How Does A ‘Savings’ Clause Work?

Almost every public safety collective bargaining agreement or memorandum of understanding has what is colloquially called a “savings clause.” The wording of savings clauses varies, but essentially the clauses “save” the remainder of the contract in the event that one particular provision in the contract becomes illegal under federal or state law. Some savings clauses go further and obligate the parties to negotiate a substitute for the illegal provision.

The savings clause in the memorandum of understanding between the San Diego City Firefighters, Local 145 and the City of San Diego, California reads: “This Memorandum is subject to all current and future applicable federal, state and local laws, regulations and the Charter of City of San Diego. If any part or provision of this Memorandum is in conflict or inconsistent with such applicable provisions of federal, state or local laws or regulations, or is otherwise held to be invalid or unenforceable by any court of competent jurisdiction, such party or provisions shall be suspended and superseded by such applicable law or regulations, and the remainder of the Memorandum shall not be affected thereby.” In other words, the San Diego savings clause was a limited-form savings clause in that it simply declared a conflicting contract provision to be unenforceable but did not impose an obligation to renegotiate a substitute provision.

The 2002 Memorandum of Understanding (California’s equivalent of a collective bargaining agreement) allowed members of Local 145 “to convert annual leave cash equivalent to retirement service credit on a pre-tax basis.” The 2002 MOU also provided that employees in the bargaining unit would no longer be able to cash out any annual leave.

The Annual Leave Conversion Program was put into effect, and firefighters each completed and signed a form indicating that he or she wished to convert his or her eligible annual leave hours as payment for the purchase of retirement service credit. Then the Internal Revenue Service came to town, examined the City’s pension plan, and issued a “Compliance Statement.”

The IRS Compliance Statement identified the Annual Leave Conversion Program as noncompliant with section 401(a) of the Internal Revenue Code. The IRS termed the Program as an impermissible cash or deferred arrangement, and ordered the City to amend its retirement plan retroactively “to remove any provisions relating to the Annual Leave Conversion Program.” When the City did so, Local 145 sued, contending the City could not unilaterally modify the terms of the 2002 MOU.

The California Court of Appeals rejected Local 145’s challenge to the City’s actions. The Court pointed to the Savings Clause in the MOU, holding “the IRS Compliance Statement provides that the retirement plan was amended to include the Annual Leave Conversion Program in violation of the Internal Revenue Code. Despite the clear language of the IRS Compliance Statement, Local 145 argues that the Savings Clause is not in conflict with or inconsistent with Internal Revenue Code section 401(a).

“Regardless of whether the conflict with the Internal Revenue Code was caused only by certain aspects of the Annual Leave Conversion Program, the Savings Clause is triggered when the Annual Leave Conversion Program, as described in the 2002 MOU, is in conflict or inconsistent with federal law. The IRS Compliance Statement clearly states that the Annual Leave Conversion Program adopted by City is in violation of Internal Revenue Code section 401(a). Further, the IRS Compliance Statement required that City amend the SDCERS to remove ‘any provisions relating to the Annual Leave Conversion Program,’ not just certain aspects of the program. Therefore, regardless of the fact that City might have designed that program differently to comply with section 401(a), the IRS Compliance Statement establishes that the program, as enacted, did not comply.

“Because of the conflict and inconsistency with federal law, the provisions of the 2002 MOU describing the Annual Leave Conversion Program are ‘suspended and superseded’ by operation of the Savings Clause. The 2002 MOU accordingly does not provide a basis for any of the claims requiring the existence of valid contractual obligation on the part of City to provide benefits under the Annual Leave Conversion Program.”

San Diego City Firefighters, Local 145 v. The Board Of Administration Of The San Diego City Employees’ Retirement System, 2012 WL 1890193 (Cal. App. 2012).