O'Neal v. Stanislaus Cnty. Employees' Ret. Ass'n
| Decision Date | 08 December 2021 |
| Docket Number | F079201 |
| Court | California Court of Appeals Court of Appeals |
| Parties | MICHAEL R. O'NEAL et al., Plaintiffs and Appellants, v. STANISLAUS COUNTY EMPLOYEES' RETIREMENT ASSOCIATION, Defendant and Respondent; COUNTY OF STANISLAUS, Intervener and Respondent. |
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Stanislaus County Super. Ct. No. 648469. Robert F. Moody, Judge. )
Law Office of Michael A. Conger and Michael A. Conger; Richard H Benes for Plaintiffs and Appellants.
Reed Smith, Harvey L. Leiderman and Maytak Chin; Damrell, Nelson Schrimp and Fred A. Silva for Defendant and Respondent.
Hanson Bridgett, Raymond F. Lynch, Adam W. Hofmann, and Matthew J Peck for Intervener and Respondent.
Michael R. O'Neal (O'Neal), Rhonda Biesemeier (Biesemeier), and Dennis J. Nasrawi (Nasrawi) (collectively, appellants), appeal following a bench trial in which the trial court entered judgment denying their claims. 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.
This is the third time this case has come before this court. In the prior two instances, we reversed decisions made by the trial court that dismissed the case prior to trial, finding that appellants had properly stated a claim for relief and that factual issues precluded a grant of summary judgment. Our prior published opinion on this matter, O'Neal v. Stanislaus County Employees' Retirement Association (2017) 8 Cal.App.5th 1184 (O'Neal) provides a detailed overview of the case, its procedural history, the relevant core legal principles, and the factual allegations underlying the action. The parties here are also intimately familiar with the facts. Accordingly, we generally limit ourselves in this opinion to reciting general facts relevant to the case, including more specific factual detail as we work through the multitude of issues raised by appellants.
Amid the recession and its aftermath that spanned at least 2009 through 2011, both StanCERA and County experienced substantial financial effects. StanCERA through a loss on investments, and County through a loss of tax revenue. At around the same time, StanCERA discovered errors in its prior actuarial calculations that indicated it had failed to identify and collect necessary payments from County in the two years leading up to June 30, 2008. Based on the legal structures governing retirement systems, StanCERA was required to account for those mistakes and losses and recalculate County's payment obligations accordingly. This recalculation created an inevitable consequence given the financial situation of the time. At a point when County's resources were substantially reduced, StanCERA's legal obligations created a substantial increase in the amount of money County was required to provide to cover StanCERA's unfunded liabilities.
County informed StanCERA that the increased financial burden was not feasible from its standpoint and requested relief. It informed StanCERA that a failure to act could result in layoffs that would affect StanCERA members along with other consequences. It implied that something must be done.
Based on this request, and over the course of three years, StanCERA made five disputed financial transactions that effectively eliminated nonvested benefits for certain members that had been funded for decades with nonvaluation reserves. StanCERA also adjusted both the period over which unfunded liabilities must be repaid and the manner in which those payments were calculated in a way that resulted in substantial periods of negative amortization of those debts.
When reduced to its essence, this case presents a straightforward question: Why did the board authorize those actions? StanCERA argues the board acted to protect its members and the overall health of the system in a time of crisis. Appellants contend the board acted to protect County at the expense of its own members in an effective raid on the pension funds.
The trial court examined the evidence and concluded both that appellants could not prove the board placed County's interest ahead of its members and that the evidence affirmatively supported StanCERA's claim it was acting to protect its members and the retirement system in a time of crisis. The court further found the board acted with proper prudence when making these decisions.
On appeal, appellants raise several issues. Initially, they attack many of the trial court's evidentiary rulings. Appellants argue these rulings left them without critical evidence while providing StanCERA the opportunity to introduce irrelevant facts that benefited StanCERA's case. Both interspersed with and following these evidentiary arguments are multiple claims that the facts support only one finding - that the board's actions breached their fiduciary duties as a matter of law. Included in these claims is a request that we reassess one of the cases underlying our opinion in O'Neal which held that a retirement board may consider potential job losses within the ambit of their members' interests. Finally, appellants present a claim that substantial evidence fails to support the trial court's judgment.
For the following reasons we find no reversible error affecting the trial court's judgment. We therefore affirm. Ultimately, the trial court's position as trier of fact leaves it with the responsibility to determine which analysis of the facts is most credible. Although acknowledging that fair arguments can be made that appellants' perspective can find support in the evidence, we find no fault with the trial court choosing the equally legitimate perspective presented by StanCERA.
The record at trial in this case consisted of a series of exhibits comprising the various meetings at which StanCERA made the contested decisions, deposition transcripts from witnesses that did not appear, live testimony from various witnesses and experts, and additional exhibits consisting of financial information and other miscellaneous supporting materials. Based on our opinion in O'Neal, the focus of the trial was on whether any one of five contested financial actions constituted a breach of the board's fiduciary duties. (O'Neal, supra, 8 Cal.App.5th at pp. 1217-1222.) These five contested actions were: (1) the 2009 decision to adopt a 30-year level percent of pay amortization schedule for unfunded actuarial accrued liability (UAAL) and subsequent conduct resulting in continuing negative amortization rates; (2) the 2009 decision to transfer $50 million from nonvaluation reserves to valuation funds; (3) the 2009 decision to transfer $10 million from nonvaluation reserves to offset required employer contributions related to UAAL; (4) the 2010 decision to transfer $21.4 million from nonvaluation reserves to offset required employer contributions related to UAAL; and (5) the 2011 decision to transfer $14.3 million from nonvaluation reserves to offset required employer contributions related to UAAL. The core facts relevant to this appeal come from the evidence relating to the purposes and motivations underlying these contested actions. We begin by reviewing that evidence.
StanCERA's retirement fund has, for many decades, generally been a successfully run plan. As far back as the early 1980's, the fund was able to generate nonvaluation reserve funds that were used to pay supplemental benefits to retirees. Although there have been past periods of UAAL, the board and County have worked together to reduce or eliminate those amounts. As one example, County issued pension obligation bonds in the mid-1990's, totaling over $100 million to reduce then-existing UAAL, that required continuing payments through 2013. In addition, County and the board have worked together to provide other benefits to members, including a pooling arrangement for medical insurance. As late as 2006, County and the board agreed to a five-year extension of that agreement.
Between 2006 and 2008, however, the fund suffered actuarial investment losses as part of the financial crisis occurring during that time. These included an investment income loss of more than $120 million in the year ending June 30, 2008. In addition, StanCERA learned that its prior actuary had utilized incorrect assumptions, causing an underpayment over the preceding two years of nearly $40 million. Thus, at the time StanCERA began evaluating its plan and determining actuarily required employer contributions in 2009 - action based on numbers dating to 2008 - unfunded liability in the plan had jumped from roughly $40 million to roughly $280 million, corresponding to a drop in funding ration from 96.6 percent to 81.8 percent, relative to 2006. These changes resulted in an expected increase in County's employer contribution of more than $22 million from the year before, which included contribution ranges of roughly 16 percent to 29 percent.
County responded to this increase by writing a letter to StanCERA in April 2009. The letter explained County's concern that it was being asked to increase its payments by $22.7 million in a year where it projected a decrease in discretionary revenue of over $17 million. County further explained that it had planned for a smaller increase and, even doing so, had a $34 million deficit in their budget, which they were attempting to balance by implementing...
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