AB 340 and trailer AB 197 enacting California Public Employees’ Pension Reform Act (PEPRA) (January 2013)
Type of reform:
The legislation reduced employer contributions, increased employee contributions, and restricted final pay to wages, excluding in-kind payments, unused accrued vacation, and overtime.
Local 101 of the American Federation of State, County and Municipal Employees v. Brown, No. 5:14-cv-05640 (United States District Court for the Northern District of California, filed Dec. 29, 2014)
Status of litigation:
The plaintiffs allege that Governor Jerry Brown and members of the board of administration of the California Public Employees Retirement System (“CalPERS”) violated the collective bargaining agreement between the plaintiffs and the Santa Clara Valley Water District (“District”) through the adoption of PEPRA. They seek an order holding that PEPRA violates the contracts clause of the United States Constitution.
Specifically, the plaintiffs allege that they were required by state law to enter into a collective bargaining agreement (“CBA”) with the district with respect to pension benefits administered by CalPERS. PEPRA reduced pension benefits for all members hired after Jan. 1, 2013, in a manner that resulted in a conflict with the terms of the CBA. The plaintiffs sought and received an arbitration award on Dec. 17, 2013. It was confirmed in the California Superior Court for the County of Santa Clara on May 12, 2014. That court held that the district’s adoption of PEPRA violated the terms of the CBA. The CalPERS board was named as an indispensable party, but was ultimately dismissed from the Superior Court suit because the court found it was not a party to the underlying arbitration.
The plaintiffs filed the present lawsuit in the United States District Court for the Northern District of California naming members of CalPERS and CalPERS itself as defendants, and the district as an indispensible party. The plaintiffs seek to enforce the May 12, 2014, order of the California Superior Court and argue that PEPRA infringes upon the terms of the CBA in violation of the contracts clause of the United States Constitution. The district seeks to comply with the May 12 court order and provide benefits in accordance with the CBA. However, CalPERS refuses to comply, stating it must comply with PEPRA, which reduces benefits for all members hired after Jan. 1, 2013.
The district filed an answer to the complaint on March 11, 2015. CalPERS moved to dismiss the complaint on March 12, 2015. In its motion to dismiss, CalPERS asserts that the plaintiffs fail to state a claim under the contracts clause because the pension benefits they allege were impaired were always subject to legislative modification in the case of future employees. Additionally, CalPERS asserts the lawsuit is barred by the immunity clause in the Eleventh Amendment.
On Sept. 11, 2015, the District Court for the Northern District of California ruled on defendant CalPERS’ motion to dismiss. District Judge Freeman granted the motion in part and denied the motion in part. First, Judge Freeman rejected the defendants’ contention that the plaintiffs had failed to allege facts sufficient to establish that the collective bargaining agreement negotiated prior to PEPRA created a contractual binding agreement as to the rights of future employees. Specifically, the court found that the absence of a statutory scheme in California at the time the parties entered into the collective bargaining agreement meant that the collective bargaining agreement could have been effective to create a contractual right for the benefit of future employees.
Second, the court ruled that the Eleventh Amendment bars a suit against the state and CalPERS. With respect to individual defendants, however, the court found that the relief sought would be prospective and ongoing in nature, and therefore, fit within an exception permitting litigation against individuals in their official capacity.
The defendants contended that although the relief sought is prospective, payments from CalPERS would be required to retroactively credit beneficiaries under the collective bargaining agreement formula, thereby expending state funds. In such a situation, the exception for suits against individuals in their official capacity should not apply. The plaintiffs argued, on the other hand, that payments would be directly from the District, not the state treasury. The court found that the issue of where the payments would come from could not be determined at this time and, therefore, denied dismissal as to the individual defendants.
On Oct.19, 2015, the individual defendants including Governor Brown, members of the Board of Administration of CalPERS, and Anne Stausboll (CEO of CalPERS) filed an answer to the complaint. The defendants denied the allegations in the complaint and asserted affirmative defenses that: 1) the complaint fails to state a claim for which relief can be granted, and 2) that the lawsuit is barred by the Eleventh Amendment because the relief is sought against the State of California and would expend itself on the public treasury or domain or interfere with public administration.
The parties filed a joint case management statement on Jan. 21, 2016. The court originally granted the parties’ joint schedule for the case, but later granted a motion to extend various deadlines. The current schedule is:
Fact discovery cut-off: Nov. 23, 2016
Expert disclosure (initial): Jan. 10, 2017
Expert disclosure (rebuttal): Jan. 31, 2017
Expert discovery cut-off: Feb. 21, 2017
Last day to file dispositive motions: Mar. 2, 2017
Last day to file oppositions: Mar. 23, 2017
Last day to file a reply: Apr. 6, 2017
Last day to hear dispositive motions: Apr. 20, 2017
Pretrial and trial: TBD
On March 2, 2017, the plaintiffs moved for summary judgment on the grounds that the enactment of PEPRA and the attempt to override the plaintiffs’ CBA is an unconstitutional violation of the Contract Clause. Specifically, the plaintiffs claimed that the CBA provided the right for members to retire and receive a 2 percent annuity benefit at age 60, while PEPRA purports to change that to a 2 percent annuity benefit at age 62. The plaintiffs claimed that PEPRA was not reasonable, necessary, or an appropriate exercise of the state’s police power. In addition, the plaintiffs sought a judgment under 42 U.S.C. § 1983 as to the alleged deprivation of constitutional rights.
Also on March 2, 2017, the defendants moved for summary judgment, contending that the specific provisions of PEPRA did not substantially impair any enforceable right in the CBA, and that the CBA does not specifically provide for the retirement annuity at 2 percent at age 60. Furthermore, the defendants argued that by participating in CALPERS, the plaintiffs had agreed to be subject to the Public Employees Retirement Law (PERL), which establishes a retirement system for all public employees. The right of the legislature to pass laws governing the retirement system is paramount to the CBA’s provisions. Finally, the defendants contend that even if PEPRA did impair the plaintiffs’ contractual rights, it serves a reasonable and necessary public purpose because California’s pensions are “severely underfunded and subject to imminent collapse without fundamental changes.” (Brief, p. 23).
On March 23, 2017, the plaintiffs and defendants responded to each other’s motions for summary judgment.
The defendants argued that the CBA did not create an enforceable right to a 2 percent annuity at age 60 for new employees. Specifically, prospective public employees take pension benefits pursuant to the laws in place when they are hired and the state legislature has the exclusive right to set and modify pension benefits for new employees. Further, PEPRA did not substantially impair the CBA’s “2% at 60” benefit because public employees are always on notice that the legislature could modify pensions—and by electing to participate in CalPERS, the plaintiffs agreed to be governed by CalPERS’ governing statutes and amendments, including PEPRA. Finally, PEPRA was reasonable and necessary to serve the important public purpose of preserving the state’s pension system.
The plaintiffs further argued that whether the legislature has the general authority to create and modify pension benefits is irrelevant. The relevant issue is whether the legislature can modify pension benefits to override the CBA. Plaintiffs contended that the legislature cannot, because the CBA provides plaintiffs with a constitutionally protected contractual right to the 2% annuity at 60 years of age. Moreover, an arbitrator already determined that the District’s failure to provide the 2% annuity at 60 years of age violated the CBA – a finding that removes any possibility of ambiguity.
With respect to defendants’ argument that plaintiffs were aware of the CalPERS statutory scheme when they entered into the CBA and should have anticipated modification by CalPERS thereto, plaintiffs respond that they did not incorporate any CalPERS terms into their contract and that their relationship with CalPERS is statutory – separate and independent from the contractual rights they receive under the CBA. Finally, plaintiffs asserted that defendants’ argument that the CBA does not apply to future employees should fail. Plaintiffs contend they had a legislative mandate to negotiate on behalf of current and future employees.
On April 6, 2017, both parties replied in support of their motions. The plaintiffs asserted that at the time the CBA was negotiated, the law required collective bargaining before making changes to public employees’ benefits. Additionally, the plaintiffs contended that the defendants had cited only case law regarding statutory pension benefits, not benefits created by a collective bargaining agreement. The plaintiffs finally argued that, contrary to the defendants’ claims, PEPRA does impair the CBA in a way that is not reasonable and necessary.
The defendants noted that it was uncontested that the pension benefits of public employees of the district (even those in collective bargaining agreements) always are subject to “the terms and conditions governing CalPERS participation.” (Def. Reply, p. 1) These conditions include the Public Employees Retirement Law (PERL); the California legislature’s right to modify benefits; and PERL’s requirement that the district execute a contract with CalPERS governing the benefits of public employees. Additionally, the defendants contended that the plaintiffs did not dispute that PERL-governed pension benefits at the time of the negotiation of the CBA. Finally, the defendants argued that the plaintiffs failed to adequately refute that PEPRA was “reasonable and necessary to serve an important public purpose.”
On April 20, 2017, the parties argued the motions for summary judgment before the Court.
On August 16, District Judge Beth Freeman granted the defendants’ motion for summary judgment and denied the plaintiff’s motion for summary judgment.
In considering the plaintiff’s claim that PEPRA substantially impaired the AFSCME’s contractual rights under the CBA, the Court first considered the existence of a contractual relationship “as to the specific term at issue” (e.g. the pension benefits of employees hired after Jan. 1, 2012. Order, p. 8 (internal citations omitted). Under the CBA, retirees may receive “2% at formula Benefit Level.” (Order, p. 9) The Court found that these terms required the parties to refer to the definitions in the 2012 agreement between the District and CalPERS (the PERS agreement), which “is subject to all the provisions of [PERL] . . . and all amendments to said Law thereafter.”(citing 2012 CalPERS – District Contract at paragraph 2) The Court determined that “2% at formula Benefit Level” was really “a catchphrase which encompasses all the relevant provisions of the 2012 District-CalPERS Agreement and by extension the PERL.” Thus, the District and AFSCME “clearly entered into a contract as to the specific term[s] at issue.” (Order, p. 12, internal citations omitted)
As to whether the contract (the CBA) was substantially impaired by PEPRA, however, the Court found it was not. The Court found that because the CBA was subject to PERL, AFSCME should have had a reasonable expectation that it could have been later amended in light of subsequent legislation. The Court looked to the recent state appellate decision in Deputy Sheriffs Association of San Diego County v. San Diego County, 233 Cal. App. 4th 573, 577 (2015) as being “on all fours” with the case at hand, because it too considered the rights of public employees with collective bargaining agreements—the terms of which conflicted with PEPRA. The Deputy court held that public employees’ benefits are determined by legislation, which is inherently subject to change and those statutes do not vest until an employee starts work. (Order, p. 16 (citing Deputy Sheriffs, 233 Cal. App. 4th, at 577-79)) Similarly, the Court found that the facts before it led to an identical result:
The Court concludes that in light of the statutory scheme set forth in PERL, as expressly recognized in the 2012 District-CalPERS Contract, and as known to AFSCME at the time the CBA was negotiated, the reasonable expectations of the parties necessarily encompassed the possibility that the Legislature might alter the pension benefits available to future employees under CalPERS. (Order, p. 16)
Further, the Court rejected the plaintiff’s argument that AFSMCE could have had a reasonable expectation that a collective bargaining agreement would alter rights of future employees. ((Order, p. 17, citing California Ass’n of Prof’l Scientists v. Schwarzenegger (“CAPS”), 137 Cal. App. 4th 371, 383 (2006)) The Court held that CAPS did not stand for that proposition, but rather held that the court would not read the collective bargaining agreement “to impose ‘a fundamental constraint on the freedom of action of the Legislatiure’ to ‘change the character of the pension program as to new employees.’” (Order, p. 17, citing CAPS, at 383)
Accordingly, the Court granted judgment to the defendants, finding that PEPRA did not substantially impair the CBA. “A change in law constitutes a substantial impairment of a contractual relationship only if the asserted impairment is outside the reasonable expectations of the parties.” (Order, p. 19)
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