In a landmark decision of a unanimous court, on July 30, 2020, the California Supreme Court issued its second case in two years on the scope of the “California Rule,” Alameda County Deputy Sheriff’s Assoc. et al., v. Alameda County Employees’ Retirement Assn., et al. (2020) __ P.3d.__ (WL 4360051) (S247095) (“Alameda”). In sum, the Court decided the narrow issue presented to it, determining that statutory amendments it considered were constitutional, while preserving the strength of the California Rule as to other legislative attempts to change pension benefits of current retirement system members to the member’s detriment without providing comparable new advantages. As we discuss below, the Court’s decision affirms the continuing force of the Rule in California, but refocuses judicial review of public pension changes in this State. For those alterations that disadvantage pensioners, courts will now closely examine the stated purposes of such modifications to determine whether they are justified and thus are permissible under the Contracts Clause of the California Constitution.
In Alameda, the Court first noted that just recently, in March 2019, the California Supreme Court issued its first decision in the five cases before it that challenged the constitutionality of various parts of the state legislature’s Public Employees’ Pension Reform Act of 2013 (“PEPRA”) and related changes to statutes governing the State and county public retirement systems as provided in Assembly Bills 340 and 197 (2012) (collectively, “PEPRA”). In that case, Cal Fire Local 2881 v. California Public Employees’ Retirement System (2019) 6 Cal.5th 965 (“CalFire”), the Court provided a comprehensive analysis of the predicates necessary to determine whether a particular employment or pension benefit is a “vested” contract right, and thus constitutionally protected, under California law. The CalFIRE Court unanimously concluded that “California’s public employees have never had a contractual right to the continued availability of the opportunity to purchase [Additional Retirement Service, or “ARS”] credit.” (CalFIRE, supra, 6 Cal.5th at p. 993.) Accordingly, the Court stated that its decision “expresses no opinion on the various issues raised by the state and amici curiae relating to the scope of the California Rule.”
In Alameda, the Court turned to the issue left on the table in CalFIRE – the meaning of the California Rule – and applied the Rule to PEPRA provisions amending the County Employees Retirement Law of 1937 (“CERL; Gov. Code, §31450 et seq.). The PEPRA provision at issue “amended CERL’s definition of compensation earnable to exclude or limit the inclusion of additional types of compensation in an effort to prevent perceived abuses of the pension system.” The Court noted that the challenge to PEPRA’s amendment of CERL raised two sets of issues.
Settlement Agreement, Board Resolutions, and Related Issues
The first set of issues concerned settlement agreements or other promises made by CERL boards: namely, do these actions provide a contractual or equitable right to members of those retirement systems to continue to receive the benefit of those promises, even when the benefits were no longer permitted because of PEPRA’s statutory changes? The Court concluded that they do not. “[N]either argument authorizes the county retirement boards to administer CERL in a manner inconsistent with the governing statutory provisions by including items of compensation in compensation earnable that section 31461, as amended, excludes.” The Court explained the role of the board of public retirement systems as managing the retirement’s “financial assets,” and “processing and payment of claims for benefits under the plan.” “Of necessity,” the Court observed, “the task of processing claims for retirement benefits requires the county retirement boards to interpret and apply the provisions of CERL, including the sections defining compensation, compensation earnable, and final compensation.” But the Court drew a line on benefit changes: “The task of a county retirement board is not to design the county’s pension plan but to implement the design enacted by the Legislature through CERL.”
With respect to settlement agreements that promised benefits in excess of that which PEPRA permitted, the Court concluded “any provision in the settlement agreements that would have required the retirement boards to continue to apply the agreed upon characterizations in the face of contrary legislative changes or authoritative judicial interpretations would have been void. The retirement boards had no authority to enter...
