A 1974 City Charter amendment enabled the Los Angeles City Council to exact an ordinance under which retired City police officers and firefighters could become eligible to have subsidy payments made on their behalves for health insurance or health care plan coverage as determined by the City Council and subject to whatever conditions are included in the ordinance. The Charter amendment also limited the maximum amount of subsidy the Council could authorize and provided that the Board of Pension Commissioners could increase or decrease subsidy payments under certain conditions.

In 1975, the City Council passed Ordinance 147,014 (the Original Ordinance) to implement the authorized subsidy program. The Original Ordinance set the maximum monthly subsidy for police and fire retirees to be limited to the amount provided to civilian retirees. Again, the Board had discretion to raise or lower the maximum monthly subsidy.

In 2005, the Charter sections governing the subsidy program were amended to eliminate the cap on the maximum monthly subsidy for police and fire retirees. The subsidy would no longer be limited by the amount provided to civilian retirees. The 2005 Charter also gave the City Council authority to permit the Pension Board to increase or decrease the subsidy. That same year, the City Council passed an ordinance fixing the maximum monthly subsidy towards the health insurance premium at $735.38 per month.

The Board increased the subsidy each year from 2006 until 2011. On July 25, 2011, the City Council passed Ordinance 181814 (the Freeze Ordinance) adding a section to the Los Angeles Administrative Code freezing the maximum subsidy for all employees retiring after July 15, 2011, at the rate in effect as of July 1, 2011.

The City and unions representing police and fire fighters disagreed over whether retiree health benefit increases under the Los Angeles Administrative Code were vested benefits. In order to resolve the dispute, members of the unions were given the option to voluntarily contribute a maximum of 2% of their base salaries to the pension plan to defray a portion of the City's cost of providing retiree health benefits. The parties agreed that employees who opted to make the 2% contribution would be entitled to receive upon retirement the retiree health benefit in effect as of the date of the effective date of the agreement. Thereafter, the maximum amount of each annual increase authorized by the City Council and the entitlement to retiree health increases "shall be a vested right for those employees."

In October 5, 2011, the City Council passed Ordinance 181893 (the Opt-In Ordinance) amending the Administrative Code to reflect that the Freeze Ordinance did not apply to employees making voluntary contributions.

Four employees in the fire and police departments filed a petition for writ of mandate alleging that the Freeze and Opt-In Ordinances violated the California Constitution. They alleged that the 1974 Charter created a vested benefit, supported by the 2005 Charter. The petitioners further alleged that the City had not reserved the right to freeze the subsidy and the Freeze and Opt-In Ordinances impermissibly impaired their vested contractual rights. The trial court granted the petition in part, but rejected the assertion that there was a vested right to the subsidy increases. The writ was issued directing the Board to exercise discretion under the Delegation Ordinance without considering the Freeze or Opt-In Ordinances.

The City appealed, arguing that the Delegation Ordinance could not restrict the City Council's authority or create a vested right to a Board-determined subsidy because it would conflict with the City Charter. The Court agreed with the City, explaining that a vested contractual right to earn a pension did not mean all terms governing the pension system then in effect became vested contractual rights of employees.

The Court explained that it would not construe a legislative act as a contract limiting the power of the government completely to control the subject matter of the act unless there was a clear legislative intent that it do so. Courts resolve ambiguity in such circumstances in favor of the government.

The Court further found that the Delegation Ordinance granted the Board discretion to change the subsidy level and institute a maximum. However, it did not require that the subsidy increase. There was no vested right to increases in the subsidy. The Court found it significant that the 2005 Charter removed the discretion of the Board to increase or decrease the subsidy. Instead, the 2005 Charter gave the Council authority to authorize the Board to adjust the subsidy. The Delegation Ordinance described situations in which the Council reasserted its authority to set the subsidy. It did not delegate absolute authority to the Board. When analyzing the 2005 Charter, the Subsidy Ordinance, and the Delegation Ordinance, the Court determined the enactments did not show a legislative intent to create a vested right to a Board-determined subsidy amount. The documents reserved the final authority over the subsidy to the City Council.

NOTE:

This case supports the holding of Retired Employees Association of Orange County, Inc. v. County of Orange (9th Cir. 2014) 742 F.3d 1137, which we reported in the March 2014 Client Update, and an ever-growing body of case law holding that a contractual vested right is only created when a legislative body expressly intends to create a vested right. Agencies must continue to review carefully the wording of MOUs, ordinances, Charters, etc., to avoid creating an unintended vested right where one would not otherwise exist.

Fry v. City of Los Angeles (2016) 245 Cal.App.4th 539.