Teachers' Retirement Bd. v. Genest

• Citation: 65 Cal.Rptr.3d 326,154 Cal.App.4th 1012
• Decision Date: 30 August 2007
• Docket Number: No. C050889.,C050889.
• Parties: TEACHERS' RETIREMENT BOARD, as Manager, etc., et al., Plaintiffs and Appellants, v. Michael C. GENEST, as Director, etc., Defendant and Appellant; John Chiang, as State Controller, etc., Defendant and Respondent; California Retired Teachers Association, Intervener and Appellant.
• Court: California Court of Appeals

65 Cal.Rptr.3d 326

154 Cal.App.4th 1012

TEACHERS' RETIREMENT BOARD, as Manager, etc., et al., Plaintiffs and Appellants, v. Michael C. GENEST, as Director, etc., Defendant and Appellant John Chiang, as State Controller, etc., Defendant and Respondent California Retired Teachers Association, Intervener and Appellant.

No. C050889.

Court of Appeal, Third District.

August 30, 2007.

Olson, Hagel & Fishburn, Deborah B. Caplan, N. Eugene Hill, Sacramento, and Richard C. Miadich for Plaintiffs and Appellants.

Mary Ellen Signorille, Melvin Radowitz and Barbara A. Jones for AARP as Amicus Curiae on behalf of Plaintiffs and Appellants and on behalf of Intervener and Appellant.

Stevens & O'Connell and Steven S. Kimball for Arkansas Retired Teachers Association, Maryland Retired School Personnel Association, Montana Retired Educators Association, New York State Retired Teachers' Association, Utah Retired School Employees Association, and Wisconsin Retired Educators' Association as Amici Curiae on behalf of Plaintiffs and Appellants and on behalf of Intervener and Appellant.

Nossaman, Guthner, Knox & Elliott and John T. Kennedy, Sacramento, for Defendant and Appellant.

No appearance for Defendant and Respondent.

Seyfarth Shaw, Kurt A. Kappes, Sacramento, and Jason T. Cooksey for Intervener and Appellant.

SCOTLAND, P.J.

While California was in a period of fiscal plight in 2003, the Legislature passed, and Governor Davis signed, Senate Bill 20 (SB 20), reducing the state's obligation to fund the Supplemental Benefit Maintenance Account of the Teachers' Retirement Fund by $500 million for fiscal year 2003-2004.

The Teachers' Retirement Board (TRB), as manager of the California State Teachers' Retirement System (CalSTRS), then filed a petition for writ of mandate and a complaint for declaratory and injunctive relief against the director of the Department of Finance (DOF), claiming that SB 20 is unconstitutional because it violates the contract clause of both the state and federal Constitutions and interferes with TRB's plenary authority to administer the assets of CalSTRS. TRB successfully moved for summary judgment on the first ground.

DOF appeals, arguing that the trial court erred in finding SB 20 unconstitutional, and that the court should not have addressed the issue because the controversy is not ripe for adjudication.

TRB cross-appeals, asserting that the trial court erroneously failed to addressed whether SB 20 unconstitutionally interferes with TRB's plenary authority. TRB and the California Retired Teachers Association, which intervened in the action, also cross-appeal claiming that the court wrongly awarded prejudgment interest at a rate of 7 percent, rather than 10 percent, per annum.

As we will explain, the trial court (1) correctly determined that the challenged portion of SB 20 violates the contract clause of the state and federal Constitutions and that the matter is ripe for adjudication, (2) properly declined to address TRB's alternate constitutional challenge that SB 20 interferes with TRB's plenary authority to administer the assets of CalSTRS, but (3) erred in awarding prejudgment interest at a rate of 7 percent, rather than 10 percent, per annum. We shall so modify the judgment and affirm it as modified.

DISCUSSION

I

The allowance that a retiree receives from CalSTRS is composed of three main components: (1) a retirement allowance under the defined benefit program (Ed. Code, §§ 22002, 22122.5; further section references are to the Education Code unless otherwise specified); (2) an annual adjustment of 2 percent per year (§ 22140); and (3) a purchasing power supplemental payment (§ 24415). The third component is paid from the Teachers' Retirement Fund's Supplemental Benefit Maintenance Account (the SBMA) to retirees whose current defined benefit program allowance has fallen below 80 percent of the purchasing power of the initial allowance due to inflation. (§ 24415.)¹

The SBMA is funded by state contributions from the General Fund. (§ 22954, subd. (a).) The purchasing power supplemental payments are made to retirees on a quarterly basis (§ 24415, subd. (a)) and are "payable only to the extent that funds are available from the [SBMA]." (§ 24415, subd. (d).) If the TRB determines that the SBMA will not have sufficient funds to provide purchasing power of up to 80 percent for the following fiscal year, it can do one of three things: (1) increase the employer contributions, which must be approved in the Budget Act; (2) reduce the supplemental payment for the following year; or (3) transfer funds from the Teachers' Retirement Fund if it has no unfunded obligations. (§ 24416.)² However, if funds remain in the SBMA after making purchasing power supplemental payments of 80 percent, then "those funds shall remain in the [SBMA] for allocation in future years." (§ 24415, subd. (b).)

Prior to 1998, the purchasing power benefit provided by the SBMA was not a vested right. Former section 24414, subdivision (d), expressly stated that "nothing in the sections establishing the Supplemental Benefit Maintenance Program shall be construed as a basis for any implied contractual obligation, or as an element of exchange of consideration by a private party for consideration offered by the state, or as an intent to grant private rights of contract, or as conferring any vested right whatsoever on any present or future member...." (Stats.1996, ch. 1165, § 34, p. 8506.)

Similarly, former section 22954, subdivision (d) stated that "the Legislature reserves the right to reduce or terminate the state's contributions to the [SBMA] in the Teachers' Retirement Fund provided by this section and to reduce or terminate the distributions required by Section 24415." (Stats.1993, ch. 893, § 2, p. 4928.)

However, the statutory landscape changed in 1998, due to Assembly Bill No. 1102 (AB 1102), which was part of a package of changes to the Teachers' Retirement Law negotiated between the Legislature, the Governor, and CalSTRS. AB 1102 repealed sections 24414 and 22954, and added a new section 22954, in part as follows: "(a) [C]ommencing July 1, 1999, a continuous appropriation is hereby annually made from the General Fund to the Controller, pursuant to this section, for transfer to the [SBMA] in the Teachers' Retirement Fund. The total amount of the appropriation for each year shall be equal to 2.5 percent of the total of the creditable compensation of the immediately preceding calendar year upon which members' contributions are based for purposes of funding the supplemental payments authorized by Section 24415.[¶] ... [¶] (c) It is the intent of the Legislature in enacting this section to establish the supplemental payments pursuant to Section 24415 as vested benefits pursuant to a contractually enforceable promise to make annual contributions from the General Fund to the [SBMA] in the Teachers' Retirement Fund in order to provide a continuous annual source of revenue for the purposes of making the supplemental payments under Section 24415." (Stats.1998, ch. 1006, §§ 4-5, 9 (AB 1102), italics added.)³

AB 1102 was linked to Assembly Bill No. 2804 (AB 2804) such that the bills would become effective only if both were enacted and became operative. (Stats. 1998, ch. 1006, § 14 (AB 1102); Stats.1998, ch. 967, § 5 (AB 2804).) In conjunction with other bills not relevant to this appeal, AB 1102 represented the benefit portion of the aforesaid agreement between CalSTRS, the Legislature, and the Governor, while AB 2804 contained the funding component of the package. (Assem. Cone, in Sen. Amends, to Assem. Bill No. 1102 (1997-1998 Reg. Session), p. 2.) AB 2804 decreased the state's contribution to the defined benefit program from 4.3 percent to 3.102 percent of the annual total creditable compensation and reamortized CalSTRS unfunded liability to the year 2027. (Former § 22955, subd. (a); Stats. 1998, ch. 967, § 4 (AB 2804); compare former § 22955, Stats.1997, ch. 482, § 20.) The Legislature estimated this would result in cost savings to the state of $577 million, $158 million, and $213 million in fiscal years 1998-1999, 1999-2000, and 2000-2001 respectively. (Assem. Cone, in Sen. Amends, to Assem. Bill No. 2804 (1997-1998 Reg. Session), p. 2.)

Thus, the Legislature decreased its contributions to the defined benefit program but (1) contractually obligated the state to make contributions to the SBMA, (2) mandated that the contributions "shall be" a specified percentage of the total creditable compensation, and (3) eliminated the Legislature's statutory right under former section 24414 to reduce or terminate the contributions to the SBMA. Indeed, the legislative history indicates that under existing law, there was no guarantee that the state would not reduce funding to the SBMA, but that this law would be altered by AB 1102, which "vests the funding stream at its current level;" i.e., 2.5 percent of the total creditable compensation. (Sen. Rules Com., Off. of Sen. Floor Analyses, 3d Reading analysis of Assem. Bill No. 1102 (1997-1998 Reg. Sess.) as amended Aug. 27, 1998.)

In 2003, the Legislature passed SB 20, which amended section 22954 to decrease the state's contribution to the SBMA in part as follows: "(b) The total amount of the appropriation for each year shall be equal to 2.5 percent of the total of the creditable compensation of the fiscal year ending in the immediately preceding calendar year upon which members' contributions are based for purposes of funding the supplemental payments authorized by Section 24415. However, for the 2003-04 fiscal year only, that appropriation is reduced by five hundred million dollars ($500,000,000)." (Stats.2003, 1st Ex.Sess. 2003, ch. 6, § 2 (SB 20); italics added.)

As part of SB 20, the Legislature enacted section 22954.1, which provides that every four years an actuarial evaluation shall be made of the anticipated ability of the SBMA to provide the purchasing power protection during...