Chapter 8: Retiree Health Benefits – “To Infinity … And Beyond!”

By: Jeff Chang

I couldn’t help but think of Buzz Lightyear’s famous exhortation as I thought about the implications of the appellate court’s decision that I had just read – International Brotherhood Of Electrical Workers, Local 1245 v. City Of Redding (2012) 210 Cal. App. 4th 1114 [148 Cal. Rptr. 3d 857; 2012 Cal. App. LEXIS 1149] (Redding).

This case involves a challenge by the International Brotherhood Of Electrical Workers, Local 1245 (IBEW) to Redding’s unilateral decision to retract a promise to pay 50% of medical insurance premiums for City employees after retirement. The lower court ruled in favor of the City. Now the California Court of Appeal has overturned that decision. Although the case still must be reconsidered by the trial court in light of the appellate court’s ruling, as things stand now, it appears that IBEW members may be obtaining the benefits of subsidized retiree health costs . . .  to infinity and beyond!

THE PLAY-BY-PLAY

1. Since 1979, the City and IBEW have had MOUs, which, among other things, provide (emphasis in bold added): “The City will pay fifty percent (50%) of the group medical insurance program premium for each retiree and dependents, if any, presently enrolled and for each retiree in the future who goes directly from active status to retirement and continues the group medical insurance without a break in coverage.”
2. In 2008, the City and IBEW began to negotiate a new MOU. In 2010, the City changed its position and offered to pay 2% per year of service, up to 50%, of retirees’ medical insurance premiums. In 2010, when the parties were unable to reach an agreement, the City unilaterally imposed its new proposal.
3. IBEW then brought an action in the trial court seeking to block the City’s unilateral change in the retiree health benefit. The trial court dismissed IBEW’s challenge and ruled for the City. IBEW then appealed the trial court’s ruling.
4. (NOW HERE’S WHERE THE STORY GETS INTERESTING) After IBEW appealed the trial court’s dismissal of its petition, the California Supreme Court held in Retired Employees Assn. Of Orange County, Inc. v. County Of Orange (2011) 52 Cal.4th 1171 [134 Cal. Rptr. 3d 779, 266 P.3d 287] (REOC) that “a vested right to health benefits for retired county employees can be implied under certain circumstances from a county ordinance or resolution.” In this case, the Supreme Court’s ruling turned out to be a game changer.
5. After reviewing the REOC ruling, the Court of Appeal reversed the Redding trial court’s ruling and sent the case back for further consideration. In doing so, it made a number of points:
   1. The union’s case should not have been dismissed out of hand because the union’s pleadings were sufficient to demonstrate an arguable obligation by the City to continue to provide the higher benefits for all active employees.
   2. Because the rights of public employees and the obligations of public employers with respect to things such as retiree health and pension benefits generally are interpreted by the same rules as private contracts, not only may local governments be bound by implied contracts, but they also will be bound by the express terms of their MOUs. The IBEW MOU could be interpreted to create a benefit obligation that not only extended to current or active employees, but to “future retirees” as well.
   3. Although the City Council did not expressly and specifically approve the subsidized retiree health benefit (but instead ratified the earlier MOUs after their adoption), the Council’s actions were sufficient legislative authorization of the benefits.
   4. The question of whether an employee’s right to retiree health benefits was “vested” was dependent on the parties’ intent. At this point in its analysis, the court seemed to confuse the concept of a “vested contractual right to retiree benefits” with the question of whether each employee was individually vested in those benefits.

WHAT SHOULD YOU BE THINKING ABOUT?

This case is interesting and bears further monitoring for a number of reasons:

1. Will the courts ultimately determine that the City has saddled itself with a vested benefit obligation that it cannot unilaterally modify or reduce – for any affected employee, active and not-yet-hired?
2. Will the courts determine that, despite its unfortunate choice of words, the City should be allowed to reduce the level of benefits for workers who have not yet been hired? If not, such an adverse ruling could have a dramatic impact on recent attempts at pension reform.
3. The language of MOUs has become extremely important with respect to the description of employee benefits.
4. Every benefit description should contain a reservation of rights by the employer to amend or terminate (at least as to future hires or benefits not yet accrued and vested).
5. It is critical for MOUs to clearly describe and illustrate the extent to which benefits at the individual level are vested and nonforfeitable.
6. Negotiating strategies may make a significant difference. One has to wonder whether the case would have turned out differently if the City had decided to impose the reduction only on future (not-yet-hired), but not active, employees.

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.