O'Neal v. Stanislaus Cnty. Employees' Ret. Ass'n

8 Cal.App.5th 1184

214 Cal.Rptr.3d 591

Michael R. O'NEAL et al., Plaintiffs and Appellants,

v.STANISLAUS COUNTY EMPLOYEES' RETIREMENT ASSOCIATION, Defendant and Respondent,County of Stanislaus, Intervenor and Respondent.

F070605

Court of Appeal, Fifth District, California.

Filed February 23, 2017

Certified for Partial Publication.^*

Law Office of Michael A. Conger and, Michael A. Conger, Rancho Santa Fe; Richard H. Benes, San Diego, for Plaintiffs and Appellants.

Reed Smith, Harvey L. Leiderman, and Jeffrey R. Rieger, San Francisco, for Defendant and Respondent.

Hanson Bridgett, Raymond F. Lynch, Adam W. Hofmann, and Jay Rapaport, San Francisco, for Intervenor and Respondent.

OPINION

DETJEN, J.

OVERVIEW

Appellants, Michael R. O'Neal, Rhonda Biesemeier, and Dennis J. Nasrawi, appeal from the trial court's grant of summary judgment against them, as well as several related evidentiary rulings. Appellants are members of the retirement system operated by respondent Stanislaus County Employees' Retirement Association (StanCERA) through their retirement board (the board). The intervener in this case, County of Stanislaus (County), is one of several employers required to fund the StanCERA retirement system.

In the aftermath of the recent recession, StanCERA implemented several changes to the actuarial calculations used to determine how to amortize unfunded liabilities within the system and chose to utilize so- called non-valuation funds, money not used to ensure the overall system was actuarially sound, to reduce or replace required employer contributions. Appellants filed suit, arguing these actions constituted a breach of the constitutional fiduciary duties placed on the board of a county retirement system. Specifically, appellants alleged the adoption of an amortization rate for unfunded liabilities which included a period of negative amortization violated state law and constitutional mandates. Appellants further argued the use of non-valuation funds to reduce or replace required employer contributions did the same.

Upon cross-motions for summary judgment, the trial court concluded that none of the actions taken by the board were contrary to law and, finding no material issue of fact, determined summary judgment was properly granted to StanCERA and County. Appellants have appealed this ruling and the related denial of their cross-motion for summary judgment. Related to the summary judgment appeal, appellants raise several complaints with evidentiary rulings made by the trial court which led to the exclusion of appellants' expert declarations and the introduction of evidence appellants contend should not have been considered on summary judgment.

For the following reasons we conclude the trial court correctly determined appellants were not entitled to summary judgment, but erred in determining no material issues of fact remained. We therefore reverse the grant of summary judgment to respondents and remand for proceedings consistent with this opinion. With respect to the evidentiary issues raised, we generally affirm the trial court, save for one issue, which has not been contested on appeal.

FACTUAL AND PROCEDURAL BACKGROUND

This case reaches us for the second time. Previously, we considered whether the trial court properly granted StanCERA's demurrer. The case now returns following the grant of summary judgment to StanCERA and County. We provide a brief overview of the claims involved to frame our discussion of relevant facts and our legal analysis.

Although detailed more fully below, the claims in this case all consider whether StanCERA violated constitutional fiduciary duties when making decisions regarding the management of the retirement system. The claims break down into two general types. The first involves StanCERA's management of certain excess-funds accounts. These accounts contained funds which are not considered when making actuarial calculations concerning the health of the retirement system. Normally, contributions and investment returns are included in the general retirement fund. However, over time, this fund can become overfunded if returns exceed expectations. These excess funds may then be separated from the general fund into special reserve funds to provide discretionary non-vested benefits to members. The first type of claim in this case questions whether money can be transferred from these funds and for what purposes such money may be used. The second type of claim involves how StanCERA accounts and corrects for investment losses and other failures to keep the overall system properly funded from an actuarial standpoint. When an actuarial accounting finds fund liabilities exceed fund assets, the difference is identified as an unfunded liability. To amortize any unfunded liability, StanCERA is obligated to increase employer contributions. It does so by adopting an amortization schedule designed to fund the unfunded liabilities within a specific period of time. The question is whether that amortization schedule can include periods of negative amortization.

StanCERA filed the initial motion for summary judgment in this case, attaching most of the evidence that was before the trial court. In explaining the history of how StanCERA managed excess funds and its unfunded liabilities, up through and including the currently contested transactions, StanCERA submitted the declaration of Kathleen Herman, Operations Manager for StanCERA since September 10, 2011, and supporting documents. Excepting certain facts concerning advice given to the board and the import of adopting a negative amortization rate, appellants generally conceded the facts identified by StanCERA were undisputed. Appellants, however, contested their relevance, legal meaning, or unstated implications.

I. USE AND MANAGEMENT OF EXCESS FUNDS PRE-2007.

Up through 2007, StanCERA appears to have had reasonably good returns on their investments. There were instances of returns exceeding expectations. As a result, a multitude of special reserve funds were created. These included reserves to pay a $5,000 death benefit, a Legal Contingency Reserve, a Tier 3 Disability Reserve, a Contingency Reserve, a reserve to make additional payments under Government Code ¹ section 31691 et seq. (the Health Insurance Reserve), and a reserve to pay supplemental cost of living increases authorized by section 31874.3 (the Special COL Reserve). These reserves totaled more than $169 million, with nearly $158 million in the Health Insurance Reserve and nearly $3 million in the Special COL Reserve. These fund reserves were generally used, as intended, to make additional health insurance payments and annually determined cost of living adjustments. In 2007, the general retirement fund showed an overall net increase of nearly $188 million.

II. EVENTS FROM 2008 THROUGH THE COMPLAINT.

In 2008, StanCERA began to experience investment losses from the global downturn. Compounding these losses, StanCERA learned that its prior actuary had made mistakes that had overinflated the actuarial calculations for the retirement fund. In 2008, the fund showed an overall net decrease of approximately $150 million. This caused the amount of unfunded liabilities to increase from around $41 million to around $232 million and the overall funding ratio to drop from 96.6 percent to 85 percent. As a result of these changes, County was faced with an actuarial accounting suggesting it increase its contributions from approximately $20 million (in 2006) to approximately $45 million (in 2008) to properly cover its employer obligations.

By the time StanCERA was working to set County's contribution levels for the 2009-2010 fiscal year, the actuarially recommended contribution had risen to over $59 million; an increase of $22.7 million over the required contribution for the 2008-2009 fiscal year. At the same time, County was suffering from a substantial decrease in revenue. County informed StanCERA that it had experienced a $17 million decrease in its discretionary revenue and had been forced over the previous two years to issue layoffs, implement hiring freezes, and reduce services to balance its budget. County asked StanCERA to consider alternative ways to alleviate the burden substantially increasing its contributions would have on StanCERA members currently working for County and County itself.

StanCERA ultimately decided to modify certain accounting procedures and transfer various funds in order to work with County on its concerns. Thus, at the board's April 28, 2009, meeting, the board voted to make three changes affecting the 2009-2010 contribution levels.

First, the board voted to change StanCERA's amortization schedule for unfunded liabilities to a 30-year level percent of pay amortization rather than the 20-year level dollar amortization initially proposed. This effected two changes in the amortization schedule. Most obviously, it extended the amount of time to amortize the unfunded liability from 20 years to 30 years, thus lowering the payments required each year. It also changed how to calculate the payments owed each year. Under a level dollar amortization schedule, the same amount is paid each year such that the amount owed steadily decreases until eliminated. Under a level percent of pay schedule, the amount owed each year is tied to the size of County's payroll and the schedule takes into account expected payroll growth over time. Under such a schedule, payments will increase over time and payments early in the schedule may be insufficient to pay down the principal. Indeed, under a level percent of pay schedule, if the amortization period is 17 years or longer, at least the first year's payment will be less than the interest on the unfunded amount. If the amortization period is reset regularly, as it was set to do for a three-year period under the amendments, this could result in a schedule which could never repay the existing debt. By utilizing both a 30-year period and a level percent of pay schedule, StanCERA...