On December 30, 2016, a California appellate court ruled that the California Legislature’s elimination of a public employee’s ability to purchase "airtime" did not violate the California Contract Clause. Cal Fire Local 2881, et al. v. California Public Employees’ Retirement System, et al, 2016 WL 7488338. The appellate court determined that the elimination of public employees’ option to buy up to five years of retirement service credit did not violate any pension right because the option was not a vested benefit and, even if it was, the Legislature lawfully eliminated the benefit.
In 2003, the Legislature enacted Government Code section 20909, which allowed eligible public employees the option to purchase at cost up to five years of non-qualifying service credit (commonly referred to as "airtime"). To be eligible, the employee had to have at least five years of service, be presently employed, and cover the cost of the increased benefit due to the additional service credit. This option was available to eligible employees from January 1, 2003 through the end of 2012.
In 2012, the Legislature enacted the Public Employees’ Pension Reform Act of 2013 ("PEPRA"), which eliminated the option provided under section 20909, effective January 1, 2013. PEPRA gave eligible members one last 15-week window to purchase airtime before the option ceased to exist.
Facts of the Case
Plaintiffs are a group of professional firefighters who were eligible to, but did not, purchase airtime service credit during the 15-week window before the elimination of this option. Plaintiffs assert that the option to buy airtime service credit is a vested contractual right. According to Plaintiffs, the Legislature’s elimination of the option provided under section 20909 violated the California Constitution; therefore, California Public Employees’ Retirement System ("CalPERS") lacks authority to refuse to consider applications for this service credit. As a result, Plaintiffs filed a petition for writ of mandate and injunctive relief to compel CalPERS to continue to enforce section 20909 by allowing eligible employees to continue to purchase airtime.
Issue on Appeal
The overarching issue on appeal related to whether the Legislature intended to give Plaintiffs and other CalPERS members a vested contractual right to purchase airtime service credit when it enacted section 20909. Plaintiffs reasoned that when their employment began, their right to purchase airtime was one of the terms and conditions of their employment; therefore, the Legislature had no authority to repeal that right during the course of their employment.
Not a Vested Right
Public employees earn a "vested" right to their pension benefits immediately upon acceptance of employment. "Vesting" means that the employee acquires an irrevocable interest in the benefit. The California Contract Clause protects such vested rights by prohibiting the State or its subdivisions from passing laws that impair contractual obligations. However, the presumption is against the creation of a vested right by statute. In order to overcome this presumption, plaintiffs must meet a heavy burden of showing that the statutory language and the circumstances surrounding its passage demonstrate a clear intent to create private rights of a contractual nature.
Plaintiffs claim that section 20909 expressly vested the right to purchase airtime service credit. However, the appellate court determined that the statute’s language and its legislative history did not create a vested pension benefit.
Legislature May Modify or Eliminate Vested Pension Rights
Even if this were a vested right, the Legislature can modify or eliminate vested pension rights in order to keep "a pension system flexible to permit adjustments in accord with changing conditions and at the same time maintain the integrity of the system." Such changes have to be reasonable, and it is for the court to decide in each case whether the action constitutes a permissible change. To be reasonable, the change must relate to the theory of a pension system and its successful operation.
In this case, the appellate court determined that the Legislature had ample authority to eliminate the option, as doing so restricted the pension system to providing benefits based on work actually performed, which is its primary purpose. In other words, pension benefits are "deferred compensation that has been earned through the actual performance of work." This change eliminated an option that allowed for the purchase of non-qualifying service credit that was completely unconnected to actual services provided or work performed. Therefore, the Legislature was eliminating something that was not related to the theory of a pension system and was, in fact, detrimental to its successful operation.
Legislature Not Required to Provide a Comparable New Advantage
To be reasonable, changes to employees’ pension rights must bear some material relation to the theory of a pension system and its successful operation, and changes to the pension plan resulting in disadvantage to employees should be accompanied by comparable new advantages. However, this is a recommendation, not a mandate. The Legislature is not required to provide a comparable new advantage.
Nevertheless, the appellate court held that there was no disadvantage. While the airtime service credit provided something valuable for those employees who purchased it, it was the employees, not the state, who paid for this benefit. Consequently, the appellate court reasoned that this was not a case where the state provided a retirement benefit in exchange for work, and then took the benefit away. Instead, this was a benefit that employees provided to themselves.