Opinion
In 2008, the County of Orange (Orange County or the County) sued the board of the County’s retirement plan, claiming that an enhanced retirement formula for prior years of service adopted in 2001 by the County Board of Supervisors violated the California Constitution. The County now appeals from the trial court’s grant of motions for judgment on the pleadings and entry of judgment in favor of the Association of Orange County Deputy Sheriffs and the Board of Retirement of the Orange County Employees’ Retirement System. We conclude that the past service portion of the enhanced retirement formula does not violate the Constitution, and we affirm.
BACKGROUND
I. The Orange County retirement system
The Orange County Employees’ Retirement System (OCERS) is a public employees’ retirement trust fund, an independent entity that administers the County’s retirement system. OCERS is governed by the County Employees Retirement Law of 1937 (CERL). (Gov. Code, §§ 31450, 31468, subd. (O(l).)
The County funds its retirement benefits through employee and employer contributions, and the retirement system investment earnings; the retirement fund is overseen by the OCERS Board. (§§ 31453.5, 31587.) These annual contributions are intended to fund the retirement benefits earned in the year the contributions are made. (§§ 31620 et seq., 31639 et seq.) The amount of the contributions is set based upon a normal contribution rate, which is a percentage of compensation required to fund the retirement benefits allocated to the current year of service being worked by county employees. Any shortfall between the normal cost and the actual amount determined to be necessary to fund future benefits (an amount based on actual experience) is made up through increases in employer contributions, and is amortized over a period of up to 30 years. (§ 31453.5.)
The benefits that an employee receives upon retirement are calculated according to a statutory formula that takes into account the employee’s final compensation,
II. December 2001 vote: 3% at 50
The Association of Orange County Deputy Sheriffs (AOCDS) is the exclusive representative of Orange County deputy sheriffs, sergeants, and investigators for the district attorney’s office, all of whom are safety members entitled to OCERS retirement benefits. (§§ 31469.3, 31470, 31470.2.) In May 2001, AOCDS’s 1999 memorandum of understanding, reached after collective bargaining with the County and set to expire in October 2002, provided that AOCDS members were entitled to retirement under the 2% at 50
On December 4, 2001, the County Board of Supervisors unanimously approved the amended AOCDS contract. The board voted to adopt resolution No. 01-410, which authorized the 3% at 50 formula for AOCDS members, effective June 28, 2002. The accompanying memorandum of understanding between the County and AOCDS provided that the increased retirement formula would apply to “all years of service,” including those years served before the date of the resolution. This portion of the new retirement formula was authorized by section 31678.2, subdivision (a), enacted in 2000, which provides that the board of supervisors could, by resolution, make the benefit formula “applicable to service credit earned on and after the date specified in the resolution, which date may be earlier than the date the resolution is adopted.” Pursuant to section 31678.2, subdivision (c), members who had already retired before June 28, 2002, did not receive any increase in pension benefits.
The County had secured an actuarial report in November 2000, which analyzed (among other options) the financial impact of adopting the 3% at 50 formula for all years of service, both past and future. The analysis estimated that the increase in the County’s “actuarial accrued liability” for the benefit enhancement for past service was between $99 and $100 million.
The board of supervisors approved and renewed the 3% at 50 formula in subsequent contracts with AOCDS in 2003, 2005, and 2007.
On January 29, 2008, however, the County had a change of heart. The board of supervisors unanimously voted to approve resolution No. 08-005, which stated that the past service portion of the 3% at 50 formula (applying
m. The County’s lawsuit
On February 1, 2008, the County filed the initial complaint in this action in Orange County Superior Court, naming as the sole defendant the OCERS Board. OCERS filed a motion to transfer venue to Los Angeles County and AOCDS intervened by stipulation. The case was transferred to Los Angeles Superior Court in April 2008. Following a demurrer by OCERS, on July 23, 2008, the County filed a first amended complaint adding AOCDS as a defendant.
The first amended complaint alleged in its first cause of action that the 2001 action by the prior board of supervisors adopting the past service portion of the enhanced 3% at 50 retirement formula violated the California Constitution’s municipal debt limitation in article XVI, section 18, subdivision (a), because without voter approval, the resolution created an immediately incurred and legally enforceable debt or liability of more than $99 million, which exceeded the County’s available unappropriated funds for the yeаr. The second cause of action alleged that the past service portion also violated article XI, section 10 of the California Constitution, which prohibits the payment of extra compensation to public employees, because the retroactive portion “grants extra compensation to public employees ‘after service has been rendered.’ ” The complaint requested declaratory and injunctive relief, including an injunction to prevent the County from commencing or continuing to pay the past service portion of the enhanced benefits to retired AOCDS members.
The County filed a second amended complaint in April 2009, limited to the municipal debt limitation cause of action. AOCDS, joined by OCERS, filed a motion to strike the new pleading on the ground that it exceeded the limitation imposed by the trial court in its order granting the demurrer. The trial court construed the motion to strike as a motion for judgment on the pleadings, and in an order filed May 22, 2009, the court granted the motion without leave to amend.
The County appeals from the judgment filed July 15, 2009.
DISCUSSION
In reviewing the trial court’s grant of the motions for judgment on the pleadings under Code of Civil Procedure section 438, subdivision (b)(1), we apply the same rules governing the review of an order sustaining a general demurrer. (Smiley v. Citibank (1995)
Article XVI, section 18, subdivision (a) of the California Constitution provides: “No county . . . shall incur any indebtedness or liability in any manner or for any purpose exceeding in any year the income and revenue provided for such year, without the assent of two-thirds of the voters of the public entity voting at an election to be held for that purpose . . . .” This municipal debt limitation means “ The legislative body may not encumber the general funds of the city beyond the year’s income without first obtaining the consent of two thirds of the electorate.’ [Citation.]” (Starr v. City and County of San Francisco (1977)
The County’s second amended complaint alleges that in 2001, when the board of supervisors approved the past service portion of the enhanced 3% at 50 retirement formula for AOCDS members, the board created a “$100 million long-term liability (that has since grown to approximately $187 million). . . .” The County alleges that the board’s action violated article XVI, section 18, subdivision (a) of the California Constitution, which it characterizes as a “ ‘balanced budget’ requirement,” because the $100 million was an immediately enforceable debt incurred in a year in which the County’s unappropriated revenue (for fiscal year 2002) totaled less than $99 million, and the County did not hold the required election to obtain voter approval.
AOCDS rejoins that the $100 million amount which the County on this appeal characterizes as a “debt” is not an “ ‘indebtedness’ or ‘liability’ ” within the meaning of California Constitution, article XVI, section 18, subdivision (a). Instead, it is an actuarial calculation of what the County’s obligations are likely to be in the futurе for the past service portion of the 3% at 50 retirement formula for AOCDS members. As an actuarial projection, the $100 million did not belong on the liability side of the County’s balance sheet in the 2002 fiscal year, and it thus escapes the application of the municipal debt limitation.
To evaluate the parties’ arguments, we must explain in some detail what the $100 million figure represents.
The OCERS Board, which has “plenary authority and fiduciary responsibility for . . . administration of the [retirement] system ...[][] [and] sole and exclusive responsibility to administer the system in a manner that will assure prompt delivery of benefits and related services to the participants and their beneficiaries,” also has “the sole and exclusive power to provide for actuarial services in order to assure the competency of the assets of the public pension or retirement system.” (Cal. Const., art. XVI, § 17, subds. (a), (e).) The OCERS Board is required to conduct regular actuarial evaluations to determine the employer and employee contributions necessary to fund the retirement benefits of county employees, and to “determine the extent to which prior assumptions must be changed.”
That $100 million figure was an estimated “unfunded actuarial accrued liability” or UAAL, predicting the unfunded cost of the retroactive portion of the proposed 3% at 50 retirement formula. This UAAL was not projected in earlier actuarial valuations which did not contemplate the enhancement of the AOCDS retirement formula to 3% at 50. “ ‘Unfunded accrued actuarial liability’ is the difference between actuarial accrued liability and the valuation assets in a fund.” (Bandt v. Board of Retirement (2006)
An unfunded liability such as a UAAL will affect the contribution rate of an employer such as the County. (In re Retirement Cases, supra, 110 Cal.App.4th at pp. 459-460.) In projecting the cost of funding the benefits provided to OCERS members, OCERS uses a method described in section 31453.5, which (as explained by OCERS) divides the likely cost of future benefits between the “normal cost” (the employer contributions required to fund the benefits allocated to the current year of service) and the UAAL (the shortfall between the past years’ projected normal cost and the actual past experience of the retirement system), which is to be amortized over 30 years.
B. 1982 Attorney General opinion
Article XVI, section 1 of the California Constitution, the debt limitation provision applicable at the state level, is similar tо and construed in tandem with the municipal debt limitation in issue here, article XVI, section
The California Public Employees’ Retirement System (CalPERS) actuarial balance sheet showed an “unfunded actuarial liability” above the state debt limitation amount. The Attorney General concluded: “The actuarial term ‘unfunded liability’ fails to qualify as a legally enforceable obligation of any kind. As previously noted the very existence of such an ‘unfunded liability’ depends upon the making of an actuarial evaluation and the use of an evaluation method which utilizes the concept of an ‘unfunded liability.’ Further the amount of such an ‘unfunded liability’ in the actuarial evaluаtion of a pension system will depend upon how that term is defined for the particular valuation method employed. Finally the amount of such an ‘unfunded liability,’ however defined for the method used, depends upon many assumptions made regarding future events such as size of work force, benefits, inflation, earnings on investments, etc. In other words an ‘unfunded liability’ is simply a projection made by actuaries based upon assumptions regarding future events. No basis for any legally enforceable obligation arises until the events occur and when they do the amount of liability will be based on actual experience rather than the projections.” (65 Ops.Cal.Atty.Gen., supra, at p. 574, italics added.) Such calculations did not result in a legally binding debt or liability, but instead provided “useful guidance in determining the contributions necessary to fund a pension system.” (Ibid.)
We acknowledge that the Attorney General opinion is not binding, but it is entitled to considerable weight. (Lexin v. Superior Court (2010)
C. The County’s arguments
The County argues that pension obligations are incurred for the purposes of the debt limitation provision at the time of an award of pension benefits, citing Carman v. Alvord (1982)
None of the other debt-limitation cases cited by the County involves a factual situation similar to this case. (See Chester v. Carmichael (1921)
The County also cites an Attorney General opinion from 2005, which states: “A retroactive improvement in retirement benefits not only requires an increase in the city’s future retirement contributions, but also creates a ‘past service liability,’ or debt to the retirement fund, which must be paid.” (
The County emphasizes its current difficult financial situation and the “ruinous fiscal irresponsibility” of the prior board of supervisors. Imprudence, however, is not unconstitutional. “Courts examining a potential violation of the Dеbt Limit are not directed to sit in post hoc judgment of the wisdom of a municipality’s income and revenue estimates.” (In re County of Orange, supra,
We affirm the trial court’s grant of judgment on the pleadings on the municipal debt limitation cause of action in the second amended complaint.
II. The prohibition against extra compensation
Article XI, section 10, subdivision (a) of the California Constitution provides: “A local government body may not grant extra compensation or extra allowance to a public officer, public employee, or contractor after service has been, rendered or a contract has been entered into and performed in whole or in part . . . .” The County alleged in its first amended complaint that the board of supervisors’ approval of the past service portion of the 3% at 50 benefit enhancement granted extra compensation to AOCDS members employed by the County on June 28, 2002 (the effective date of the resolution), for services they had already rendered to the County, and this violated article XI, section 10.
Similarly, the Third Appellate District held that pay adjustments made retroactive to the start of a county’s fiscal year were not unconstitutional as a gift of public money
Under very different circumstances, courts have found unconstitutional extra compensation taking a variety of forms: retroactive pay for overtime already worked (Longshore v. County of Ventura (1979)
A. Vested pension rights
“A public employee’s pension constitutes an element of compensation, and a vested contractual right to pension benefits accrues upon acceptance of employment. Such a pension right may not be destroyed, once vested, without impairing a contractual obligation of the employing public entity. [Citation.]” (Betts v. Board of Administration (1978)
“[P]ension laws are to be liberally construed to protect pensioners and their dependents from economic insecurity. [Citation.] Unlike other terms of public employment, which are wholly a matter of statute, pension rights are obligations protected by the contract clause of the federal and state Constitutions. [Citations.] ... [f] ... As the Supreme Court notes, ‘upon acceptance of public employment [one] acquire[s] a vested right to a pension based on the system then in effect.’ [Citations.]” (United Firefighters of Los Angeles City v. City of Los Angeles (1989)
The County argues, however, that the general rule that current employees have a vested right to increases in pension benefits conferred during employment does not govern this case. Although 3% of 50 is an enhanced pension benefit conferred during the tenure of AOCDS employees working for the County on June 28, 2002, the County argues that the new benefit formula did not vest as to service before that date, because the past service portion of the enhanced benefit is prohibited extra compensation. Case law stands in the County’s way.
B. Extra compensation and pensions
1. Sweesy
In Sweesy v. L. A. etc. Retirement Bd. (1941)
The Supreme Court observed: “ ‘A pension is a gratuity only where it is granted for services previously rendered which at the time they were rendered gave rise to no legal obligation ...[.] But where, as here, services are rendered under a pension statute, the pension provisions become a part of
The Supreme Court also rejected the contention that the retroactive benefit was additional compensation; “The problem cannot be solved merely by stating as a proposition that a provision will not be upheld which purports to grant a pension after the completion of the services for which the pension is contemplated as additional compensation. The law is well settled that additionаl benefits may constitutionally be provided for members of the system who have acquired a pensionable status. . . . There is some language in the decisions which refers to pension benefits as additional or increased compensation for services performed and to be performed. [Citations.] But that designation may not be strictly accurate in every case. As in this case, the members of the system make contributions to the pension fund, even though contributions may also come from public funds. Such systems are usually founded on actuarial calculations. Therefore, the question of what benefits would be warranted by either the individual or mass contributions to the fund is for the legislative body, and not for the pension board or the courts, whose respective functions in such cases are to administer and interpret the provisions of the law as written.” (Sweesy, supra, 17 Cal.2d at pp. 361-362.) The court added that “the provision for pension to members’ widows benefits all members, whether on active or retired duty; but as to any prospective grantee of the pension it is an inchoate right which may be taken away at any time
In Sweesy, supra,
2. Nelson
In Nelson v. City of Los Angeles (1971)
“[A]n increase in benefits to persons occupying a pensionable status is not to be treated as the payment of ‘extra compensation or allowance,’ as those terms are used in the proscription of article XI, section 10.” (Nelson, supra,
In American River Fire Protection Dist. v. Brennan (1997)
The court of appeal noted, “[ejarly decisions interpreting the extra compensation clause found its framers had a narrow intention to prohibit government appropriations motivated by charity or gratitude,” responding to legislative abuses in enacting privatе statutes to address individual claims. (American River, supra,
The American River court rejected the district’s argument that permitting the retroactive buyout would “eviscerate” the prohibition against extra compensation and “lead to rampant abuses in pension programs.” (American River, supra,
4. Application to this case
We describe the preceding cases in detail because they show the progression of the law in this area. We continue the progression, and conclude that the past service portion of the 3% at 50 enhanced pension benefit formula for AOCDS members is not unconstitutional extra compensation.
The pension rights of AOCDS members employed on June 28, 2002, vested when they accepted public employment. (Miller, supra,
The resolution adopting 3% at 50 specifically provided that the enhancement applied to all years of service, including years worked before June 28, 2002. This retroactive application also became part of the contract of employment of all AOCDS members. (Sweesy, supra, 17 Cal.2d at pp. 359-360.) The increased benefits were not extra compensation. (Id. at p. 363; Nelson, supra,
The County argues that Sweesy and Nelson are not applicable because those cases involved retroactive benefits awarded to already retired employees rather than active employees. (Under § 31678.2, subd. (c), the past service portion of the enhanced benefit formula at issue in this case did not apply to AOCDS members who had already retired.) Although the County argues that there is a “clear distinction between retirees and current employees,” that distinction is one the Supreme Court in Sweesy declined to draw. The retirement board argued that the new widow’s pension benefit applied not to retirees but only to current employees, but the court nоted that the legislation did not draw a distinction between members in active duty and retired members, “and no distinction may here be drawn on that basis.” (Sweesy, supra,
The County further argues that the statement in American River, supra,
C. Section 31678.2
Section 31678.2, subdivision (a) of CERL specifically authorizes past service pension benefit increases, providing “a board of supervisors . . . may, by resolution adopted by majority vote, make any section of this chapter prescribing a formula for calculation of retirement benefits applicable to service credit earned on and after the date specified in the resolution, which date may be earlier than the date the resolution is offered.” Subdivision (c) provides that such a benefit for past service “shall only be applicable to members who retire on or after the effective date of the resolution described in subdivision (a).” “Before 2000, the Legislature expressly prohibited a county from providing increased pension benefits on a retroactive basis. (§31678.) However, in 2000, the Legislature adopted a broad exception to this rule, specifically providing counties with the option of applying an improved benefit formula in a retroactive manner.” (San Diego County Employees Retirement Assn. v. County of San Diego (2007)
The County Board of Supervisors adopted resolution No. 01-410 in December 2001, authorizing the 3% at 50 formula for “all years of service” by AOCDS members employed by the County on June 28, 2002. The resolution complies with the statute: a majority (unanimous) vote of the board of supervisors made the enhanced formula applicable to all years of service,
The County’s present argument—that applying increases in pension benefits for current emplоyees to their past service violates the extra compensation clause—necessarily also contemplates that section 31678.2 authorizes unconstitutional actions by a board of supervisors or governing body. The County ignores the obvious implications of its extra compensation argument, neglecting to address the constitutionality of section 31678.2 in its reply brief, although the brief by respondent OCERS discusses the section at length. The County continues its silence on the issue in its response to the amicus curiae brief from CalPERS, which points out that the County fails to acknowledge the implications of its arguments for statutes which allow increased pension benefits for state employees to be applied to prior years of service.
Our conclusion that applying the 3% at 50 formula to past service does not violate article XI, section 10 of the California Constitution’s prohibition of extra compensation makes it unnecessary for us to address the constitutionality of section 31678.2, or the other, wider implications of the County’s argument. Nevertheless, we note that this case involved the collective bargaining process, in which AOCDS bargаined with the County for the past service application of the 3% at 50 formula. “The legislative history underlying section 31678.2 . . . show[s] that the supporters of this legislation were seeking to provide counties with ‘ “maximum local control” ’ in determining the appropriate retirement formula and to require the counties to engage in collective bargaining on the retroactive benefit issue. [Citations.] These objectives are consistent with a conclusion that the Legislature intended to provide the counties with broad discretion in deciding the manner in which to apply this optional retroactive benefit.” (San Diego County Employees Retirement Assn. v. County of San Diego, supra,
The judgment is affirmed. Respondents are awarded their costs on appeal.
Mallano, R J., and Chaney, J., concurred.
Appellant’s petition for review by the Supreme Court was denied April 13, 2011, S191218.
Notes
Unless otherwise specified, all subsequent statutory references are to the Government Code.
An employee’s “final compensation” is the highest annual compensation the employee earns while in active service, based on one year or the average of three years. (§§ 31462, 31462.1.)
The AOCDS contract required the County to pay all employee contributions that AOCDS members would otherwise pay.
In 2007, OCERS had retained an actuarial consulting firm to evaluate the impact of the past service portion (pre-June 28, 2002) of the increase in the pension benefit formula.
Section 31453, subdivision (a) provides: “An actuarial valuation shall be made within one year after the date on which any system established under this chapter becomes effective, and thereafter at intervals not to exceed three years. The valuation shall be conducted under the supervision of an actuary and shall cover the mortality, service, and compensation experience of the members and beneficiaries, and shall evaluate the assets and liabilities of the retirement fund. Upon the basis of the investigation, valuation, and recommendation of the actuary, the board shall . . . recommend to the board of supervisors the changes in thе rates of interest, in the rates of contributions of members, and in county and district appropriations as are necessary.” Section 7507, subdivision (b)(1) requires that a local legislative body “when considering changes in retirement benefits . .. shall secure the services of an actuary to provide a statement of the actuarial impact upon future annual costs, including normal cost and any additional accrued liability, before authorizing changes in public retirement plan benefits . . . .”
“The Board’s power to amortize the fund’s UAAL over a 30-year period . . . allows the County to grant an increase in benefits and to pay for the increased cost of the benefits over time as the associated pension obligations become due.” (Bandt v. Board of Retirement, supra, 136 Cal.App.4th at pp. 158-159.)
In Starr v. City and County of San Francisco, supra,
The County also cites In re County of Orange (C.D.Cal. 1998)
The full quoted text of the article in the 1982 opinion bears repeating: “ ‘Over the years, the term “unfunded liability” has created considerable confusion for the readers of actuarial reports. The confusion arises when the term is thought of in the same manner as accounting liabilities. That is, the connotation was that the money was “owed” by the plan or somehow the plan was deficient. The truth of the matter is that the “past service liability” and the “unfunded liability” are a function of the actuarial methods and assumptions used to fund a pension plan.
“ ‘The actuarial profession has been called upon on numerous occasions to explain these “liabilities”; however, the confusion continues to exist. In an attempt to clarify these values, the actuaries at PERS have adopted new terminology which, hopefully, will help resolve the question. In lieu of the previous term, the terms “actuarial liability” and “unfunded actuarial liability” [(UAAL)] will be used. These terms distinguish the liabilities presented from accounting liabilities. Remember, the “liabilities” are not owed by the plan. They are primarily a function of the methods and assumptions used by the actuary to fund the plan.’ ” (65 Ops.Cal.Atty.Gen., supra, at pp. 572-573, fn. 2.)
The Accounting Professionals also state that they agree with invited comments which support changing the GASB rules to require reporting the “ ‘unfunded accrued benefit obligation ... on the face of the financial statements to measure the annual cost of pension benefits earned and the demands on future cash flows.’ ” This is simply a suggested change to future accounting standards, however, and does not support a conclusion that the board’s action in 2001 created a liability under the then existing standards.
Those salary levels had been rendered uncertain by events surrounding the enactment of Proposition 13, which events included alterations in state employees’ salary levels and uncertainty about possible salary freezes. (Jarvis v. Cory, supra, 28 Cal.3d at pp. 574-576.)
The County’s first amended complaint did not contain an allegation that the retroactive portion of the 3% at 50 formula was a gift of public money in violation of article XVI, section 6 of the California Constitution.
When Sweesy, supra,
The Supreme Court later noted, in a case discussing Sweesy, supra,
“The words ‘pensionable status’ although not precisely defined ... in Sweesy[, supra,
We also note that the County’s argument that the past service portion of the enhancement is extra compensation would logically seem to apply with more force to employees who had already retired on June 28, 2002. In any event, section 31678.2, subdivision (c) provides that the statute does not apply to employees retired at the time of a resolution changing the retirement formula.
CalPERS points to numerous legislative authorizations allowing pension benefits to be calculated based on state employees’ past service, and concludes “including prior years of public service to calculate benefits has been a fundamental] part of public employees’ pension benefits for at least the past 97 years.”