Retirement Issues Discussed

by Stephen H. Silver, ESQ.

Many of our clients have contacted this office and expressed concerns regarding the pending or anticipated legislation and/or ballot initiatives that, if enacted, would alter pension benefits of active employees, and even current retirees. My response has been, and is, that there is well-established precedent covering almost 100 years in the form of reported decisions of California Courts of Appeal and the California Supreme Court that recognize that a public employee acquires a vested right that is protected by the Contract Clauses of the United States and California Constitution to entitlement to the pension benefits in effect at the time he or she first renders service for the public employer. In addition, if those benefits should improve during the course of employment, the vested right would be expanded to encompass those enhanced benefits. 

The Court Opinions have made it abundantly clear that this entitlement is a form of deferred compensation which is part of the consideration earned for services performed on day one. This deferred compensation is subject to the employees meeting the necessary conditions to entitlement, such as, for example, retiring with the requisite minimum years of service. The Courts have held that an employer cannot take away or impair this deferred compensation any more than it could recoup all or a portion of the wages paid for work already performed.

There are many examples of the types of benefits that have been held to be vested and therefore subject to protection under the Contract Clauses of the Constitutions. The most typical example is the right to a particular formula. There are numerous older cases that struck down a switch from a fluctuating pension to a fixed pension. The fluctuating pension entitles the employee to the applicable percentage (based on age and years of service at retirement) of the pensionable income earned by an employee occupying that position at any given time following retirement. The fixed pension is the type that most of our clients now enjoy which is a percentage of the employee's pensionable income during a prescribed time period of employment.

Another example involves an adverse alteration of the prescribed retirement contributions to be paid by the employees. In other words, if the pension plan provides that the employees must pay retirement contributions equal to 9% of pensionable income, a change that would increase that rate to a larger percentage of pensionable income would be struck down as an invalid impairment of a vested contractual right. 

The most typical examples of alterations or changes presently being proposed are (1) placing a cap on retirement allowances; (2) changing the manner in which an employee's final compensation is determined from the highest 12-month period to the average of a longer period; (3) increasing the employee contribution rate and (4) altering what items of remuneration must be regarded as pensionable income. Subject to the caveats stated below, it is my opinion that any of these changes would constitute an unlawful impairment of vested contractual rights in violation of the United States and California Constitution.

Because the Courts have held that any impairment of these vested rights would be a violation of the Contract Clause of the United States Constitution (as well as the California Constitution), there is a viable argument that even an amendment of the California Constitution adopted through a ballot initiative should be invalidated as an unlawful abrogation of a vested contractual right in violation of the federal Constitution.

I must caution you, however, that it is critical to understand the exact nature of your entitlement. If any aspect is subject to alteration by the employer, the vested right is also subject to that condition. As an example, if the employer has reserved the right to change any ingredient of the retirement formula, even through negotiations, the entitlement is subject to that condition. Thus, any alteration in accordance with that reserved right would not be an impairment of the vested right. In that connection, courts have held that the obligation assumed by the employer to pay all or a portion of required employee contributions does not created a vested right as it inherently is subject to renegotiation.

Similarly, if the retirement system reserves the right to make changes under certain conditions, the vested right is subject to those contingencies. A typical example is alteration of employee contributions. Under the County Employees' Retirement Law and many private retirement plans, the employee's contribution rate is subject to fluctuation based upon am actuarial valuation. The most typical causes for alterations in the employee's rate are changes in actuarial assumptions or benefits. Usually, negative or positive experience cannot impact the employee's rate. The courts have made it clear that any increases in the member contribution rates that were properly implemented based on actuarial determinations do not impair vested rights.

For those of you who receive retirement benefits through PERS, you should be aware that, while the member rate is currently fixed (9% for safety members and 7% or 8% for non-safety members), there is a provision in the Retirement Law that allows PERS (not the employer or the State of California) to adjust employee contribution rates.

Finally, I am embarrassed to add that, notwithstanding this clear, established precedent, I do not have as much faith in today's judiciary as I would like. I have been examining too many result oriented decisions where courts seem to find a way to distinguish precedent in order to obtain the desired result. While I think that would be very difficult to accomplish in this situation in light of the overwhelming body of case law regarding this subject, I cannot completely rule out that possibility, especially in light of the current perceived negative public sentiment toward pensions.

If you would like to discuss this subject in greater detail or would like specific case authorities for the propositions I have enunciated, please feel free to contact me at 310.393.1486. For more information and articles about this subject and others of interest, please visit SHSW+L's website www.SHSLaborLaw.com.