Originally posted at CalPensions.
By Ed Mendel.

A federal appeals court last week gave Sonoma County retirees another chance to show that an implied contract gave them vested rights to retiree health care, preventing the benefit from being cut to $500 a month.

The majority ruling in a 2-to-1 vote of a 9th Circuit panel said retirees have a “heavy burden” showing county intent to create a lifetime contract, which the dissenting justice said is not supported by dozens of labor agreements submitted to a lower court.

Another 9th Circuit federal panel unanimously ruled Feb. 13 that Orange County retirees do not have an implied contract preventing the county from separating their health care from a pool with active workers, sharply increasing premiums paid by retirees.

And a state Appellate panel published a unanimous ruling Jan. 23 that upheld a cap on San Diego retiree health care payments, rejecting an attempt to relitigate a federal court ruling that the city’s police retiree health care is not a contractual vested right.

“After five years of litigation with the POA (Police Officers Association), making the city expend time, energy, money and resources to defend the exact same case in this action is an example of precisely the type of vexatious litigation the doctrine of collateral estoppel was designed to prevent,” said the state Appellate panel.

Compared to the attention given public pension costs, retiree health care has been a sleeper issue. Most government employers did not calculate or report retiree health care debt until accounting rules changed a decade ago.

Most still do not pre-fund retiree health care like pensions, investing annual payments to get earnings that reduce long-term costs and debt passed to future generations.

An example of what can happen is a generous state worker retiree health care plan: It’s long-term debt is already much greater than pension debt, and in five years it may be taking more money from the state general fund than pensions.

Over the next 30 years, the state worker retiree health care unfunded liability is $63.8 billion, state Controller John Chiang reported last year. The state worker pension unfunded liability is $45.5 billion, a CalPERS actuarial valuation said last year.

A forecast from the nonpartisan Legislative Analyst’s Office last November projected that a $2.3 billion general fund pension payment to CalPERS (special funds boost the total payment to $3.8 billion) will grow to $2.8 billion in fiscal 2019-20.

State general fund spending on retiree health care for state workers, $1.8 billion this fiscal year, is projected to grow more than 10 percent a year during the same forecast period, nearly doubling to $3.3 billion.

How generous is the state worker retiree health care plan? When the typical state worker retires, they pay less for full health care coverage than they paid while working on the job.

State worker retiree health care pays 100 percent of the premium of the retiree (the average cost of several of the largest health plans) and 90 percent of the premium for dependents.

For the health care of active workers, the state usually pays 80 or 85 percent of the premium for the worker, depending on labor contract bargaining, and 80 percent of the premium for dependents.

State pension law seems settled. A widely held view is that a series of state court rulings, a key one in 1955, mean the pension offered at hire becomes a vested right, protected by contract law, that can only be cut if offset by a new comparable benefit.

Retiree health care law may still be evolving. And unlike the main pension rulings that are all in state courts, the legal battles over retiree health care are being fought in state and federal courts.

Some think state court judges have a conflict when they make rulings on pensions that can affect their own pensions. A nationally known lawyer, David Boies, wanted to move Rhode Island pension reform litigation from state to federal courts.

As Orange County unsuccessfully tried to overturn a large retroactive pension increase for deputy sheriffs, the attorney for the deputies, a retired Court of Appeal justice, told her former colleagues their ruling would affect every pension in the state.

“(I)t would affect yours, it would affect mine,” said Miriam Vogel, as quoted by Orange County Supervisor John Moorlach in the Orange County Register in 2011. He said it was Vogel’s only argument before she took a couple of questions and sat down.

As with pensions, state judges have a similar conflict when they rule on retiree health care. With 10 or more years of service, state judges are eligible for state retiree health care that pays 100 percent of the premium.

In San Diego, a federal district court ruling that a police retiree health care cut in 2005 did not violate vested rights was upheld on appeal. A state superior court denial of relitigation of the federal ruling was upheld by the state appellate ruling in January.

“The constitutional issue of vested benefits is both state and federal, so a choice can be made,” said Jan Goldsmith, San Diego city attorney.

If the plaintiffs had been successful in the state courts, said Goldsmith, it could have affected a cut in benefits negotiated with unions in 2011 that is expected to save the city more than $700 million over 25 years.

“I was on the bench for 10 years, and I frankly don’t see it,” Goldsmith said of a state court conflict on public employee retirement rulings. “I’m a true believer.”

In Orange County, an agreement negotiated with unions in 2008 separated active and retired worker health care premiums, ending a pool begun in 1985 that raised county costs but cut payments by retirees because their age-related coverage costs more.

When the cut was upheld by a district court and appealed by retirees, the federal 9th circuit court asked the state Supreme Court: “Whether, as a matter of California law, a California county and its employees can form an implied contract that confers vested rights to health benefits on retired county employees.”

In a benchmark ruling, the state Supreme Court said in 2011 that a contract with vested rights “can be implied under certain circumstances from a county ordinance or resolution” if an intent to do so can be shown by evidence.

A federal district court, following the new state guidelines, again ruled that Orange County can end the retiree health care pool. The federal 9th circuit panel upheld the ruling last month.

Last September, a superior court judge overturned a freeze on retiree health care for Los Angeles city attorneys, finding an implied contract. And a federal judge tossed a suit to overturn Sacramento County retiree health care cuts, finding no contract.

The split vote of a 9th circuit panel last week gives Sonoma County retirees a chance to return to federal district court and present evidence showing, under the new guidelines, the county intended to create a contract for lifetime retiree health care.