A superior court judge overturned a freeze on retiree health care for Los Angeles city attorneys this month, citing some of the same case law that made public pensions a vested right that can only be cut if offset by a new benefit.
The court ruling is a blow to the view that state and local governments, when looking for cost savings, may be able to make cuts in promised retiree health care that are not allowed for tamper-proof pensions.
The debt or “unfunded liability” for retiree health care promised state and local government workers rivals pension debt. But most employers make no annual pension-like contributions to a retiree health care investment fund to help pay future costs.
Los Angeles, a leading exception to the pay-as-you-go policy, had the best funded retiree health care among big cities in a national Pewstudy issued in January. The city pays a big price for the policy praised by many and practiced by only a few.
Making the actuarially required payments for retiree health care promised current Los Angeles workers in the future accounts for nearly a quarter of the soaring retirement costs former Mayor Richard Riordan warns are driving the city toward bankruptcy.
Los Angeles expected to save about $100 million a year with the retiree health care freeze, called the “cornerstone” of an attempt two years ago to curb soaring retirement costs and balance the city budget.
The freeze gave Los Angeles city employees the option of paying more for retiree health care or receiving a lower benefit, similar to the voter-approved pension option given San Jose workers now awaiting a ruling after a trial in July.
And as with the San Jose pension option, part of the legal rationale for the Los Angeles retiree health care option is a provision in the city charter that specifically reserves the right to modify retiree health care benefits.
Los Angeles gave employees an option in 2011 of earning a retiree health care subsidy frozen at $1,190 a month (for the non-sworn) or contributing 4 percent of pay to continue earning retiree health care with annual increases.
“The fixed and permanent $1,190 medical plan premium subsidy in the freeze ordinance constitutes an impairment of a vested right to a substantial or reasonable benefit,” Los Angeles Superior Court Judge Luis Lavin said in a ruling Sept. 13.
The judge directed the city to provide a retiree health care insurance premium subsidy without regard to the freeze ordinance “since no new comparable advantages offset that impairment.”
The city has not announced a decision about an appeal. The Los Angeles City Attorneys Association, which filed the suit, declined to comment on the broad impact of the ruling, saying its board had not yet been briefed.
A number of unions, including police and firefighters, agreed to give members the option and many chose to make the payment. A website, LAcityworkers.com, said the court ruling directly applies to two unions: city attorneys and engineers and architects.
“SEIU 721, AFSCME and other unions whose membership voluntarily entered into this agreement are not covered by today’s ruling,” said the website. “Only EAA MOU 31 and the LACAA as well as those units which voted NO on the 4 % are covered.”
In brief, the city attorneys argued that the freeze impaired a vested right contractual obligation to a retiree health care subsidy. Los Angeles argued that employees do not have that right because the charter reserves a city right to change the subsidy.
Judge Lavin, a Harvard-trained lawyer, cited a state Supreme Court ruling in an Orange County suit in 2011 that said governments can create an “implied contract” for retiree health care, even if not specifically stated by an ordinance or resolution.
He said Los Angeles statutes that say a subsidy “will be provided” in exchange for a minimum of 10 years at age 55 demonstrate a clear commitment to give employees retiree health care.
“The city’s reservation of rights to set the precise amount of the medical premium subsidy does not operate to defeat the finding that its employees have a vested right to a medical premium subsidy in the first place,” the judge wrote.
Lavin found no vested right to a retiree health care subsidy that “perpetually” increases or is linked to medical cost increases. But the ruling that a vested contractual obligation is impaired still rests on the freeze of the subsidy.
The judge cited two landmark state Supreme Court decisions in suits over switching pensions that “fluctuate,” based on the pay of current workers in the same job, to modern “fixed” pensions based on pay the retiree earned while on the job.
Former state Treasurer Bert Betts, who served from 1959 to 1967, did not retire before legislation in 1974 authorized fixed pensions. His right to a fluctuating pension was upheld in Betts v. Board of Administration (1978).
In an earlier case, a Long Beach charter change switched employees to a fixed pension and increased their pension contribution from 2 to 10 percent of pay. The charter change was rejected in Allen v. City of Long Beach (1955).
Judge Lavin said the state Supreme Court held in the two cases that a fixed benefit system is “disadvantageous” to a fluctuating or fluid benefit system, clearly so in inflationary times.
“For similar reasons, the court finds that the freeze ordinance impairs the vested right to a medical premium subsidy that covers all or part of the cost of medical coverage,” Lavin wrote in his ruling.
The Los Angeles retiree health care subsidy, covering a retiree and one dependent, increased from $800 in 2002 to $1,187 in 2010. The judge said a benefit frozen at $1,190 a month likely would be “far outpaced” by inflation in the next decade.
Having determined that the freeze impairs a vested contract right, the judge’s ruling moved on to whether the impairment is “reasonable” under standards set by the two high court decisions.
Lavin said the “disadvantage” of the freeze is not offset by a “comparable new advantage.” He said giving employees who make the 4 percent contribution a vested right to a maximum subsidy only gives them what they already have.
On the requirement that an impairment bear “some material relation to the theory of a pension system and its successful operation” the judge also cited standards in a Court of Appeal ruling, Valdes v. Cory (1983), including that an impairment be temporary.
“Because the apparent goal of the freeze ordinance is to resolve the city’s pending fiscal emergency, the ordinance is not materially related to the theory of a pension/medical subsidy system and its successful operation,” Lavin wrote.
“Indeed, the economic viability of the medical subsidy system is quite robust given that it is pre-funded and its operation includes assumptions for increasing medical coverage costs and inflation.”