California Public Employees’ Pension Reform Act Of 2013 Partially Violates Prohibition Against Impairment Of Contracts When Applied To Employees Covered By A Collective Bargaining Agreement

In Deputy Sheriffs' Association of San Diego County v. County of San Diego, et al., (January 11, 2015, D065364) 2015 WL 273138, the Fourth District Court of Appeal held that the provisions of the California Public Employees' Pension Reform Act of 2013 ("Act") concerning amount of employee contributions violated the state constitutional prohibition against impairment of contract when applied to employees who were hired after the Act's effective date, but covered by preexisting collective bargaining agreements containing conflicting terms.  Conversely, the Court held that application of the Act's defined benefit formula provisions to the same employees did not result in prohibited impairment of contract.

In this action, the County of San Diego and the Deputy Sheriffs' Association of San Diego County were parties to collective bargaining agreements that were effective through June 26, 2014.  The California Public Employees' Pension Reform Act became effective on January 1, 2013 and effected the county&r#39;s retirement system.   Among other provisions, the Act limited the defined benefit formulas available to new members of the county's retirement plan.   The Act limited the available formulas to 2 percent at age 57, 2.5 percent at age 57, and 2.7 percent at age 57 and required employers to offer the formula closest to that offered to comparable employees on December 31, 2012.   

The Deputy Sheriffs' Association of San Diego brought suit and alleged that the requirement of 2.7 at 57 formula which was applicable as of the Act's effective date of January 1, 2013 but before the collective bargaining agreements/ expiration date of June 26, 2014, violated the state constitutional contract clause because it was in conflict with the terms and conditions of the collective bargaining agreement.   The association alleged that the new employees had a right to the defined benefit provisions in the collective bargaining agreements because the agreements predated the Act, were binding, and required the use of the agreements' formula until they expired.  However, the Court held that the new employees were not entitled to the agreements' defined benefit formulas because there is no contract clause protection for unvested contractual pension rights.   As such, there was no impairment of contract for the prospective employees because they had not vested into their contractual pension rights before the act became effective.  Plan changes for prospective employees only do not violate the contract clause.   The Court continued that the contract clause protects only "reasonable contract expectations" which do not arise until employment commences.

The association also brought suit challenging the applications of the Act's provisions regarding employee contribution and alleged that the contribution provisions, as applied to new employees, violated the constitutional prohibition against impartment of contracts.  In this instance, the agreement required the county to pay 6 percent of the employees' requirement contributions for employees hired between January 1 and July 1, 2013.  For employees hired after July 1, 2013, the agreements required the county to pay 3 percent of the employees’ required retirement contributions during the first five years of employment and 6 percent thereafter.  However, the Act, which, as above, took effect on January 1, 2013, requires new members to pay at least 50 of the defined benefit plans’ normal cost, which would be more than required by the contracts in question.   The Court held that it was not necessary to reach the question of whether the Act constituted constitutional impairment of contrasts because the Court determined the application of the Act to the employee contribution rates in this case resulted in statutorily prohibited impairment of the county's obligations.  Therefore, the Court held that the provisions required specific employee contributions did not apply to the new members governed by the agreements until the agreements expired on June 26, 2014.

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