FACTS AND PROCEDURAL BACKGROUND
The County of San Diego (County) and the Deputy Sheriffs’ Association of San Diego County (DSA) were parties to a memorandum of understanding (MOU) that specified a 3% at 55 retirement benefit formula for all employees hired after a specific date. The MOU also stated that the County would pay a specific percentage of unit members’ retirement contributions.
Effective January 1, 2013, the County – pursuant to the Public Employees’ Pension Reform Act of 2013 (PEPRA) – began instead offering “new members” a 2.7% at 57 retirement benefit as mandated by Government Code § 7522.25. The County also increased employee retirement contributions for all employees to 50% of normal cost pursuant to Government Code § 7522.30.
DSA challenged both changes, alleging that they impaired pre-existing contractual obligations created by the MOU, and thus violated Article I, section 9 of the California Constitution (prohibiting the passage of any “law impairing the obligation of contracts”). The Superior Court found against DSA on both claims.
THE COURT OF APPEAL’S DECISION
On appeal, the court of appeal agreed that implementation of the lower “new member” retirement tier mandated by PEPRA was not an unconstitutional contract impairment, regardless of whether it conflicted with preexisting negotiated agreements, because employees not yet hired cannot have a vested contractual right to any specific benefit that is protected by the constitutional contract clause.
As to the employee contribution, however, the court of appeal found that it need not reach the constitutional issue because Government Code § 7522.30(f) specifically provides that where an existing MOU would be impaired by implementing the 50% of normal cost employee contribution, the provision “shall not apply” until the MOU expires.
IMPACT OF THIS DECISION
This decision reaffirms two basic yet important points: (1) PEPRA’s requirements are mandatory, and (2) changing benefits of future employees cannot impair vested contractual rights because those rights, by definition, can only vest after an employee is actually hired.
The decision, however, is most important for what it did not say. The court might have deviated from established case law regarding not only when and how retirement benefits vest, but also the very ability of the legislature to mandate changes to such benefits for future employees. It did not do so. Instead, it reaffirmed that such changes do not – indeed cannot – impair any constitutionally protected contract right held by individual employees.
The court’s recognition that PEPRA’s requirements are mandatory might seem obvious, but some labor groups have argued – and continue to argue – otherwise. The point is important because the mandatory nature of the new lower benefit formulas effective January 1, 2013, means that after that date it essentially became illegal to offer new employees any other richer benefit, regardless of what may have been previously negotiated with their representative union. Thus, failing to comply with an MOU provision otherwise guaranteeing a higher benefit is not an unlawful contract breach.
Notably, the court did not fully address one of DSA’s arguments: that the County actions impaired contractual obligations to DSA itself, and that this impairment was independently unconstitutional regardless of whether any individual employee’s vested rights were impaired. Because the court dismissed this argument without elaboration, employee organizations are likely to make similar claims in later cases until a court clarifies the law on this point.
The decision also fails to address the relationship between PEPRA and the Meyers-Milias-Brown Act (“MMBA,” Government Code § 3500 et seq.). Some labor groups have argued that since PEPRA does not expressly state it preempts the MMBA, its provisions cannot supersede agreements negotiated under the MMBA. In at least one arbitration case – involving the Santa Clara Valley Water District – a union has prevailed in arbitration based largely on this claim. In another more recent case arising in Napa County, however, the same arbitrator reached an opposite result based on the specific language of the MOUs at issue. For details, feel free to contact us. We await a definitive ruling from the courts on this point, but pending that ruling we expect employee organizations to persist in their arguments.
PRACTICE POINTERS
- While the fact that PEPRA became effective two years ago means that most potential challenges were filed sometime in the past, many of those claims began life as grievances and are still working their way through various levels of decision and appeal. Public employers who are facing a claim over implementation of PEPRA requirements should find comfort in the San Diego County decision. Since PEPRA’s requirements are mandatory, the employer’s only obligation – absent a negotiated agreement to the contrary – is to provide notice and an opportunity to request bargaining over negotiable impacts. Be prepared to demonstrate that such notice was provided, and the opportunity waived or the obligation satisfied, a task made more difficult by recent PERB decisions.
- Many MOUs include a “severance” or “supersession” clause that expressly addresses the consequences of unlawful MOU provisions. In some cases, these provisions also obligate the employer to negotiate with the union on request over a lawful replacement benefit. In defending against a claim that a contract provision trumps PEPRA, the exact terms of such a clause can be very important.
We are optimistic that as the court of appeal addresses the unresolved issues in the years ahead, it will continue to affirm that implementation of the changes required by PEPRA is a mandatory duty, and that compliance with PEPRAs requirements does not constitute an unlawful MOU impairment. There are, however, no guarantees, and for now some important issues remain unsettled.
For more information, contact Justin Otto Sceva (jsceva@publiclawgroup.com, 415-848-7213) or Erich Shiners (eshiners@publiclawgroup.com, 916-379-5721)