Claypool v. Wilson

• Decision Date: 12 March 1992
• Docket Number: No. C011580,C011580
• Citation: 6 Cal.Rptr.2d 77,4 Cal.App.4th 646
• Court: California Court of Appeals Court of Appeals
• Parties: , 15 Employee Benefits Cas. 1270 Peggy J. CLAYPOOL et al., Petitioners, v. Pete WILSON, as Governor et al., Respondents.

Page 77

6 Cal.Rptr.2d 77

4 Cal.App.4th 646, 15 Employee Benefits Cas. 1270

Peggy J. CLAYPOOL et al., Petitioners, v. Pete WILSON, as Governor et al., Respondents.

No. C011580.

Court of Appeal, Third District, California.

March 12, 1992.

As Modified on Denial of Rehearing April 13, 1992.

Review Denied June 18, 1992.

Gary Reynolds, Howard Schwartz, Anne Stausboll, Sacramento, Margie Valdez, Maureen C. Whelan, William Corman, San Jose, Davis, Reno & Courtney, Alan C. Davis, Deborah L. Shibley, San Francisco Nancy A. Williams, Mark A. Madsen, Kevin A. Howard, McDonough, Holland & Allen, William C. Hilson, Jr., Diepenbrock, Wulff, Plant & Hannegan, Steven H. Felderstein, Sacramento, George Kim Johnson, Sigman & Lewis, Dan Feinberg, Jeffrey Lewis, Oakland, Joan R. Gallo, City Atty., Susan Devencenzi, Deputy City Atty., San Jose, Carlos Resendez, Groce, Locke & Hebdon, Crofts, Callaway & Jefferson, Sharon E. Callaway, W. Bebb Francis, III, San Antonio, Tex., James Q. Shirley, Sheehan, Phinney, Bass & Green, Alan P. Cleveland, Manchester, N.H., Charles F. Conrad, amici curiae on behalf of petitioners.

Dennis F. Moss, Sherman Oaks, for petitioners.

Daniel E. Lungren, Atty. Gen., N. Eugene Hill, Asst. Atty. Gen., Ramon M. de la Guardia, Cathy A. Neff, Daniel G. Stone, Richard Thomson, Deputy Attys. Gen., Sacramento, Hufstedler, Kaus & Ettinger, Joseph L. Wyatt, Jr., Michael V. Toumanoff, John W. Alden, Jr., Los Angeles, Lawrence E. Gercovich, Deputy Controller, D. Robert Shuman, Richard J. Chivaro, Larry W. Kreig, Sacramento, for respondents.

BLEASE, Associate Justice.

In this original mandamus proceeding members of the Public Employees' Retirement System (PERS) and their employee organizations (collectively Petitioners), challenge the constitutionality of two parts of chapter 83 of the Statutes of 1991 (Chapter 83). One part repeals three funded supplemental cost of living (Cola) programs and directs that the funds be used to offset contributions otherwise due from PERS employers. The other transfers the responsibility for actuarial determinations from the PERS Board to an actuary acting under a contract with the Governor.

Petitioners and their allies, the nominal respondent Board of Administration of PERS (PERS Board) and amicus curiae, contend that repeal of the supplemental Cola programs and reallocation of the funds to offset employer contributions unconstitutionally impair the contract rights of PERS beneficiaries and, along with the transfer of actuarial functions, violate California Constitution, article XVI, section 17, which declares that the assets of a public pension or retirement system are trust funds.

The heart of the controversy has two chambers. One concerns the permissible uses of a unique fund within PERS amounting to some two billion dollars. The fund was generated from earnings on the investment of mandatory payroll contributions of employee members of the system. Ordinarily such earnings are accumulated to meet the basic pension obligations of the State and other PERS employers. Some were diverted to fund supplemental Cola benefits to retirees to aid in the preservation of the purchasing power of their pensions. Under Chapter 83 the statutes providing for the supplemental Colas are repealed, a new supplemental Cola program enacted, and the funds reallocated to meet the basic pension obligations of PERS employers.

Petitioners claim that this reallocation of investment earnings impairs the vested contract rights of PERS members. We will conclude that no contract rights are impaired. The principal beneficiaries of the fund, if not reallocated, are former employees who ceased employment prior to the time when an implied statutory promise not to reallocate the fund could have arisen. They earned no vested contract rights under the repealed statutes and must rely, along with present employees, upon a new supplemental Cola program enacted by Chapter 83 as a replacement for the repealed programs. The employees who may have earned vested contract rights by rendering service under the repealed statutes are given comparable advantages under the new supplemental Cola program and for that reason their rights are not unconstitutionally impaired.

The second chamber of the controversy concerns the transfer of PERS Board actuarial functions to an actuary selected by the Governor [the Actuary]. The key issue is whether the assignment of these matters to an outside actuary violates the requirement of California Constitution, article XVI, section 17, that PERS be managed We will deny the petition.

as a trust. We will conclude that Chapter 83 contains safeguards which insulate the Actuary from the control of the Governor and that the transfer of actuarial functions is not facially inconsistent with trust law.

FACTS AND STATUTORY BACKGROUND

The facts for the most part are contained in the history of the Public Employees' Retirement Law and matters subject to judicial notice. (See Valdes v. Cory (1983) 139 Cal.App.3d 773, 780, 189 Cal.Rptr. 212; California Teachers Association v. Cory (1984) 155 Cal.App.3d 494, 500, fn. 2, 202 Cal.Rptr. 611.) Our point of departure is the opinion of this court in Valdes v. Cory. There we recounted the history of PERS to March 1982, the date of the enactment challenged in that case. (Id. 139 Cal.App.3d at pp. 780-783, 189 Cal.Rptr. 212.) We will revisit this history before relating subsequent developments. Except as we note, the statutes governing PERS have been substantially carried forward to the present.

A. PERS History Prior to 1982

In 1931 the Legislature established the State Employees' Retirement System, presently known as PERS. (Stats.1931, ch. 700, § 25; Gov.Code, § 20004.) ¹ The system included a fund derived from mandatory employee payroll contributions (member contributions), contributions of the state, and earnings on the investment of the fund. (Stats.1931, ch. 700, §§ 41, 63, 65-74.) The member contributions were calculated to provide an average annuity at age 65 equal to one one-hundred-fortieth of a member's final compensation multiplied by the years of service. (Id., § 65.) These contributions were deducted from the payroll of each office or department and the remaining salary payment was declared a full and complete discharge of the obligation owed an employee except for claims of benefits under the retirement law. (Id., § 67.)

The system was administered by a board of administration. At the outset the PERS Board was directed to make actuarial valuations of the fund and the liabilities of the system and to recommend to the Legislature appropriate changes in the rates of contribution to achieve equality between valuation and liabilities. (Stats.1931, ch. 700, §§ 51, 58, 69-72.)

Each year the PERS Board was to credit member contributions with four percent interest or such greater amount of interest as it deemed proper in light of the earnings on the fund in that year, but no more than actual earnings. (Stats.1931, ch. 700, § 52.) An individual member account was kept for each member of the retirement system and was credited with the member's payroll contributions and with annual interest. (Id., § 67.) The records and accounts of the PERS Board were directed to show the accumulated contributions of the State. (Id., §§ 56-57.) If a member discontinued employment other than by death or retirement the member was to be paid the amount of his or her accumulated member contributions. (Id., § 75.) A member was entitled to retire at age 60 with 20 years of service and to receive a retirement allowance consisting of an annuity equal to the value of the accumulated employee contributions together with a matching pension funded by the state contributions. (Id., §§ 79-82.)

In 1937 a reserve against deficiencies was created. "Income, of whatever nature, earned on the retirement fund during any fiscal year, in excess of the interest credited to contributions during said year shall be retained in said fund as a reserve against deficiencies in interest earned in other years, losses under investments, and other contingencies." (Stats.1937, ch. 806, § 8; see now § 20203.) In 1939 the system was expanded to include any municipal corporation in the State which elected to contract with the PERS Board for coverage of its employees. (Stats.1939, ch. 927, § 3b.) The law was also amended to provide that interest at the current rate rather than 4 percent should be the baseline credit to In 1945 the original enactments were repealed but the provisions in essential part were carried over as the State Employees' Retirement Law. (Stats.1945, ch. 123, §§ 1-2; Gov.Code, §§ 20000-21455.) In 1947 the pension component of the retirement allowance was defined to be the amount, which, when added to the annuity component met prescribed target amounts based on age at retirement and final compensation. (Stats.1947, ch. 732, § 4.) Under the present version of this provision, for example, a state miscellaneous member retiring at age 60 with 25 years of service is entitled to a retirement allowance of 2 percent of final compensation multiplied by the number of years of service, i.e., half-pay. (§ 21251.13.) This allowance is increased annually by a basic Cola limited to two percent per year. (§§ 21222, 21224.) Some other classifications of members have a higher basic Cola.

                member contributions.  (Id., § 13.)   In 1943 the system was expanded to include any public agency in the State which elected to contract with the PERS Board for coverage of its employees.  (Stats.1943, ch. 640.)
                

In the early years of the system the reserve against deficiencies was not substantial. "For years, the interest credited to accumulated contributions closely paralleled the actual earnings rate after deduction of administrative costs. Until 1971, the crediting rate was usually within one quarter of one percent of the earnings rate. In recent years, however, the crediting rate has not kept pace with...