Retroactive Application Of California’s New Pension Limitations

Responding to problems with underfunding of pension systems, the California Legislature passed the California Public Employees’ Pension Reform Act. The Act, which was effective January 1, 2013, limited the defined benefit formulas available to new members of public safety retirement plans. There are various options available under the Act, but the maximum benefit possible is 2.0% at age 50, 2.5% at age 55, and 2.7% at age 57. The Act generally requires the employer to offer the formula closest to the formula the employer offered to comparable employees on December 31, 2012.

San Diego County and the Deputy Sheriff’s Association of San Diego County were parties to collective bargaining agreements covering two groups of employees, the deputy sheriffs’ unit and the safety management unit. Each contract extended through June 26, 2014, and called for defined pension benefits of 3% at age 55.

The question the California Court of Appeals had to answer was whether the Act – which would have capped benefits at 2.7% at age 55 – could apply to employees hired between the January 1, 2013 effective date of the Act and the June 26, 2014 expiration of the Association’s contracts. At issue was whether the Act unlawfully impaired the constitutionally-protected “obligation of contract.”

The Association argued that the new safety members covered by the agreements had a constitutionally-protected right to the application of the 3% @ 55 formula because the agreements predated the Act, they were binding, and they required the use of the 3% @ 55 formula until they expired. The Court disagreed, finding that “the Association’s position conflicts with authorities indicating there is no contract clause protection for unvested contractual pension rights. Where, as here, a collective bargaining agreement incorporates statutorily available retirement plan options and the Legislature has not restricted itself from later changing the options, then subsequent changes applicable only to prospective employees do not violate the contract clause.

“This holding is consistent with the long-standing recognition the contract clause protects only reasonable contract expectations, which in the case of a prospective public employee’s pension rights, do not arise until employment commences. Accordingly, we conclude the Association has not established application of the 2.7% @ 57 formula to new safety members covered by the agreements violates the state constitution’s contracts clause.”

The Court also had to deal with the Act’s requirements that new members pay at least 50% of the “normal cost” of their retirement benefits, which would amount to 12.58% for Association members. The Act also prohibits employers from paying any portion of the employee contribution. The Associations’ contracts required the County to pay a portion of the employees’ required retirement contributions, and had different overall employee contribution levels.

The Court found the contribution issue to be on different footing than the level of defined benefits. The Court held that “we need not reach the constitutional question as we conclude application of the employee contribution requirements resulted in a statutorily prohibited impairment of the County’s obligations under the agreements. The Act provides that if the terms of a contract between a public employer and its public employees that is in effect on January 1, 2013, would be impaired by any provision of this section, that provision shall not apply to the public employer and public employees subject to that contract until the expiration of that contract. In this case, the agreements were in effect on January 1, 2013, and the application of the Act’s employee contribution provisions conflicted with the agreements’ terms governing employee contributions. Consequently, under the plain language of the statute, the conflicting provisions of the Act did not apply to new members governed by the agreements until the agreements expired on June 26, 2014.”

Deputy Sheriffs’ Association of San Diego County v. County of San Diego, 233 Cal. App. 4th 573 (Cal. App. 2015).