Board of Administration v. Wilson

Decision Date19 February 1997
Docket NumberNo. C020118,C020118
Citation52 Cal.App.4th 1109,61 Cal.Rptr.2d 207
CourtCalifornia Court of Appeals Court of Appeals
Parties, 97 Cal. Daily Op. Serv. 1204, 97 Daily Journal D.A.R. 1731 BOARD OF ADMINISTRATION OF THE PUBLIC EMPLOYEES' RETIREMENT SYSTEM et al., Plaintiffs and Respondents, v. Pete WILSON, as Governor, etc., Defendant and Appellant; Association of California State Attorneys and Administrative Law Judges et al., Interveners and Respondents.

Schachter, Kristoff, Orenstein & Berkowitz, John D. Adkisson, Drew R. Liebert, Richard H. Koppes, Kayla Gillan, and Nossaman, Guthner, Knox & Elliott, San Francisco, for Plaintiffs and Respondents.

Dennis F. Moss for Interveners and Respondents.

SIMS, Acting Presiding Justice.

This litigation arises from changes in the way the Legislature has funded the California Public Employees' Retirement Fund (PERF). Until 1990, the state paid employer contributions to the PERF on a monthly basis. In 1990, the Legislature changed the payment schedule from monthly to quarterly. In 1991, the Legislature temporarily changed the payment schedule from quarterly to semiannually for one year only. Legislation in 1992 changed the schedule to "semiannually, six months in arrears." Legislation in 1993 changed the schedule to "annually, 12 months in arrears." (Gov.Code, § 20822.) 1

A mandamus action was brought in the trial court, challenging "in arrears" financing on various grounds, including violation of the constitutional right to be free of impairment of contracts. (U.S. Const., art. I, § 10; 2 Cal. Const., art. I, § 9. 3 ) The trial court determined "in arrears" financing is an unconstitutional impairment of contract.

Appellant Pete Wilson, Governor of the State of California, appeals from a judgment in favor of the Board of Administration of the California Public Employees' Retirement System (the PERS Board), individually and as Trustee of the Public Employees' Retirement Fund on behalf of PERS Members and Beneficiaries, and William D. Crist, PERS member and president of the PERS Board (hereafter collectively PERS). 4

Appellant contends the trial court erred in determining that the "in arrears" pension financing is an unconstitutional impairment of contract. Appellant also raises issues of standing, statute of limitations, laches, and propriety of directing the transfer of state funds. We shall conclude PERS members have a contractual right to an actuarially sound retirement system and the "in arrears" pension financing unconstitutionally impaired that contractual right. We shall therefore affirm the judgment.

FACTUAL AND PROCEDURAL BACKGROUND

This litigation involves two sequential versions of a provision of the Public Employee Retirement Law, section 20822 (former § 20751). Senate Bill (SB) 1107, 5 enacted in 1992, provided that state employer contributions from the General Fund would be paid to the PERF semiannually, six months in arrears. SB 240, 6 enacted in 1993, set pension financing at 12 months in arrears. 7

"In 1931 the Legislature established the State Employees' Retirement System, presently known as PERS. [Citations.] ... [p] 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. [Citation.]" 8 (Claypool v. Wilson (1992) 4 Cal.App.4th 646, 653-654, 6 Cal.Rptr.2d 77.) As early as 1947 the Legislature specified actuarially determined compulsory contributions. Since 1968, the PERS Board has been empowered to adjust the rates of employer contributions in accordance with its actuarial determinations. The retirement law requires the Governor to include the actuary's contribution rates in the budget and requires the Legislature to adopt the actuary's contribution rates and authorize the budget appropriation. (§ 20814, former § 20750.905.)

Until 1990, the State's employer contributions were transferred to the retirement fund on a monthly basis, on the first of every month immediately following the end of a pay period. (Former § 20751, Stats.1970, ch. 346, § 29, p. 748.)

In 1990, the Legislature (with PERS Board input and approval) changed the payment schedule from monthly to quarterly, payable on the first day of the calendar quarter for wages earned during the previous quarter. (Stats.1990, ch. 463, § 3, p.2024 [SB 1809].) At the same time, PERS members received a new advantage, in that retirement benefits would be calculated based on an employee's highest earnings in the 12-month period before retirement, as opposed to the previous method whereby benefits were calculated based on compensation over a three-year period. (Stats.1990, ch. 1251, § 2 [SB 2465].) The 1990 legislation also provided for PERS to adopt a 40-year amortization period for calculating contribution rates. (Stats.1990, ch. 1251, § 6, p. 5272 [SB 2465]; Stats.1990, ch. 463, § 1, p.2024 [SB 1809].)

In 1991, the Legislature temporarily changed the State's contribution schedule from quarterly to semiannually for one year only, the 1991-1992 fiscal year. (§ 20823, former § 20751.5, Stats.1991, ch. 83, § 33 [AB 702].) Contributions were transferred on January 31, 1992, and June 30, 1992. AB 702 contained a sunset provision whereby quarterly payments were to be restored in the 1992-1993 fiscal year. (Ibid.) AB 702 contained specific legislative findings as follows: "The Legislature finds and declares that this section will not affect the soundness of the retirement fund, in that the change to semiannual payments is on a one-time basis and any resulting loss to that fund will be accounted for by increased employer contributions in subsequent years." (§ 20823, subd. (b) [former § 20751.5].) The validity of the 1991 legislation is not at issue in this appeal. 9

In September 1992, the Legislature responded to mounting budget pressures by enacting as urgency legislation SB 1107, which amended former section 20751 to provide that the State's employer contributions for General Fund employees were to be made "semiannually, six months in arrears." 10 (Stats.1992, ch. 707, § 2.) Thus, contributions for fiscal year 11 1992-1993 would be paid on July 1, 1993, and January 1, 1994. SB 1107's "in arrears" financing differed from the prior "level contribution" system, whereby payments flowed to the retirement fund as liability was incurred for future pension obligations.

In June 1993 (before any contributions were paid under SB 1107), SB 240 (see fn. 6, ante ) was signed into law as urgency legislation. (Stats.1993, ch. 71.) SB 240 amended former section 20751 to provide that State employer contributions for General Fund employees be made "annually, 12 months in arrears." Thus, for example, employer contributions for the 1994-1995 fiscal year would not be paid until July 1996.

"In arrears" financing differs from the prior system. Under the prior system, known as a "level contribution" system, payments flowed to the retirement fund as liability was incurred for future pension obligations. Under the "in arrears" system, contributions would not be paid during the same fiscal year that employee services were rendered.

As a result of SB 1107 and SB 240, employer contributions (amounting to $910 million) which would have been paid during fiscal years 1992-1993 and 1993-1994 were not paid during those fiscal years.

While these events were taking place, there was also activity on another front. Thus, in November 1992 (after enactment of SB 1107 but before enactment of SB 240), the voters adopted Proposition 162, which among other things added to California Constitution, article XVI, section 17, the requirement that the Board have "sole and exclusive power to provide for actuarial services in order to assure the competency of the assets of the public pension or retirement system." (Cal. Const., art. XVI, § 17, subd. (e).) Proposition 162 contained a statement of "Findings and Declaration," which stated in part: "Politicians have undermined the dignity and security of all citizens who depend on pension benefits ... by repeatedly raiding their pension funds.... [p] ... To protect the financial security of retired Californians, politicians must be prevented from meddling in or looting pension funds." (Historical Notes, 3 West's Ann. Const. Code (1996 ed.) art. 16, § 17, p. 114 [Prop. 162, § 2, subds. (c)-(d) ].) Proposition 162 also contained a statement of "Purpose and Intent," in which the voters declared their purpose and intent in passing Proposition 162 was, inter alia, "to strictly limit the Legislature's power over [public pension] funds, and to prohibit the Governor or any executive or legislative body of any political subdivision of this state from tampering with public pension funds." (Historical Notes, 3 West's Ann. Const. Code (1996 ed.) art. 16, § 17, p. 114 [Prop. 162, § 3, subd. (e) ].)

In April 1994, PERS filed a petition for writ of mandate and complaint for declaratory relief, alleging that SB 1107 and SB 240 were unconstitutional under California Constitution, article XVI, section 17 12 and were unconstitutional impairments of contract under the United States Constitution, article I, section 10 (fn.2, ante ), and the California Constitution, article I, section 9 [52 Cal.App.4th 1122] fn.3, ante ). The pleading named as defendants the Governor, the State Controller, and the State Treasurer, in their official capacities. PERS requested that the trial court issue a peremptory writ of mandate implementing former section 20751 as it existed prior to the enactment of SB 1107 and SB 240. The trial court granted a motion to intervene by the Association of California State Attorneys and Administrative Law Judges, California...

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