Tuesday, March 5, 2019

California Supreme Court Upholds Elimination of Air Time in Latest Vested Rights Case

The California Supreme Court issued its eagerly awaited ruling in Cal Fire Local 2881 v. California Public Employees’ Retirement System (“Cal Fire”), which challenged the elimination of public employee’s right to purchase additional retirement service credit (also known as “air time.”) The case presented the Court with two issues: (1) whether employees had a vested right to purchase air time; and (2) whether the Legislature’s elimination of the right to purchase airtime unconstitutionally impaired that right. The Court decided the case on the first issue, determining that employees did not have a vested right to purchase air time. As a result, it did not decide the second issue – likely deferring its discussion of what constitutes an unconstitutional impairment of pension rights for one of the two other major pension right cases pending before it, Alameda County Deputy Sheriffs’ Association v. Alameda County Employees’ Retirement Association (“ACDSA”) or Marin Association of Public Employees v. Marin County Employees Retirement Association (“MAPE”).

Because the Court did not reach the issue of whether eliminating air time purchases unconstitutionally impaired a vested right, it did not address the state’s assertion that the “California Rule” governing pension benefits did not require detrimental changes to be offset by new advantages to pass constitutional scrutiny.  However, the Court’s brief characterization of the parties’ arguments about the California Rule seems to indicate the Court may ultimately reject the state’s position. The Court described the state’s position as seeking to “reduce the protection afforded pension rights by modifying or abandoning the California Rule,” seemingly implying the state’s analysis of the California Rule conflicts with the Court’s precedent. We will have to wait until the Court decides the ACDSA or MAPE appeals to get its full analysis of the issue, but the fact that it sees the state’s position as seeking to modify or abandon the California Rule is certainly encouraging.  

1.            Background

Before January 1, 2013, PERS members with at least 5 years of service credit with a PERS contracting agency could purchase service credit towards their PERS retirement. To buy air time, a member had to pay PERS an amount “equal to the increase in employer liability” for the additional service time. This practice was meant to provide employees a way to make up for time they spent away from public employment, without imposing additional costs on the retirement system. In 2012, however, the Legislature enacted the Public Employees’ Pension Reform Act (“PEPRA”), which – among other things – eliminated the right to purchase air time after December 31, 2012.

Cal Fire, Local 2881 sued PERS, claiming PEPRA’s elimination of air time impaired its members’ vested rights to purchase air time. Cal Fire alleged its members had a vested right to purchase air time, acquired by working the requisite five years.  Cal Fire claimed the Legislature violated the Contracts Clause of the U.S. and California Constitution because it eliminated a vested right to purchase air time without providing a comparable new advantage. The trial court ruled against Cal Fire, finding there was no vested right to purchase air time and, even if there was, its elimination was permissible, because it was materially related to the successful operation of a pension system. The Court of Appeal affirmed the ruling on both grounds.

Cal Fire petitioned the Court for review, claiming in part that the lower courts erred by upholding the elimination of air time even though the change was not offset by a corresponding new advantage.

2.            The Court’s Analysis

In evaluating whether Cal Fire could show there was a vested right to purchase air time, the California Supreme Court recognized two exceptions to the general rule allowing the Legislature to modify terms and conditions of public employment.  First, terms and conditions of employment can be constitutionally protected from changes when the statute or ordinance creating a benefit clearly evinces a legislative intent to create contractual rights. Second, certain benefits of employment can be constitutionally protected by implication, even if there is no clear evidence the legislature intended them to be protected. If either exception applied to the right to purchase air time, then the Contracts Clause of the U.S. and California Constitution would restrict the Legislature’s power to modify that right.

The Court found the first exception did not apply, because there was no evidence the Legislature intended to create a contractual right to buy air time. According to the Court, nothing in the pre-PEPRA law indicated the Legislature promised not to modify or eliminate the right to buy air time in the future.

The Court found the second exception did not apply, because the right to buy air time was not a type of benefit that would be entitled to an implied contractual protection.  In reaching this conclusion, the Court acknowledged that many pension benefits are impliedly contractual in nature, and thus protected by the Contracts Clause of the Constitution, because they represent a form of deferred compensation.

As the Court explained, pension benefits are a “classic example of deferred compensation,” because they flow directly from a public employee’s service, and their magnitude is roughly proportional to the time of that service.  By contrast, the right to purchase air time was made available at the option of each employee, and expired as soon as the employee retired or terminated employment. The amount of the employee’s service was irrelevant to whether he or she could purchase air time, once the five-year service time requirement was met.

Finding that neither exception applied to the right to purchase air time, the Court held there was no vested right to purchase air time.  The Legislature was therefore free to eliminate the right to purchase air time without implicating the Contracts Clause.

3.            Final Thoughts

The Court’s decision only addressed whether there was a vested right to purchase air time, not whether the California Rule allows the government to reduce a vested benefit without providing an offsetting new advantage. The Court will likely take up the latter issue when it decides the ACDSA and MAPE appeals, which are currently before it.  Given the Court’s brief remarks about the parties’ positions with respect to the California Rule, we are cautiously optimistic the Court will ultimately affirm its precedent and continue requiring detrimental changes to pension benefits be offset by comparable new advantages to survive constitutional scrutiny.