Legal Alerts Mar 07, 2019

California Supreme Court Decides Cal Fire Narrowly

Option to Purchase Airtime is Not a Vested Right

California Supreme Court Decides Cal Fire Narrowly

As expected, the California Supreme Court affirmed the appellate court’s holding in Cal Fire Local 2881 v. California Public Employees’ Retirement System et al., concluding that the plaintiffs did not have a vested right to the option to purchase nonqualified service credit, referred to as “airtime,” for CalPERS purposes. Airtime is service credit for time not attributed to actual work performed, but counted for purposes of calculating retirement benefits. In its decision, the Court ruled that the Legislature’s decision to eliminate the ability to purchase airtime was constitutional. Concluding that the ability to purchase airtime was not a vested right, the Court declined to address the “California Rule” — despite intense pressure to do so.
The California Rule, traditionally referred to as the vested rights doctrine, refers to decades of California case law commencing with the 1947 case Kern v. City of Long Beach. It has recognized that public employees obtain a vested contractual right to pension benefits as soon as they begin employment that may not be destroyed, once vested, without impairing a contractual obligation.
The ability to purchase airtime was eliminated by the Public Employees’ Pension Reform Act, or PEPRA, effective Jan. 1, 2013 with the enactment of Government Code section 7522.46. Previously, CalPERS permitted eligible members to purchase up to five additional years of airtime pursuant to Government Code section 20909. The plaintiffs in Cal Fire challenged the application of section 7522.46 by filing a petition for writ of mandate and injunctive relief seeking the court to order CalPERS to continue permitting classic members, who otherwise meet the service credit eligibility requirements, to purchase airtime. After losing at the trial and appellate court levels, the plaintiffs filed a petition for review with the California Supreme Court. Review was granted on April 12, 2017.    
After considering the plaintiffs’ arguments, the Court concluded that they failed to establish that the option to purchase airtime was a vested right and, as such, ruled in favor of the Legislature.
The Court did not rule on to what extent, if at all, a vested right may be impaired  – for that we will have to wait on the Court’s ruling on the Alameda County Deputy Sheriff’s Association et al. v. Alameda County Employees’ Retirement Association et al. and the Marin Association of Public Employees et al. v. Marin County Employees’ Retirement Association et al. cases. However, Cal Fire provides public employers the following guidelines to assess whether a proposed change to a component of its employees’ pension benefits implicates a vested right:

  • Public employment benefits are statutory rather than contractual, except during the term of a collectively bargained agreement subject to the Meyers-Milias-Brown Act, and are, therefore, subject to constitutional protection under the contract clause only in very limited exceptions. 
  • The Court identified only two exceptions: (1) when there is a clear legislative intent, whether express or implied, to create a vested right or (2) when the nature of the benefit is such that an implied contract right exists even in the absence of clear legislative intent. Pension rights are accorded special protection under this latter exception.
  • However, not all public employment benefits are pension rights, even though they may affect the pension benefit that is paid to an employee upon retirement. An example of this is the reduction in the mandatory retirement age from 70 to 67 in Miller v. State of California. While the plaintiff argued that precluding him from three additional years of service was an unconstitutional impairment of a vested right, the Miller court held that the plaintiff had no right to continued employment to age 70 and, therefore, he had no vested right to the later retirement age.  
  • The special protection extended to pension rights is rooted in the understanding that pension rights are a form of deferred compensation granted in exchange of services rendered but not paid until a future date. This might prove to be key to the Court’s consideration, in Alameda and Marin, of a central component of the California Rule under current case law — that existing employees have a vested right to earn pension benefits under the same terms, if not better, as existed at the time of employment even with respect to future service with the same employer. The concept of deferred compensation in the context of pension rights applies to services previously rendered that have not been fully compensated. Pension rights are intended to fill that gap. If so, it cannot be said that future accruals associated with future service are a form of deferred compensation because services have not yet been rendered. As such, it is possible that the Court may rule that the right to pension benefits for future service is not a vested right under the implied contract clause exception. Of course, the other exception — whether there is a clear intent to create a vested right — could still apply.

After considering the preceding, the Court concluded that there was no evidence that the Legislature intended to create a vested right to the option to purchase airtime and that the option to purchase airtime was not protected under the implied contract clause because it was not a form of deferred compensation. As such, the option to purchase airtime was not a vested right and, therefore, the Legislature’s elimination of that option was constitutional.
Given the Court’s decision to sidestep a decision on the California Rule, Cal Fire is not groundbreaking but, on subsequent looks, it might give us some inkling on how the Court may rule when it finally takes on the California Rule. For now, public employers should consult with their benefits counsel before considering any changes to pension benefits.  
If you have any questions about this decision and how it may impact your agency, please contact the author of this Legal Alert listed at the right in the firm’s Employee Benefits & Executive Compensation practice group or your BB&K attorney.

Additional Reading: 70 Years of Pension Precedent Could Soon Be Weakened by the California Supreme Court
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Disclaimer: BB&K Legal Alerts are not intended as legal advice. Additional facts or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information in this communiqué.

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