By Jon Holtzman and Linda Ross.
On March 4, the California Supreme Court delivered its long awaited opinion in Cal Fire, which holds that the Legislature’s elimination of the “air time” benefit – the ability to buy up to five years of service credit not based on time worked – did not infringe upon the vested rights of current employees who cannot buy air time after the passage of PEPRA. Although the “air time” issue itself is narrow, many had hoped the decision would roll back the so called “California Rule” that has been held to prohibit changes in “vested” pension benefits after an employee begins his/her service with a government employer, absent the granting of an “equivalent benefit.” These hopes were stoked by Governor Brown’s often-stated view that the Court should roll back the California Rule in the cases now before it, and his decision to take the cases away from the Attorney General’s Office, and have an attorney is the Governor’s office brief and argue them.
The Court of Appeal in Cal Fire held (1) that air time was not a vested benefit because there was no indication that the Legislature intended the benefit to be available forever, and (2) that, even if the benefit was vested, it could be changed because the “California Rule” does not require the substitution of an equivalent benefit.
Many pension reform supporters had hoped that the Court would seize upon Cal Fire to eliminate or sharply curtail the California Rule. However, most close observers felt that the case could be easily resolved based on the Court of Appeal’s first holding – that the benefit was not vested in the first place. And, in fact, that’s what happened. The Supreme Court held unanimously that “air time” was not vested, and therefore declined to consider modifications to the California Rule. However, the Court expressly left the door open to future challenges to the California Rule, noting at the outset of the case that the rule has been adopted by only 12 states, and three have them have since modified it.
The Court’s decision not to reach the issue of the “California Rule” has set off a vigorous debate among public sector attorneys and pension -watchers over whether the decision really changed anything in the employee benefits world. In particular, some pension-watchers were hoping for a decision holding that core pension benefits, such as the pension formula, could be changed for the future service of current employees. It is fair to say the case provides little guidance on this issue.
However, others, me included, were very pleasantly surprised that Court attempted to insert some intellectual bones into the analysis of what constitutes a vested benefit. Prior to Cal Fire, it is not an exaggeration to suggest that the cases considering whether a benefit is vested were essentially “word salad;” they repeated and embellished on various “snippets” of language, without any attempt to explain the policy or legal underpinnings of the vested rights doctrine in California. And, the cases from lower courts are very difficult to reconcile with each other.
In the process of attempting to insert a legal framework in the vesting doctrine, the Cal Fire Court significantly limits the grounds under which a benefit can become vested. Needless to say, if only a select few benefits can become vested in the first place, the issue of how and when those benefits can be changed becomes a bit more limited.
How Cal Fire’s Analysis Will Be Helpful In Future Cases
In simple terms, Cal Fire makes clear that not all benefits affecting the amount of a pension are vested for life, and that the court will ask: (1) was there a clear promise that the benefit would be available in retirement; or (2) was the benefit a form of “deferred compensation” earned incrementally over time based upon actual service? As to the latter, it seems clear that incrementally earned benefits are vested. But what about the benefits that current employees may earn in the future though additional service? The decision suggests that the only basis on which such benefits can become vested is where the Legislation creating the benefit shows a very clear intention that the benefit will remain available through retirement. This suggests that the Court could find that ancillary aspects of the pension benefits, such as the inclusion of various forms of compensation in the determination of the pension benefit, are not vested.
The Cal Fire decision also clarifies the law of vesting in a number of helpful ways:
- The Court strengthens already helpful language from a prior decision that there is a presumption against a benefit becoming vested, and that a party claiming a benefit is vested must prove by “clear” evidence that the legislative body that adopted the benefit intended it be vested.
- The Court makes clear that pension benefits have been treated as an exception to the general rule against vesting of public employment benefits based on the fact that they are “deferred compensation” – meaning they are earned incrementally over time and will be paid later in retirement.
- The Court makes clear that the mere fact that a change affects the ultimate pension benefit, does not make it a pension benefit for the purpose of vesting principles.
- The Court refused to defer to a CalPERS interpretation that air time and other ancillary pension benefits are vested. This is an implicit rebuke of CalPERS’ earlier attempts to take the side of the unions in pension litigation. Fortunately, the current leadership at CalPERS appears to have recognized that CalPERS’ interference in vesting litigation was inappropriate.
In addition, the Supreme Court clearly distanced itself from earlier Court of Appeal decisions that have applied the vested benefits doctrine beyond the pension arena. The Court finds: “We have never held…that the constitutional protection afforded pension benefits, which attached even in the absence of manifest legislative intent to create contract rights, extends generally to other benefits of public employment.” It further notes: “We have never held that statutory terms and conditions of employment gain constitutional protection merely from the fact of their existence, even if they have persisted for decades.” In particular, the Court points out that there are only two cases in which the Court has extended the vesting doctrine outside of pension benefits, and both involved strong contractual arguments.
What issues does the case leave open?
There are two major issues the Court leaves open. The first, and most significant, is the degree of protection that is to be accorded to as-yet-unearned benefits (benefits tied to future work) of current employees.
The second issue the court leaves open is the terms under which vested benefits can be changed once vested. The main bone of contention in that analysis is whether a “comparable” benefit must be provided.
In addition to Cal Fire, there is another major case pending in the Supreme Court: Alameda. The Court has also granted a number of other pension cases, and indicated they are being “held” pending the decision in the Alameda case. Many hope that the Court will reach the issues above in Alameda.
However, in light of the Cal Fire holding, it is unclear how the Court will deal with the other cases now pending before it because Alameda, too, turns on an initial determination of whether the benefits at issue there are “vested” – and, under the analysis of Cal Fire, there is a strong argument they are not. Alameda involves an ambiguous definition of “compensation earnable” (which determines “final compensation”) and which (1) does not clearly state it is vested, and (2) is arguably not a form of “deferred compensation” earned incrementally over time. It is possible that the Court will remand Alameda and the other cases it is holding to the Court of Appeal and the Court of Appeal to decide in the first instance whether the benefits at issue there are vested. Alternatively, the Supreme Court could simply extend the Cal Fire line of reasoning and decide that the ambiguous text cannot give rise to a vested benefit.
As in Cal Fire, the Court may be reluctant to revisit the “California Rule” in a case that does not involve a change to a “core” pension benefit such as the formula for service of current employees. As PEPRA did not make such changes, resolution of the California Rule issue may or may not occur until or unless there is further pension reform legislation that changes a “core” element of pensions, such as the pension formula, for future service. In the near term, at least, such legislation would most likely only come about through a voter initiative, or changes to one of the few “independent” pension systems in the state.