California court addresses what constitutes “compensation earnable” for legacy members’ Pension benefits

The recent Court of Appeal case, Alameda County Deputy Sheriffs’ Association, et al. v. Alameda County Employees’ Retirement Association, et al., concerns whether a provision in the Public Employees’ Pension Reform Act of 2012 (PEPRA) unconstitutionally impairs vested rights as applied to “legacy” members, those hired prior to January 1, 2013. 

The Court of Appeal noted that the lawsuit arises out of the tension between two “valid,” yet “opposed,” public interests: “the interest of the government in maintaining the flexibility to alter statutes to conform to current needs and the interest of public employees in a stable and predictable pension, earned through years of public service.”

As background, PEPRA eliminated or reduced certain practices affecting pension benefits. 

Pension rights may be modified prior to retirement.  However, California Supreme Court decisions hold that any alterations must bear some material relationship to the pension system’s successful operation.  Further, changes in a pension plan which result in disadvantage to employees should or must be accompanied by comparable new advantages. 

The PEPRA provision at issue in this case altered the definition of “compensation earnable” in the County Employees Retirement Law of 1937 (CERL).  Compensation earnable affects the calculation of a member’s average pay during their final compensation period, which in turn affects the amount of his or her monthly pension benefit.  

PEPRA made this change by excluding certain categories of pay from “compensation earnable:”
* payments for unused vacation or other leave accruals in any amount that exceeds that which may be earned and payable in each 12-month period during the final average salary period;
* payments made at the termination of employment, except those payments that do not exceed what is earned and payable in each 12-month period during the final average salary period; and
* payments for additional services rendered outside of normal working hours, such as on-call or standby pay. 

Before PEPRA, the retirement boards of three CERL systems included these categories of pay in “compensation earnable”—in Alameda, Contra Costa, and Merced counties.  After PEPRA went into effect, these retirement boards sought to remove these types of earnings for legacy members.  Employee organizations brought suit claiming that applying the new exclusions to legacy members violates the employees’ vested rights.

The Court of Appeal pointed out that since no corresponding new advantages have been provided to the legacy members, “the application of the detrimental changes to legacy members can only be justified by compelling evidence establishing that the required changes ‘bear a material relation to the theory . . . of a pension system,’ and its successful operation.”  The Court of Appeal further directed the trial court to focus on the impacts on the specific legacy members at issue.  In addition, if the claimed justification for the change is the financial stability of the specific CERL system, the court must analyze whether the exemption of legacy members from the specific changes would cause that particular CERL system to have difficulty meeting its pension obligations with respect to those members.

The Court of Appeal sent the matter back to the trial court to conduct a specific analysis of the changes, the impact of those changes on the legacy members, and an evaluation of the legislative rationale for the change in the context of the facts of each specific CERL system. 

At the time of this writing, it is unknown whether or not a party or parties will ask the California Supreme Court to review the Court of Appeal’s decision.  Either way, it is an important case about what legal test should be used to determine the validity of changes in public sector pensions, as applied to legacy members.

Please contact your public sector labor counsel with any questions or for more information. 

By Anne Yen | January 19, 2018

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