This morning, the California Supreme Court issued its highly-anticipated decision in Alameda County Deputy Sheriffs’ Association, et al. v. Alameda County Employees’ Retirement System, et al., (“Alameda”), reviewing the “California Rule” with respect to public employee pensions. The Supreme Court affirmed that employees earn, upon commencement of employment, a vested right to the pension benefits then in place, a right which is protected by the contracts clause of the California Constitution. However, the Court revised the test to be applied when pension benefits are modified. In doing so, the Court rejected the employees’ claims in Alameda that certain changes made by the Public Employees’ Pension Reform Act (“PEPRA”) were unlawful.
The California Rule, as it existed prior to the Alameda decision, was described in Allen v. Board of Administration (1983) 34 Cal.3d 114, 120 as follows: “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.” (Emphasis added.) In other words, the pension promised to an employee at the beginning of their career could not be reduced without being offset by a “comparable new advantage.”
Alameda changes this framework. As stated by the Supreme Court, when analyzing modifications to vested pension rights, the court first must determine whether the modification imposes disadvantages to the existing pension right, and, if so, whether the disadvantages are accompanied by comparable new advantages. If the disadvantages are not offset, the court must determine whether the legislative body’s purpose in making the change was sufficient to justify an impairment of pension rights. If so, a comparable new advantage must be given unless it would undermine or otherwise be inconsistent with the modification’s constitutionally permissible purpose.
In Alameda, the Supreme Court recognized that the changes enacted by PEPRA imposed disadvantages to employee pension rights that were not offset by comparable new advantages. However, the Court held that the legislature’s purpose in modifying the County Employees’ Retirement Law’s “very broad and general definition of ‘compensation earnable’” to prevent employees from artificially inflating their pension benefits (i.e., “pension spiking”) justified the disadvantage because the modifications “bear some material relation to the theory of a pension system and its successful operation.” Finally, the Court held that providing employees with an offsetting new advantage in exchange for restricting the employees’ ability to receive increased pension benefits would be inconsistent with the purpose of PEPRA’s modifications. Consequently, the Court held that the PEPRA provisions at issue did not violate the contracts clause.
The Court also rejected the employees’ equitable estoppel claim on which they prevailed in the Court of Appeal. The employees argued that they relied to their detriment on representations made by their employers and the county retirement systems that the pay items at issue would be included in the calculation of their pension benefits. However, the Court found that the employees did not have a reasonable expectation that the promises made by the county retirement systems meant anything other than those systems would provide benefits commensurate with what is allowable under CERL generally.
Despite the Supreme Court’s rejection of the employees’ claims and the newly-modified California Rule, the decision makes clear that the legislature and public employers do not have unfettered authority to reduce pensions. Specifically, the Court confirmed that reducing promised pension benefits solely to save money is improper, citing Abbott v. City of Los Angeles (1958) 50 Cal.2d 438, and the Court’s recognition that pension systems are “essential to attract qualified municipal employees.” More fundamentally, the Supreme Court rejected the State’s invitation to reconsider the California Rule in its entirety. Nevertheless, it remains to be seen what legislative purposes may be deemed sufficient to justify future impairments to vested pension rights and under what circumstances comparable new advantages may be deemed inconsistent with those purposes.
The Alameda opinion is detailed and complex. We will continue analyzing the Supreme Court’s decision and intend to provide further commentary in the near future.