers and taxpayers.” (Little Hoover
Com., Public Pensions for Retirement Security (Feb. 2011) [cover letter of Chairman
Daniel Hancock].) The situation was described as “dire,” “unmanageable,” a “crisis” that
“will take a generation to untangle,” and “a harsh reality” that could no longer be
ignored: “The money coming in is nowhere near enough to keep up with the money that
will need to go out.” (Id., pp. v, 38, 12, 21, 25.)
“The state must exercise its authority—and establish the legal authority—to reset
overly generous and unsustainable pension formulas for both current and future workers.”
(Little Hoover Com., Public Pensions for Retirement Security, supra, p. 53.) And
because “State and local governments have made a promise to workers they can no
longer afford,” the commission recommended: “To provide immediate savings of the
scope needed, state and local governments must have the flexibility to alter future,
unaccrued retirement benefits for current workers.” (Id., p. 42, italics added.)
One feature of the system that drew the commission’s critical attention was
“pension spiking,” which the commission defined as follows: “The practice of increasing
[an employee’s] retirement allowance by increasing final compensation or including
various non-salary items (such as unused vacation pay) in the final compensation figure
used in the [employee’s] retirement benefit calculations, and which has not been
considered in prefunding of the benefits.” (Little Hoover Com., Public Pensions for
Retirement Security, supra, p. 73.) The commission found the practice had become
“widespread throughout local government,” and had generated “public outrage [that] . . .
4
cannot continue to be ignored.”2 (Little Hoover Com., Public Pensions for Retirement
Security, supra, pp. 36, vi.) “The spiking games must end. Pensions must be based only
on actual base salary . . . not padded with other pay for clothing, equipment or vehicle
use, or enhanced by adding service credit for unused sick time vacation time or other
leave time.” (Id., at p. 46.)
The Pension Reform Act
The Legislature heard, and agreed.3 The following year, it passed Assembly Bill
No. 340 (AB 340), enacting the California Public Employees’ Pension Reform Act of
2
One commentator correlated public anger to timing and perception: “Public
employee pensions are usually based on the employee’s pay at the end of the career, often
the average of the employee’s last three or five years of government employment.
Employees make efforts to increase their pay at the end of their careers to ‘spike’ their
pensions. Even if the methods employees use . . . are within the rules of the pension
system, they seem illegitimate” because of the appearance that the pension system is
being “manipulated” just as the employee’s working career for the public concludes.
(Beermann, The Public Pension Crisis, supra, 70 Wash. & Lee L.Rev. at p. 21, italics
added.)
The Legislature’s amendment of section 31461 had similar motivations:
“According to the author, ‘California’s public pension systems’ ” “ ‘have been tainted by
a few individuals who have taken advantage of the system. This is in part due to the ’37
Act’s very broad and general definition of ‘compensation earnable’ . . . .’ [¶] . . . [¶]
The author concludes, ‘This measure will address these abusive practices . . . .’
Supporters state, ‘AB 340 would eliminate the current . . . ability for employees to
manipulate their final compensation calculations . . . .’ ” (Assem. Com. on Public
Employees, Retirement and Social Security, Analysis of Assem. Bill No. 340
(2011–2012 Reg. Sess.) as amended April 25, 2011, p. 4; Sen. Com. on Public
Employment and Retirement, Analysis of Assem. Bill No. 340, (2011–2012 Reg. Sess.)
as amended June 22, 2011, pp. 4–5 [same].)
3
The Legislature was already aware of abuse, having repeatedly attempted to limit
how compensation earnable was being defined in Los Angeles. (See Stats. 1993, ch. 396,
§ 4, adding § 31461.1 [allowing exclusion of “cafeteria or flexible benefit plan
contributions, transportation allowances, car allowances, or security allowances”]; Stats.
1999, ch. 7, § 1, adding § 31461.4 [excluding, as an urgency measure, “any increase,
made on or after January 1, 1996, in cafeteria or flexible benefit plan contributions for
any member represented by a certified employee organization, nor shall they include any
increase in cafeteria or flexible benefit plan contributions made on or after January 1,
1995, for any member not represented by a certified employee organization, provided that
5
2013 (Pension Reform Act), which made fundamental alterations in the manner in which
public pensions are calculated. (§ 7522 et seq.; Stats. 2012, ch. 296.) Concurrent with
that effort, the Legislature enacted Assembly Bill No. 197 (2011–2012 Reg. Sess.) (AB
197), with the declared purpose to “exclude from the definition of compensation earnable
any compensation determined by the [county retirement] board to have been paid to
enhance a member’s retirement benefit.”4 (Legis. Counsel’s Dig., Assem. Bill No. 197
(2011–2012 Reg. Sess.); Stats. 2012, ch. 297.) To this end, both A.B. 340 and A.B. 197
amended section 31461 by adding subdivision (b):
“(b) ‘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.
the nonrepresented member waives the applicability of Sections 31460 and 31461 in
writing prior to receiving any cash payment based on the increase”]; Stats. 2001, ch. 778,
§ 1, adding § 31461.45 [“ ‘Compensation earnable’ in a county of the first class shall
include only those items of remuneration specifically included as a result of the
court-approved settlement in . . . Judicial Council Coordination Proceeding No.
4049 . . . . Those items of remuneration . . . shall include only the following [111
specified bonuses, allowances, and differentials]”].) The Legislature had also imposed
other statewide exclusions for county employees. (See Stats. 1998, ch. 129, § 1, adding
§ 31461.5 [“salary bonuses or any other compensation incentive payments for regular
duties or for additional services outside regular duties”]; Stats. 2000, ch. 966, § 3, adding
§ 31461.6 [“overtime premium pay”].)
4
“ ‘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). In plain English, and
excluding survivor beneficiaries, a “member” is a past or present “employee” (§ 31469)
of a “public agency” (§ 31478) who did or is rendering “public service” for compensation
to that public agency (§ 31479).
6
“(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.”5
There is no dispute that the purpose of this change was to curtail pension spiking. 6
5
There was one exception: “Compensation that a member was entitled to receive
pursuant to a collective bargaining agreement that was subsequently deferred or
otherwise modified as a result of a negotiated amendment of that agreement shall be
considered compensation earnable and shall not be deemed to have been paid to enhance
a member’s retirement benefit.” (§ 31542, subd. (c).) None of the parties discusses
application of this provision.
With respect to section 31461, the only difference between AB 340 and AB
197—both of which were enacted by the Legislature on August 31, 2012, and then signed
together by the Governor on September 12, 2012—is that AB 197 also added 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 v. San
Diego County Employees Retirement Association (2004) 117 Cal.App.4th 734 and In re
Retirement Cases (2003) 110 Cal.App.4th 426.” (Stats. 2012, ch. 297, § 2.)
Although there is no material difference between the versions of subdivision (b) in
AB 340 and AB 197, in the interests of simplicity for this appeal, we will adopt the
parties’ practice of referring to both measures as AB 197, and that designation and the
Pension Reform Act will be used interchangeably.
7
Marin County, which was already wrestling with its own pension difficulties, 7
was one of the first to act to implement the Pension Reform Act. On December 18, 2012,
6
According to the Senate Rules Committee discussion of this language in AB 197:
“This section implies [sic: applies] to current members in the 1937 Act County
Retirement System who have not yet retired. The intent of this section is to reign [sic:
rein] in pension spiking by current members of the system to the extent allowable by
court cases that have governed compensation earnable in that system since 2003. These
cases allow certain cash payments to be included in compensation for the purpose of
determining a benefit, but only to the extent that the cash payments were limited to what
the employee earned in a year. [¶] A concern has been raised that, as written, the
conference report [on AB 340] would increase the ability of some current employees to
spike their pensions rather than achieving the intended outcome of reduction [sic:
reducing] spiking opportunities. [¶] . . . [¶] This bill will be transmitted to the Governor
with the request that it be signed after AB 340.” (Sen. Rules Com., Analysis of Assem.
Bill No. 197 (2011–2012 Reg. Sess.) as amended Aug. 31, 2012, p. 2; see Assem. Com.
on Public Employees, Retirement and Social Security, Analysis of AB No. 340
(2011–2012 Reg. Sess.) as amended April 25, 2011, p. 4, quoted in fn. 3, ante.)
The Pension Reform Act included a similar provision concerning the “pensionable
compensation” of members in the Public Employees’ Retirement System (PERS). (Stats.
2012, ch. 296, § 15, adding § 7522.34.) Later in the 2012 session the Legislature adopted
a comparable provision for the “creditable compensation” of teachers. (Stats. 2012, ch.
864, § 1, amending Ed. Code, § 22119.2.) As is the case with section 31461, both of
these measures vested the boards administering the respective retirement systems with
the authority to exclude “Any other form of compensation” (§ 7522.34, subds.
(c)(11) & (c)(12)) and “Any other payments” (Ed. Code, § 22119.2, subd. (c)(9)) from
pension calculations. Section 7522.34 is especially noteworthy because, like subdivision
(b)(1) of section 31461, it expressly excluded “Any compensation determined by the
board to have been paid to increase a member’s retirement benefit . . . .” (§ 7522.34,
subd. (c)(1).)
7
As far back as 2005, calling for concerted and comprehensive action, the Marin
County Civil Grand Jury had warned: “Marin County . . . and its cities and
towns . . . provide pension plans to their employees that are many times more generous
than similar plans found in the private sector. The volatility of the cost of these pensions
has caused extreme stress on the budgets of many of these entities.” (Marin County Civil
Grand Jury, The Bloated Retirement Plans of Marin County, Its Cities and Towns (May
9, 2005) p. 1.)
Six years later, the grand jury reported that the chickens were coming home to
roost, and were in part responsible for current financial difficulties: “During the financial
fiasco of 2008 and 2009, the Marin County Employees’ Retirement Association’s
(MCERA) net assets . . . declined by . . . 25.5% . . . due to investment losses. Employer
8
the Board of Directors of the Marin County Employees’ Retirement Association and its
directors (collectively MCERA8) adopted a “Policy Regarding Compensation Earnable
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 County Civil
Grand Jury, Public Sector Pensions: A Perspective (May 31, 2011) p. 1.)
The grand jury noted the county’s Long-Term Restructuring Plan: “At current
levels, public pension systems are not financially sustainable without reform. . . . Under
current actuarial assumptions, it is projected that the County of Marin will experience an
approximately 40% increase in employer pension contribution rates in FY
2010-11 . . . . This represents an increased General Fund cost of approximately $11.4
million next fiscal year, the most significant component of the County’s estimated $15
million structural gap for FY 2010-11. Employer costs will continue to rise in
subsequent years barring a significant rebound in investment earnings.” (Id. at p. 7.) The
grand jury also noted the county’s “Annual Financial Report,” which had concluded that
employee compensation and pension costs were likely to endure beyond stock market
fluctuations: “ ‘Public pensions are . . . a significant factor contributing to the projected
budget shortfall. . . . Even with recent stock market gains, pension contributions are
expected to increase in the next several years as asset gains and losses are typically
smoothed to control rate volatility.’ ” (Id. at p. 6.) The grand jury concluded: “The
pension plans of all MCERA’s Sponsors [i.e., member organizations] are significantly
underfunded, primarily due to investment losses. MCERA currently has reserves with a
market value of only $1.21 billion . . . . The present value of benefits for members is
$1.93 billion.” (Id. at p. 18.)
In a 2015 report, the grand jury noted that the granting of largely unpublicized
“pension enhancements . . . contributed to the increase of the unfunded pension liability
of MCERA; 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 expose the citizens of Marin County
to additional tax burdens to cover the unfunded costs and may place the future financial
viability of the pension plans at significant risk. Additionally, such an impact may impair
the governments’ ability to provide the broad range of essential services that citizens are
expecting; instead those funds may be used to pay for employee pensions.” (Marin
County Civil Grand Jury, Pension Enhancements: A Case of Government Code
Violations and a Lack of Transparency (2015) p. 2.) The report closed with an ominous
warning: “Action on this issue should not be delayed, as the effects of . . . improperly
enhanced pensions grow each year” and “are increasing the payroll” of the governmental
entities involved. (Id. at p. 7.)
8
Formed in 1950 by Marin voters, MCERA is an independent governmental entity
separate and distinct from the County of Marin. MCERA is described in the petition as
9
and Pensionable Compensation Determinations” implementing AB 197 with “the new
rules set forth herein regarding the definition of Compensation Earnable,” that would
comply with the “new . . . section 31461.” Commencing on January 1, 2013, specified
items would be excluded from the new definition.9
“funded by actuarially calculated contributions from its members and their employers,
and it calculates and then distributes pension benefits to its members once they retire.”
The grand jury’s 2011 report stated: “Despite its economic importance and its impact on
public budgets with resultant loss of jobs and reduction in services, the public seems to
have little interest in what MCERA does . . . . MCERA’s Board of Retirement and staff
labor, for the most part, in obscurity.” (Marin County Civil Grand Jury, Public Sector
Pensions: A Perspective, supra, at p. 17.)
9
The pertinent language of the revised policy reads:
“As a result of new subdivision (b)(3) of section 31461, which requires that, on
and after January 1, 2013, all payments for ‘additional services rendered outside of
normal working hours, whether paid in a lump sum or otherwise’ be excluded from
compensation earnable, effective on and after that date, MCERA will no longer collect
retirement contributions on, and will exclude from retirement calculation, standby-pay,
administrative response pay, any form of call-back even if not paid at overtime rates.
“As a result of new subdivision (b)(1)(A) of section 31461, which permits in-kind
conversions in the final compensation period to be excluded from final compensation, on
and after January 1, 2013, effective on and after that date, MCERA will no longer collect
retirement contributions on, and will exclude from retirement calculations, in-kind
benefits converted to cash, such as waiver for health insurance cash back and 125 plan
revision.” (Underscore omitted.)
An attachment to the policy specified the “general pay items that are . . . excluded
from . . . Compensation Earnable by MCERA effective on and after January 1, 2013”:
“In-kind benefits Converted to Cash (e.g., Waiver for Health Insurance Cash Back, 125
Plan Revision [see fn. 11 and accompanying text, post]);” “Payments for Additional
Services Rendered Outside of Normal Working Hours (e.g., Standby, Administrative
Response, and Call Back, whether overtime or not)”; “Reimbursements (e.g., Tool, Meal,
Boot, Cell Phone, License),” “Overtime, Unless FLSA Premium Pay”; “Severance
Payments”; “Leave Cash Outs Paid Only at Termination (e.g., Annual, Sick, Floating
Holiday, Personal, Comp Time),” “Lump Sum Payment of Comp Time At Promotion”;
“Payments (Not Remuneration for Service or Skills) paid in a Lump Sum or Other
Form”; “Executive Bonuses”; “Employer Contributions to Deferred Compensation or
Defined Contribution Plans.”
MCERA’s Board also specified the scope of its action: “[T]he new rules set forth
herein regarding the definition of Compensation Earnable shall apply only to MCERA
10
The Lawsuit
Reaction to the change in policy was almost immediate. On January 18, 2013, less
than three weeks after the Pension Reform Act took effect, five recognized employee
organizations and four individuals (collectively plaintiffs) commenced this action against
MCERA.10 Plaintiffs alleged that on December 18, 2012: “[T]he MCERA BOARD
voted to implement AB 197 effective January 1, 2013 and announced a new policy for
the calculation of retirement benefits. Under the policy, MCERA would begin excluding
standby pay, administrative response pay, callback pay, cash payments for waiving health
insurance, and other pay items from the calculation of members’ final compensation for
all compensation earned after January 1.”
Plaintiffs further alleged:
“Since at least 1997, . . . if not before then, MCERA, the County, and other
MCERA-participating employers agreed to include certain elements of compensation, in
members who retire from MCERA on and after January 1, 2013, and only then as to the
portion of their final average compensation periods that occur on or after the effective
date of the new statutory exclusions, January 1, 2013.”
10
The plaintiff organizations were the Marin Association of Public Employees,
Local 1021 of the Service Employees International Union, Local 856 of the International
Brotherhood of Teamsters, the Marin County Fire Department Firefighters’ Association,
and the Marin County Management Employees Association, which collectively represent
approximately 2100 county employees who are members of MCERA. The four
individuals named as plaintiffs previously received a specified type of benefit terminated
by AB 197, to wit: “an eligibility worker . . . for approximately 31 years” who “receives
cash in lieu of fringe benefits that MCERA has previously included as compensation
earnable for purposes of calculating her pension benefits”; “a deputy district
attorney . . . for approximately 23 years” who “receives on-call pay that MCERA has
previously included as compensation earnable for purposes of calculating his pension
benefits”; “a fire captain . . . for approximately 27 years” who “receives so-called ‘hold
harmless’ payments . . . which MCERA has previously included as compensation
earnable for purposes of calculating his pension benefits”; and “a Program
Manager . . . employed by the County . . . since 1977” and who also “receives so-called
‘hold harmless’ payments . . . which MCERA has previously included as compensation
earnable for purposes of calculating his pension benefits.” The Teamsters local and the
deputy district attorney are not parties to this appeal.
11
addition to base pay, as compensation earnable for purposes of calculating retirees’ final
compensation, and thus, pension benefits. . . .
“Among other elements of compensation that have long been included in pension
calculations are standby pay, administrative response pay, call-back pay, and cash
payments made to employees who waive health insurance coverage. More recently, the
County negotiated changes to its Internal Revenue Code Section 125 cafeteria
plan11. . . resulting in payments in cash in lieu of fringe benefits, which the County and
MCERA agreed would be treated as compensation earnable (so-called ‘hold harmless’
payments). . . .
“Over the years, MCERA and employers who participate in MCERA, such as the
County, have repeatedly communicated and committed to MCERA members that these
and other elements of compensation would be included in the calculation of members’
final compensation and encouraged MCERA members to plan their retirement based on
the idea that these pay items would be included in the determination of their pension
benefits. MCERA and participating employers made these representations and
commitments to members in MOUs, plan documents, newsletters, bulletins, handbooks,
handouts, official policy statements, and other publications and correspondence with
MCERA members. . . .
“Because MCERA has included these various pay items in the calculation of
retirement benefits, the cost of these benefits has been actuarially factored into
contribution rates and has been paid for by both member and employer contributions.
Additionally, the value and associated costs of these benefits have also been a factor in
determining the wage and benefit packages offered to MCERA members through
11
26 U.S.C. section 125(d)(1) provides: “The term ‘cafeteria plan’ means a
written plan under which— [¶] (A) all participants are employees, and [¶] (B) the
participants may choose among 2 or more benefits consisting of cash and qualified
benefits.” “The term ‘qualified benefit’ means any benefit which . . . is not includible in
the gross income of the employee . . . .” (Id., subd. (f)(1).)
12
collective bargaining . . . and in some instances has led to employees accepting lower
wages or other benefits.”
Plaintiffs also complained about the generalized way in which MCERA had
changed its policy: “In addition to impairing MCERA members’ vested rights,” MCERA
“also decided to exclude certain pay items from compensation earnable without making a
determination that such compensation has been paid to enhance MCERA members’
retirement benefits, as required by AB 197. To the extent any determination has been
made that these pay items have been paid to enhance retirement benefits, such
determinations are incorrect and constitute an abuse of discretion.”
Plaintiffs further alleged that they “relied on MCERA and participating
employers’ commitment to include these pay items in the calculation of final
compensation, and they agreed to accept employment and remain employees of their
respective employers based on the promised pension benefit”; and that “[t]he elimination
of these various pay items from the calculation of MCERA members’ final compensation
will result in a reduction in members’ pension benefits below what they had previously
been promised,” and “the value of the benefits . . . are a form of deferred compensation
for work already performed,” and “protected by Article I, section 9 of the California
Constitution and Article I, section 10, clause 1 of the United States Constitution.”12 And
plaintiffs concluded: “By excluding items from the final compensation calculation that
12
Because the issue comes to us following the sustaining of a general demurrer,
“we accept, and liberally construe, the truth of the complaint’s properly pleaded factual
allegations, but not contentions, deductions, or conclusions of fact or law.” (Caldera
Pharmaceuticals, Inc. v. Regents of University of California (2012) 205 Cal.App.4th 338,
350.) There is no genuine disagreement between plaintiffs and MCERA concerning
historical events. Only the causally connected allegations of representations and reliance
might be problematic. However, because they center around how plaintiffs responded to
representations made by MCERA—representations MCERA has never denied
making—we accept them as proper allegations of ultimate fact, not law. (See, e.g.,
Estate of Bixler (1924) 194 Cal. 585, 589–590; Winn v. McCulloch (1976) 60 Cal.App.3d
663, 670; 5 Witkin, Cal. Procedure (5th ed. 2008) Pleading, § 730, p. 148.) These
allegations relate to the common law estoppel cause of action plaintiffs claim they should
have been allowed to plead, a claim we reject. (See fn. 24, post.)
13
MCERA had previously committed to provide, AB 197 unconstitutionally impairs
MCERA members’ vested rights.”
Plaintiffs prayed for declaratory and injunctive relief that AB 197 and MCERA’s
“actions are unconstitutional impairments of vested rights and therefore unenforceable.”
Plaintiffs also prayed for issuance of a writ of mandate “to compel [MCERA] to continue
to calculate the pensions of its members in a manner consistent with its policies in effect
before December 18, 2012 and in a manner consistent with binding promises made to
MCERA members.”
The State of California was granted leave to intervene, as expressly directed by the
governor, in order that it could defend the constitutionality of AB 197. Shortly thereafter,
MCERA interposed a general demurrer on the sole ground that, because “AB 197 . . . [is]
constitutional,” and MCERA was “required by law to implement . . . AB 197,” plaintiffs
had failed to state a cause of action. Plaintiffs filed opposition vigorously disputing both
of these points.
In June 2013, after hearing extensive argument, the trial court sustained MCERA’s
demurrer without leave to amend and entered judgment against plaintiffs.
DISCUSSION
The crux of this appeal is whether MCERA may eliminate benefits previously
treated as compensation earnable from the calculation of the pension formula for what
plaintiffs term “legacy members”—employees who were hired prior to January 1,
2013—because AB 197 modified that formula. In legal terms, did the narrowing
achieved by AB 197 impair plaintiffs’ vested pension rights? Because there is no
genuine factual dispute presented (see fn. 12, ante), the issue is purely one of law for our
independent review. (Teachers’ Retirement Bd. v. Genest (2007) 154 Cal.App.4th 1012,
1028 and decisions cited.)
However, before we consider the constitutional issue, we are obligated to ascertain
if the appeal may be decided on some other, nonconstitutional ground. (E.g., Palermo v.
Stockton Theatres, Inc. (1948) 32 Cal.2d 53, 66; Teachers’ Retirement Bd. v. Genest,
supra, 154 Cal.App.4th 1012, 1043.) Plaintiffs advance two such claims.
14
The Order Sustaining MCERA’s Demurrer Is
Not Procedurally Defective
Plaintiffs first attack the trial court’s order as procedurally defective because it
“does not provide a justification for sustaining the demurrer.” If the attack were to
succeed, the judgment can be reversed on a nonconstitutional basis. But the attack will
not succeed.
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 Govt. 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 (2003) 110 Cal.App.4th 426, 453.) A statute, once duly
enacted, is presumed to be constitutional. [¶] SO ORDERED.”
This order was filed on June 19, 2013, and mailed to the parties the following day.
On June 24, MCERA mailed plaintiffs notice of entry. The ensuing judgment, which
quoted almost all of the order, was entered on June 26, the same day plaintiffs
unsuccessfully moved for reconsideration of the order, following which they were
rebuffed in their request for extraordinary relief from this court. (Marin Association of
Public Employees v. Superior Court (Feb. 25, 2014, A139621) [nonpub. opn].) At no
time during these proceedings did plaintiffs advise the trial court, or attack the order, on
the ground now advanced. By reason of this inaction, the claim was forfeited. (E.g.,
Code Civ. Proc., § 472d, quoted at fn. 13, post; E. L. White, Inc. v. City of Huntington
Beach (1978) 21 Cal.3d 497, 504, fn. 2; Lambert v. Carneghi (2008) 158 Cal.App.4th
1120, 1128, fn. 4.)
15
Even if the claim had been preserved for review, it would not require reversal.
California has a statute governing this precise subject, one not cited in plaintiffs’ briefs.13
Concerning that statute, this court long ago recognized that it “has been interpreted to
require the affirmance of trial court rulings on demurrers if any of the grounds raised by
defendant require the sustaining of the demurrer, whether or not the court specifies all the
grounds.” (Banerian v. O’Malley (1974) 42 Cal.App.3d 604, 610.) That is why the
ruling is examined de novo on the sole legal question of whether the complaint states a
claim for relief upon any theory. (E.g., Code Civ. Proc., § 589; McCall v. PacifiCare of
Cal., Inc. (2001) 25 Cal.4th 412, 415; cf. Wells v. Marina Properties, Inc. (1981)
29 Cal.3d 781, 787 [“ ‘a demurrer of course calls for the determination of an issue of law
only.’ ”].)
So it is incorrect to treat the ruling on a demurrer as akin to a statement of
decision, which is only required, upon request, “upon the trial of a question of fact.”
(Code Civ. Proc., § 632.) But this is clearly what plaintiffs believe is missing from the
trial court’s order. Instead of “rationaliz[ations],” “general proposition[s],” and
“platitude[s],” plaintiffs appear to think the trial court should have provided a
point-by-point analysis of each of the legal issues raised by the petition. That belief is
patently unreasonable and far exceeds the statutory requirement.14 (See Mautner v.
13
“Whenever a demurrer in any action or proceeding is sustained, the court shall
include in its decision or order a statement of the specific ground or grounds upon which
the decision or order is based which may be by reference to appropriate pages and
paragraphs of the demurrer. [¶] The party against whom a demurrer has been sustained
may waive these requirements.” (Code Civ. Proc., § 472d.)
14
That unreasonability is best shown by the consequences of an issue to which the
parties devote considerable attention in the briefs, namely, whether the items MCERA
would discontinue treating as compensation earnable as of January 1, 2013, qualified as
compensation earnable under the version of section 31461 as construed in Ventura
County Deputy Sheriffs’ Assn. v. Board of Retirement (1997) 16 Cal.4th 483, 487
(Ventura County) [under CERL “items of ‘compensation’ paid in cash . . . must be
included in the ‘compensation earnable’ . . . on which an employee’s pension is based”],
prior to enactment of the Pension Reform Act. Plaintiffs would appear to expect the trial
court to have analyzed each of the dozens of specific items and payments that MCERA
16
Peralta (1989) 215 Cal.App.3d 796, 802 [“Code of Civil Procedure section 472d does not
mandate a detailed statement explaining the court’s reasons for sustaining the demurrer”];
Berkeley Police Assn. v. City of Berkeley (1977) 76 Cal.App.3d 931, 943 [trial court is
not required to set “forth a memorandum of decision stating in detail its reasons for
sustaining the demurrer”].) The decisive issue, as even MCERA and the state concede, is
whether MCERA’s implementation of AB 197 constitutes an unconstitutional
impairment of plaintiffs’ contracts of employment and concomitant pension benefits.
MCERA’s general demurrer required the trial court to decide that issue as a matter of law
with a yes or a no answer, which would resolve the sole ground for MCERA’s demurrer:
did plaintiffs fail to state a cause of action? The trial court made that decision, with its
reasons given. Plaintiffs may not like the brevity of those reasons, but Code of Civil
Procedure section 472d requires no more for our de novo review. (E. L. White, Inc. v.
City of Huntington Beach, supra, 21 Cal.3d 497, 504, fn. 2; Berkeley Police Assn. v. City
of Berkeley, supra, at p. 943.)
The Manner in Which MCERA Implemented
AB 197 Was Not Improper
The second nonconstitutional ground for reversal advanced by plaintiffs is that
MCERA “did not follow the correct procedural requirements” of AB 197 “for excluding
payments made to ‘enhance a member’s retirement benefit.’ ” Again, plaintiffs are not
correct.
The Pension Reform Act added section 31542, the pertinent provisions of which
provide:
“(a) The board shall establish a procedure for assessing and determining whether
an element of compensation was paid to enhance a member’s retirement benefit. If the
would no longer treat as compensation earnable (see fn. 9, ante) and determined whether
each qualified as compensation earnable according to Ventura County. The pointlessness
of such a time consuming exercise is that it takes no account of the Ventura County
approach being altered by the Pension Reform Act’s amending the definition of
compensation earnable in section 31461, and only begs the core issue of the Legislature’s
power to make that change. (See fn. 22, post.)
17
board determines that compensation was paid to enhance a member’s benefit, the
member or the employer may present evidence that the compensation was not paid for
that purpose. Upon receipt of sufficient evidence to the contrary, a board may reverse its
determination that compensation was paid to enhance a member’s retirement benefits.
“(b) Upon a final determination by the board that compensation was paid to
enhance a member’s retirement benefit, the board shall provide notice of that
determination to the member and employer. The member or employer may obtain
judicial review of the board’s action by filing a petition for writ of mandate within 30
days of the mailing of that notice.”
Plaintiffs correctly recognize that these provisions are intended to govern
individualized determinations. As plaintiffs describe it: “[T]he focus is on whether
compensation was made to enhance a particular member’s retirement—hence the
instruction that the procedure determine whether ‘a member’s retirement benefit’ has
been enhanced. [¶] [I]f the board makes such a determination, the member or the
member’s employer must be given an opportunity to present evidence to the contrary.
This presumes, of course, that the employee and employer must be given some kind of
notice of the determination, since otherwise the right to present contrary evidence would
be meaningless. The retirement board then has an opportunity to reverse its decision, if
the employee or employer presents ‘sufficient evidence to the contrary.’ [¶] Finally, if
the retirement board persists in holding that the compensation was paid to enhance the
member’s retirement benefit, either the individual member or the member’s employer
may thereafter seek review of the board’s decision by filing a petition for writ of
mandate. Again, this is an individualized right and requires an analysis specific to the
particular member.” But here, plaintiffs conclude, “Marin CERA did not make a
determination that payments for in-kind benefits converted to cash were made in order to
enhance any particular member’s retirement benefit.” This analysis of section 31542 is
perfectly reasonable, but plaintiffs misapprehend its application here, particularly as the
situation is defined by the allegations of plaintiffs’ petition.
18
Section 31542 is clearly intended to serve as the mechanism for calculating the
pension of an employee about to retire. There is nothing to indicate the statute was
intended to govern the situation here—a shift in policy by the retirement board in
compliance with a new command from the Legislature, clearly intended to be applied in
the future to plaintiffs’ so-called employees when they put in for retirement. Indeed, if
plaintiffs’ construction were correct, section 31542 would initiate the calculation process
for every employee affected by the change, without regard to whether actual retirement is
imminent for him or her. This 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. We have repeatedly emphasized that statutory language is
to be construed to avoid such absurd or outlandish consequences. (See Pacific
Gas & Electric Co. v. Public Utilities Com. (2015) 237 Cal.App.4th 812, 857 and
decisions cited.) We conclude that MCERA has not, in plaintiffs’ words, “failed to
follow the required procedure for excluding payments” from the determination of each
employee’s “compensation earnable.”
The Amendment to Section 31461 Is Not an
Unconstitutional Impairment of Plaintiffs’ Vested Pension Rights
Plaintiffs’ essential position is clearly set out in their opening brief: “[P]ublic
employees earn a vested right to their pension benefits immediately upon acceptance of
employment and . . . such benefits cannot be reduced without a comparable advantage
being provided.” “A corollary of this approach is that public employees are also entitled
to any increase in benefits conferred during their employment, beyond the pension
benefit in place when they began. [S]ince they are performing work under the improved
pension system, the terms of that system become an integral part of their compensation,
and they immediately become vested in the improved benefit.” “Because A.B. 197 has
resulted only in the exclusion of payments from pension benefits, with no new benefit to
offset the decreased pensions, this infringes employees’ vested rights.”
Plaintiffs candidly admit “[i]n practice, this means that for existing employees,
any changes must generally be neutral with regard to the overall benefit provided and
19
cannot represent a net decrease in the pension benefit.”15 Less ambiguously, they assert
“neither Marin CERA nor the Legislature can now curtail those benefits.” Plaintiffs
insist that if their position is not vindicated on this appeal, California will have returned
to “the view that public employee pensions are mere ‘gratuities’ to be granted or taken
away at the whim of the employer.”
A brief review of principles governing public employee pensions will show that
much of plaintiffs’ reasoning is not controversial, but their ultimate conclusion cannot be
sustained.
Some General Law of Pensions
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.”
“ ‘[P]ublic employment gives rise to certain obligations which are protected by
the contract clause of the Constitution, including the right to the payment of salary which
has been earned.’ ” (Miller v. State of California (1977) 18 Cal.3d 808, 815 (Miller).)
“Earned” in this context obviously means in exchange for services already performed.
(See White v. Davis (2003) 30 Cal.4th 528, 566.) Ordinarily, “[p]romised compensation
is one such protected right.” (Olson v. Cory (1980) 27 Cal.3d 532, 538.)
In accordance with this view, a pension is treated as a form of deferred salary that
the employee earns prior to it being paid following retirement.16 In Miller’s classic
15
It bears emphasis that we construe plaintiffs’ language concerning “a net
decrease in the pension benefit” as referring to a reduction of the anticipated “pension
benefit” of still working employees. Plaintiffs’ limitation of this action to legacy
employees clearly excludes any question of decreasing the pensions to retired employees,
and nothing in this opinion addresses the power of either state or local employers to do
so. (See fn. 19, post.)
16
Which means it can never be the mere gratuity hyperbolically feared by
plaintiffs. (See Riggs v. District Retirement Board (1942) 21 Cal.2d 382, 385 [“ ‘ “A
pension is a gratuity only where it is granted for services previously rendered which at the
time they were rendered gave rise to no legal obligation . . . But where, as here, services
20
formulation: “ ‘It is true that an employee does not earn the right to a full pension until
he has completed the prescribed period of service, but he has actually earned some
pension rights as soon as he has performed substantial services for his employer.17
[Citations.] He is not fully compensated upon receiving his salary payments because, in
addition, he has then earned certain pension benefits, the payment of which is to be made
at a future date. While payment of these benefits is deferred, and is subject to the
condition that the employee continue to serve for the period required by the statute, the
mere fact that performance is in whole or in part dependent upon certain contingencies
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.’
“ ‘Although vested prior to the time when the obligation to pay matures, pension
rights are not immutable. For example, the government entity providing the pension may
make reasonable modifications and changes in the pension system. This flexibility is
necessary ‘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.’ ” (Miller,
supra, 18 Cal.3d 808, 815–816, quoting Kern v. City of Long Beach, supra, 29 Cal.2d
848, 854–855.)
Miller continued in its restatement of pension principles: “In Wallace [v. City of
Fresno (1954) 42 Cal.2d 180, 183], referring to Kern, we again emphasized ‘that a public
are rendered under a pension statute, the pension provisions become a part of the
contemplated compensation for those services and so in a sense a part of the contract of
employment itself.” ’ ”].)
17
Thus it is commonly said that a public employee has pension rights that “vest”
on the first day of employment (e.g., Kern v. City of Long Beach (1947) 29 Cal.2d 848,
852, 855 and decisions cited), or in the less precise phrasing used by plaintiffs, “upon
acceptance of employment.” (Betts v. Board of Administration (1978) 21 Cal.3d 859,
863.) We say less precise because, unlike professional sports, there are no signing
bonuses in public service. The actual moment of vesting comes with the commencement
of work, which gives rise to “the right to the payment of salary which has been earned.”
(Miller, supra, 18 Cal.3d 808, 813, italics added.)
21
pension system is subject to the implied qualification that the governing body may make
reasonable modifications and changes before the pension becomes payable and that until
that time the employee does not have a right to any fixed or definite benefits but only to a
substantial or reasonable pension.’ ” (Miller, supra, 18 Cal.3d 808, 816; see Betts v.
Board of Administration, supra, 21 Cal.3d 859, 863 [“The employee does not obtain,
prior to retirement, any absolute right to fixed or specific benefits, but only to a
‘substantial or reasonable pension.’ ”]; Packer v. Board of Retirement (1950) 35 Cal.2d
212, 218 [“any one or more of the various benefits offered . . . may be wholly eliminated
prior to the time they become payable, provided . . . the employee retains the right to a
substantial pension”]; cf. Terry v. City of Berkeley (1953) 41 Cal.2d 698, 702 [citing
Packer as “authority for the proposition that reasonable changes detrimental to [public
employees] may be made” prior to retirement].)
What the Supreme Court stated in Kern deserves more than the excerpt quoted in
Miller: “The rule permitting modification of pensions is a necessary one since 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. . . . [¶] Thus it appears . . . that an employee may acquire a vested contractual
right to a pension but that this right is not rigidly fixed by the specific terms of the
legislation in effect during any particular period in which he 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 therefore in holding that he has a vested right to a pension but that the
amount, terms and conditions of the benefits may be altered.”18 (Kern v. City of Long
Beach, supra, 29 Cal.2d 848, 854–855.)
18
Immediately before this excerpt, the court cited Casserly v. City of Oakland
(1936) 6 Cal.2d 64 as one of the authorities for the proposition that “[i]t has also been
held that a pension could be reduced prior to retirement from two-thirds to one-half of the
22
Our Supreme Court has repeatedly stated that while pension rights may not be
“destroyed,” they may be modified prior to the employee’s retirement. (E.g.,
International Assn. of Firefighters v. City of San Diego (1983) 34 Cal.3d 292, 300–301;
Allen v. Board of Administration (1983) 34 Cal.3d 114, 120; Miller, supra, 18 Cal.3d
808, 815; Kern v. City of Long Beach, supra, 29 Cal.2d 848, 853–855.) The right to
modify inheres in the inalienable rights of government.
There Is No Absolute Requirement That Elimination or
Reduction of an Anticipated Retirement Benefit “Must”
Be Counterbalanced by a “Comparable New Benefit”
In one of the decisions cited in Miller, the Supreme Court stated: “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.” (Allen v. City of Long Beach (1955) 45 Cal.2d 128, 131.) It is a
onetime variation of this last sentence that is a foundation of plaintiffs’ appeal on the
constitutional issue.
In 1983, our Supreme Court stated: “A constitutional bar against the destruction
of such vested contractual pension rights, however, does not absolutely prohibit their
employee’s salary, and modifications have been approved in some cases when made after
the happening of the contingencies upon which the payments were to commence.”
(Kern v. City of Long Beach, supra, 29 Cal.2d 848, 854.) Casserly involved a
Depression-era ordinance that by reducing the pay of serving employees achieved a
corresponding reduction of pension payments to retirees who had held the same pay
grade. In the course of upholding the reduction, the Supreme Court quoted with approval
the decision of this court in Aitken v. Roche (1920) 48 Cal.App. 753, 755, where we
characterized as “fallacious” the argument that “the amount of a prospective pension is
fixed” in perpetuity. (Casserly v. City of Oakland, supra, at p. 68.) This is especially
true with so-called “fluctuating” pension systems where retirement benefits are pegged to
current salaries. (See, e.g., Eichelberger v. City of Berkeley (1956) 46 Cal.2d 182, 185
[“It is settled that where the pension statute states . . . that the pension shall be a
percentage of the average salary attached to the rank held by the employee before
retirement, it is construed as providing for a fluctuating pension which increases or
decreases as the salaries paid to active employees increase or decrease,” citing Casserly
and Aitken].)
23
modification. With respect to active employees, we have held that any modification of
vested pension rights must be reasonable, must bear a material relation to the theory and
successful operation of a pension system, and, when resulting in disadvantage to
employees, must be accompanied by comparable new advantages. [Citations.]”19 (Allen
v. Board of Administration, supra, 34 Cal.3d 114, 120, italics added.) The single word
we have italicized, and the thought it seemingly expresses, permeates plaintiffs’ opening
brief. However, we do not believe the word “must” was intended to be given the literal
and inflexible meaning attributed to it by plaintiffs.
The Supreme Court in the 1983 Allen opinion cited three decisions as support for
the quoted proposition. The two Supreme Court decisions cited employed the word
“should.” (Allen v. City of Long Beach, supra, 45 Cal.2d 128, 131 [“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”]; Abbott v. City of Los Angeles, supra 50 Cal.2d 438, 449 [quoting this
19
The likelihood of a change amounting to an impermissible impairment is greater
when the change applies to retired employees. Retirees receive an extra measure of
judicial solicitude because their part of the contract has already been fully performed.
(See Allen v. Board of Administration, supra, 34 Cal.3d 114, 120 [“As to retired
employees, the scope of continuing governmental power may be more restricted, the
retiree being entitled to the fulfillment . . . of the contract which he has already
performed”]; Abbott v. City of Los Angeles, supra, 50 Cal.2d 438, 455 [municipality must
meet “its contractual obligations, the consideration for which has already been received
by it”]; Terry v. City of Berkeley, supra, 41 Cal.2d 698, 702–703 [principle that “the right
to a pension is a vested right . . . is a right to fair pension . . . the terms of which may be
altered within reason without an impairment of the contract” not applicable to retirees;
“the plaintiff had been retired; he had rendered the called-for performance; he had done
everything possible to entitle him to the payment of his pension”].) The patent unfairness
of diminishing the benefits a pensioner earned prior to ceasing employment needs no
belaboring. That possibility is not presented here, as the only issue is the application of
AB 197 to persons still working. (See fn. 15, ante.) For that reason, decisions upon
which plaintiffs rely such as Protect Our Benefits v. City and County of San Francisco
(2015) 235 Cal.App.4th 619 and United Firefighters of Los Angeles City v. City of Los
Angeles (1989) 210 Cal.App.3d 1095, are inapposite.
24
sentence from Allen].) It is only a 1969 Court of Appeal decision, which cites the same
two Supreme Court decisions, that uses “must.” (Lyon v. Flournoy (1969)
271 Cal.App.2d 774, 782 (Flournoy) [“In brief, modifications affecting the earned
pension rights of active employees must be reasonable, related to the theory of a sound
pension system, and changes detrimental to the individual must be offset by comparable
new advantages. (Abbott v. City of Los Angeles, supra, 50 Cal.2d at pp. 447, 449; Allen
v. City of Long Beach, supra, 45 Cal.2d at pp. 131-133.)”].)
There is, of course, no bar to the Supreme Court adopting a Court of Appeal’s
reasoning as its own. Yet there is legitimate reason to question whether that was what the
Supreme Court intended in 1983. First, as just shown, only the least authoritative of the
three sources cited actually supports the word “must,” while the two Supreme Court
decisions employ “should.” Second, barely a month later, the Supreme Court—speaking
though the same justice—filed another decision which used the “should” formulation
from the 1955 Allen decision as quoted in Abbott.20 Third, the 1983 Allen decision
involved retirees (and Flournoy the widow of a retiree), who historically receive a
heightened degree of judicial protection. (See fn. 19, ante.) Fourth, and most
significantly, the “must” formulation has never been reiterated by the Supreme Court,
which has instead uniformly employed the “should” language from the 1955 Allen
decision. (Olson v. Cory, supra, 27 Cal.3d 532, 541 [“Although an employee does not
obtain any ‘absolute right to fixed or specific benefits . . . there [are] strict limitation[s]
20
“Of course, we have repeatedly observed that even such ‘vested contractual
pension rights may be modified prior to retirement for the purpose of keeping a pension
system flexible to permit adjustments in accord with changing conditions and at the same
time maintain the integrity of the system. [Citations] . . . .’ (Allen v. City of Long Beach,
supra, 45 Cal.2d at p. 131.) Nonetheless, ‘[s]uch modifications must be reasonable,’ and
to be sustained as such, ‘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. [Citations.]’ (Ibid.) . . . . (Abbott v. City of Los Angeles
(1958) 50 Cal.2d 438, 449.)” (International Assn. of Firefighters v. City of San Diego,
supra, 34 Cal.3d 292, 300–301.)
25
on the conditions which may modify the pension system in effect during employment.’
[Citation.] Such modifications must be reasonable and any ‘ “changes in a pension plan
which result in disadvantage to employees should be accompanied by comparable new
advantages” ’ ”]; Legislature v. Eu (1991) 54 Cal.3d 492, 529–530 [quoting Olson]; City
of Huntington Beach v. Board of Administration (1992) 4 Cal.4th 462, 472 [“changes in a
pension plan which result in disadvantage to employees should be accompanied by
comparable new advantages,” citing Allen v. City of Long Beach, supra, 45 Cal.2d 128,
131].)
It thus appears unlikely that the Supreme Court’s use of “must” in the 1983 Allen
decision was intended to herald a fundamental doctrinal shift. “Should,” not “must,”
remains the court’s preferred expression. And “should” does not convey imperative
obligation, no more compulsion than “ought.” (Lashley v. Koerber (1945) 26 Cal.2d 83,
90; see People v. Webb (1986) 186 Cal.App.3d 401, 409, fn. 2 [“the word ‘should’ is
advisory only and not mandatory”].) In plain effect, “should” is “a recommendation,
not . . . a mandate.” (Cuevas v. Superior Court (1976) 58 Cal.App.3d 406, 409.)
But the most persuasive evidence against the Supreme Court intending to impose a
quid pro quo standard is circumstantial—the bottom line of who won. The issue in Allen
was whether pension payments to retired legislators could be reduced pursuant to new
statutory and constitutional language. The trial court had concluded that reduction would
be contrary to the contract clauses of both state and federal constitutions. (Allen v. Board
of Administration, supra, 34 Cal.3d 114, 118–119.) The Supreme Court reversed,
holding that the reduction was not constitutionally improper. There is nothing in the
opinion linking the reduction to provision of some new compensating benefit. If the
court intended “must” to have a literal meaning, the retirees would have won. They lost.
In light of the foregoing, we cannot conclude that Allen v. Board of Administration
in 1983 was meant to introduce an inflexible hardening of the traditional formula for
public employee pension modification. Consequently, we do not deem ourselves bound
by expressions in Court of Appeal opinions—including our own in In re Retirement
Cases, supra, 110 Cal.App.4th 426, 448—reiterating the Allen language.
26
In any event, we think there is a “new benefit” provided by the Pension Reform
Act. That measure made no change to the definition of “compensation” in CERL,
namely section 31460. The change in policy adopted by MCERA—which is not an
employer of any individual plaintiff or of persons employed by other governmental
entities—is not alleged to have changed in the way compensation is calculated by any of
those entities. Thus, for all we know, employees who prior to MCERA changing its
policy in December 2012 collected any of the items or payments at issue (see fn. 9, ante)
continued to have those items or payments included in their monthly compensation.
However, due to MCERA’s change in policy, each of those employees’ paychecks is no
longer being reduced by deductions to cover those sums in funding the employee’s
retirement. Put simply, the new benefit is an increase in the employee’s net monthly
compensation. Put even more simply, it is more cash in hand every month.
Plaintiffs Do Not Establish that Their Vested Right to a
Reasonable Pension Has Been Substantially Impaired
Plaintiffs’ initial premise, and the centerpiece of their oral argument, is that the
moment each individual plaintiff commenced working for a public agency in Marin
County, that person acceded to a “vested right” to a pension. To a large extent, that
premise is correct. As already established by Miller, the “right” to a pension “vests”
when the first portion of wages or salary already earned is deferred by being withheld for
a future pension. (See fn. 17 and accompanying text, ante.) But to call a pension right
“vested” is to state a truism. As one Court of Appeal sensibly noted, “ALL pension
rights are vested” in the sense they cannot be destroyed. (Santin v. Cranston (1967)
250 Cal.App.2d 438, 443.) Until retirement, an employee’s entitlement to a pension is
subject to change short of actual destruction. That same Court of Appeal aptly—and
accurately—characterized that entitlement as only “a limited vested right.” (Id. at p.
441.) Even plaintiffs concede there is no talismanic significance to “vested rights” that
will prevent legislative modification between hiring and retirement. However, what
plaintiffs fail to acknowledge is that in the very authority on which their position is based,
our Supreme Court explained just how potent is this governmental power.
27
“Not every change in a retirement law constitutes an impairment of the obligations
of contracts, however. [Citation.] Nor does every impairment run afoul of the contract
clause. The United States Supreme Court has observed, ‘Although the Contract Clause
appears literally to proscribe “any” impairment, . . . “the prohibition is not an absolute
one and is not to be read with literal exactness like a mathematical formula.” [Citation.]
Thus, a finding that there has been a technical impairment is merely a preliminary step in
resolving the more difficult question whether that impairment is permitted under the
Constitution.’ [Citation.] An attempt must be made ‘to reconcile the strictures of the
Contract Clause with the “essential attributes of sovereign power,” . . .’ [Citation.] 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.’ [Citations.]
“The high court also has expressed the relevant principles another way: ‘The
constitutional prohibition against contract impairment does not exact a rigidly literal
fulfillment; rather, it demands that contracts be enforced according to their “just and
reasonable purport”; 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. [Citations.] The
contract clause and the principle of continuing governmental power are construed in
harmony; although not permitting a construction which permits contract repudiation or
destruction, the impairment provision does not prevent laws which restrict a party to the
gains “reasonably to be expected from the contract.” [Citation.] Constitutional decisions
“have never given a law which imposes unforeseen advantages or burdens on a
contracting party constitutional immunity against change.” [Citations.]’ [Citations.]”
(Allen v. Board of Administration, supra, 34 Cal.3d 114, 119–120 [quoting United States
Trust Co. v. New Jersey (1977) 431 U.S. 1 and City of El Paso v. Simmons (1965)
379 U.S. 497].)
To return to Miller: “The scope of permissible modifications of vested pension
rights was established in Allen v. City of Long Beach (1955) 45 Cal.2d 128 . . . : ‘Such
28
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.’
(Allen, supra, at p. 131.)” (Miller, supra, 18 Cal.3d 808, 816.)
Implicit in the formula, however expressed, is that alterations, changes, and
modifications do not invariably work to the employee’s benefit. In large measure, the
judicial history of examining pensions is largely given over to broken promises and
changed circumstances. Nevertheless, the basic limits are established.
When the Supreme Court says that vested pension rights may not be “destroyed,”
it means a pension system cannot be abolished on the eve of retirement (see Kern v. City
of Long Beach, supra, 29 Cal.2d 848 [municipal pension plan repealed 32 days before
employee completed 20-years service needed for retirement]); or not after substantial
service has been provided (see Legislature v. Eu, supra, 54 Cal.3d 492 [initiative measure
abolishing legislative pension system valid only as to persons subsequently elected]); or
not by effectively abolishing a pension plan the legislative authority refuses to fund. (See
Bellus v. City of Eureka (1968) 69 Cal.2d 336, 352; Valdes v. Cory (1983)
139 Cal.App.3d 773, 787; Klench v. Board of Pension Fd. Commrs. (1926)
79 Cal.App.171, 182.)
But there are acceptable changes aplenty that fall short of “destroying” an
employee’s anticipated pension. “Reasonable” modifications can encompass reductions
in promised benefits. (E.g., Miller, supra, 18 Cal.3d 808 [change of retirement age with
reduction of maximum possible pension]; Claypool v. Wilson (1992) 4 Cal.App.4th 646[repeal of cost of living adjustments]; Brooks v. Pension Board (1938) 30 Cal.App.2d
118 [pension reduced prior to retirement from two-thirds to one-half of employee’s
salary].) Or changes in the number of years service required. (Miller, supra, at p. 818
[“Upon being required by law to retire at age 67 rather than age 70, plaintiff suffered no
impairment of vested pension rights since he had no constitutionally protected right to
29
remain in employment until he had earned a larger pension at age 70”]; Amundsen v.
Public Employees’ Retirement System (1973) 30 Cal.App.3d 856 [change in minimum
service requirement].) Or a reasonable increase in the employee’s contributions.
(§ 31454; International Assn. of Firefighters v. City of San Diego, supra, 34 Cal.3d 292,
300–301; City of Downey v. Board of Administration (1975) 47 Cal.App.3d 621, 632; cf.
Allen v. City of Long Beach, supra, 45 Cal.2d 128, 131 [invalidating “provision raising
the rate of an employee’s contribution . . . from 2 per cent of his salary to 10 per cent”].)
Thus, short of actual abolition, a radical reduction of benefits, or a fiscally
unjustifiable increase in employee contributions, the guiding principle is still the one
identified by Miller in 1977: “ ‘the governing body may make reasonable modifications
and changes before the pension becomes payable and that until that time the employee
does not have a right to any fixed or definite benefits but only to a substantial or
reasonable pension.’ ” (Miller, supra, 18 Cal.3d 808, 816, italics added.) As made clear
by the 1947 decision quoted in Miller: “an employee may acquire a vested contractual
right to a pension but . . . this right is not rigidly fixed by the specific terms of the
legislation in effect during any particular period [the employee] serves,” and “the amount,
terms and conditions of the benefits may be altered.” (Kern v. City of Long Beach, supra,29 Cal.2d 848, 855.) Hence the reiteration of reserved legislative power: “ ‘[A] public
pension system is subject to the implied qualification that the governing body may make
reasonable modifications and changes before the pension becomes payable and that until
that time the employee does not have a right to any fixed or definite benefits but only to a
substantial or reasonable pension.’ ” (Miller, supra, 18 Cal.3d 808, 816.)
The ordinary progression of analysis for an alleged contract clause violation goes
as follows: Is there a valid contract to be impaired? If there is a valid contract, has it
been impaired? Lastly, is the impairment substantial, meaning was a substantial right
secured by the contract extinguished, made invalid, or significantly altered? (E.g.,
General Motors Corp. v. Romein (1992) 503 U.S. 181, 186; Home Building & Loan Assn.
v. Blaisdell (1934) 290 U.S. 398, 430–431.) “Analysis of a contract clause claim requires
inquiry into: ‘ “(1) the nature and extent of any contractual obligation . . . and (2) the
30
scope of the Legislature’s power to modify any such obligation.” ’ [Citations.] The party
asserting a contract clause claim has the burden of ‘mak[ing] out a clear case, free from
all reasonable ambiguity,’ [that] a constitutional violation occurred. [Citation.]” (Deputy
Sheriffs’ Assn. of San Diego County v. County of San Diego (2015) 233 Cal.App.4th 573,
578.)
The contract clauses do not foreclose government action which reflects changing
concepts of public policy, concomitantly granting government the power to make illegal
that which was previously legal. That power has been exercised over a myriad of
products and practices, and has not been stymied simply because a contract was in
existence when the ban took effect. (E.g., Stone v. Mississippi (1879) 101 U.S. 814[prohibition of existing state lottery]; Boston Beer Co. v. Massachusetts (1877) 97 U.S.
25 [state license to produce liquor invalidated by adoption of state prohibition law].)
Such a contract might provide for a rate of interest which a statute later makes usurious
and invalid, yet there is no contract clause violation. (Griffith v. State of Connecticut
(1910) 218 U.S. 563, 571.) Or it might be a contract for transporting freight on public
highways at a cost below that fixed by a subsequently established utility commission
which is statutorily authorized to fix minimum rates. Abrogation or modification of the
contract presents no constitutional violation. (Stephenson v. Binford (1932) 287 U.S.
251, 276.) Enacting a new tax or increasing an existing one does not entail constitution
exemption of existing contracts. (National Ice etc. Co. v. Pacific F. Exp. Co. (1938)
11 Cal.2d 283, 293–295; Western Contracting Corp. v. State Bd. of Equalization (1974)
39 Cal.App.3d 341, 350–351.)
Additional examples could be produced only at the risk of unduly prolonging this
opinion. The following is a useful summary: “ ‘The contract clause does not protect
expectations that are based upon contracts that are invalid, illegal, [or]
unenforceable. . . . Nor does the contract clause protect expectations which are based
31
upon legal theories other than contract, such as quasi-contract or estoppel.’ ”21 (Medina
v. Board of Retirement (2003) 112 Cal.App.4th 864, 871.)
It is without dispute that (1) up to January 1, 2013, there was a contract between
MCERA and certain public employees concerning how those employees would be
compensated, and (2) that after January 1, 2013, under compulsion of the Pension Reform
Act, the agreement was unilaterally altered by MCERA to reduce the scope of
compensation that had been accounted as “compensation earnable.” The issue here is
whether the amendment of section 31461—the only part of AB 197 challenged by
plaintiffs and addressed here—qualifies as an “unreasonable” change, a “substantial”
impairment, and thus a violation of the state and federal constitutions. There being no
factual dispute, the issue is properly resolved as one of law. (See Teachers’ Retirement
Bd. v. Genest, supra, 154 Cal.App.4th 1012, 1028 and decisions cited.) We conclude the
dual answer is no: MCERA’s implementation of the amended version of section 31461
does not qualify as a substantial impairment of plaintiffs’ contracts of employment with
its right to a “reasonable” and “substantial” pension. Thus there is no violation of the
state and federal constitutions.
Plaintiffs do not—indeed could not—dispute that the Legislature possesses broad
power to regulate the conditions of employment and the terms of compensation of those
employed in public service. It has already been established that plaintiffs cannot rely on
the “must be accompanied by comparable new advantages” language in Allen v. Board of
Administration, supra, 34 Cal.3d 120, to frustrate the application to them of the Pension
Reform Act’s redefinition of compensation earnable. It has also been shown that
plaintiffs adopt an unrealistic notion of the immutability of employees’ “vested” rights.
Plaintiffs obviously do not assert that the entirety of their contracts of employment have
been extinguished. Although plaintiffs do not develop the point, they implicitly assert
that their contracts of employment were substantially impaired by (1) the amendment of
section 31461 in the Pension Reform Act, and (2) the December 18, 2012 policy change
21
Plaintiffs’ attempt to raise a nonconstitutional estoppel claim is examined at fn.
24, post.
32
by MCERA. They challenge only one aspect of how they have been compensated,
insisting they have a constitutionally protected right to continue using the old definition
of “compensation earnable” when their pension benefits are calculated, and that right will
be substantially impaired if the current version of section 31461 is enforced.
The dispositive issue is one of degree only. The extent of the new rule of section
31461 is quite modest, as is the scope of the parties’ disagreement. The parties accept
that the catalyst for the Pension Reform Act was dire financial predictions necessitating
urgent and fundamental changes to improve the solvency of various pension systems,
including CERL. They do not dispute that the Legislature’s intent in amending section
31461 was to make it illegal after January 1, 2013, for the enumerated items and
payments to figure in compensation earnable and the calculation of final compensation.
And plaintiffs concede in their opening brief that MCERA’s change of policy is purely
prospective: MCERA “is applying its policy only to compensation earned after
January 1, 2013, meaning that if a member’s final compensation period includes pay
periods before 2013, the excluded pay items would be included in pension calculations
for those pay periods.”22 Moreover, all the parties agree the Pension Reform Act does
22
Because the parties do not make an issue of it, we express no opinion on
whether MCERA was constitutionally obligated to take this position.
However, we do note that plaintiffs have an unusual notion of the discretion
MCERA may exercise. Based on the Supreme Court’s discussion of compensation
earnable under section 31461 as it read in 1997 (Ventura County, supra, 16 Cal.4th 483),
plaintiffs assert: “CERL retirement boards do not have complete discretion over what
can [be] considered compensation earnable. Ventura makes clear that before A.B. 197,
compensation paid in cash and which was not overtime was required to be included as
compensation earnable. And while it is true that the retirement boards have some
discretion to interpret and apply CERL—for example, they have the discretion to include
as compensation earnable items not required to be included by CERL [citation]—this
discretion is limited by the contours of the statute and the constitution, including the
Contracts Clause. Even if it were a discretionary decision for Marin CERA to include
these various payments as compensation earnable—which Appellants maintain it was
not, because CERL required these payments to be considered compensation
earnable—once Marin CERA established their inclusion as part of the pension system,
members earned a vested right to the continuation of that benefit.”
33
not prohibit public employees from receiving “compensation” from items and payments
enumerated in subdivision (b) of section 31461.
So, whatever moral opprobrium it attached to “pension spiking,”23 the
Legislature’s “reform” was hardly one-sided. The amendment of section 31461 had no
immediate adverse financial impact on employees (save those planning imminent
retirement, a group from which plaintiffs exclude themselves) because the items and
payments listed in subdivision (b) could still be pocketed as compensation. Those years
where employees had received the now prohibited payments would not be erased but
would still be included by MCERA in the employees’ compensation earnable and final
The Supreme Court’s discussion of compensation earnable in Ventura County, as
plaintiffs note, antedated enactment of the Pension Reform Act. Given that “[a]n opinion
is not authority for a point not raised, considered, or resolved therein” (Styne v. Stevens
(2001) 26 Cal.4th 42, 57), Ventura County would appear to have little, if any, relevance
to the scope and meaning of the subsequently amended language of section 31461 we are
considering here. The utility of Ventura County is also weakened because none of the
words “constitution,” “contract,” or “impair” were used in the opinion, so it is no
authority for an unchanging constitutional dimension to a statute as substantially
amended as was section 31461. The permanence plaintiffs attribute to MCERA’s
exercise of discretion in allowing certain payments to be included in compensation
earnable is troubling because it seems to deny MCERA the discretion to change that
decision. Plaintiffs also seem to believe that discretion once granted by a statute cannot
thereafter be withdrawn. But that is indisputably what the Legislature accomplished with
the addition of subdivision (b) to section 31461 and the command that “ ‘Compensation
earnable’ does not include, in any case” (italics added). At that point—subject to
§ 31542, subd. (c), quoted at fn. 5, ante—MCERA’s discretion disappeared because, as
we have held, there is no discretion to act “contrary to specific statutory command”
(Karuk Tribe of Northern California v. California Regional Water Quality Control Bd.,
North Coast Region (2010) 183 Cal.App.4th 330, 363, fn. 25), and because “the
determination of what items were to be included in ‘compensation earnable’ . . . is not
subject to a contract right.” (In re Retirement Cases, supra, 110 Cal.App.4th 426, 453.)
23
See fns. 2, 6, ante. At oral argument, plaintiffs’ counsel vehemently insisted
this term should be confined to those employees looking only to artificially inflate their
pensions on the eve of retirement and which had no application to his clients. The plain
implication is that none of the individual plaintiffs plan to stop working in the immediate
future.
34
compensation, the basic units of pension computation. In light of the unquestioned need
for change, we conclude this one was reasonable.
The very careful examination we have given to the parties’ extensive briefing
convinces us that plaintiffs are unable to overcome too many fundamental and established
principles. Understandably, they focused on what they have lost. This has caused them
to lose focus on the essential bilateral nature of the problem. Plaintiffs’ insistence on
retaining their claimed “vested rights” measured by the former version of section 31461
and Ventura County (see fn. 14 & 22, ante) has hindered their appreciation of how that
right is only to a “reasonable” pension, that the public employee “does not have a right to
any fixed or definite benefits” that may be “fixed by the specific terms of the legislation
during any particular period.” Plaintiffs’ unbending resistance to the new section 31461
betrays an inability to accept that “statutory language is subject to the implied
qualification that the governing body may make modifications and changes in the
system.” The qualification “is a necessary one since 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.” (Kern v. City of Long Beach, supra, 29 Cal.2d 848,
854–855; accord, International Assn. of Firefighters v. City of San Diego, supra,34 Cal.3d 292, 300–301; Miller, supra, 18 Cal.3d 808, 816.)
Restricting their unyielding focus to only their “vested rights” has led plaintiffs to
pay insufficient attention to the ever-present possibility of legislative involvement, one of
the “ ‘ “essential attributes of sovereign power” ’ ” that is always to be consulted. (Home
Building & Loan Assn. v. Blaisdell, supra, 290 U.S. 398, 435; Allen v. Board of
Administration, supra, 34 Cal.3d 114, 119.) The Legislature’s involvement would
obviously take statutory form, which is relevant because “ ‘[t]he terms and conditions of
[public] employment are fixed by statute and not by contract. . . . The statutory
provisions controlling the terms and conditions of [public] employment cannot be
circumvented by purported contracts in conflict therewith.’ ” (Martin v. Henderson
(1953) 40 Cal.2d 583, 590–591.) Thirteen years ago this court made the same point in
connection with the enforced downward adjustment of anticipated pension benefits:
35
“ ‘The contractual basis of a pension right is the exchange of an employee’s services for
the pension right offered by . . . statute.’ ” (In re Retirement Cases, supra,
110 Cal.App.4th 426, 447, italics added.) We also left no doubt that private agreement
could not substitute: “the determination of what items were to be included in
‘compensation earnable,’ . . . is not subject to a contract right.” (Id. at p. 453.)
Plaintiffs make no real effort to demonstrate why the Pension Reform Act’s
modification of the definition of compensation earnable does not “bear some material
relation to the theory of a pension system and its successful operation” (Allen v. City of
Long Beach, supra, 45 Cal.2d 128, 131), or is not a “reasonable modification” of the
pension system projected to plunge into a fiscal and actuarial abyss. (See Miller, supra,
18 Cal.3d 808, 816.) Plaintiffs make numerous references to In re Retirement Cases, but
they ignore our statement that statutory changes to “the determination of what items were
to be included in ‘compensation earnable’ . . . is not subject to a contract right.” (Id. at p.
453.) Perhaps because they believe the 1983 Allen decision requires that there must first
be a quid pro quo, plaintiffs do not mention the economic storm clouds that attended
enactment of the Pension Reform Act, or how their presence was perceived by the
Legislature as a spur to fundamental change. Repeated invocation of the inviolability of
their “vested rights” cannot substitute for analysis of just how the change to section
31461 demonstrates that employees will not retire with a “substantial” or “reasonable”
pension. (See Betts v. Board of Administration, supra, 21 Cal.3d 859, 863; Miller, supra,
18 Cal.3d 808, 816; Wallace v. City of Fresno, supra, 42 Cal.2d 180, 183; Kern v. City of
Long Beach, supra, 29 Cal.2d 848, 855.) Unfortunately, the exercise of that power can
be a harsh reminder to employees that “ ‘a public pension system is subject to the implied
qualification that the governing body may make reasonable modification and changes
before the pension becomes payable and that until that time the employee does not have a
right to any fixed or definite benefits’ ” (Miller, supra, at p. 816), which can mean that
“any one or more of the various benefits . . . may be wholly eliminated prior to the time
they become payable,” so long as “the employee retains the right to a substantial
pension.” (Packer v. Board of Retirement, supra, 35 Cal.2d 212, 218.)
36
In the circumstances presented, plaintiffs have failed “to make out a clear case,
free from all reasonable ambiguity” and “reasonable doubt,” that they are the victims of a
constitutional violation. (Floyd v. Blanding (1879) 54 Cal. 41, 43; Deputy Sheriffs’ Assn.
of San Diego County v. County of San Diego, supra, 233 Cal.App.4th 573, 578.) Put
another way, after January 1, 2013, payment of any of the items specified in section
31461, subdivision (b), could not be deemed salary already earned pursuant to a contract
that enjoyed constitutional protection. (See, e.g., White v. Davis, supra, 30 Cal.4th 528,
566, 571; Miller, supra, 18 Cal.3d 808, 815; Kern v. City of Long Beach, supra,29 Cal.2d 848, 853.)
We emphasize the limited nature of our holding. The Legislature’s change to the
definition of compensation earnable was expressly made purely prospective by the
Pension Reform Act. MCERA’s responsive implementation was also explicitly made
prospective only. (See fn. 9 and accompanying text, ante.) Neither altered the status of
compensation or payments accrued prior to January 1, 2013: what had previously met
the old definition of compensation earnable would still be included by MCERA in
calculating worker pensions. Nothing in AB 197 prevents employers from compensating
employees with any of the items or payments specified in subdivision (b) of section
31461, a point on which the parties are unanimous.
Given that this case never cleared the pleading stage, we are 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 MCERA employees. That is a limited issue of
legislative power considered in an undisputed factual context.24 Because we conclude
24
In the final two pages of their brief, and without providing much detail,
plaintiffs maintain the allegations of their petition can be “fleshed out” to “establish a
right to the continued calculation of their pension benefits under equitable estoppel
theories,” which forms the basis for their conclusion that the trial court “abused its
discretion by refusing to grant leave to amend.” Plaintiffs are defeated by three firmly
established and interlocking principles, all of which are found in a 1979 decision by our
Supreme Court, a decision unusually apposite because it involved a county employee’s
rejected claim for overtime pay that was initially allowed by statute, but thereafter
cancelled by statute prior to the employee’s retirement: Longshore v. County of Ventura
37
(1979) 25 Cal.3d 14. The first principle is “[a] public employee is entitled only to such
compensation as is expressly and specifically provided by law.” (Id. at pp. 22–23.) The
second, “[t]he statutory compensation rights of public employees are strictly limited and
cannot be altered or enlarged by conflicting agreements between the public agency and
its employee.” (Id. at p. 23.) And the third, “no court has expressly invoked principles of
estoppel to contravene directly any statutory or constitutional limitations.” (Id. at p. 28.)
The employee’s attempt to recover compensation failed because “[a]pplication of
estoppel to enlarge [the employee’s] . . . retroactive compensation . . . would effectively
purport to enforce an employment contract in contravention of law.” (Id. at p. 29.)
Any promises or representations made to plaintiffs could have no validity if
contrary to plain statutory language forbidding what plaintiffs wish to have recognized.
As we said in 1959, “there is no estoppel to prove illegality.” (Holland v.
Morgan & Peacock Properties (1959) 168 Cal.App.2d 206, 211.) Indeed, even if the
agreements and understandings had been reduced to writing, this court has recognized
that they could not displace clear statutory language or delay its implementation. (See In
re Retirement Cases, supra, 110 Cal.App.4th 426, 453 [“the determination of what items
[are] to be included in ‘compensation earnable’ . . . is not subject to a contract right”],
447 [“ ‘The contractual basis of a pension right is the exchange of an employee’s services
for the pension right offered by statute,’ ” italics added].) In these circumstances,
MCERA could never have the authority to create a right to receive pension benefits.
(E.g., City of San Diego v. Haas (2012) 207 Cal.App.4th 472, 495 [“only the [legislative
body] has the power to grant employee benefits, and [the retirement association] exceeds
its authority when it attempts to ‘expand pension benefits’ beyond those the [legislative
body] has granted,” italics omitted]; cf. Miller, supra, 18 Cal.3d 808, 814 [Legislature’s
power to control “ ‘the terms and conditions of civil service employment cannot be
circumvented by purported contracts in conflict therewith’ ”]; Retired Employees Assn. of
Orange County v. County of Orange (2011) 52 Cal.4th 1171, 1176 [“a county may be
bound by an implied contract . . . if there is no legislative prohibition against such
arrangements, such as a statute or ordinance”], 1183 [“as long as there is no statutory
prohibition against such an agreement”].) Plaintiffs would have this court elevate private
agreement over public policy, frustrating lawfully enacted legislation that in plain effect
declared such agreement illegal.
In sum, even if plaintiffs could present allegations establishing a factual basis for a
nonconstitutional estoppel (see Medina v. Board of Retirement, supra, 112 Cal.App.4th
864, 871), the legal hurdles for success are insurmountable. This is a situation where the
nature of plaintiffs’ claim is clear, but there can be no liability on that claim as a matter of
law. Accordingly, there could be no prejudicial error in denying plaintiffs an opportunity
to amend their complaint to set up an estoppel that would prevent MCERA from
implementing and enforcing the new definition of compensation earnable set out in
subdivision (b) of section 31461. (See Schonfeldt v. State of California (1998)
38
plaintiffs had no such rights after January 1, 2013, we have no occasion to consider
whether any other modification effected by AB 197 qualifies as a reasonable alteration of
employee contractual or pension rights.
DISPOSITION
The judgment is affirmed.
_________________________
Richman, J.
We concur:
_________________________
Kline, P.J.
_________________________
Miller, J.
61 Cal.App.4th 1462, 1465 [“If there is no liability as a matter of law, leave to amend
should not be granted”].)
39
Trial Court: Marin County Superior Court
Trial Judge: Honorable Roy O. Chernus
Attorneys for Plaintiffs and Appellants Leonard Carder, Peter Warren Saltzman,
Marin Association of Public Employees; Arthur Wei-Wei. Liou;
Catherine Hall:
Attorneys for Plaintiff and Appellant Weinberg, Roger & Rosenfeld, Vincent A.
Service Employees International Union Harrington, Jr., Kerianne Ruth Steele, Anne
Local 1021: I. Yen, Sean Daniel Graham, Caren Pamela
Spencer;
Attorneys for Plaintiffs and Appellants Carroll, Burdick & McDonough, Gregg
Marin County Fire Department McLean Adam, Amber Lynn Griffiths;
Firefighters’ Association; Marin County Messing Adam & Jasmine,
Management Employees Association; Joel Gregg McLean Adam, Jonathan Dennis
Chandler; and Angelo Sacheli: Yank;
Attorneys for Defendants and Respondents Manatt, Phelps & Phillips, Ashley Kathleen
Marin County Employees’ Retirement Dunning, Kelly L. Knudson, Benjamin G.
Association; Board of Retirement of the Shatz, Michael V. Toumanoff;
Marin County Employees’ Retirement Nossaman, Ashley Kathleen Dunning,
Association: Michael V. Toumanoff;
Attorneys for Intervenor and Respondent: Kamala D. Harris, Attorney General,
Douglas J. Woods, Assistant Attorney
General, Constance L. LeLouis, Rei R.
Onishi, Anthony P. O’Brien, Deputy
Attorneys General
40