California Court Strikes Down Most Pension Reductions

Since 1996, retired employees of the City and County of San Francisco have been eligible to receive a supplemental cost of living allowance (COLA) as part of their pension benefits when the retirement fund’s earnings from the previous year exceeded projected earnings. On November 8, 2011, City voters passed Proposition C, an initiative measure that, among other things, amended the Charter of the City and County of San Francisco to condition the payment of the supplemental COLA on the retirement fund being “fully funded” based on the market value of the assets for the previous year.

Protect Our Benefits, a political action committee representing the interests of retired City employees, filed a court challenge seeking to invalidate Proposition C as an impairment of a vested contractual pension right under the contract clauses of the federal and state Constitutions. The California Court of Appeals partially agreed with Protect Our Benefits, and invalidated a portion of Proposition C.

The Court began its opinion with a general recitation of pension law: “A public employee’s pension constitutes an element of compensation, and a vested contractual right to pension benefits accrues upon acceptance of employment. Unlike other terms of public employment, which are wholly a matter of statute, pension rights are obligations protected by the contract clause of the federal and state Constitutions. Upon accepting public employment, one acquires a vested right to a pension based on the system then in effect, and to additional pension benefits conferred during his or her subsequent employment. While the constitutional proscription against the destruction of vested contractual pension rights does not absolutely prohibit their modification, a lawmaker’s power to modify pension rights once vested is quite limited.”

Applying these principles, the Court found that “retirees were entitled to receive a supplemental COLA benefit when the Fund’s actual earnings exceeded expected earnings, without regard to the Fund’s market value or actuarial liabilities. Because there might be some years in which the Fund will earn more than projected, but will not be fully funded under a market value measurement, the full funding requirement results in a detriment to pensioners who would otherwise be entitled to receive the supplemental COLA. This diminution in the supplemental COLA cannot be sustained as reasonable because no comparable advantage was offered to pensioners or employees in return.”

However, the Court found that one class of retirees had no constitutional protection for the supplemental COLA. The Court concluded that “pension benefits did not include a supplemental COLA until voters approved a charter amendment on November 5, 1996. While voters have indeed approved pension increases for retirees in the past, in 2011 they obviously intended to place a limit on the supplemental COLA. We have concluded this limitation cannot be constitutionally applied to current employees and those who retired after the initial enactment of the supplemental COLA in 1996, but this does not mean it impairs the contractual rights of employees who retired before the supplemental COLA went into effect. Such pre-1996 pensioners had a vested right to the pension benefits that were in effect when they retired, having earned such benefits as an element of compensation, but they had no contractual expectation while in service that they would receive a supplemental cost of living allowance.”

Protect Our Benefits v. City and County of San Francisco, 2015 WL 1404952 (Cal. App. 2015).