Chapter 1: New Lessons From The O.C. – State And Local Governments Must Learn To “Express” Themselves

By: Jeff Chang

On November 21, 2011[1], the California Supreme Court answered a question posed to it by the United States Court of Appeals for the Ninth Circuit[2] as part of ongoing federal litigation between the County of Orange and its retirees. In its response, the California Supreme Court concluded that, “under California law, a vested right to health benefits for retired county employees can be implied under certain circumstances from a county ordinance or resolution.”

The issue in the federal case is whether the County violated the federal and state Constitutions when it changed the method by which retirees’ health insurance premiums had historically been determined, resulting in increased retiree health premiums.  Because the County had never “officially” promised the more favorable rate determination in the form of a resolution, MOU or ordinance, it felt justified in making this change – arguing that it should only be held accountable for its official commitments.  The retirees have argued that the County’s longstanding practice of providing subsidized retiree health premiums created an implied contract, which the County could not legally impair.

The news media, various pundits, and benefits practitioners (including yours truly) are already beginning to put their spins on the ruling. The Sacramento Bee opened its coverage of the ruling by stating, “In a development that may help Sacramento County retirees regain lost health-care subsidies….”

While we’re sure the ruling will encourage public agency retirees who believe that their retiree health benefits may have been illegally curtailed or taken from them, this ruling has several practical ramifications for California’s public employers:

1. Because a vested right to retiree health benefits can be implied from a public employer’s course of dealings, it is critical for all California public employers to examine and determine the nature and scope these types of commitments (for retiree health, active employee health, pensions, etc.). For more about this process, see What’s A District To Do? 
2.  For those benefits where the public employer’s “actions” in providing certain levels of benefits may be different (that is, more generous) than its “official” resolutions or ordinances, the employer must act immediately to clarify and document its intentions with respect to such benefits on an “expressed” basis – in writing and not leaving gaps for interpretation.
3.  In some cases, in order to avoid disputes or litigation with its employee groups, it may become necessary for a public employer to “grandfather” certain employee groups as it strives to clearly define who is entitled to what, and when. In other cases, it may be  that the benefit commitments were never intended to rise to the level of “vested rights,” but are more like “terms of employment” subject to the collective bargaining process. That should be made clear to employees. This more employer-oriented view was espoused by the federal Ninth Circuit in its 2009 ruling.[3]
4.  The larger, federal case is not over. Although the California Supreme Court answered the narrow question of whether a vested right to retiree health benefits can arise by implication, it did not decide whether the course of dealings between the County and its retirees actually gave rise to such an implied contract.

Stay tuned for the next episode of the O.C.