Court Holds New Pension Formulas Do Not Constitutionally Impair Existing MOUs

by on January 24, 2015

posted in Employee Benefits, Recent Court Decisions, Retirement,

The California Court of Appeal, Fourth District, recently held, in Deputy Sheriffs’ Association of San Diego County v. County of San Diego, that the implementation of new defined benefit formula provisions for “new members” does not impermissibly impair agreements with employee groups where the pre-existing agreements contain conflicting terms.

Pension Formulas

The Memorandum of Understanding (such documents are also known as Memoranda of Agreement (MOA) and Collective Bargaining Agreements (CBA), but is referenced for simplicity here as “MOU”) between San Diego County and the Deputy Sheriff’s Association of San Diego County (DSA) contained provisions requiring the County to provide covered employees with a defined pension benefit based on a 3% at age 55 formula. When the Public Employees’ Pension Reform Act of 2012 (PEPRA) became effective in January of 2013, pension formulas for new members after that date were altered by operation of the statute.

The DSA challenged the application of the new formula restrictions for “new members” hired on or after January 1, 2013 but before the expiration of the MOU arguing that it violated constitutional provisions prohibiting laws that impair the obligation of contracts (known as the “Contracts Clause”, Article 1, Section 9 of the California Constitution).

The Court found that the pension formula in question could be modified without violating the Contracts Clause until (and unless) the right to it becomes vested – based on an individual performing services under the agreement (also requiring them to be employees covered by the agreement), occurring prior to the effective date of the Statute. The Court clarified that the notation in Professional Scientists (137 Cal. App. 4th 371) that the interests of future employees related to negotiated pension rights might be protected as much as those of existing employees is an incidental statement of conclusion and not authoritative.

Employee Required Contributions Toward Retirement

In addition to the discussion on Pension Formulas, the Court determined that constitutional issues do not arise in connection with employee contribution requirements or prohibitions on an Agency’s ability to pay any of those amounts.

Because the PEPRA law contained an express provision (Gov. Code § 7522.30(f)) stating that the requirement regarding employee contributions would not apply until an existing MOU, where it would otherwise be impaired, expired; the plain language of the statute resolves the issue without a need to address the Constitutional questions.

Public Employers Should Review MOUs

Where a public employer has not yet negotiated successor MOU’s, and previous agreements contained provisions related to pension formulas and employee contributions, they should review those agreements for compliance with the PEPRA law. “New members” of such agencies must be enrolled in the new retirement formulas as provided for in PEPRA, and employee contributions may be paid by employers only until such time as the pre-existing MOU has expired and the Agency is no longer bound to the provisions it contained.

tags: CalPERS, MOUs, PEPRA, retirement benefits,

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