Alameda Cnty. Deputy Sheriff's Ass'n v. Alameda Cnty. Employees' Ret. Assn.

19 Cal.App.5th 61

227 Cal.Rptr.3d 787

ALAMEDA COUNTY DEPUTY SHERIFF'S ASSOCIATION et al., Plaintiffs and Appellants,

v.ALAMEDA COUNTY EMPLOYEES' RETIREMENT ASSN. and Bd. of the Alameda County Employees' Retirement Assn. et al., Defendants and Respondents;

Service Employees International Union, Local 1021 et al., Interveners ;

Building Trades Council of Alameda County et al., Interveners and Appellants.

A141913

Court of Appeal, First District, Division 4, California.

Filed January 8, 2018

As Modified February 5, 2018

Isaac S. Stevens, Sacramento, Mastagni, Holstedt, Amick, Miller & Associates, Timothy K. Talbot, Rockne A. Lucia, Pleasant Hill, Rains, Lucia & Willinson, W. David Holsberry, San Francisco, Holsberry, Stemerman & Holsberry, for Appellant

Harvey L. Leiderman, San Francisco, Reed Smith, Rei Onishi, Ashley K. Dunning, San Francisco, Nossaman, Los Angeles, Robert L. Gaumer, Alameda City Employees' Retirement Association, for Respondent

Anne I. Yen, Vincent A. Harrington, Jr., Weinberg, Roger & Rosenfeld, Alameda, Peter W. Saltzman, Leonard Carder LLP, Vishtasp Soroushian, Andrew H. Baker, Oakland, Teague P. Paterson, Beeson, Tayer & Bodine, Robert Bonsall, Sacramento, Beeson, Tayer, Silbert & Bodine, Katwyn T. DeLaRosa, Bennett & Sharpe, Inc., Fresno, William I. Corman, Bogatin, Corman & Gold, Oakland, Christopher E. Platten, Wylie, McBride, Platten & Renner, San Jose, Paul Q. Goyette, Goyette & Associates, Gold River, Arthur W. Liou, Oakland, Leonard Carder, Robert J. Bezemek, Oakland, Wright Lassiter, III, Mark Friedman, Calabasas Hls, Brian E. Washington, Oakland, Michael E. Kyle, Randick, O'Dea & Tooliatos, Pleasanton, Rod A. Attebery, Neumiller & Beardslee, Stockton, Richard D. PioRoda, Kenton Alm, Meyers, Nave, Riback, Silver & Wilson, San Francisco, James D. Maynard, San Marcos, Maynard Law, Irvine, David J. Larsen, Silver & Wright Thomas L. Geiger, Contra Costa County Counsel, Martinez, Lyle R. Nishimi, Judicial Council of California, San Francisco, Marie D. Hanson, Hanson Bridgett, Barbara Fee, Carl P. Nelson, Bold, Polisner, Maddow, Nelson & Judson, Walnut Creek, Robert Leete, William D. Ross, Los Angeles, Craig Downs, Martin T. Snyder, Snyder, Cornelius & Hunter, Sue Casey, Barry J. Bennett, Fresno, Bennett, Sharpe, Delarosa, Bennett & Licalsi, for Intervenor

Anthony P. O'Brien, Burlingame, Office of the Attorney General, for Intervenor and Respondent

REARDON, J.

This consolidated action arises out of the tension between two undeniably valid, and yet fundamentally opposed, public interests: the interest of the government in maintaining the flexibility to alter statutes to conform to current needs and the interest of public employees in a stable and predictable pension, earned through years of public service. On September 12, 2012, Governor Brown—faced with a statewide crisis involving the significant underfunding of public pension systems—signed into law the Public Employee Pension Reform Act of 2013 and related legislation (interchangeably, PEPRA, the Pension Reform Act, or AB 197) in an attempt to curb what were seen as pervasive abuses in public pension systems throughout California, including those governed by the County Employees Retirement Law of 1937 (CERL), Gov. Code, § 31450 et seq.¹ ( § 7522 et seq. ; Stats. 2012, chs. 296 & 297; see Marin Assn. of Public Employees v. Marin County Employees' Retirement Assn. (2016) 2 Cal.App.5th 674, 680-683, 206 Cal.Rptr.3d 365 ( Marin ), review granted Nov. 22, 2016, S237460.) Various public employees and public employee organizations in Alameda, Contra Costa, and Merced Counties (collectively, the Three Counties) subsequently challenged the constitutionality of PEPRA as it applied to certain CERL plan members who were hired prior to PEPRA's effective date (legacy members). We conclude that the trial court's detailed analysis of PEPRA's effects on the pensions of legacy members was incorrect in certain respects and also improperly failed to include a necessary vested rights analysis. We therefore affirm in part, reverse in part, and remand this matter for further proceedings in accordance with this opinion.

I. FACTUAL AND PROCEDURAL BACKGROUND

A. Some History of CERL and Section 31461

The Three Counties are among the 20 counties that maintain employee retirement plans under CERL. (See Irvin v. Contra Costa County Employees' Retirement Assn. (2017) 13 Cal.App.5th 162, 169 & fn. 6, 220 Cal.Rptr.3d 510 ( Irvin ).)² Each county plan is administered by its own retirement board, which is tasked with the management of the retirement system. (§ 31520.) The total pensionable costs of each county system are intended by CERL to be actuarially accounted for in advance and funded by employer and employee contributions, as well as returns on investment. (See, e.g., §§ 31453-31454.6, 31520.2; see also In re Retirement Cases (2003) 110 Cal.App.4th 426, 438-439, 1 Cal.Rptr.3d 790 [CERL mandates that "the funds for the pensions contain both employer and employee contributions and that the level of funding be based on actuarial valuations"]; id . at pp. 461-462, 1 Cal.Rptr.3d 790 [discussing importance of investment income to system].) Thus, "[u]nder CERL an employee's pension is a combination of a retirement annuity based on the employee's accumulated contributions supplemented by a pension established with county contributions sufficient to equal a specified fraction of the employee's ‘final compensation.’ " ( Ventura County Deputy Sheriffs' Assn. v. Board of Retirement (1997) 16 Cal.4th 483, 490, 66 Cal.Rptr.2d 304, 940 P.2d 891 ( Ventura ).)

In order to calculate the specific amount of employee pensions under CERL, the administering retirement board is " ‘required to determine whether items of remuneration paid to employees qualify as "compensation" under section 31460 and "compensation earnable" pursuant to section 31461, and therefore must be included as part of a retiring employee's "final compensation" (§ 31462 or § 31462.1).’ " ( Marin , supra , 2 Cal.App.5th at p. 680, 206 Cal.Rptr.3d 365.) Since the definitions contained in these statutes are central to the proper administration of any CERL system and crucial to the resolution of the many issues we here consider, we set them out in detail.

Section 31460 defines " ‘compensation’ " as "the remuneration paid in cash out of county or district funds, plus any amount deducted from a member's wages for participation in a deferred compensation plan ..., but does not include the monetary value of board, lodging, fuel, laundry, or other advantages furnished to a member."³ Under the pre-PEPRA version of section 31461, " ‘compensation earnable’ " for a CERL member "means the average compensation as determined by the board, for the period under consideration upon the basis of the average number of days ordinarily worked by persons in the same grade or class of positions during the period, and at the same rate of pay." (§ 31461, subd. (a).) In making this calculation, "[t]he computation for any absence shall be based on the compensation of the position held by the member at the beginning of the absence." (Ibid. ) Moreover, "[c]ompensation, as defined in Section 31460, that has been deferred shall be deemed ‘compensation earnable’ when earned, rather than when paid." (Ibid .)

Once a member's "compensation earnable" is established by the retirement board, section 31462 defines " ‘final compensation’ " as "the average annual compensation earnable by a member during any three years elected by a member at or before the time he or she files an application for retirement, or, if he or she fails to elect, during the three years immediately preceding his or her retirement." (§ 31462, subd. (a).) Section 31462.1 is substantially the same as section 31462, differing only in that it sets the relevant time period as any single year elected by a member. (§ 31462.1, subd. (a)(1).)⁴

1. Relevant Statutory Amendments and Judicial Interpretations pre-PEPRA .

For many years, the most important case interpreting CERL's definition of compensation earnable was Guelfi v. Marin County Employees' Retirement Assn. (1983) 145 Cal.App.3d 297, 193 Cal.Rptr. 343 ( Guelfi ), disapproved on various grounds by Ventura , supra , 16 Cal.4th at pp. 496-505, 66 Cal.Rptr.2d 304, 940 P.2d 891. In that case, two retired police officers argued that their CERL retirement board did not possess the authority to exclude overtime pay, educational incentive pay, and uniform allowances that they had earned during their chosen final compensation periods from its calculation of their final compensation. ( Guelfi, supra, 145 Cal.App.3d at pp. 299-301, 193 Cal.Rptr. 343.) The Guelfi court—Division Two of this District—disagreed. It first concluded, relying largely on a case interpreting PERL, that uniform allowances must be included in the "other advantages furnished to a member" for purposes of section 31460, and therefore did not constitute compensation under CERL. ( Guelfi, supra, 145 Cal.App.3d at pp. 303-304, 193 Cal.Rptr. 343.) It next held that, while overtime and educational incentive pay did fit the definition of "compensation" for purposes of section 31460, they nevertheless must be excluded from compensation earnable under the language of section 31461. ( Guelfi, supra, 145 Cal.App.3d at pp. 304-307, 193 Cal.Rptr. 343.) Specifically, the Guelfi court opined, educational incentive pay did not constitute compensation earnable under CERL because not all employees in the same grade or class of position qualified for this pay as mandated by section 31461. ( Guelfi, supra, 145 Cal.App.3d at pp. 303-306, 193 Cal.Rptr. 343.) Similarly, the appellate court concluded that, given the express language of section 31461, compensation earnable must be based on the "number of days ‘ordinarily’ worked by others of the same rank," thereby necessarily excluding extra hours worked as overtime. ( Guelfi, supra, 145 Cal.App.3d at pp. 306-307, 193 Cal.Rptr. 343.)

With the Guelfi decision as a...