8 Cal. App. 5th 1184
Cal. Ct. App.2017Background
- Plaintiffs (O’Neal, Biesemeier, Nasrawi) are members of StanCERA, the Stanislaus County retirement system; County of Stanislaus is an employer and intervenor.
- After 2008 investment losses and prior actuarial errors, StanCERA: (1) changed amortization methodology (30‑year, then 25/24/23, level percent of payroll) that produced periods of negative amortization; and (2) transferred funds from non‑valuation (excess) reserves (Health Insurance and Special COL reserves) into valuation reserves or used them to offset employer contribution obligations (notably $50M, $10M, $21.4M, and later $14.3M transfers).
- Plaintiffs sued for breach of fiduciary duties under Article XVI, §17 of the California Constitution and CERL, alleging (a) improper use/transfer of non‑valuation funds and (b) adoption of an amortization schedule with negative amortization violated law and fiduciary duty, causing loss to trust corpus.
- Trial court granted summary judgment for StanCERA and County and excluded plaintiffs’ expert (Sheffler); plaintiffs appealed. The Court of Appeal reversed the grant of summary judgment and remanded, finding material factual disputes remained.
- Key legal questions: (1) whether transfers of non‑valuation funds to valuation accounts or to offset employer contributions were per se illegal; (2) whether a negative amortization period violates §31453.5 or constitutive fiduciary duties; (3) whether summary judgment was appropriate; and (4) admissibility of plaintiffs’ actuarial expert evidence.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Use/transfers of non‑valuation (excess) funds to valuation accounts or to offset employer contributions | Transfers (2009–2011) improperly diverted trust assets and violated CERL/§17; per se breach of fiduciary duty | Board has plenary administrative authority; statute/AG opinions do not bar returning or using previously segregated excess funds if consistent with fiduciary duties | Transfers were not per se illegal; the board may close/reallocate non‑valuation accounts, but its actions remain subject to constitutional/common‑law fiduciary duties — material fact issues exist about breach/damages, so summary judgment for defendants was improper |
| Adoption of amortization schedule that produced negative amortization (level % of pay; reset periods) | Negative amortization is not "amortization" under §31453.5 and thus unlawful; adopting it is a breach of fiduciary duty | §31453.5 requires amortization over ≤30 years but does not prohibit temporary negative amortization; board discretion remains subject to fiduciary constraints | Negative amortization is not per se illegal under §31453.5; however, whether adopting such a schedule breached fiduciary duties (e.g., favored employers over beneficiaries or was imprudent) raises triable factual issues |
| Evidentiary exclusion of plaintiffs’ expert (William Sheffler) | Sheffler’s actuarial opinions show imprudence and quantify damages; should have been considered at summary judgment | Sheffler’s declarations lacked foundation, reasoning, and reliable methodology; opinions were legal conclusions and speculative | Trial court did not abuse discretion in excluding Sheffler’s conclusory opinions as insufficiently grounded; some narrower actuarial factual opinions may be admissible at trial, to be reassessed by trial court |
| Appropriateness of summary judgment for StanCERA/County | Plaintiffs argued their undisputed facts required judgment for them (breach as a matter of law) | Defendants argued (and trial court held) no material factual disputes and their actions conformed to law/ fiduciary duties | Court of Appeal: plaintiffs not entitled to summary judgment; defendants likewise not entitled to summary judgment because material issues of fact remain about motives, loyalty, prudence, and damages; judgment reversed and case remanded |
Key Cases Cited
- Ventura County Deputy Sheriffs’ Assn. v. Board of Retirement, 16 Cal.4th 483 (Cal. 1997) (describing CERL structure and pension funding basics)
- City of Sacramento v. Public Employees Retirement System, 229 Cal.App.3d 1470 (Cal. Ct. App. 1991) (retirement boards’ duty to beneficiaries prevails over minimizing employer contributions)
- Claypool v. Wilson, 4 Cal.App.4th 646 (Cal. Ct. App. 1992) (use of non‑valuation reserve funds to offset employer obligations not a per se constitutional "raid" where funds remain for pension purposes)
- Bandt v. Board of Retirement, 136 Cal.App.4th 140 (Cal. Ct. App. 2006) (boards may consider members’ employment interests; factual posture at trial matters for reviewing fiduciary decisions)
- Sargon Enterprises, Inc. v. University of Southern California, 55 Cal.4th 747 (Cal. 2012) (trial court gatekeeping of expert opinion: admissibility requires reliable basis and logical reasoning)
- Uzyel v. Kadisha, 188 Cal.App.4th 866 (Cal. Ct. App. 2010) (breach of loyalty not excused by good faith or lack of profit; damages may be asserted for trust corpus harm)