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Pension in California

Public Pensions

by Mike Rosen (2012)

The California Supreme Court weighs in on public pensions.

In the ongoing battle over public workers’ retirement benefits – which retirees see as their vested right after years of service but critics argue are gradually bankrupting the state – the California Supreme Court ruled in November that implied contracts can be sufficient to establish permanent benefits.

The opinion has implications for several California counties – including Orange, Fresno, Sonoma, and Contra Costa – that have taken steps to cut costs by altering health benefits that retirees say they were promised.

While pensions generally are set in stone by written contracts, provisions for other retirement benefits – such as health care premiums – may be fuzzier. That’s why the Ninth Circuit Court of Appeals asked the California high court to weigh in on Retired Employees Association of Orange County, Inc. v. County of Orange (52 Cal. 4th 1171 (2011). The justices determined that “a county may be bound by an implied contract under California law if there is no legislative prohibition against such arrangements, such as a statute or ordinance.” (See “2012 Clay Awards”.)

The court did not decide whether a contract existed in Orange County, nor did it articulate a specific test for determining whether actions by a state agency have given rise to an implied contract. The case has been remanded to district court in Santa Ana, which scheduled a hearing later this month.

At the heart of the Orange County case is the way medical insurance premiums are calculated. Since 1985 the county has pooled retired and active employees in the same health insurance group, resulting in lower premiums for retirees. The county pays most of each active employee’s premium, but retirees must pay the majority of their own.

Under financial pressure, the city passed a resolution in 2007 to end the pooling practice, and as a result premiums for retirees skyrocketed. Their union sued to halt the split, arguing that the decades-long practice of pooling had created an implied contract. The county countered that it was liable only for benefits explicitly spelled out in a contract.

“A rule doesn’t need to be put into a contract, it can be raised from implication from practice,” says Michael Brown, the union’s attorney. Governments, he adds, cannot deal with their current fiscal problems “by breaking prior promises they made to induce employees to join or remain in county employment.”

But retirement health plans have become one of the most visible big-ticket items due in part to rules issued in 2004 by the Government Accounting Standards Board that force public agencies to disclose their methods for calculating those premiums.

“It’s not a coincidence that we’re seeing a lot of public agencies looking for ways to shave off retirement expenses in this area,” says Thomas Manniello, a shareholder at the Monterey office of Lozano Smith who focuses on employment law.

“Health benefits are one of the few items that are really on the table for negotiation,” says Isabel Safie, an associate in the employee benefits practice group at Best Best & Krieger in Riverside. “We may see less collective bargaining in the future if employee groups decide that this decision means that retiree health benefits are immediately off the table,” says Safie about the Supreme Court ruling.

Safie says that if retirees are emboldened by the ruling, it could spur more litigation over benefits that aren’t spelled out in a contract. For example, if an agency decides to switch its health insurance plan from a PPO to an HMO, employee groups may fight the change.

Says Manniello, “Agencies are going to have to be very clear about what benefits they are providing and be careful not to overpromote. … They may agree to certain benefits at the negotiation table, but then the staff preparing the info pamphlets might promise something else. … It can be like a game of telephone.”

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