In a recent published decision, a California court of appeal held that Marin County did not violate its employees’ “vested right” to a pension when it altered the pensions available to current employees upon retirement. (Marin Association of Public Employees vs. Marin County Employees’ Retirement Association, (2016) 2 CalApp. 5th 674.) Plaintiffs had until September 16, 2016 to file a petition for review with the California Supreme Court. The court held that a public agency may adjust a pension before the employee retires, so long as the employee’s vested right to a “reasonable and substantial” pension is not impaired. The significance of this case for public education employers is its application to health and welfare benefits that an individual employer may offer to specified retirees.
The California Public Employees’ Pension Reform Act of 2013 (PEPRA), enacted to address the enormous unfunded liability of public pension funds, became effective on January 1, 2013. A companion bill amended the County Employees Retirement Law. Both pieces of legislation aimed, in part, to curtail “spiking” salaries prior to retirement by excluding certain items which had previously been included in the calculation of pension benefits.
Marin County acted quickly to implement the legislative reforms, with the result that the projected retirement income for current employees would be reduced. Soon thereafter, unions representing county employees and individual employees filed suit to halt implementation of the changes. The lawsuit alleged that the benefits were a form of deferred compensation for work already performed, thus the change in the calculation for pension credit unconstitutionally impaired the employees’ vested rights. The trial court sustained the defendants’ demurrer without leave to amend, and the plaintiffs appealed.
The Court of Appeal conducted an extensive review and analysis of what constitutes a “vested” right to a prospective retirement benefit. The analysis and holding described below support the conclusion that the same result would apply to health and welfare benefits which many public school employers provide to retirees pursuant to collective bargaining agreements, and by policy, contract or practice, to unrepresented employees.
Under GASB 45, public education employers are required to conduct periodic actuarial studies of their post-retirement health and welfare benefit obligations, which are commonly referred to as OPEB (“Other Post Employment Benefit”) studies. The OPEB study computes the current and future financial impact of the obligations. The information obtained from these studies has led many public education employers to seriously examine the retirement benefits they offer to employees, and attempt to address these concerns at the bargaining table by reducing benefits for future unit members. Some employers also have reduced retirement benefits for future unrepresented employees as well. In general, however, these efforts have affected only those employed after a future specified date; the retirement benefits of current employees have remained intact. Accordingly, any changes in employers’ obligations, including any projected savings, are not realized until far into the future.
The Court of Appeal sustained the trial court’s decision that the new formula to calculate and thus reduce pension benefits did not impair plaintiffs’ constitutional rights to their vested pension. The decision clarifies that public employers may make “reasonable” changes in retirement benefits, altering the formula to reduce the level of the benefit, for current employees, before the benefit becomes payable. Until the employee retires, the employee does not have a vested right to a fixed or definite benefit, but only to a reasonable benefit. While the benefit may not be entirely repudiated, it may be reduced.
Public education employers may rely on this decision to negotiate adjustments to retiree health and welfare benefits for current represented employees. Employers may also implement such adjustments for unrepresented employees, taking into consideration the provisions in any individual employment agreements.
If you have any questions regarding this case or about public education employers’ obligations related to employee retirement benefits, please do not hesitate to contact us.