Marin Ass'n of Pub. Emps. v. Marin Cnty. Employees' Ret. Ass'n

• Decision Date: 17 August 2016
• Docket Number: A139610
• Citation: 206 Cal.Rptr.3d 365,2 Cal.App.5th 674
• Court: California Court of Appeals Court of Appeals
• Parties: MARIN ASSOCIATION OF PUBLIC EMPLOYEES et al., Plaintiffs and Appellants, v. MARIN COUNTY EMPLOYEES' RETIREMENT ASSOCIATION et al., Defendants and Respondents; The State of California, Intervenor and Respondent.

2 Cal.App.5th 674

206 Cal.Rptr.3d 365

MARIN ASSOCIATION OF PUBLIC EMPLOYEES et al., Plaintiffs and Appellants

v. MARIN COUNTY EMPLOYEES' RETIREMENT ASSOCIATION et al., Defendants and Respondents;The State of California, Intervenor and Respondent.

A139610

Court of Appeal, First District, Division 2, California.

Filed August 17, 2016

Attorneys for Plaintiffs and Appellants Marin Association of Public Employees; Catherine Hall : Leonard Carder, Peter Warren Saltzman, Arthur Wei–Wei Liou ;

Attorneys for Plaintiff and Appellant Service Employees International Union Local 1021: Weinberg, Roger & Rosenfeld, Vincent A. Harrington, Jr., Kerianne Ruth Steele, Anne I. Yen, Alameda, Sean Daniel Graham, Caren Pamela Spencer, Alameda; Attorneys for Plaintiffs and Appellants Marin County Fire Department Firefighters' Association; Marin County Management Employees Association; Joel Chandler; and Angelo Sacheli: Carroll, Burdick & McDonough, Gregg McLean Adam, Amber Lynn Griffiths ; Messing Adam & Jasmine, Gregg McLean Adam, Jonathan Dennis Yank ;

Attorneys for Defendants and Respondents Marin County Employees' Retirement Association; Board of Retirement of the Marin County Employees' Retirement Association: Manatt, Phelps & Phillips, Ashley Kathleen Dunning, Kelly L. Knudson, San Francisco, Benjamin G. Shatz, Michael V. Toumanoff, Los Angeles; Nossaman, Ashley Kathleen Dunning, San Francisco, Michael V. Toumanoff, Los Angeles;

Attorneys for Intervenor and Respondent: Kamala D. Harris, Attorney General, Douglas J. Woods, Assistant Attorney General, Constance L. LeLouis, Rei R. Onishi, Anthony P. O'Brien, Deputy Attorneys General.

Richman, J.

The practice known as “pension spiking,” by which public employees use various stratagems and ploys to inflate their income and retirement benefits, has long drawn public ire and legislative chagrin. Effective January 1, 2013, the Legislature amended Government Code ¹ section 31461, a provision of the County Employees Retirement Law, with the aim of curtailing pension spiking by excluding specified items from the calculation of retirement income. A number of individuals currently employed by various governmental entities in the County of Marin, together with a number of organizations representing current county employees, brought suit to halt implementation of the revised formula. The trial court concluded application of the new formula to current employees did not amount to an unconstitutional impairment of the employees' contracts, and sustained the pension authority's general demurrer without leave to amend.

After an extensive independent review, we reach the same conclusion and affirm, holding that the Legislature did not act impermissibly by amending section 31461 to exclude specified items and categories of compensation from the calculation of pensions for current employees. As will be shown, while a public employee does have a “vested right” to a pension, that right is only to a “reasonable” pension—not an immutable entitlement to the most optimal formula of calculating the pension. And the Legislature may, prior to the employee's retirement, alter the formula, thereby reducing the anticipated pension. So long as the Legislature's modifications do not deprive the employee of a “reasonable” pension, there is no constitutional violation. Here, the Legislature did not forbid the employer from providing the specified items to an employee as compensation, only the purely prospective inclusion of those items in the computation of the employee's pension. Neither the statutory change, nor the implementation of that change by the county pension agency, amounts to an impairment of the employee's receipt of a “reasonable” pension upon retirement.

BACKGROUND

The Statutory Framework and the Emergence of the Unfunded Pension Liability Crisis

The County Employees Retirement Law of 1937 (Stats. 1937, ch. 677 (CERL)), as codified in 1947 (§ 31450 et seq.) allows, but does not require, a county to establish and operate a retirement plan for its employees. Twenty of the state's 58 counties have elected to do so. Each county plan is administered by a retirement board, which, as we previously characterized it, 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) for purposes of calculating the amount of a pension.” (In re Retirement Cases (2003) 110 Cal.App.4th 426, 433, 1 Cal.Rptr.3d 790.)

In the aftermath of the severe economic downturn of 2008–2009, public attention across the nation began to focus on the alarming state of unfunded public pension liabilities. (E.g., U. S. Cong., Congressional Budget Off., The Underfunding of State and Local Pension Plans (May 2011) p. 1 [estimating unfunded liabilities as of 2009 at “between $2 trillion and $3 trillion”]; Report of the State Budget Crisis Task Force (2012) p. 2 [“Pension funds for state and local government workers are underfunded by approximately a trillion dollars according to their actuaries and by as much as $3 trillion or more if more conservative investment assumptions are used”]; Novy–Marx & Rauh, Public Pension Promises: How Big Are They and What Are They Worth? (2011) 66 J. Fin. 1206, 1211 [estimating “state employee pension liabilities as of June 2009” at between $3.2 trillion to $4.43 trillion].) One legal commentator characterized unfunded pension obligations as the “ticking fiscal time bomb for state and local governments.” (Beermann, The Public Pension Crisis (2013) 70 Wash. & Lee L.Rev. 3, 13 ; cf. Rauh, The Pension Bomb , Milken Inst. Rev. (2011) 28 [“Many pension systems are rapidly approaching a day of reckoning.”)

As so often occurs, California was in first place: “The state with the biggest absolute level of underfunding is California, with underfunding of approximately $475 billion.” (Novy–Marx & Rauh, The Liabilities and Risks of State–Sponsored Pension Plans (2009) 23 J. Econ. Persp. 191, 197–199.) In 2010, the Stanford Institute for Economic Policy Research, studying only the California Public Employees' Retirement System, the California State Teachers' Retirement System, and the University of California Retirement System, estimated “the current shortfall at more than half a trillion dollars.” (Howard Bornstein, et al., Going for Broke: Reforming California's Public Employee Pension Systems , SIEPR Policy Brief (April 2010) p. 2; see also Nation, The Funding Status of Independent Public Employee Pension Systems in California , SIEPR Policy Brief (Nov. 2010) pp. 1, 13 [examining 24 systems operating under CERL which “account for approximately 91 percent of the total assets and liabilities for independent systems” and estimating their “aggregate unfunded liability ... at nearly $200 billion in June 2008”].) “The magnitude of the problem in California ... is staggering” and “is without peer.” (Hylton, Combating Moral Hazard: The Case for Rationalizing Public Employee Benefits (2012) 45 Ind. L.Rev. 413, 444.)

In 2011, the Little Hoover Commission advised the Governor and the Legislature: “California's pension plans are dangerously underfunded, the result of overly generous benefit promises, wishful thinking and an unwillingness to plan prudently. Unless aggressive reforms are implemented now, the problem will get far worse, forcing counties and cities to severely reduce services and layoff employees to meet pension obligations.” The Commission urged a number of “structural changes that realign pension costs and expectations of employees, employers and taxpayers.” (Little Hoover Com., Public Pensions for Retirement Security (Feb. 2011) [cover letter of Chairman Daniel Hancock].) The situation was described as “dire,” “unmanageable,” a “crisis” that “will take a generation to untangle,” and “a harsh reality” that could no longer be ignored: “The money coming in is nowhere near enough to keep up with the money that will need to go out.” (Id ., pp. v, 38, 12, 21, 25.)

“The state must exercise its authority—and establish the legal authority—to reset overly generous and unsustainable pension formulas for both current and future workers.” (Little Hoover Com., Public Pensions for Retirement Security, supra , p. 53.) And because “State and local governments have made a promise to workers they can no longer afford,” the commission recommended: “To provide immediate savings of the scope needed , state and local governments must have the flexibility to alter future, unaccrued retirement benefits for current workers.” (Id ., p. 42, italics added.)

One feature of the system that drew the commission's critical attention was “pension spiking,” which the commission defined as follows: “The practice of increasing [an employee's] retirement allowance by increasing final compensation or including various non-salary items (such as unused vacation pay) in the final compensation figure used in the [employee's] retirement benefit calculations, and which has not been considered in prefunding of the benefits.” (Little Hoover Com., Public Pensions for Retirement Security, supra , p. 73.) The commission found the practice had become “widespread throughout local government,” and had generated “public outrage [that] ... cannot continue to be ignored.”² (Little Hoover Com., Public Pensions for Retirement Security, supra , pp. 36, vi.) “The spiking games must end. Pensions must be based only on actual base salary ... not padded with other pay for clothing, equipment or vehicle use, or enhanced by adding service credit for unused sick time vacation time or other leave time.” (Id ., at p. 46.)

The Pension Reform Act

The Legislature heard, and agreed.³ The following year, it passed Assembly Bill No. 340 (AB 340), enacting the California Public Employees' Pension Reform Act of 2013 (Pension Reform Act), which made fundamental alterations in the...