California Supreme Court Rules in Cal Fire Case – Round One Goes to the Legislature, But It Ain’t Over

By Jeff Chang

The California Supreme Court recently issued its decision in the Cal Fire Local 2881 v. CalPERS case – the first of six so-called “California Rule” (“Vested Pension Rights”) cases pending before the Court. The California Rule, in essence, states that: “A public employee’s pension constitutes an element of compensation, and a vested contractual right to pension benefits accrues upon acceptance of employment. Such a pension right may not be destroyed, once vested, without impairing a contractual obligation of the employing public entity.” (Betts v. Board of Administration). In what many might characterize as a significant disappointment, there was no “knockout” of the California Rule. In fact, the Court, decided that it could resolve the matter without specifically addressing the California Rule. Nonetheless, the Court ruled in favor of the California Legislature and CalPERS in holding that employees’ right to purchase nonqualified service credit, or “airtime,” was not a right protected by the contract clause of the California Constitution and, therefore, could be altered or eliminated at the discretion of the Legislature. Round one to the Legislature.

Unfortunately, for the many “friend of the court” arguments, or amici, urging the Court to modify or abandon the California Rule, the Court made clear that the March 4 ruling was not intended to alter or affect the continued application of the California Rule. Apparently, the future of the rule is left for another day… another round… another case. If the future of the Rule is still to be decided, what can we learn from this ruling?

  • First, “pension rights” are arguably special and should be distinguished from welfare benefits, such as the retiree health benefits addressed by the Court in the Retired Employees Assn. of Orange County In REAOC, the Court held that the courts would find a “vested right” arising from resolutions of a county only when language or circumstances accompanying those enactments (resolutions) clearly demonstrated a legislative intent to create a private contractual right. By contrast, courts have found a vested right to certain pension benefits by implication, even in the absence of a clear manifestation of legislative intent.
  • Second, although the Court recognized that a constitutionally protected contractual right (a vested right under the California Rule) may be implied from legislation in appropriated circumstances, it chose not to articulate what the California Rule covers or protects – rather it explained why the right to purchase airtime was not protected:
    • The elimination of airtime purchases was prospective – it did not take away purchases that had already occurred.
    • The Legislature did not “negotiate” with public employees over the elimination of the airtime provision. As such, the legislative elimination should be viewed as the creation of a “policy,” which can be changed unilaterally by the Legislature at any time.
    • The plaintiffs failed to provide any persuasive evidence that suggested the Legislature intended for the airtime purchase provision to exist indefinitely.
  • Although the ruling was unanimous by the seven-member court, Justice Leondra Kruger added some helpful clarification in her concurring opinion. First, she clarified that the Court was inclined to analyze this (and perhaps future cases) on the basis of ordinary contract principles. She clarified that an “implied-in-fact unilateral contract” can arise from the government’s offer of employment benefits in exchange for the employee’s acceptance of employment and continued service. However, she also stated that “when the benefit is one that will be provided only in the future – like a pension – the formation of such a contract vests the right to that benefit, making the government’s offer irrevocable as to employees who have worked for the deferred benefit and earned it as part of the employment bargain.”

Call me a “cock-eyed optimist,” but I believe that the Court’s focus on (a) the difficulty in establishing an implied contractual right from legislative actions and (b) the fact that public employees must “work” for their pension benefits before they will become irrevocable, will eventually lead to rulings that clarify that the California Rule will not prevent public agencies from changing (or even eliminating) benefit formulas for active employees, if done for proper reasons and as long as already-earned benefits are not compromised.

Additional Reading: California Supreme Court Decides Cal Fire Narrowly

Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at jeff.chang@bbklaw.com or (916) 329-3685.

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