The opinion
IN THE SUPREME COURT OF
CALIFORNIA
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSOCIATION
et al.,
Plaintiffs and Appellants,
v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT
ASSOCIATION et al.,
Defendants and Respondents;
STATE OF CALIFORNIA et al.,
Interveners and Appellants.
****
CONTRA COSTA COUNTY DEPUTY SHERIFF’S
ASSOCIATION et al.,
Plaintiffs and Appellants,
v.
CONTRA COSTA COUNTY EMPLOYEES’ RETIREMENT
ASSOCIATION et al.,
Defendants and Respondents;
STATE OF CALIFORNIA et al.,
Interveners and Appellants.
****
AMERICAN FEDERATION OF STATE, COUNTY AND
MUNICIPAL EMPLOYEES et al.,
Plaintiffs and Appellants,
v.
MERCED COUNTY EMPLOYEES’ RETIREMENT
ASSOCIATION et al.,
Defendants and Respondents;
STATE OF CALIFORNIA et al.,
Interveners and Appellants.
S247095
First Appellate District, Division Four
A141913
Alameda County Superior Court
RG12658890
Contra Costa County Superior Court
MSN12–1870
Merced County Superior Court
CV003073
July 30, 2020
Chief Justice Cantil-Sakauye authored the opinion of the
Court, in which Justices Chin, Corrigan, Liu, Cuéllar, Kruger,
and Groban concurred.
Justice Cuéllar filed a concurring opinion.
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
S247095
Opinion of the Court by Cantil-Sakauye, C. J.
The California Public Employees’ Pension Reform Act of
2013 (PEPRA; Stats. 2012, ch. 296, § 1) substantially revised the
laws governing the pension plans of the state’s public
employees. In a prior decision, Cal Fire Local 2881 v. California
Public Employees’ Retirement System (2019) 6 Cal.5th 965 (Cal
Fire), we rejected a constitutional challenge to one change
effected by PEPRA, the elimination of the opportunity for public
employees to purchase “additional retirement service credit”
under Government Code section 20909. The present decision
addresses legal issues raised by a different provision of PEPRA,
which amended the County Employees Retirement Law of 1937
(CERL; Gov. Code, § 31450 et seq.).1
CERL governs the pension systems maintained by many
of the state’s counties. Each county system is administered by
1
Unless indicated otherwise, all further statutory citations
are to the Government Code.
We use the abbreviation “PEPRA” in its popular sense to
refer to Assembly Bill No. 340 (2011-2012 Reg. Sess.) (Assembly
Bill 340), which enacted the amendment under consideration
here. (Stats. 2012, ch. 296, § 28.) Assembly Bill 340 formally
gave the name “California Public Employees’ Pension Reform
Act of 2013” only to newly added article 4 of Chapter 21 of the
Government Code, which spans sections 7522 – 7522.74. (Stats.
2012, ch. 296, § 15.)
1
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
its own retirement board, which is tasked with implementing
CERL’s provisions. Under CERL, the amount of an employee’s
pension benefit is determined as a percentage of the
“compensation earnable” received by the employee during a
representative year of county employment. Even before PEPRA,
CERL expressly excluded overtime pay from compensation
earnable and limited the inclusion of payments from a deferred
compensation plan. The PEPRA provision at issue here
amended CERL’s definition of compensation earnable to exclude
or limit the inclusion of additional types of compensation in an
effort to prevent perceived abuses of the pension system.
Although this amendment applies to the calculation of the
pensions of all employees covered by CERL, the parties agree
that the issues raised in this appeal relate only to the
amendment’s impact on the pensions of persons who were first
employed by a county prior to the effective date of PEPRA,
referred to as “legacy employees.”
This challenge to PEPRA’s amendment of CERL raises
two sets of issues. First, the Alameda County Deputy Sheriff’s
Association (Association) and its coplaintiffs (collectively,
plaintiffs) contend that employees in the three counties involved
in this matter have a contractual right to receive pension
benefits calculated without regard to PEPRA’s changes, a right
based either on (1) agreements in effect when PEPRA was
enacted or (2) application of the doctrine of equitable estoppel.2
2
As explained below, this matter resulted from the
consolidation of three separate lawsuits filed by organizations
representing employees of Alameda, Contra Costa, and Merced
Counties. Among the plaintiffs in these actions, only those in
2
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
Long prior to the passage of PEPRA, employees in each of these
counties had entered into litigation settlement agreements with
their respective retirement boards that specify the types of
compensation included in compensation earnable. In some
cases, the provisions added by PEPRA conflict with the terms of
these agreements, excluding or restricting items of
compensation that the agreements require to be included in
compensation earnable. Plaintiffs argue that these agreements
confer on existing employees the contractual right to continue to
include these items of compensation in their pensionable
compensation, notwithstanding their exclusion by the
provisions added by PEPRA, or, alternatively, that the counties
are equitably estopped from implementing the PEPRA
amendment in a manner inconsistent with the agreements. In
turn, Central Contra Costa Sanitary District (District) and the
State of California (State) (collectively, defendants) respond that
the retirement boards are required to implement the provisions
of CERL, including PEPRA’s amendment, notwithstanding any
contrary agreements they might have entered into with county
employees.3
the Alameda County action petitioned this court for review of
the Court of Appeal’s decision. The plaintiffs in the Contra
Costa and Merced actions filed respondents’ briefs in this court
advancing positions similar to those of the Association and its
coplaintiffs.
3
In addition to the petition for review filed by the
Association, we granted petitions for review filed by both the
District and the State. The District had been joined as a
defendant in the Contra Costa County action because its
employees participate in a CERL pension plan. Although not
3
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
Wholly apart from these ordinary contract issues,
plaintiffs also contend that county employees who began their
work prior to PEPRA’s enactment have a constitutional right to
receive pension benefits calculated according to the law as it
existed prior to PEPRA. Since at least the middle of the last
century, our precedents have granted constitutional protection
to public employee pension plans. Under the “California Rule,”
as it has come to be known (Cal Fire, supra, 6 Cal.5th at p. 971),
the contract clause of the state Constitution requires any
modification of public employee pension plans to satisfy a
standard established in a long line of California Supreme Court
decisions, including most prominently Allen v. City of Long
Beach (1955) 45 Cal.2d 128 (Allen I). As explained below, in
determining the constitutional validity of a modification to a
public employee pension plan, Allen I requires a court first to
determine whether the modification imposes disadvantages on
affected employees, relative to the preexisting pension plan,
and, if so, whether those disadvantages are accompanied by
comparable new advantages. Assuming the disadvantages are
not offset in this manner, the court must then determine
whether the agency’s purpose in making the changes was
sufficient, for constitutional purposes, to justify an impairment
of pension rights. Public employee pension plans may be
modified “for the purpose of keeping [the] pension system
flexible to permit adjustments in accord with changing
conditions and at the same time maintain the integrity of the
system,” but to survive contract clause scrutiny, such changes
initially a party, the State was permitted to intervene in all
three of the consolidated actions to defend PEPRA.
4
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
“must bear some material relation to the theory of a pension
system and its successful operation.” (Id. at p. 131.) Finally,
assuming the changes occurred for a constitutionally
permissible purpose, we interpret Allen I to require the
modification to provide comparable new advantages to public
employees unless to do so would undermine, or would otherwise
be inconsistent with, that proper purpose.
Invoking the contract clause, plaintiffs argue that persons
employed by a county at the time of PEPRA’s enactment
possessed implied contractual rights in the pre-PEPRA terms of
CERL that are protected against impairment. Because
PEPRA’s amendment has the practical effect of diminishing
some employees’ pension benefits without granting any
comparable new advantages, plaintiffs contend, its application
to the pensions of existing employees is precluded by the
California Rule. In turn, defendants respond that (1) PEPRA’s
amendment did not trigger constitutional scrutiny because its
provisions constituted a clarification, rather than a modification
of CERL, and, alternatively, (2) any changes met the
requirements of the California Rule.
With regard to the ordinary contract issues, we hold that
county employees have no express contractual right to the
calculation of their pension benefits in a manner inconsistent
with the terms of the PEPRA amendment. Because the county
retirement boards are required to implement CERL as enacted
by the Legislature, the settlement agreements, which are silent
on this issue, must be interpreted to permit the modification of
board policies to accommodate statutory changes to CERL. In
addition, we conclude that plaintiffs have failed to demonstrate
the elements necessary for the invocation of equitable estoppel.
5
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
In particular, there is no evidence that the county boards made
any representations regarding the continued enforceability of
the terms of the settlement agreements in the event of
inconsistent legislative changes to the controlling statutory
provisions.
With regard to the constitutional question, we reject
defendants’ threshold argument that no constitutional issue is
presented here because the exclusions and limitations from
compensation earnable imposed by PEPRA did not constitute a
change in the law governing CERL pension benefits. Although
the inclusion in compensation earnable of the elements of
compensation excluded by PEPRA had not been specifically
addressed when the amendment was enacted, either in CERL
itself or its judicial interpretations, the more general law of
compensation earnable was sufficiently settled prior to PEPRA
to justify treating the amendment as a change in the law for
purposes of contract clause analysis. With respect to the merits
of plaintiffs’ constitutional claim, however, we hold that the
challenged provisions added by PEPRA meet contract clause
requirements. They were enacted for the constitutionally
permissible purpose of closing loopholes and preventing abuse
of the pension system in a manner consistent with CERL’s
preexisting structure. Further, it would defeat this proper
objective to interpret the California Rule to require county
pension plans either to maintain these loopholes for existing
employees or to provide comparable new pension benefits that
would perpetuate the unwarranted advantages provided by
these loopholes.
6
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
I. BACKGROUND
CERL establishes an optional employee pension system
for county adoption. Of our state’s 58 counties, 20 have chosen
to implement their pension plans under CERL. (Irvin v. Contra
Costa County Employees’ Retirement Assn. (2017)
13 Cal.App.5th 162, 169, fn. 6.) The remaining counties either
operate an independent retirement system or contract with the
state’s pension plan, the Public Employees’ Retirement System
(CalPERS; § 20000 et seq.). (Irvin, at p. 169, fn. 6.) Because the
legislation at issue here applies only to CERL, the pensions of
persons employed by counties that do not participate in CERL
are not directly affected by our decision. For convenience, our
subsequent references to “counties” and “county employees” in
this decision should be understood to refer only to counties that
maintain a pension plan under CERL and persons employed by
those counties.
In addition, as noted above, the arguments raised by the
parties apply only to county employees who were employed prior
to PEPRA’s effective date. PEPRA made substantial changes in
the law applicable to the pensions of public employees hired
after its effective date that are not applicable to the pensions of
legacy public employees, but none of those changes is at issue
here. Again for convenience, unless stated otherwise, references
to “county employees” in the remainder of this decision include
only persons who were first employed by a county prior to
PEPRA’s effective date. Similarly, our description of the
provisions of CERL addresses only those provisions applicable
to such legacy employees. Employees hired post-PEPRA are
often subject to alternate statutory provisions, and, as a general
matter, we do not address those provisions.
7
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
A. County Employee Pensions Under CERL
CERL contains a collection of alternative pension
provisions tailored to individual counties and subsets of workers
within those counties. (See, e.g., §§ 31486, 31487, 31496, 31499,
31511, 31676.01–31676.19.) Notwithstanding this tailoring, the
county plans are identical in their general approach, although
the details in the following description vary among them.
Each county maintains its own pension plan,
administered by a retirement board whose general membership
is dictated by statute. (§§ 31520, 31520.1; see Lexin v. Superior
Court (2010) 47 Cal.4th 1050, 1095–1096 [discussing the
composition of retirement boards].) Under the California
Constitution, such retirement boards have “plenary authority
and fiduciary responsibility for investment of moneys and
administration of the system.” (Art. XVI, §17.) Both the county
and its employees must make regular contributions to their
plan’s pension fund in amounts determined by the county board
of supervisors, upon recommendation of the retirement board.
(§§ 31453, 31453.5, 31454, 31621.)
In general terms, a county employee becomes eligible to
retire after he or she has worked for the county for at least ten
years and has attained the age of 55, although the county board
of supervisors has the discretion to lower the minimum age of
retirement to 50 years. (§ 31672, subd. (a).) Once vested county
employees reach the minimum retirement age, they may elect
8
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
to retire and begin receiving monthly retirement benefits.4
(§ 31672, subd. (a).)
CERL contains a series of statutory benefit schedules that
may be adopted by a participating county. (§§ 31676.01–
31676.19.) These schedules determine the amount of a retiring
employee’s pension benefit, which is calculated on the basis of
the employee’s (1) age at retirement, (2) years of service, and
(3) final compensation. Final compensation, explained further
below, is roughly equivalent to the employee’s annual
compensation, and it depends directly on “compensation
earnable,” the statutory term amended by PEPRA. Under one
typical schedule, for example, a retiring employee will receive
an annual pension benefit equal to one-sixtieth of his or her final
compensation for each year of county employment, multiplied by
4
As explained in Cal Fire, supra, 6 Cal.5th 965, use of the
term “vested” is potentially confusing here because the term is
used in two different ways in discussing pensions. (Id. at p. 972,
fn. 3.) County employees become eligible to receive a pension
after ten years of county employment. (§ 31672, subd. (a).) Once
an employee has become qualified to receive a pension by
satisfying this minimum service requirement, he or she is said
to be “vested” with respect to the receipt of a pension. That is
not the same as having a “vested right” in a particular pension
benefit. The term “vested right” has come to refer to a benefit of
public employment whose repeal or other divestment is
constrained by the constitutional contract clause. (Cal Fire, at
p. 972, fn. 3.) To further compound the confusion, “vested right”
means different things in other legal contexts. (E.g., Avco
Community Developers, Inc. v. South Coast Regional Com.
(1976) 17 Cal.3d 785, 791 (Avco) [“vested right” to pursue a
permitted real estate development].)
9
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
a number derived from a table in the statute.5 (§ 31676.1.) That
number is determined by the employee’s age at retirement and
increases gradually with retirement age, reaching a maximum
for retirement at age 65. (Ibid.) This last calculation leads an
employee who retires at a more advanced age to receive a
greater pension benefit than a similarly situated employee who
retires at a younger age.
As this description demonstrates, a county employee’s
final compensation is a critical factor in determining the amount
of his or her pension benefit, because the benefit is calculated as
a percentage of final compensation. All other things being
equal, the greater an employee’s final compensation, the greater
will be the monthly pension benefit.
B. Compensation Earnable
At issue in this matter is PEPRA’s amendment of section
31461, the CERL provision defining the term “compensation
earnable.” Final compensation, which factors directly into the
5
Pension benefits under CERL are composed of two
elements, a “service retirement annuity” and a “current service
pension.” (§§ 31673-31675; O’Neal v. Stanislaus County
Employees’ Retirement Assn. (2017) 8 Cal.App.5th 1184, 1199.)
Our example does not discuss the distinction between these two
elements because it appears to make no practical difference in
the size of an employee’s pension benefit. Under the benefit
schedules, the amount of the current service pension is
calculated to result in an identical pension benefit for employees
with identical circumstances of retirement, without regard to
the respective size of their service retirement annuities. (E.g.,
§§ 31676.01, 31676.1 [current service pension is calculated so
that, “when added to the service retirement annuity,” the total
pension benefit will have a particular value].)
10
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
pension benefit calculation, is statutorily defined as an
employee’s annual compensation earnable, received either in a
single specific year or calculated as an average over three
specific years.6 (§§ 31462, 31462.1; Ventura County Deputy
Sheriffs’ Assn. v. Board of Retirement (1997) 16 Cal.4th 483, 499
(Ventura County).) The basis for a county employee’s pension
benefit is therefore the annual compensation earnable received
by the employee in the period during which final compensation
is determined.
Compensation earnable, in turn, is defined in section
31461 as the employee’s “average compensation . . . for the
period under consideration upon the basis of the average
number of days ordinarily worked by persons in the same grade
or class of positions during the period, and at the same rate of
pay. The computation for any absence shall be based on the
compensation of the position held by the member at the
beginning of the absence.”7 (§ 31461, subd. (a).) For purposes of
this definition, “compensation” is statutorily defined as the
employee’s “remuneration paid in cash . . . but does not include
6
The three-year average governs unless the county board of
supervisors affirmatively elects the single year alternative.
(§§ 31462, 31462.1, subd. (a)(2).) In either case, the retiring
employee is entitled to designate the year or years to be used in
calculating final compensation. (§§ 31462, 31462.1.)
7
CERL contains a few alternative definitions of
compensation earnable applicable in specific circumstances.
(See, e.g., §§ 31461.1, 31461.4, 31461.45 [all applicable only to
Los Angeles County; see §§ 28020, 28022]; 31461.2 [applicable
only to certain administrators and coroners].) We are concerned
here only with the generally applicable definition, which is
found in section 31461, subdivision (a).
11
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
the monetary value of board, lodging, fuel, laundry, or other
advantages furnished to a member.” (§ 31460.) Since the 1990s,
CERL has provided that an employee’s contributions to a
deferred compensation plan are included in compensation
earnable in the year of the contribution, rather than the year in
which the sums are withdrawn from the plan. (§§ 31460, 31461;
see Ventura County, supra, 16 Cal.4th at p. 491.) Further,
compensation earnable has long been held not to include
overtime pay. (See Guelfi v. Marin County Employees’
Retirement Assn. (1983) 145 Cal.App.3d 297, 306–307 (Guelfi)
[“overtime pay is not ‘compensation earnable’ and thus is not to
be included in computing . . . ‘final compensation’ ”].) Since
2000, overtime premium pay has been expressly excluded from
compensation earnable in most circumstances by section
31461.6. (Stats. 2000, ch. 966, § 3.)
As our quotation from section 31461 suggests, CERL’s
definition of compensation earnable is both very general and
somewhat inscrutable. (See Ventura County, supra, 16 Cal.4th
at p. 493 [sections 31460 and 31461 are “ambiguous in some
respects”].) After an extensive examination of the language and
legislative history, we held in Ventura County that
“ ‘compensation earnable’ is the average pay of the individual
retiring employee computed on the basis of the number of hours
worked by other employees in the same class and pay rate —
that is[,] the average monthly pay, excluding overtime, received
by the retiring employee for the average number of days worked
in a month by the other employees in the same job classification
at the same base pay level.” (Id. at p. 504.) Accordingly, to
calculate compensation earnable, section 31461 uses a retiring
employee’s personal daily rate of pay, while it looks to the
12
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
number of days “ordinarily” worked by comparable employees —
that is, “persons in the same grade or class of positions during
the period, and at the same [base] rate of pay” (id., subd. (a)) —
to determine the number of workdays over which that rate of
pay is applied. As a practical matter, a retiring employee’s final
compensation is the annual compensation the employee would
have received had he or she worked the average number of days
ordinarily worked by his or her peers during the final
compensation period. To find final compensation, a county
retirement board is presumably required to determine the
employee’s compensation during the final compensation period,
divide that figure by the days worked by the employee in that
time to determine his or her average daily rate of pay, and then
multiply that rate by “the average [annual] number of days
ordinarily worked” (ibid.) by the employee’s peers during the
final compensation period.8
Determining the components of an employee’s
compensation that are included in compensation earnable has
been a recurring issue in the implementation of CERL. The
compensation of many county employees, particularly including
public safety workers like the members of the Association,
consists of a base salary augmented by a series of employee-
8
This is the manner in which at least one county retirement
board does calculate final compensation. (See, e.g., Orange
County Employees Retirement System Compensation Earnable
Policy (Mar. 18, 2019), at p. 4 [using hours worked rather than
days worked] <https://www.ocers.org/sites/main/files/
file-attachments/compensationearnablepolicy_1.pdf> [as of July
30, 2020]; all Internet citations in this opinion are archived by
year, docket number, and case name at
<http://www.courts.ca.gov/38324.htm>.)
13
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
specific add-ons to recognize, for example, special training,
experience, or hazardous duty. Prior to our decision in Ventura
County, many county retirement boards were guided by Guelfi,
supra, 145 Cal.App.3d 297, which held that compensation
earnable does not include such add-ons unless they are paid to
all of an employee’s peers. Guelfi also held that the value of in-
kind advantages provided to an employee is excluded from
compensation earnable, even if the employee is paid the cash
value of the advantage rather than receiving it in-kind. (Id. at
pp. 303–304.) Ventura County disapproved both of these aspects
of Guelfi, holding that the statutory definition of “compensation”
in section 31460 includes all cash compensation paid to an
employee, regardless whether the cash represented the value of
an in-kind benefit or constituted premium pay not received by
all of the employee’s peers. (Ventura County, supra, 16 Cal.4th
at pp. 496–499.) Because such “compensation” is the basis for
compensation earnable, these general holdings from Ventura
County have guided the determination of compensation
earnable under CERL since the decision’s issuance in 1997.
C. PEPRA
The Legislature viewed PEPRA as a “comprehensive”
reform of California’s public pension systems. (Sen. Rules Com.,
Off. of Sen. Floor Analyses, Analysis of Assem. Bill No. 340
(2011–2012 Reg. Sess.) Aug. 28, 2012, p. 8.) Many of PEPRA’s
provisions were based on a reform proposal published by
Governor Edmund G. Brown, Jr. in October 2011.9 Its
9
A copy of Governor Brown’s “Twelve Point Pension Reform
Plan,” which is dated October 27, 2011, is posted on the
14
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
centerpiece was a new pension plan applicable only to newly
hired public employees that is “less expansive, and therefore
less burdensome for the state and local governments, than the
plans covering then-existing public employees.” (Cal Fire,
supra, 6 Cal.5th at pp. 974–975.) But PEPRA also modified
some statutes governing the pensions of existing employees (Cal
Fire, at p. 975) and incorporated provisions from separately
pending legislation that were not a part of the governor’s
proposal. One of those provisions was the amendment at issue
in this matter.10
California government website at
<https://www.ca.gov/archive/gov39/wp-content/uploads/2017/
09/Twelve_Point_Pension_Reform_10.27.11.pdf> [as of July 30,
2020].
10
As explained in a contemporary Senate bill analysis, “The
comprehensive pension reform proposal . . . is based on the
Governor’s 12-Point Pension Reform Plan. [¶] The Conference
Committee Report includes 10 of the 12 points included in the
Governor’s plan. . . . Additionally, in order to achieve the goal
of comprehensive reform, included are some pension reform
changes found in bills going through the Legislature this session
that were not included as part of the Governor’s plan.” (Sen.
Rules Com., Off. of Sen. Floor Analyses, Analysis of Assem. Bill
No. 340 (2011-2012 Reg. Sess.) Aug. 28, 2012, pp. 7-8.) Rather
than arising in the governor’s reform proposal, however, the
provision of PEPRA under consideration here originated in an
earlier version of Assembly Bill 340 and was retained
throughout the legislative process. (Assem. Bill No. 340, Final
Hist. (2011-2012 Reg. Sess.); see Assem. Bill No. 340, as
amended April 25, 2011; Sen. Rules Com., Off. of Sen. Floor
Analyses, Analysis of Assem. Bill No. 340 (2011-2012 Reg. Sess.)
Aug. 28, 2012.)
15
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
The present amendment, applicable to the pensions of
both legacy and new employees, added a subdivision to the
definition of compensation earnable in section 31461.11 (Stats.
11
In the text, we often refer to this provision of PEPRA as
“the PEPRA amendment.”
Subdivision (b) of section 31461, added by the PEPRA
amendment, provides:
“(b) ‘Compensation earnable’ does not include, in any case,
the following:
“(1) Any compensation determined by the board to have
been paid to enhance a member’s retirement benefit under that
system. That compensation may include:
“(A) Compensation that had previously been provided in
kind to the member by the employer or paid directly by the
employer to a third party other than the retirement system for
the benefit of the member, and which was converted to and
received by the member in the form of a cash payment in the
final average salary period.
“(B) Any one-time or ad hoc payment made to a member,
but not to all similarly situated members in the member’s grade
or class.
“(C) Any payment that is made solely due to the
termination of the member’s employment, but is received by the
member while employed, except those payments that do not
exceed what is earned and payable in each 12-month period
during the final average salary period regardless of when
reported or paid.
“(2) Payments for unused vacation, annual leave, personal
leave, sick leave, or compensatory time off, however
denominated, whether paid in a lump sum or otherwise, in an
amount that exceeds that which may be earned and payable in
each 12-month period during the final average salary period,
regardless of when reported or paid.
16
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
2012, ch. 296, § 28.) New subdivision (b) excludes entirely from
compensation earnable two types of compensation and limits the
amount of two other types of compensation that can be included
in any 12-month period during the final compensation period.
(§ 31461, subd. (b).) As a result of the amendment,
compensation earnable now excludes any compensation
determined by the local retirement board to have been paid to
enhance a member’s retirement benefit (id., subd. (b)(1)) and
any compensation for services rendered outside normal working
hours (id., subd. (b)(3)). In addition, compensation for the
surrender of unused paid time off, such as vacation and sick
leave, and payments made at termination of employment, which
often also constitute compensation for unused leave time, can be
included in compensation earnable only to the extent the leave
time was “earned and payable” in any 12-month period during a
final compensation year.12 (§ 31461, subd. (b)(2) & (b)(4).) Soon
after PEPRA was adopted, related legislation added subdivision
(c) to section 31461, which clarifies that the “terms of
subdivision (b) are intended to be consistent with . . . the
holdings in Salus v. San Diego County Employees Retirement
“(3) Payments for additional services rendered outside of
normal working hours, whether paid in a lump sum or
otherwise.
“(4) Payments made at the termination of employment,
except those payments that do not exceed what is earned and
payable in each 12-month period during the final average salary
period, regardless of when reported or paid.”
12
The words “and payable” were added to section 31461,
subdivision (b)(2) by a separate bill passed soon after PEPRA.
The same bill added subdivision (c) to section 31461. (Stats.
2012, ch. 297, § 2.)
17
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
Association (2004) 117 Cal.App.4th 734 and In re Retirement
Cases (2003) 110 Cal.App.4th 426.” (Stats. 2012, ch. 297, § 2.)
A bill analysis prepared in connection with the pre-
PEPRA version of Assembly Bill 340 explained that the purpose
of these changes was to circumscribe CERL’s “very broad and
general definition of ‘compensation earnable’ ” in order to reduce
pension “ ‘spik[ing],’ ” the manipulation of an employee’s pattern
of work and pay to produce inflated compensation earnable
during the final compensation period. (Assem. Comm. on Public
Employees, Retirement and Social Security, Analysis of Assem.
Bill No. 340 (2011–2012 Reg. Sess.) Apr. 25, 2011, p. 3.)
A review of the exclusions and limitations in PEPRA’s
amendment of section 31461 demonstrates that the Legislature
sought to limit pension spiking by eliminating practices that,
while arguably permitted under the broad language of the
preexisting definition, are inconsistent with the statute’s overall
concept of compensation earnable. Subdivision (b)(1) excludes
compensation found by a retirement board to have been “paid to
enhance a member’s retirement benefit.” In a properly
operating employment setting, compensation received by
employees is paid to compensate for their work; its enhancement
of an employee’s pension benefit is merely a consequence, not an
objective, of the compensation. In excluding compensation
found by the retirement board to have been paid to enhance a
pension benefit, the Legislature appears to have been concerned
that some employees, presumably those in positions of unusual
authority or influence, were able to manipulate county
compensation practices to artificially increase their cash
compensation during the final compensation period.
Subdivision (b)(1) provides three examples of the types of
18
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
compensation that could raise an inference of improper
payment.13 Each contemplates a departure from ordinary
practices: cash compensation in lieu of a benefit normally
provided in-kind (§ 31461, subd. (b)(1)(A)), which would bring
the value of an otherwise excluded in-kind benefit within the
definition of compensation; a “one-time or ad hoc payment made
to a member” but not to peers (id., subd. (b)(1)(B)); and a
payment made “solely due to the termination of the member’s
employment” but received while the employee is still employed
(id., subd. (b)(1)(C)). Because payments made upon or after
termination of employment have been held to be outside
compensation earnable (see In re Retirement Cases (2003)
110 Cal.App.4th 426, 473–476 (Retirement Cases)), this would
also make pensionable a form of compensation otherwise
excluded from compensation earnable.
New subdivision (b)(3) of section 31461 excludes payments
for “additional services rendered outside of normal working
hours” from compensation earnable. An often-cited example of
such compensation is on-call duty pay, which is provided to
13
The PEPRA amendment does not require exclusion solely
because an item of compensation fits within one of these
examples. Instead, they illustrate the type of practices that
raise suspicion under section 31461, subdivision (b)(1). (Ibid.
[“That compensation may include. . . .”].) Before it is excluded,
an item of compensation described by subdivision (b)(1)(A)
through (C) must be found by the county retirement board to
have been “paid to enhance a member’s retirement benefit.”
(§ 31461, subd. (b)(1).) Section 31542, subdivision (a), also
added by PEPRA (Stats. 2012, ch. 296, § 29), requires each board
to “establish a procedure for . . . determining whether an
element of compensation was paid to enhance a member’s
retirement benefit.”
19
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
employees in return for voluntarily making themselves
available to be called to work outside their normal working
hours. Because such pay is cash remuneration, it is
“compensation” under section 31460. Yet because compensation
earnable excludes overtime pay and is calculated on the basis of
the days “ordinarily” worked by an employee’s peers (§ 31461,
subd. (a)), the inclusion of payment for services provided outside
normal hours in compensation earnable is arguably inconsistent
with the statutory concept.
As to new subdivision (b)(2) of section 31461, many
counties permit employees to accumulate unused leave time,
such as vacation days and sick leave, and to “cash out” the leave
time at a later date by receiving the cash value of the time in
return for its surrender. Such leave time is earned in the year
in which it is awarded. Yet compensation for cashed out leave
time becomes “compensation” for purposes of section 31460 in
the year in which the cash value is received, which need not be
the year in which the surrendered time was earned. This can
lead to a distortion of the pension calculation when leave time
awarded in a prior year is cashed out during the final
compensation period, since this has the effect of adding
remuneration for a prior year’s service to the compensation
received for service during the final compensation period.
A similar problem arises with payments made upon termination
of employment, excluded by section 31461, subdivision (b)(4),
because such payments are generally also compensation for the
surrender of accrued leave time. By limiting the amount of
“cash out” and termination pay that can be included in
compensation earnable to the value of leave time “earned and
payable in each 12-month period during the final average salary
20
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
period” (ibid.), the Legislature appears to have intended to
prevent retiring employees from, in effect, including
remuneration earned during prior years in the final
compensation calculation.
The State points to an additional function of section 31461,
subdivision (b)(2) and (4). Prior to PEPRA’s amendment, even
in counties that limited the amount of leave time that could be
cashed out in a calendar year, employees were able to double the
amount of cashed out leave time received during a final
compensation year by designating a final compensation year
that straddles two calendar years, for example, July 1 through
June 30. By cashing out leave time in the second half of the
prior calendar year and the first half of the subsequent calendar
year, a retiring employee could double the amount of cashed out
leave time received in the final compensation year. By limiting
the inclusion of cashed out leave time to that “earned and
payable” in a “12-month period,” subdivision (b)(2) and (4)
prevent this practice.
We emphasize that there is nothing inherently abusive in
the practices addressed by section 31461, subdivision (b)(2)
through (4), at least when divorced from their pension
consequences. Accepting voluntary on-call duty and cashing out
unused leave time to the extent permitted by an employer are
ordinary practices that serve proper public policy interests. Yet
by not expressly excluding such payments when determining a
county employee’s pension benefit, the pre-PEPRA definition of
compensation earnable allowed an employee to considerably
increase his or her pension benefit by volunteering for a large
quantity of on-call duty or by accumulating and cashing out a
large quantity of unused leave time during the final
21
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
compensation period. Because such enhancements are arguably
inconsistent with the underlying concept of compensation
earnable, which is intended to reflect pay for work ordinarily
performed during the course of a year, these types of
enhancement have been characterized as pension spiking.
D. This Litigation
Following the enactment of PEPRA, the Association, the
Merced County Sheriff’s Employees’ Association, and the Contra
Costa County Deputy Sheriffs Association filed separate
petitions for a writ of mandate against their respective county
retirement boards.14 The three matters were eventually
consolidated in a single proceeding in Alameda County.15 The
fundamental contention of these lawsuits was that PEPRA’s
exclusion of certain types of income from compensation earnable
could not lawfully be applied to the calculation of the pensions
of persons who were county employees at the time PEPRA
became effective.
14
Various other entities and individual plaintiffs also joined
as petitioners in these actions. In the course of the proceedings,
additional parties were permitted to intervene or were joined as
defendants, including the State, several public employers, such
as the counties and county agencies like the District, and other
public employee organizations.
15
A fourth, similar case from Marin County was ordered
consolidated with these three, but that case was dismissed on
demurrer prior to enforcement of the order of consolidation. The
judgment in that action was affirmed in Marin Assn. of Public
Employees v. Marin County Employees’ Retirement Assn. (2016)
2 Cal.App.5th 674 (Marin County). We granted review of Marin
County (Nov. 22, 2016, S237460) but have deferred briefing.
22
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
The litigation revealed that PEPRA’s amendment of
section 31461 had caused the three county retirement boards to
change certain policies governing the calculation of
compensation earnable. Although the exact pre-PEPRA
practices varied among these counties, each retirement board
maintained a policy permitting employees to include in
compensation earnable at least some of the types of
compensation that are excluded or limited by the PEPRA
amendment. Most often this was compensation for cashed out
leave time, which could be included in an amount exceeding that
earned and payable in a single year, but on-call duty pay and
some termination pay were also includable in one or more of the
counties. (See Alameda County Deputy Sheriff’s Assn. v.
Alameda County Employees’ Retirement Assn. (2018)
19 Cal.App.5th 61, 82–83 (Alameda Sheriffs).)
Further, the changes required by PEPRA were, in some
cases, contrary to the terms of agreements entered into between
the county retirement boards and county employees, as well as
written policies adopted to reflect the terms of those
agreements. This court’s decision in Ventura County, supra,
16 Cal.4th 483, by disapproving much of Guelfi, supra,
145 Cal.App.3d 297, called into question aspects of the then-
prevailing approach to the calculation of compensation earnable
under CERL. In the wake of Ventura County, county employees
and their representatives filed lawsuits against many CERL
retirement boards, including those in Alameda, Contra Costa,
and Merced Counties, to address these issues. Each of these
three lawsuits was resolved by a settlement agreement that, in
part, required the respective retirement boards to include
various types of compensation in the calculation of
23
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
compensation earnable. Because these agreements were still in
effect when PEPRA was enacted, compliance with its
amendment of section 31461 led the boards to adopt policies that
were, to some extent, inconsistent with the terms of the
settlement agreements. (Alameda Sheriffs, supra,
19 Cal.App.5th at pp. 85–86.)
The plaintiffs in the consolidated actions contended that
county employees had both a vested right under the
constitutional contract clause to the continued application of the
policies in effect prior to PEPRA and, separately, a right under
the settlement agreements, either directly or pursuant to the
doctrine of equitable estoppel, to the continued application of the
policies contained in them.16 After extensive litigation, the trial
court entered a writ of mandate, ruling that county employees
possess a vested right to the continuation of some, but not all, of
the pre-existing practices.
The Court of Appeal affirmed in part and reversed in part
in Alameda Sheriffs, supra, 19 Cal.App.5th 61. The court
concluded that subdivision (b)(1) and (3), added to section 31461
16
In their complaint, the plaintiffs cited the contract clauses
of both the state and federal Constitutions as authority for their
constitutional claims. In Cal Fire, we implicitly considered only
California’s contract clause. (Cal. Const., art. I, § 9; Cal Fire,
supra, 6 Cal.5th at pp. 976, 977 & fn. 8 [plaintiffs’ claims
pleaded under the California Constitution].) We take the same
approach here, ruling solely on California’s unique approach to
the contract clause in this context and discussing decisions
under the United States Constitution only for their persuasive
value in interpreting our own. Plaintiffs do not suggest that the
federal Constitution provides greater protection for their
pension rights than does the California Constitution.
24
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
by PEPRA, changed the law governing CERL pensions by
excluding types of compensation that were previously included
in compensation earnable. (Alameda Sheriffs, at pp. 109–112.)
Although recognizing that the constitutionality of these changes
is governed by the Allen I test, the court declined to resolve the
constitutional issue, concluding that it was “without sufficient
information” about the implementation of CERL in the three
counties. (Alameda Sheriffs, at p. 123.) At the same time, the
court accepted the plaintiffs’ estoppel argument, ruling that the
injustice resulting from a failure to give effect to the terms of the
settlement agreements outweighed “ ‘any effect upon public
interest or policy’ ” from failing to give effect to the terms of
PEPRA. (Alameda Sheriffs, at p. 126.)
We granted petitions for review filed by (1) the Association
and the individual plaintiffs in its action, (2) the District, which
had been joined as a defendant in the Contra Costa County
action because it employs persons who participate in a CERL
pension plan, and (3) the State, which had been permitted to
intervene in the consolidated actions to defend the
constitutionality of the legislation.
II. DISCUSSION
The issues raised here fall into two groups: first, whether
the provisions of PEPRA’s amendment of CERL violated rights
acquired by county employees by virtue of the settlement
agreements entered into with the retirement boards, and,
second, whether the amendment impaired county employees’
constitutionally protected implied contractual rights in the
implementation of CERL as it existed prior to the PEPRA
amendment. Pursuant to traditional jurisprudential principles,
we turn first to the nonconstitutional questions raised by the
25
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
settlement agreements. (See Santa Clara County Local
Transportation Authority v. Guardino (1995) 11 Cal.4th 220,
230–231 [the court will not decide constitutional questions when
other dispositive grounds are available].)
A. The Retirement Boards’ Settlement Agreements
Did Not Create a Contractual or Equitable
Right to the Calculation of Pension Benefits
That Supersedes the PEPRA Amendment
Plaintiffs contend that county employees have the right to
continue, after PEPRA, to have included in compensation
earnable the items of compensation declared includable by the
settlement agreements entered into by the retirement boards in
the wake of Ventura County, despite the exclusion or limitation
of these items by new subdivision (b)(2) through (4) of section
31461.17 Plaintiffs contend that this right arises either directly,
under the terms of the agreements, or by operation of the
doctrine of equitable estoppel. We conclude that neither
argument authorizes the county retirement boards to
administer CERL in a manner inconsistent with the governing
statutory provisions by including items of compensation in
compensation earnable that section 31461, as amended,
excludes.
17
The precise nature of the compensation at issue varies
among the settlement agreements, which are not identical in
their terms, but each agreement states that employees will be
allowed to include in compensation earnable at least some of the
types of compensation ruled out by PEPRA’s amendment of
section 31461.
26
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
1. Local retirement boards are required to comply
with CERL in calculating county employee pension
benefits
An understanding of the proper role of county retirement
boards under CERL is critical to resolving plaintiffs’ contract
and estoppel claims. Under CERL, “management of the
retirement system is vested” in the county retirement boards.
(§ 31520.) This delegation of authority is echoed by article XVI
of our Constitution, which grants to public employee retirement
boards, including those operating under CERL, the “sole and
exclusive responsibility to administer the system in a manner
that will assure prompt delivery of benefits and related services
to the participants and their beneficiaries.” (Cal. Const., art.
XVI, §17, subd. (a); see Flethez v. San Bernardino County
Employees Retirement Assn. (2017) 2 Cal.5th 630, 635–636
[applying art. XVI to a county retirement system].) As a
practical matter, the retirement boards’ responsibilities
generally involve management of the system’s financial assets
(Westly v. Board of Administration (2003) 105 Cal.App.4th 1095,
1109–1110 (Westly)) and the processing and payment of claims
for benefits under the plan (see, e.g., McIntyre v. Santa Barbara
County Employees’ Retirement System (2001) 91 Cal.App.4th
730, 734 [board has exclusive authority to determine whether
plan is obligated to pay benefits to employee]; Masters v. San
Bernardino County Employees Retirement Assn (1995)
32 Cal.App.4th 30, 45 [board has exclusive authority to
determine whether employee is permanently incapacitated and
whether the disability is service-related]). In carrying out these
responsibilities, the Constitution grants retirement boards
“plenary authority and fiduciary responsibility for investment of
moneys and administration of the system.” (Cal. Const., art.
27
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
XVI, §17.) Of necessity, the task of processing claims for
retirement benefits requires the county retirement boards to
interpret and apply the provisions of CERL, including the
sections defining compensation, compensation earnable, and
final compensation.
The task of a county retirement board is not to design the
county’s pension plan but to implement the design enacted by
the Legislature through CERL. As noted, CERL speaks of the
retirement boards as “manag[ing]” the retirement system
(§ 31520), while the Constitution charges them with
“administer[ing]” the system and its assets (Cal. Const.,
art. XVI, §17, subd. (a)). Although CERL grants to retirement
boards the power to make regulations, those regulations must
be consistent with the provisions of CERL. (§ 31525 [“The board
may make regulations not inconsistent with this chapter”].) The
boards do not have the authority to “evade the law” that
otherwise applies to their system. (Westly, supra,
105 Cal.App.4th at p. 1100.) “The granting of retirement
benefits is a legislative action within the exclusive jurisdiction
of the [relevant legislative body]. . . . [¶] It is not within [a
board’s] authority to expand pension benefits beyond those
afforded by the authorizing legislation. . . . The scope of the
board’s power as to benefits is limited to administering the
benefits set by the [legislative body].” (City of San Diego v. San
Diego City Employees’ Retirement System (2010)
186 Cal.App.4th 69, 79–80; see similarly City of San Diego v.
Haas (2012) 207 Cal.App.4th 472, 495.) This conclusion follows
from principles governing the authority of administrative bodies
generally: “[I]t is well established that the rulemaking power of
an administrative agency does not permit the agency to exceed
28
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
the scope of authority conferred on the agency by the
Legislature. [Citation.] ‘A ministerial officer may not . . . under
the guise of a rule or regulation vary or enlarge the terms of a
legislative enactment or compel that to be done which lies
without the scope of the statute . . . .’ [Citation.] And, a
regulation which impairs the scope of a statute must be declared
void.” (Agnew v. State Bd. of Equalization (1999) 21 Cal.4th 310,
321; see PaintCare v. Mortensen (2015) 233 Cal.App.4th 1292,
1305–1306 [“An administrative agency ‘has only as much
rulemaking power as is invested in it by statute.’ [Citations.]
Regulations that are inconsistent with a statute, alter or amend
it, or enlarge or impair its scope are void”].)
Accordingly, it is the Legislature that has final authority
to establish the provisions governing the award of pension
benefits under CERL. Further, it is the judiciary, not individual
retirement boards, that has “final responsibility” for the
interpretation of the Legislature’s terms. (Terhume v. Superior
Court (1998) 65 Cal.App.4th 864, 873.) For that reason,
although county retirement boards have the authority to
interpret CERL’s provisions as necessary to perform their
administrative functions, they have no authority to adopt or act
on an interpretation that is inconsistent with those provisions.
An administrative action that is unauthorized or inconsistent
with governing legislation is invalid. (Terhume, at p. 873.)
2. County retirement boards cannot confer a
contractual right to the calculation of employee
pension benefits in a manner inconsistent with
CERL
Plaintiffs argue that, by virtue of the settlement
agreements, existing county employees have an express
29
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
contractual right to the continued inclusion in compensation
earnable of certain items otherwise excluded by PEPRA’s
amendments. In order to find such a right, the settlement
agreements must be interpreted to require that their
classifications of compensation be applied in calculating the
pensions of existing employees, regardless of subsequent
statutory amendments or judicial decisions. The settlement
agreements are silent on this issue. None of them contains a
provision anticipating the possibility that CERL’s definition of
“compensation earnable” could be legislatively amended in a
manner inconsistent with their classifications or addressing the
fate of those classifications in the event of legislative change or
contrary judicial decision.
It is a commonplace that “[a] contract must be lawful
[citation], i.e., it must not be in conflict either with express
statutes or public policy.” (Vierra v. Workers’ Comp. Appeals Bd.
(2007) 154 Cal.App.4th 1142, 1148; see Civ. Code, § 1550.)
California decisions have repeatedly recognized that this
principle places constraints on the authority of public agencies
to enter into agreements, since those agreements are unlawful
if they exceed the agencies’ procedural and substantive powers.
Procedurally, an agreement cannot be used to avoid legally
prescribed procedures by dictating a result that, although
within an agency’s power, can be achieved only by following
those procedures. (E.g., City of San Diego v. California Water &
Telephone Co. (1947) 30 Cal.2d 817, 823–824 [city agreement to
abandon road held void because the statutory procedure for
abandonment, requiring public hearings, is exclusive]; Trancas
Property Owners Assn. v. City of Malibu (2006) 138 Cal.App.4th
172, 181–183 [city cannot, in litigation settlement agreement,
30
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
avoid the requirement of a public hearing and findings by
agreeing to the functional equivalent of a zoning variance].)
Substantively, an agency cannot agree to a result that is
otherwise beyond its power to achieve. (E.g., Summit Media
LLC v. City of Los Angeles (2012) 211 Cal.App.4th 921, 936–937
[city cannot agree to exempt party from otherwise applicable
ordinances]; Midway Orchards v. County of Butte (1990)
220 Cal.App.3d 765, 783 [city cannot by agreement approve a
real estate development that is inconsistent with its general
plan].) As a corollary of this principle, a public agency is
prohibited from entering into an agreement that constrains the
future exercise of its legislative or police powers. (Avco, supra,
17 Cal.3d at p. 800; Summit Media, at p. 934–935.)
As discussed above, the duty of a county retirement board
is to administer CERL as enacted by the Legislature; the boards
have no authority to act inconsistently with CERL. Accordingly,
the county boards must comply with any changes to CERL
enacted by the Legislature. They have no authority to disregard
such amendments by continuing to pursue a practice that is
contrary to CERL. As a consequence, any provision in the
settlement agreements that would have required the retirement
boards to continue to apply the agreed upon characterizations in
the face of contrary legislative changes or authoritative judicial
interpretations would have been void. The retirement boards
had no authority to enter into an agreement that would require
them to pursue a policy that conflicts with the governing
legislation.
Accordingly, the settlement agreements are best
interpreted to require the retirement boards to implement their
classifications of items of compensation only so long as those
31
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
classifications are consistent with prevailing law. (See Civ.
Code, § 1643 [“A contract must receive such an interpretation as
will make it lawful”]; Edwards v. Arthur Andersen LLP (2008)
44 Cal.4th 937, 953–954 [same]; Tiedje v. Aluminum Taper
Milling Co. (1956) 46 Cal.2d 450, 453–454 [“A contract made . . .
against the express mandate of a statute may not serve as the
foundation of any action, either in law or in equity”].) To the
extent any of the provisions of the settlement agreements are
now in conflict with section 31461, the agreements must be
interpreted to permit the retirement boards to modify their
practices to conform to the governing statute. County employees
acquired no express contractual right to have their retirement
benefits calculated in a manner inconsistent with changes in
CERL.
Plaintiffs argue that the settlement agreements did not
exceed the retirement boards’ power because the interpretations
of CERL embodied in the settlement agreements were
permissible under section 31461 as it existed at the time the
agreements were executed. This argument is based, at least in
part, on footnote 6 of Guelfi, supra, 145 Cal.App.3d at page 307.
In this controversial footnote, the court interpreted section
31461 merely to establish a minimum standard for the items
that must be included in compensation earnable, while leaving
individual retirement boards the discretion to include other
items of compensation beyond this minimum. As Guelfi phrased
it, “[n]othing in this opinion should be taken as barring either
the inclusion of [pay premiums or] overtime in the calculation of
benefits should the Board decide to do so . . . . Our conclusion is
only that CERL does not require inclusion of those items of
32
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
remuneration for retirees.” (Guelfi, at p. 307, fn. 6, italics
added.)
Like the Court of Appeal, we reject this open-ended
concept of compensation earnable, and we hereby disapprove of
footnote 6 of Guelfi v. Marin County Employees’ Retirement
Assn., supra, 145 Cal.App.3d at page 307. As the Court of
Appeal correctly explained, compensation earnable under
section 31461 has a specific statutory definition: It is an
employee’s “average compensation . . . for the period under
consideration,” adjusted for “the average number of days
ordinarily worked by persons in the same grade or class of
positions during the period. . . . ” (§ 31461, subd. (a); see
Alameda Sheriffs, supra, 19 Cal.App.5th at pp. 94–95.) The
term “compensation,” as used in section 31461, is similarly
statutorily defined: It is an employee’s “remuneration paid in
cash” and expressly excludes the “monetary value” of benefits
paid in kind. (§ 31460.) Nothing in those definitions hints
either that they are intended merely to establish a minimum,
rather than to serve as a comprehensive definition, or that they
may be implemented at the discretion of local retirement boards.
There is no indication, for example, that a local board has the
discretion to include the monetary value of in-kind benefits,
which are expressly excluded by section 31461. Necessarily, the
same is true of any other item of compensation that, even if not
expressly mentioned as excluded, does not fall within the
definitions. County retirement boards, as discussed above, have
the ordinary authority of an administrative body to resolve, in
the first instance, ambiguities in the interpretation and
application of these statutes, but nothing in the text of sections
31460 and 31461 hints that the discretion extends further. As
33
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
the Court of Appeal pithily put it, “[a]n item of compensation is
either includable in compensation, compensation earnable, and
final compensation under the CERL statutes, or it is not.”
(Alameda Sheriffs, at p. 96.)
In any event, plaintiffs’ contention — that the
determination of compensation earnable in the settlement
agreements should be honored because they reflect
interpretations that were lawful at the time — misses the point.
We assume for purposes of this analysis that the settlement
agreements embodied permissible interpretations of CERL at
the time they were executed. The issue here is whether the
retirement boards could have agreed to continue to implement
those interpretations despite a statutory amendment that
rendered the interpretations contrary to CERL. For the reasons
discussed above, such a provision would have been beyond their
authority. County employees can have no express contractual
right to the continued adherence to interpretations of CERL
that are now, as a result of PEPRA, contrary to the statute.18
18
Plaintiffs also argue that county employees acquired a
contractual right to receive these benefits because their
contributions to the county pension fund were based on an
actuarial calculation that included the additional benefit costs
attributable to the inclusion of items now excluded or limited by
PEPRA. In plaintiffs’ view, county employees have, in effect,
paid for the inclusion of the items excluded by PEPRA but
permitted by the settlement agreements. Although this might
entitle employees to a partial refund of their contributions, an
issue we do not address, it does not create a contractual right to
receive benefits in a manner inconsistent with CERL.
(Cf. Retirement Cases, supra, 110 Cal.App.4th at pp. 453-454,
469-472 [county employees have a right only to receive a pension
34
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
Finally, we note that plaintiffs repeatedly refer to the
settlement agreements as judicially approved. Judicial
approval of the agreements does not alter our conclusion that
they must be interpreted not to confer on the retirement boards
the authority to pursue policies contrary to CERL. As noted
above, our analysis assumes that the interpretations of CERL
embodied in the settlement agreements were proper at the time
they were approved. At most, the courts’ approval confirms this.
The approving courts, however, rendered no opinion on the
continued validity of those interpretations in the face of
subsequent legislative amendments. Even if judicial approval
of a settlement agreement could have conferred upon retirement
boards the authority to violate a future amendment of CERL, a
very doubtful proposition, there is no reason to conclude that
these approvals should be understood as conferring such
authority.
Our ruling does not mean that county employees could not
have acquired a constitutional right to the continued calculation
of their pension benefits in the manner existing prior to PEPRA,
a right that would be enforceable against subsequent,
inconsistent amendments to CERL. In these circumstances,
however, such a right could be created only by the
preamendment provisions of CERL, as enforced by the
constitutional contract clause — that is, created in the manner
discussed in part II.B, post. Because the settlement agreements
are properly interpreted not to require the boards to adhere to
benefit as mandated by CERL, regardless of contributions;
county retirement boards can collect contributions in arrears to
compensate for increased pension benefits resulting from
Ventura County’s interpretation of CERL].)
35
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
contractual terms that become contrary to the governing
statute, plaintiffs have no express contractual right to receive
benefits calculated in a manner that is inconsistent with the
PEPRA amendment.
3. Plaintiffs have failed to demonstrate the
prerequisites for invocation of the doctrine of
equitable estoppel
The Court of Appeal held that the Merced County
retirement board is precluded from implementing new
subdivision (b)(4) of section 31461, which limits the inclusion of
termination pay in compensation earnable, by the doctrine of
equitable estoppel. The estoppel was premised on the
settlement agreement entered into by that board following the
issuance of Ventura County. (Alameda Sheriffs, supra,
19 Cal.App.5th at pp. 125–126.) Although the Court of Appeal
invoked the doctrine only in connection with the Merced County
agreement, its reasoning would extend more generally to any
inconsistency between the settlement agreements and the terms
of section 31461 and require the boards to adhere to the
interpretation of CERL found in the settlement agreements,
notwithstanding the changes introduced by the PEPRA
amendment.19 Plaintiffs urge us to affirm the Court of Appeal
19
The ruling applied only to the Merced County retirement
board because only its settlement agreement permitted the
inclusion of termination pay. Because the Court of Appeal had
already interpreted the PEPRA amendment not to limit the
inclusion of compensation for cashed out leave time, the court
found it unnecessary to consider application of the doctrine of
estoppel to that type of compensation. (Alameda Sheriffs, supra,
19 Cal.App.5th at p. 124.)
36
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
on this ground and extend our ruling to any inconsistency
between the settlement agreements and PEPRA.
“ ‘The doctrine of equitable estoppel is founded on concepts
of equity and fair dealing. It provides that a person may not
deny the existence of a state of facts if he intentionally led
another to believe a particular circumstance to be true and to
rely upon such belief to his detriment. The elements of the
doctrine are that (1) the party to be estopped must be apprised
of the facts; (2) he must intend that his conduct shall be acted
upon, or must so act that the party asserting the estoppel has a
right to believe it was so intended; (3) the other party must be
ignorant of the true state of facts; and (4) he must rely upon the
conduct to his injury.’ ” (City of Goleta v. Superior Court (2006)
40 Cal.4th 270, 279 (Goleta).) Although equitable estoppel is a
well-accepted remedy among private parties, it has been applied
sparingly when the party sought to be estopped is a
governmental entity. “The government may be bound by an
equitable estoppel in the same manner as a private party” (City
of Long Beach v. Mansell (1970) 3 Cal.3d 462, 496–497, 501
(Mansell)), but the doctrine is invoked only in “those ‘exceptional
cases’ where ‘justice and right require’ ” (id. at p. 501) — that is,
when “the injustice which would result from a failure to uphold
an estoppel is of sufficient dimension to justify any effect upon
public interest or policy which would result from the raising of
an estoppel” (id. at pp. 496–497). In short, “[e]quitable estoppel
‘will not apply against a governmental body except in unusual
instances when necessary to avoid grave injustice and when the
result will not defeat a strong public policy.’ ” (Goleta, at p. 279.)
We reject the Court of Appeal’s conclusion with respect to
equitable estoppel because we find no actionable
37
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
representations in the settlement agreements that would
support invocation of that doctrine. Equitable estoppel
generally must be premised on some type of representation,
ordinarily false, about a set of circumstances. (J.M. v.
Huntington Beach Union High School Dist. (2017) 2 Cal.5th 648,
657 (J.M.) [“Equitable estoppel generally requires an
affirmative representation or act by the public entity”];
Simmons v. Ghaderi (2008) 44 Cal.4th 570, 584 [“A valid claim
for equitable estoppel requires . . . a representation or
concealment of material facts”].) The representations cited by
the Court of Appeal were “the promise that [county employees]
would receive a pension as authorized by CERL,” combined with
“precise and explicit promises to [county employees] as to what
such a statutorily authorized CERL pension would include,”
which promises were found in “their court-approved Post-
Ventura Settlement Agreements.” (Alameda Sheriffs, supra,
19 Cal.App.5th at p. 128.) The cited representations are
insufficient to support an estoppel in these circumstances.
The core of plaintiffs’ estoppel claim is the second group of
statements cited by the Court of Appeal, the boards’
representations about the requirements of CERL, as contained
in the settlement agreements.20 Necessarily, to the extent the
20
The first of these representations, that county employees
would receive “a pension as authorized by CERL,” is plainly
insufficient. Plaintiffs, in seeking an estoppel, are attempting
to compel the county boards to award pension benefits in a
manner inconsistent with CERL. It is defendants who advocate
for application of the statute’s provisions. Ordinarily, a party
will be estopped from “deny[ing] the existence of a state of facts
. . . he intentionally led another to believe.” (Goleta, supra,
38
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
settlement agreements represent an interpretation of the
statutory provisions of CERL, they reflect the statute as it
existed at the time the settlement agreements were concluded,
a decade prior to PEPRA. The settlement agreements contain
no representations that can be construed as a guarantee that
these provisions would not be amended. On the contrary, as
discussed above, the agreements contain no provisions
addressing the agreements’ implementation in the event of such
an amendment. Further, all parties were presumably aware
that CERL’s provisions, as enactments of the Legislature, could
be changed by that same body, in which event the agreements’
interpretations might no longer reflect the statute’s provisions.
An agency’s representation about the contents of its governing
statute at a particular point in time, standing alone, provides no
basis for estopping the agency from conforming its practice to a
statutory change that occurred subsequent to that
representation.
Application of the doctrine of estoppel requires, at a
minimum, an actionable statement — that is, “an affirmative
representation or act by the public entity” that is intended to
induce reliance by the plaintiff. (J.M., supra, 2 Cal.5th at p. 657,
italics omitted.) An actionable representation in these
circumstances would require, at a minimum, a statement
indicating that the county boards would adhere to the
interpretation of CERL found in the settlement agreements
notwithstanding any change in the governing statute. In the
40 Cal.4th at p. 279.) We know of no authority for estopping a
party from denying the very opposite of its purportedly
actionable representation.
39
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
absence of such a representation, county employees had no
reason to expect that the county boards would not conform their
practice to any changes in their governing statute. The
plaintiffs provided no evidence of such a statement. Instead, the
county boards merely entered into agreements that embodied an
interpretation of CERL as it existed at the time. They
subsequently made statements suggesting that employee
pensions in their county would be determined according to that
interpretation. There is no indication that the boards went
further, assuring employees that these interpretations were
impervious to legislative change or, more pertinent, that the
boards intended to adhere to the interpretations in the face of
legislative change. In the absence of this type of representation,
we find no basis for estopping the county boards from adjusting
their policies in response to the PEPRA amendment, as they are
required by law to do.21
B. PEPRA’s Amendment of Section 31461 Did Not
Violate the Rights of County Employees Under
the Constitutional Contract Clause
The terms of public employee pensions are protected by
the constitutional contract clause. (Cal Fire, supra, 6 Cal.5th at
21
In reaching this conclusion, we do not mean to suggest
that if such a representation had been made, this would,
standing alone, justify imposing an estoppel on the county
boards. There are, at a minimum, the further considerations of
the board’s lack of legal authority to follow through on such a
representation and the application of the overriding test for
estoppel of a public agency, articulated in Mansell, supra,
3 Cal.3d at pages 496-497, 501. We merely hold that plaintiffs
have failed to demonstrate an actionable representation, the
threshold requirement for invocation of the doctrine of equitable
estoppel. (J.M., supra, 2 Cal.5th at p. 657.)
40
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
p. 987; Legislature v. Eu (1991) 54 Cal.3d 492, 528 (Eu).)
At issue here is whether PEPRA’s amendment of section 31461
to exclude certain types of compensation from compensation
earnable constitutes a substantial and unjustified impairment
of county employees’ pension rights, the general standard
required for a violation of the contract clause in these
circumstances. (Sonoma County Organization of Public
Employees v. County of Sonoma (1979) 23 Cal.3d 296, 308–309
(Sonoma Employees).) This is a question of law subject to our
independent review. (Allen I, supra, 45 Cal.2d at p. 131.)
1. Protection of public employee pensions under the
contract clause
a. Contract clause protections generally
The vested rights doctrine, the foundation of plaintiffs’
contention that PEPRA’s amendment of section 31461 is
unconstitutional as applied to existing county employees, is
grounded in the contract clause. (Cal. Const., art. I, § 9.) “Both
the United States and California Constitutions contain
provisions that prohibit the enactment of laws effecting a
‘substantial impairment’ of contracts, including contracts of
employment.” (Cal Fire, supra, 6 Cal.5th at p. 977.) This
constraint applies to public contracts, as well as those between
private parties. (Ibid.) As suggested by the reference to a
substantial impairment, not every legislative impairment of
contractual relations triggers the contract clause. (San
Francisco Taxpayers Assn. v. Board of Supervisors (1992)
2 Cal.4th 571, 583–584; Eu, supra, 54 Cal.3d at p. 528 [contract
clause protects against “unreasonable” impairments].) “[T]he
prohibition is not an absolute one and is not to be read with
41
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
literal exactness like a mathematical formula.” (Home B. & L.
Ass. v. Blaisdell (1933) 290 U.S. 398, 428 (Blaisdell).)
In evaluating legislation that impairs private contractual
rights, the United States Supreme Court applies what it
characterizes as a “two-step test.” (Sveen v. Melin (2018) ___
U.S. ___, ___ [138 S.Ct. 1815, 1821].) As a threshold question,
the court must determine “ ‘whether the state law has, in fact,
operated as a substantial impairment of a contractual
relationship. [Citations.] The severity of the impairment is said
to increase the level of scrutiny to which the legislation will be
subjected.’ ” (Energy Reserves Group v. Kansas Power & Light
(1983) 459 U.S. 400, 411 (Kansas Power).) In making this
determination, “the Court has considered the extent to which
the law undermines the contractual bargain, interferes with a
party’s reasonable expectations, and prevents the party from
safeguarding or reinstating his rights.” (Sveen, at p. ___ [138
S.Ct. at p. 1822.) If the state law is found to create a
“substantial” impairment, “the inquiry turns to the means and
ends of the legislation.” (Ibid.) To justify the legislation, the
state “must have a significant and legitimate public purpose
behind the regulation, [citation], such as the remedying of a
broad and general social or economic problem. . . . The
requirement of a legitimate public purpose guarantees that the
State is exercising its police power, rather than providing a
benefit to special interests.” (Kansas Power, at pp. 411–412.) If
the legislation survives that scrutiny, “the next inquiry is
whether the adjustment of ‘the rights and responsibilities of
contracting parties [is based] upon reasonable conditions and
[is] of a character appropriate to the public purpose justifying
[the legislation’s] adoption.’ ” (Id. at p. 412.)
42
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
A different, more searching analysis occurs when the state
legislates an impairment of its own contractual obligations
because “the government’s self-interest is at stake.” (Sonoma
Employees, supra, 23 Cal.3d at p. 308.) Although “ ‘courts
properly defer to legislative judgment as to the necessity and
reasonableness of a particular measure’ ” when “the State itself”
is not “a contracting party” (Kansas Power, supra, 459 U.S. at
pp. 413, 412), “complete deference to a legislative assessment of
reasonableness and necessity is not required” when the state
seeks to alter its own obligations. (Sonoma Employees, at
p. 308.) In general terms, a state’s impairment of its own
obligations “may be constitutional if it is reasonable and
necessary to serve an important public purpose.” (United States
Trust Co. v. New Jersey (1977) 431 U.S. 1, 25 (U.S. Trust).)
Sonoma Employees addressed a contract clause challenge
to state legislation that nullified every agreement between a
local government and its employees providing for an annual cost
of living wage increase greater than the cost of living increase
given by the state to its own employees. The legislation had
been passed in the wake of the electorate’s adoption of
Proposition 13 in 1978, which the Legislature feared would
bring a fiscal emergency to the state’s local governments. We
invalidated the law as an unconstitutional impairment of the
wage agreements, concluding that “respondents have clearly
failed to satisfy their threshold burden of demonstrating that
the substantial abridgement of petitioners’ contract rights to an
increase in wages was warranted by a grave fiscal crisis, and
they advance no other justification for the impairment.”
(Sonoma Employees, at pp. 313–314.)
43
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
In justification of the heightened degree of scrutiny
applied when the state seeks to alter its own contractual
obligations, we explained in Sonoma Employees, quoting U.S.
Trust, supra, 431 U.S. at pages 1, 26, 29, 30–31, that “ ‘a
governmental entity can always find a use for extra money . . . .
If a State could reduce its financial obligations whenever it
wanted to spend the money for what it regarded as an important
public purpose, the Contract Clause would provide no protection
at all . . . . [A] State cannot refuse to meet its legitimate
financial obligations simply because it would prefer to spend the
money to promote the public good rather than the private
welfare of its creditors . . . . [A] State is not completely free to
consider impairing the obligations of its own contracts on a par
with other policy alternatives. Similarly, a State is not free to
impose a drastic impairment when an evident and more
moderate course would serve its purposes equally well.’ ”
(Sonoma Employees, supra, 23 Cal.3d at p. 308.)
b. Contract clause protection of public employee
pension rights in California
As we discussed in Cal Fire, a public employee has no
express contractual rights in a pension plan created by statute,
like CERL. (Cal Fire, supra, 6 Cal.5th at pp. 977–978, 984–985.)
Nonetheless, we have recognized, at least since Kern v. City of
Long Beach (1947) 29 Cal.2d 848 (Kern), that such plans create
implied contractual rights that are protected against legislative
impairment by the contract clause. (Cal Fire, at pp. 984–985.)
The parties agree that the provisions of CERL, although
statutory, are protected by the contract clause. (But see fn. 29,
post.)
44
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
With respect to that constitutional protection, our
decisions have established a standard specifically tailored to the
unique circumstances presented by public employee pension
reform. A modification of the pension rights accorded to a public
employee at the time he or she commenced public employment,
or of pension rights made available subsequently during the
course of his or her public career, will be upheld against a
contract clause challenge only if it satisfies the test established
in Allen I: “An employee’s vested contractual pension rights
may be modified prior to retirement for the purpose of keeping
a pension system flexible to permit adjustments in accord with
changing conditions and at the same time maintain the integrity
of the system. [Citations.] Such modifications must be
reasonable . . . . To be sustained as reasonable, alterations of
employees’ pension rights must bear some material relation to
the theory of a pension system and its successful operation, and
changes in a pension plan which result in disadvantage to
employees should be accompanied by comparable new
advantages.” (Allen I, supra, 45 Cal.2d at p. 131; see also Betts
v. Board of Administration (1978) 21 Cal.3d 859, 866 (Betts)
[contract clause protects not only pension rights available at
commencement of employment but also those “which are
thereafter conferred during the employee’s subsequent
tenure”].) This quotation from Allen I is the foundation of the
California Rule. By analogy to the federal standard, it defines
when a modification of public employee pension rights will
survive contract clause scrutiny as “reasonable and necessary to
serve an important public purpose.” (U.S. Trust, supra, 431
U.S. at p. 25.)
45
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
A review of the rule’s historical development will help to
explain its requirements. As we first recognized over a century
ago in O’Dea v. Cook (1917) 176 Cal. 659, when a public
employee renders service under a pension statute “the pension
provisions become a part of the contemplated compensation for
those services and so in a sense a part of the contract of
employment itself.” (Id. at pp. 661–662; see Cal Fire, supra,
6 Cal.5th at p. 984.) In squaring this insight with the
traditional rule that statutes do not create contractual rights,
our subsequent decision in Kern held that “public employment
gives rise to certain obligations which are protected by the
contract clause of the Constitution, including the right to the
payment of salary which has been earned. Since a pension right
is ‘an integral portion of contemplated compensation’ [citation],
it cannot be destroyed, once it has vested, without impairing a
contractual obligation.” (Kern, supra, 29 Cal.2d at pp. 853.) It
is the nature of pension rights as deferred compensation that
caused Kern to hold them protected under the contract clause.
(Cal Fire, at pp. 984–985.)
In and after Kern, we have attempted to define the
constitutionally appropriate balance between preserving public
employee pension rights and granting the Legislature the
flexibility necessary to cope with changing circumstances. In
Kern, the defendant city had terminated its safety officer
pension plan, providing no replacement, mere days before the
plaintiff officer completed the 20 years of service necessary to
qualify for a pension. (Kern, supra, 29 Cal.2d at p. 850.) We had
no difficulty finding that the wholesale elimination of previously
available pension benefits works a substantial impairment of an
employee’s implied contractual rights. (Id. at p. 853 [although
46
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
pension statutes can be modified, “it does not follow that an
employee may be deprived of all pension benefits by a repeal of
the statute without the enactment of a substitute”].) As we
concluded, allowing a last minute repeal of pension rights
“would defeat one of the primary objectives in providing
pensions for government employees, which is to induce
competent persons to enter and remain in public employment,”
because “the promise of a pension annuity would either become
ineffective as an inducement to public employees or it would
become merely a snare and a delusion to the unwary.” (Id. at
p. 856.)
Given the complete elimination of the plaintiff’s pension
plan in Kern, we recognized that “[t]he permissible scope of
changes in the provisions [of a public pension plan] need not be
considered here . . . .” (Kern, supra, 29 Cal.2d at p. 855.) Yet we
made observations that subsequently influenced the resolution
of this issue. Kern acknowledged that “[t]he rule permitting
modification of pensions is a necessary one since pension
systems must be kept flexible to permit adjustments in accord
with changing conditions and at the same time maintain the
integrity of the system and carry out its beneficent policy.” (Id.
at pp. 854–855.) Because of that necessity, we concluded, “[A]n
employee may acquire a vested contractual right to a pension
but . . . this right is not rigidly fixed by the specific terms of the
legislation in effect during any particular period in which he
serves. The statutory language is subject to the implied
qualification that the governing body may make modifications
and changes in the system. The employee does not have a right
to any fixed or definite benefits, but only to a substantial or
reasonable pension. There is no inconsistency therefore in
47
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
holding that he has a vested right to a pension but that the
amount, terms and conditions of the benefits may be altered.”
(Id. at p. 855.)
The question of the permissible scope of pension plan
modifications came before the court again in Packer v. Board of
Retirement (1950) 35 Cal.2d 212 (Packer). The plaintiff in
Packer was the widow of a Los Angeles County peace officer who
died a few years after retiring. Four years before the deceased’s
retirement, as part of a larger pension reform, the applicable
pension ordinance was amended to grant benefits to an officer’s
surviving spouse only if the officer accepted a lesser retirement
benefit. Previously, such surviving-spouse benefits had been
available as a matter of course to all officers. Because the
plaintiff’s husband did not elect the lower benefit alternative,
the retirement board found that she was not entitled to benefits
upon his death. (Id. at pp. 213–214.)
In addressing the constitutional propriety of the
modification of the surviving spouse provisions, Packer first
acknowledged Kern’s ruling that some pension modification is
permitted to allow state and local governments the flexibility to
cope “ ‘with changing conditions and at the same time maintain
the integrity of the system.’ ” (Packer, supra, 35 Cal.2d at
p. 214.) With respect to the particular modification at issue in
Packer, we noted that “under certain circumstances” the larger
reform of which the challenged provision was a part “would give
county peace officers and their families greater benefits than
they had before.” (Id. at p. 218.) Pensions continued to be paid
to the surviving spouses of officers who died from service-related
causes, for example, and these were doubled in amount by the
pension reform. Other basic terms and conditions of retirement
48
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
were unchanged. In addition, of course, the amended statute
continued to make available a general surviving spouse benefit
to retirees, albeit on condition of their accepting a lesser benefit
during their own life. (Id. at pp. 218–219.) Taking the changes
as a whole, we concluded, it was “difficult, if not impossible,” to
determine whether the “total value” of an officer’s pension rights
had been diminished by the amendments. (Id. at p. 219.)
Because “[i]t is reasonably clear . . . that the employees,
including [the plaintiffs’ decedent], retained rights to
substantial pension benefits,” we held that the amendment “did
not exceed the scope of a permissible modification.” (Id. at
p. 219.)
Soon after, we again confronted the issue in Wallace v.
City of Fresno (1954) 42 Cal.2d 180 (Wallace). The plaintiff, a
former police chief who retired in 1949, was stripped of his
pension benefits after a postretirement conviction for tax fraud.
(Id. at pp. 181–182.) The city had enacted its pension plan for
peace officers in 1923, early in the plaintiff’s career. The initial
plan had no provision for depriving a retiree of benefits, but in
1927 the governing ordinance was amended to require the
termination of the pension benefits of a retiree who was
convicted of a felony or a crime of moral turpitude. (Id. at
p. 182.) Although Wallace assumed that the felony conviction
provision would have been enforceable if contained in the
original pension ordinance, we held that its application to the
plaintiff triggered the contract clause because its adoption
during his employment constituted a modification of the terms
of his pension plan. As we framed the question, we were
required to “determine whether the changes made come within
the bounds of a reasonable modification or whether their effect
49
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
is to impair his vested contractual rights.” (Wallace, at pp. 183–
184.) We again recognized that modification of a pension plan
is permitted to cope with changing times, but we balanced this
principle against “the facts that pension payments are deferred
compensation to which a pensioner becomes entitled upon
performing all services required under the contract and that his
retirement because of age ordinarily shows that he has done
everything necessary to entitle him to payment of the pension.”
(Id. at pp. 184–185.) We concluded that the amendment was not
a reasonable modification. As we explained, “[t]he termination
of all pension rights upon conviction of a felony after retirement
does not appear to have any material relation to the theory of
the pension system or to its successful operation. Rather, the
change was designed to benefit the city and, as stated in the
city’s brief, to meet the objections of taxpayers who would be
opposed to contributing funds for the maintenance of a
pensioner who had been convicted of a felony.” (Id. at p. 185.)
The foregoing three decisions were synthesized in Allen I,
supra, 45 Cal.2d 128, which articulated the standard for
contract clause protection of public employee pension benefits
that persists to this day. Allen I was the second chapter of the
story introduced in Kern, which addressed the elimination in
1945 of the public safety officer pension system of the City of
Long Beach. Presumably as a result of the ruling in Kern, the
city restored the pension plan for officers hired prior to its
elimination. Subsequently hired officers, however, worked
without a pension plan until 1950, when the city entered them
in the state pension system. (Allen I, at p. 130.) The following
year, the city amended the original pension plan applicable to
the officers hired before 1945 in three ways: (1) employee
50
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
pension contributions were increased fivefold, from two percent
of salary to ten percent; (2) the city switched from a fluctuating
pension benefit, which was pegged to the salary paid to current
employees in the retiree’s final job position, to a fixed benefit,
which was determined by the retiree’s own late career salary;
and (3) employees who were granted pension plan service credit
for a leave of absence for military service were, for the first time,
required to make contributions to the plan in return for the
service credit. (Id. at pp. 130–131.) The affected officers
challenged each of these changes as a violation of the contract
clause.
Citing Wallace, Packer, and Kern, we acknowledged that
vested pension rights may be modified “for the purpose of
keeping a pension system flexible to permit adjustments in
accord with changing conditions and at the same time maintain
the integrity of the system.” (Allen I, supra, 45 Cal.2d at p. 131.)
More specifically, we held, “Such modifications must be
reasonable, and it is for the courts to determine upon the facts
of each case what constitutes a permissible change. To be
sustained as reasonable, alterations of employees’ pension
rights must bear some material relation to the theory of a
pension system and its successful operation, and changes in a
pension plan which result in disadvantage to employees should
be accompanied by comparable new advantages.” (Ibid.)
Applying this rule, we rejected all three of the modifications,
concluding that the plan amendment “substantially decreases
plaintiffs’ pension rights without offering any commensurate
advantages, and there is no evidence or claim that the changes
enacted bear any material relation to the integrity or successful
operation of the [preexisting] pension system . . . .” (Ibid.)
51
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
Our reasoning in rejecting the individual modifications
gave substance to the rule’s requirements. We began with a
consideration of the disadvantages and comparable new
advantages. Our discussion of the increase in the contribution
rate was short and pointed: “The provision . . . obviously
constitutes a substantial increase in the cost of pension
protection to the employee without any corresponding increase
in the amount of the benefit payments he will be entitled to
receive upon his retirement.” (Allen I, supra, 45 Cal.2d at
p. 131.) Our consideration of the switch to a fixed pension
benefit was more deliberate. As we pointed out, a fixed pension
benefit is unresponsive to changing economic conditions. In
contrast, tying the amount of the benefit to a current employee’s
salary permits retirees to “maintain a fairly constant standard
of living despite changes in our economy,” since it is assumed
that current salaries will reflect those changes. (Id. at p. 132.)
Particularly because the post-war period was “an era of rising
salaries and high cost of living,” we concluded that “plaintiffs’
rights would be adversely affected by the change to the fixed
benefit plan.” (Ibid.) Our rationale for questioning the newly
required contributions in return for credit for military service
was similar to that of the increased ordinary contributions. “The
provision . . . imposes a considerable financial burden upon
those who, while in the armed forces, earn less than they would
earn as city employees, and it raises the cost to them of pension
protection without securing any advantage in addition to that
which they already enjoyed.” (Id. at p. 133.)
After concluding that each of the changes was, for the
reasons stated, disadvantageous to pre-1945 hires, we
addressed the purpose of the changes. Allen I first noted that
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ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
the changes were not adopted out of concern for the financial
stability of the pension system. “The city does not claim that
any of the provisions contained in [the amendment] was
necessary to preserve or protect the pension program applicable
to [pre-1945 hires], and there is no indication that the city would
have difficulty in meeting its obligations to those employees
under the provisions of [the original pension plan].” (Allen I,
supra, 45 Cal.2d at p. 133.) Instead, we observed, the city
explained that “the changes . . . were enacted in order to make
the pension system for [pre-1945 hires] more nearly coincide
with the retirement system established . . . for policemen and
firemen employed after that date, thus to ameliorate ‘personal
[sic] problems’ assertedly created by differences in pension costs
and benefits to the two groups of employees and to ‘somewhat
equalize the compensation provided for employees who perform
like services.’ ” (Ibid.)
We concluded that this rationale was insufficient to justify
the impairment of pension benefits caused by the various
changes. As we explained, “[s]uch purposes, however beneficial
to the city, bear no relation to the functioning and integrity of
the pension system established for persons employed prior to
[1945] and constitute no justification for materially reducing the
vested contractual rights earned by plaintiffs prior to the time
[the charter amendment] was adopted.” (Allen I, supra,
45 Cal.2d at p. 133.)
In sum, when evaluating modifications to a public
employee pension plan under the contract clause, Allen I
requires a court first to determine whether the modifications
impose an economic disadvantage on affected employees and, if
so, whether those disadvantages are offset in some manner by
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ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
comparable new advantages.22 The court must then determine
whether the government’s articulated purpose in making the
changes was sufficient, for constitutional purposes, to justify
any impairment of pension rights. Although changes may be
enacted “for the purpose of keeping [the] pension system flexible
to permit adjustments in accord with changing conditions and
at the same time maintain the integrity of the system,” such
changes “must bear some material relation to the theory of a
pension system and its successful operation.” (Allen I, supra,
45 Cal.2d at p. 131.)
In the intervening 65 years, our decisions have clarified
aspects of the Allen I test, but its substance is unchanged.23 In
22
Neither Allen I nor any of our subsequent pension
decisions have addressed a situation in which all economic
disadvantages of a pension modification were offset by
comparable new advantages. Such an argument was made in
Betts, supra, 21 Cal.3d at pages 864-865, but we found it
inapplicable in the circumstances presented. (Id. at p. 867.) In
Packer, which predated Allen I, we held that the contract clause
was not violated upon finding that it was “difficult, if not
impossible,” to determine whether the “total value” of an
officer’s pension rights had been diminished by the challenged
amendments. (Packer, supra, 35 Cal.2d at p. 219.) Packer can
therefore be interpreted as holding that no contract clause
violation results when a pension plan modification provides
fully compensating new advantages. We note, however, that the
determination of disadvantages and comparable advantages
was made collectively in Packer, rather than as to individual
employees. (See Packer, at p. 218.) This collective approach was
effectively disavowed in Abbott v. City of Los Angeles (1958)
50 Cal.2d 438, 449 (Abbott).
23
Plaintiffs argue that, in Olson v. Cory (1980) 27 Cal.3d
532, we held that a modification of pension rights is “per se
54
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
Abbott, supra, 50 Cal.2d 438, we employed the rationale
articulated in Allen I in concluding that the change from a
fluctuating to a fixed pension benefit could not properly be
applied to persons who were employed by the defendant city at
the time the change occurred, even though the change had
occurred 35 years earlier. (Abbott, at pp. 453–455.) In the
process, we explained that the determination of disadvantages
and comparable new advantages must be made individually as
to each affected employee, rather than on the basis of the
employees as a group. (Id. at p. 449; see similarly Betts, supra,
21 Cal.3d at p. 864.)
In analyzing a similar constitutional issue in Betts, supra,
21 Cal.3d 859, we entertained the argument that, as a general
matter, the change from a fluctuating benefit to a fixed benefit
adjusted annually for inflation could pass constitutional muster
because such a change represented the replacement of “one ‘cost
of living’ formula” for another. (Id. at p. 865.) We found it
unnecessary to rule on that argument, however, because the
Legislature had adopted the cost of living adjustment at a time
when pension benefits were still determined by the fluctuating
unreasonable” if it is permanent, rather than temporary. Olson
rendered no such holding. At the point in the decision cited by
plaintiffs, Olson merely summarized four factors considered by
the Supreme Court in Blaisdell, supra, 290 U.S. 398, in deciding
whether a particular impairment of private contracts was
unconstitutional. One of these was whether the impairment
was permanent or temporary. Contrary to plaintiffs’ claim of
“per se” unreasonableness, none of the factors was characterized
as determinative on its own. (See Olson at p. 539; Blaisdell, at
p. 441.) Neither Olson nor any other decision of this court has
held that an impairment of contracts is unconstitutional solely
because it is permanent, rather than temporary.
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ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
method. The change to a fixed benefit did not come until several
years later. Accordingly, we held, the plaintiff had a vested
right to both a fluctuating pension benefit and the cost of living
adjustment, since those advantages were offered
simultaneously by the pension plan during his public service.
(Id. at p. 866 [“An employee’s contractual pension expectations
are measured by benefits which are in effect not only when
employment commences, but which are thereafter conferred
during the employee’s subsequent tenure”].)
Thereafter, in International Assn. of Firefighters v. City of
San Diego (1983) 34 Cal.3d 292 (Firefighters), our court made
explicit what was already implicit in the vested rights doctrine,
namely, that the contract clause does not protect public
employees against adverse changes in the manner in which a
pension plan is implemented that are authorized by the existing
terms of the plan, rather than as a result of legislative changes
to those terms. (Id. at pp. 301–302 [holding that an increase in
employee contribution rates pursuant to the existing terms of a
pension plan does not violate vested rights].)
Although we have addressed pension-related contract
clause issues in a few other decisions rendered in the years since
Betts, these decisions applied the principles established in
Allen I, Abbott, and Betts without changing their substance.
(E.g., City of Huntington Beach v. Board of Administration
(1992) 4 Cal.4th 462, 471–472 (Huntington Beach); Eu, supra,
54 Cal.3d at p. 529; Allen v. Board of Administration (1983)
34 Cal.3d 114 (Allen II).) Our last decision to touch on these
issues, issued over 25 years ago, continued to cite the test
established in Allen I. (Huntington Beach, at p. 472.)
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ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
Although it did not otherwise augment our contract clause
jurisprudence, Allen II has caused some confusion. When
summarizing the test applied to pension plan modifications
under the contract clause, the decision stated that when such a
change results in disadvantages to employees, it “must” be
accompanied by comparable new advantages. (Allen II, supra,
34 Cal.3d at p. 120.) This differed from the formulation in Allen
I, which held that disadvantages “should” be accompanied by
new advantages. (Allen I, supra, 45 Cal.2d at p. 131.) Based on
this inconsistency, the Court of Appeal in the decision under
review concluded that “the Supreme Court changed the
formulation of its reasonableness test” in Allen II. (Alameda
Sheriffs, supra, 19 Cal.App.5th at p. 120.) Although the court’s
conclusion is understandable, we conclude that Allen II did not
modify the rule of Allen I. Other than its isolated use of the word
“must,” there is no reason to believe that Allen II intended a
modification. The two Supreme Court cases Allen II cited as its
source for the test, Allen I and Abbott, both use the word
“should.” Allen II did not indicate an intent to change the
governing standard, let alone attempt to justify it, as would
ordinarily occur if we intended to effect a material change in the
law, and the distinction between “must” and “should” played no
role in the resolution of Allen II. Further, our subsequent
decisions have never recognized a change in the test. All of our
later decisions mentioning this standard use the word “should,”
including a decision issued only one month after Allen II and
authored by the same justice. (Firefighters, supra, 34 Cal.3d at
p. 301; see also Huntington Beach, supra, 4 Cal.4th at p. 472;
Eu, supra, 54 Cal.3d at pp. 529–530.) A different division of the
First District Court of Appeal examined the same question in
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ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
Marin County and, after a careful analysis, concluded that
“ ‘[s]hould,’ not ‘must,’ remains the court’s preferred expression.”
(Marin County, supra, 2 Cal.App.5th at p. 699, review granted;
see similarly, Hipsher v. Los Angeles County Employees
Retirement Assn (2018) 24 Cal.App.5th 740, 753, review granted
Sept. 12, 2018, S250244 [use of “must” in Allen II not to be taken
literally].) The one-time use of “must” in Allen II appears to
have been inadvertent, and it should not be understood to have
changed the Allen I standard.
2. PEPRA’s amendment of section 31461 constituted a
modification of CERL
As the Court of Appeal recognized, a legislative action
cannot be found to have impaired public employee pension
rights unless the action constituted a modification of the pension
system. (Alameda Sheriffs, supra, 19 Cal.App.5th at p. 96
[“whether the changes to section 31461 . . . unconstitutionally
impair the vested pension rights . . . depends, at least as an
initial matter, on whether those changes actually modified
CERL”].) Changes in the implementation of a pension plan that
occur pursuant to its existing terms and conditions, for example,
do not support a claim of impairment. (Firefighters, supra,
34 Cal.3d at pp. 301–302 [increase in employee contribution
rates pursuant to the provisions of a pension plan does not
violate the contract clause].) A change in the language of a
statute or ordinance governing a pension plan that does not
change the manner in which it is implemented similarly does
not support a claim of impairment. (Gatewood v. Board of
Retirement (1985) 175 Cal.App.3d 311, 319 (Gatewood)
[statutory amendment that was consistent with existing judicial
interpretation did not give rise to contract clause claim].)
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ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
Legislation amending unambiguous statutory language or
effectively overruling a settled judicial interpretation of
statutory language, however, undoubtedly constitutes a
constitutionally cognizable modification of employee pension
rights, assuming the legislation materially changed the manner
in which the pension system is implemented. We conclude that
the amendment of section 31461 to add subdivision (b)(1)
through (3) constituted a change in the law because those
provisions narrowed the expansive interpretation of
compensation earnable adopted in Ventura County.24
24
When it is unclear whether the legislation actually effects
a change in the governing law — that is, when neither the
preexisting language of the statute nor a judicial decision
resolves the issue addressed by the legislation — it cannot be
said with equal confidence that the legislation impairs existing
pension rights. The State and the District argue that an
amendment of ambiguous statutory language governing pension
rights does not constitute a modification for purposes of the
contract clause, so long as the amendment qualifies as a
clarification of the statute. (See Protect our Benefits v. City and
County of San Francisco (2015) 235 Cal.App.4th 619, 636-637
[considering whether a contract clause claim should be denied
because a change in the governing ordinance was a clarification
of an earlier ordinance]; In re J.C. (2016) 246 Cal.App.4th 1462,
1479-1480 [in determining the retroactivity of a statutory
amendment, an amendment that adopts a reasonable
interpretation of a previously ambiguous statute is regarded as
clarifying, rather than changing, the law].) Given the very
general language of section 31461, defendants argue that
PEPRA’s amendments should be viewed as clarifying, rather
than changing, the definition of compensation earnable. In light
of our conclusion, explained hereafter, that the PEPRA
amendment of section 31461 is properly considered a change of
the interpretation of section 31461 rendered in Ventura County
59
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
a. Ventura County adopted a broadly inclusive
definition of “compensation earnable”
Our sole decision addressing the scope of “compensation
earnable” is Ventura County, supra, 16 Cal.4th 483, in which we
considered whether “various payments by the county over and
above the basic salary paid to all employees in the same job
classification are ‘compensation’ within the meaning of the
[CERL] statute” (id. at p. 487) and clarified the meaning of
compensation earnable under section 31461. We began by
recognizing that the statutory terms “compensation” and
“compensation earnable” are “ambiguous in some respects” and
fail clearly to resolve the status of items of compensation beyond
basic salary or wages. (Ventura County, at p. 493.) Regarding
the first issue, the status of payments over and above base
salary, we began with the statutory definition of compensation
as “remuneration paid in cash . . . , but [not] the monetary value
of board, lodging, fuel, laundry, or other advantages furnished
to a member.” (§ 31460; see Ventura County, at pp. 490–491.)
Accepting the implications of a literal reading of this language,
we held that the term includes all compensation paid in cash,
while excluding any benefits conferred in a form other than
cash. (Ventura County, at p. 497.) We applied this ruling to hold
that a wide variety of cash payments that supplement an
employee’s base pay are included in “compensation,” including
uniform allowances, cashed-out leave time, bilingual premium
rather than a clarification of the statutory language, it is
unnecessary for us to decide whether the Legislature’s
clarification of ambiguous statutory language would avoid
contract clause scrutiny.
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ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
pay, pay for field training officer and motorcycle duty, holiday
pay, and educational incentive pay. (Id. at pp. 497–498.)
Having settled the issue of compensation, we turned to the
meaning of compensation earnable, which bore the definition
now found in section 31461, subdivision (a). (Ventura County,
supra, 16 Cal.4th at p. 499.) As discussed above, we ruled that
“ ‘compensation earnable’ is the average pay of the individual
retiring employee computed on the basis of the number of hours
worked by other employees in the same class and pay rate —
that is[,] the average monthly pay, excluding overtime, received
by the retiring employee for the average number of days worked
in a month by the other employees in the same job classification
at the same base pay level.” (Id. at p. 504.) In reaching that
conclusion, we relied in part on the similar language that was
at one time used to define “compensation earnable” in the
CalPERS statute. (Ibid.) The CalPERS language had been
repealed a decade earlier and replaced with a more detailed
statute, which included a new category of items of compensation
labeled “special compensation.” Although this legislation
“recast[] and redefine[d]” compensation earnable under
CalPERS, we found no indication “that the inclusion of ‘special
compensation’ in the definition adds anything that was not
included under the prior legislation.” (Id. at p. 505.) As we
observed, many of the items of compensation that the Ventura
County plaintiffs sought to include in CERL’s compensation
earnable “appear to be the type of ‘special compensation’ items
which are included in the ‘compensation earnable’ of PERS
members.” (Ventura County, at p. 504.) On that basis, we held
that all of the various “premiums in dispute” are included in
compensation earnable. (Id. at p. 505.) Although we did not
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ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
specifically identify these premiums, the phrase appears to refer
to all of the “items plaintiffs seek to have included in their
‘compensation earnable.’ ” (Id. at p. 504.)
b. Subdivision (b)(4) did not modify CERL
We first address the pre-PEPRA status of termination
pay, now excluded by section 31461, subdivision (b)(4), because
it is the only aspect of section 31461 specifically addressed by a
published appellate decision following Ventura County. As
discussed above, the definitions of “compensation” and
“compensation earnable” adopted in Ventura County effectively
overturned aspects of Guelfi, supra, 145 Cal.App.3d 297, which
had guided the implementation of section 31461 prior to Ventura
County. Our disapproval of Guelfi’s long-standing rulings
spawned a variety of lawsuits statewide by county employees
and pensioners, as we anticipated. (Ventura County, supra,
16 Cal.4th at p. 507). These lawsuits were consolidated in a
single proceeding, and those that did not settle became the
subject of Retirement Cases, supra, 110 Cal.App.4th 426.25
Among the issues addressed by Retirement Cases was the
inclusion in final compensation of “termination pay,” which the
court defined as “one-time cash payments made to plan
members upon retirement for accrued but unused compensatory
time, sick leave time, and vacation or holiday time.” (Retirement
Cases, supra, 110 Cal.App.4th at p. 473.) Retirement Cases
25
The lawsuits in Alameda, Contra Costa, and Merced
County that resulted in the settlement agreements addressed
ante, part II.A of this decision, were included in the consolidated
proceeding in Retirement Cases, but each was settled prior to the
trial court’s entry of judgment in the proceeding.
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ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
recognized that Ventura County had defined such payments as
compensation. The court ruled, however, that they were not a
part of “final compensation” because, under the relevant
statutes, the period for calculating final compensation “extends
up to, but does not include retirement.” (Id. at p. 474; see
§§ 31462, 31462.1.) Until the cash compensation was received,
the accrued leave time remained an in-kind benefit, excluded
from compensation under section 31460. Yet at the time the
cash was received, the final compensation period had ended.
(Retirement Cases, at p. 474.) This ruling was subsequently
adopted in Salus v. San Diego County Employees Retirement
Assn. (2004) 117 Cal.App.4th 734, 740.
Because Retirement Cases and Salus remained good law
at the time PEPRA was enacted, section 31461, subdivision
(b)(4) made no material change in the implementation of CERL.
Subdivision (b)(4) addresses “[p]ayments made at the
termination of employment.” Assuming, as the Court of Appeal
concluded (Alameda Sheriffs, supra, 19 Cal.App.5th at p. 104),
that this phrase refers to the same type of payments deemed
“termination pay” by Retirement Cases and Salus — that is,
payments made after the employment relationship ends —
CERL already restricted the pensionability of termination pay
when PEPRA became law.26 As so interpreted, subdivision
26
Alternatively, it can be argued that section 31461,
subdivision (b)(4), which governs “[p]ayments made at the
termination of employment,” includes payments made in
anticipation of an employee’s imminent retirement but received
prior to termination. Interpreted in this manner, subdivision
(b)(4) would constitute a narrowing of the broad ruling of
Ventura County. In that case, however, subdivision (b)(4) would
63
ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
(b)(4) did not impair county employee pension rights for
purposes of the contract clause.
c. Subdivision (b)(1), (2), and (3) effected a change
in CERL
We have not located any other pre-PEPRA judicial
decision that addresses the inclusion in compensation earnable
of the remaining items excluded or limited by the PEPRA
amendment.27 We conclude, however, that the ruling in Ventura
County was sufficiently clear in including within compensation
earnable the items of compensation now excluded or limited by
section 31461, subdivision (b)(1) through (3) that these
provisions must be considered a change in the law for purposes
of the contract clause.
As noted above, Ventura County’s consideration of these
issues was brief and relatively summary, but the decision
appears to include the items excluded or limited by the PEPRA
amendment within the definition of compensation earnable.
The decision began with a consideration of CERL’s definition of
“compensation” in section 31640, which concluded that the
definition includes virtually any item of cash compensation
received by a county employee. As the court explained, “[w]hen
paid in cash, the payment is remuneration and, as it is not
also be largely coextensive with subdivision (b)(2). Because the
interpretive issue is not material to our resolution of this
matter, we do not address it further.
27
Section 31461, subdivision (c) states that “[t]he terms of
subdivision (b) are intended to be consistent with and not in
conflict with the holdings” in Retirement Cases and Salus, but
neither decision addresses a relevant issue other than
termination pay.
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ALAMEDA COUNTY DEPUTY SHERIFF’S ASSN. v.
ALAMEDA COUNTY EMPLOYEES’ RETIREMENT ASSN.
Opinion of the Court by Cantil-Sakauye, C. J.
excluded, it is ‘compensation’ under section 31460.” (Ventura
County, supra, 16 Cal.4th at p. 497.) Although that sentence
related specifically to “cash payments made in lieu of providing
the same advantages in kind” (ibid.), it captures the court’s
general ruling regarding the meaning of “compensation.” This
term, of course, is the foundation for compensation earnable,
which is defined as “the average compensation . . . for the period
under consideration.” (§ 31461, subd. (a), italics added.) Given
the broad definition of “compensation” adopted by Ventura
County and the absence of any limitations on that term as it is
used in section 31461, it is reasonable to construe the decision
as holding that compensation provided as cash remuneration, if
not expressly excluded from compensation earnable, is included
in that term. Because none of the items excluded or limited by
subdivision (b)(1) through (3) was excluded prior to PEPRA, the
exclusion of those items must be regarded as a change in the
law.
Our discussion in Ventura County of the specific items of
compensation there at issue is consistent with this
interpretation. As noted above, the court held that all of the
“premiums in dispute” are included within compensation
earnable, presumably referring to all of the items put at issue
by plaintiffs. (Ventura County, supra, 16 Cal.4th at p. 505.)
Those items included, among others, “additional compensation
for scheduled meal periods for designated employees, pay in lieu
of annual leave accrual, holiday pay, . . . [and] a longevity
incentive.” (Id. at pp. 488–489; see id. at pp. 488–489, fns. 6, 7,
11 & 12.) These items are similar to those subsequently
excluded or limited by section 31461, subdivision (b)(2) and (3)
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— and yet Ventura County had ruled that they are included
within compensation earnable.
Defendants argue that CERL had never permitted the
inclusion in compensation earnable of the various items of
compensation excluded or limited by section 31461, subdivision
(b)(1) to (3). The argument is not based on Ventura County or
any other judicial interpretation of CERL, but rather on
defendants’ own interpretations of the language of the
governing statutes. In effect, they argue, the pre-PEPRA
provisions of CERL should have been interpreted to exclude
these items. Even assuming their interpretive arguments have
merit, our consideration of a change in the law must focus on
how the governing statutes were interpreted, not how they
might have been interpreted. Our contract clause jurisprudence
is designed, at least in part, to protect the reasonable
expectations of public employees covered by the pension plan.
(Betts, supra, 21 Cal.3d at p. 866; see Cal Fire, supra, 6 Cal.5th
at p. 989, fn. 14.) Those reasonable expectations are defined not
only by the statutes themselves, but also by judicial
interpretations of those statutes. Employees can reasonably
expect their pensions to be calculated according to existing
judicial interpretations, at least until those interpretations are
limited or overruled by subsequent authority. Because, as
discussed above, Ventura County adopted a broad interpretation
of compensation earnable and because that interpretation was
never changed or otherwise limited by subsequent judicial or
statutory authority prior to PEPRA, we measure the PEPRA
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amendment against that interpretation, not by a different
interpretation that might have been adopted.28
The District, for example, relies on an argument made to
the Contra Costa County retirement board by its outside
counsel, who opined that the term “final compensation” should
be interpreted to limit the inclusion of cashed out leave time to
leave time actually earned by the employee during a final
compensation year. Although we might have accepted that
argument had it been presented in Ventura County, it was not.
Our decision was unqualified in this regard. Similarly, the State
argues that the compensation excluded by section 31461,
subdivision (b)(1) was “never pensionable” under CERL because
“the idea of basing a public employee’s pension on payments
intended to spike the member’s retirement benefit, and not
exclusively on compensation for faithful service, contradicts the
fundamental theory of a pension system.” Although this is
another plausible argument, Ventura County made no such
exception in its general ruling that compensation earnable
includes all non-excluded cash remuneration. The State’s
arguments regarding subdivision (b)(2) and (3) similarly rely on
its own statutory constructions, rather than the actual ruling of
Ventura County. For the reasons discussed above, we conclude
that, when measured against a reasonable reading of the only
28
Our conclusion might be different if the Legislature had
timely amended an ambiguous statute in a manner contrary to
the interpretation adopted in a judicial decision, suggesting its
disagreement with the court’s interpretation, as occurred in
Gatewood, supra, 175 Cal.App.3d 311. Because the Legislature
did not amend CERL in response to Ventura County, that
situation is not before us.
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applicable judicial guidance — our ruling in Ventura County —
subdivision (b)(1), (2), and (3) changed the law of compensation
earnable.
3. PEPRA’s amendment of CERL is not constitutional
merely because it applies only to pension benefits
awarded after its enactment
Before turning to the application of the California Rule to
subdivision (b)(1) to (3) of section 31461, we address an
argument prominently urged by the State to support the
constitutionality of the PEPRA amendment. Regardless of the
impact on the pensions of county employees who retire after its
effective date, the State argues, the PEPRA amendment “could
not have impaired any vested rights, because [PEPRA’s
changes] only operate prospectively.” According to the State,
PEPRA should be held consistent with the contract clause
because it “does not affect the pension of anyone who retired
before its effective date. Nor does it retroactively re-characterize
the pensionability of any item that was earned and already
included in an employee’s final pensionable compensation before
[its] effective date.” The argument disregards our long-standing
contract clause jurisprudence, but there is another, more
fundamental reason to reject it. The argument misunderstands
the retroactive effect of the PEPRA amendment on county
employee pension benefits.
It goes almost without saying that the State’s argument is
inconsistent with our prior pension decisions, and the State
makes no attempt to reconcile its position with those decisions.
The contention, in essence, is that the PEPRA amendment is
prospective because it does not change the pension benefits of
persons who have already retired or the pensionability of items
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of compensation earned by county employees who are
sufficiently near to retirement to have entered the final
compensation period. So long as modifications of pension law
are prospective as so defined, the State argues, the Legislature
is unconstrained by the contract clause. Our decisions are
fundamentally at odds with this conception of the contract
clause. In Kern, our first decision to grapple with the
requirements of the contract clause, the pension modification —
in fact, a wholesale repeal — applied only to “persons not then
eligible for retirement.” (Kern, supra, 29 Cal.2d at p. 850.) We
did not suggest that this limitation avoided the contract clause
issue; on the contrary, we overturned the repeal. (Kern, at
p. 856.) In several subsequent decisions we found pension
modifications untenable under the contract clause. None of
those modifications applied to persons already retired, yet that
restriction did not preserve their constitutionality. Nor did we
suggest that they would have survived constitutional scrutiny if
only their impact had been limited to persons who had not
entered the final compensation period. (E.g., Eu, supra,
54 Cal.3d at pp. 530–532 [ballot initiative’s pension
modifications could not be applied to state legislators who
assumed office prior to its passage]; Betts, supra, 21 Cal.3d at
p. 867 [pension modification could not be applied to plaintiff,
who was employed by the state prior to its enactment]; Abbott,
supra, 50 Cal.2d at pp. 453–455 [holding that a pension
modification enacted 35 years earlier could not be applied to
persons who were employed by the defendant city at the time
the change occurred]; Allen I, supra, 45 Cal.2d at pp. 131–133.)
On the contrary, the State’s argument is entirely at odds with
our contract clause jurisprudence.
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Because it misunderstands the impact of prospective
application in this context, the State’s argument does not
persuade us to modify our long-standing jurisprudence. In
evaluating the proper scope of contract clause protection for
pension rights, it is important to recognize the unusual nature
of such rights as compensation. Public employees begin earning
pension benefits from their first day of work. As a result, we
have consistently held that pension rights become vested at that
time. (Kern, supra, 29 Cal.2d at p. 855 [a public employee “has
actually earned some pension rights as soon as he has performed
substantial services for his employer”]; Dryden v. Board of
Pension Commissioners (1936) 6 Cal.2d 575, 579 [right to
pension becomes vested upon acceptance of employment];
McGlynn v. State of California (2018) 21 Cal.App.5th 548, 558–
559 [vested pension rights accrue upon commencement of
work].) Yet the value of pension rights is not determined until
the end of an employee’s career, when the retiring employee’s
pension benefit is calculated. CERL perfectly illustrates this.
The amount of a CERL pension benefit is based on a county
employee’s years of service, age at retirement, and
compensation during a specific one or three-year period. The
first two cannot be determined until retirement, and
pensionable compensation is also normally determined near, if
not at, the end of the employee’s career. Further, it is the law
in effect at the time of retirement that is used to calculate the
amount of an employee’s pension benefit. Generally speaking,
the law prevailing during the period when pension rights are
earned — that is, during an employee’s career — does not factor
into the calculation of the value of those pension rights unless
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that law is still in effect when the pension benefit is calculated
— i.e., at retirement.
Because it is the law in effect at the end of a public
employee’s career that is used to determine the amount of the
pension benefit, most modifications of the provisions governing
the benefit calculation have, in practice, a profoundly
retroactive impact on persons who began their employment
prior to the modification. From early on, we have acknowledged
that the Legislature may modify the statutory terms and
conditions governing a public employee’s pension over the
course of his or her career. (Kern, supra, 29 Cal.2d at pp. 853–
854, citing Pennie v. Reis (1889) 80 Cal. 266 [upholding the
Legislature’s substitution of a pension plan for the lump-sum
death benefit available at the beginning of the plaintiff peace
officer’s career].) Yet, by normal operation of the pension
system, such modifications apply not only to the pension rights
accrued by public employees after the effective date of the
modification, but also to all pension rights accrued prior. To the
extent the modification changes the manner in which a pension
benefit is calculated, it changes the value of the pension rights
accrued from the very inception of an employee’s career. Most
significant modifications of a pension plan therefore have an
impact reaching far into the past.
For this reason, the State’s argument that the PEPRA
amendment cannot have violated vested rights because it
operates only prospectively is misguided. Although the
amendment’s provisions apply only to employees who retire
after its effective date, its exclusions and limitations are used in
the calculation that, by setting the amount of their pension
benefit, determines the value of the pension rights these
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employees accrued over the entire course of their careers. In
practice, county employee pension benefits will be calculated as
though the PEPRA amendment was the governing law from the
beginning of their careers.
To effect a pension modification that is prospective in
practice, the Legislature would be required to enact a law that
applies only to pension rights accrued after its effective date,
while preserving unchanged the law applicable to pension rights
accrued prior to that date. Because PEPRA’s amendment
applies to all pension rights, regardless of when they were
accrued, the State’s claim of prospective operation is
unpersuasive.29
4. The PEPRA amendment did not violate the
California Rule
In evaluating the constitutionality of modifications to a
public employee pension plan, Allen I requires a court first to
determine whether the modification imposes disadvantages on
affected employees, relative to the preexisting pension plan,
and, if so, whether the disadvantages are accompanied by
comparable new advantages. Assuming the disadvantages are
not offset, the court must then determine whether the legislative
body’s purpose in making the changes was sufficient, for
constitutional purposes, to justify an impairment of pension
rights. Although public employee pension plans may be
modified “for the purpose of keeping [the] pension system
29
In making this observation, we do not mean to suggest
that a change that is prospective in practice would thereby be
insulated from contract clause scrutiny under Allen I. We
intend merely to illustrate the type of amendment that, in the
pension context, would be truly prospective in its impact.
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flexible to permit adjustments in accord with changing
conditions and at the same time maintain the integrity of the
system,” to survive contract clause scrutiny such changes “must
bear some material relation to the theory of a pension system
and its successful operation.” (Allen I, supra, 45 Cal.2d at
p. 131.) Finally, assuming the changes were made for a proper
purpose, one further analytic step is necessary, as explicated
below: The Legislature’s decision to impose financial
disadvantages on public employees without providing
comparable advantages will be upheld under the contract clause
only if providing comparable advantages would undermine, or
would otherwise be inconsistent with, the modification’s
constitutionally permissible purpose. We conclude that the
PEPRA amendment survives this constitutional scrutiny.
a. The PEPRA amendment imposed
disadvantages on county employees without
providing comparable advantages
There is no question that the PEPRA amendment
diminished county employees’ pension rights without providing
any comparable new advantages. New subdivision (b)(1)
through (3) of section 31461 exclude from compensation
earnable categories of compensation that, prior to PEPRA, were
includable.30 Although the impact on the pension rights of
individual employees will vary, depending on the employee’s
personal circumstances and the policy adopted prior to PEPRA
30
Because, as explained above, section 31461, subdivision
(b)(4) did not change CERL for purposes of the contract clause,
we need not evaluate that subdivision under the California
Rule. Our conclusion would not, however, be different if
subdivision (b)(4) were included in the analysis.
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by his or her county retirement board regarding the inclusion of
these categories, it seems inescapable that the pension benefits
of some county employees will be less than they otherwise would
have been as a result of the PEPRA amendment. In the three
counties involved in this matter, for example, retirement board
policies permitted at least some of the types of compensation
excluded by new subdivision (b) to be included in compensation
earnable. Because that compensation will no longer be factored
into employees’ final compensation, diminished pension benefits
will result. There is no argument that PEPRA provided affected
employees new advantages to offset the financial impact of these
exclusions.
b. PEPRA’s amendments of CERL were enacted for
the constitutionally permissible purpose of
conforming pension benefits more closely to the
theory underlying section 31461 by closing
loopholes and proscribing potentially abusive
practices
The second component of the California Rule is the
requirement that the changes to a public pension plan have been
enacted for a constitutionally permissible purpose. The
requirement is premised on the recognition in Kern, supra,
29 Cal.2d 848, that “[t]he rule permitting modification of
pensions is a necessary one since pension systems must be kept
flexible to permit adjustments in accord with changing
conditions and at the same time maintain the integrity of the
system and carry out its beneficent policy.” (Id. at pp. 854–855.)
While acknowledging this need for flexibility, we held in Allen I
that modifications of public pension plans are permissible only
if they relate to the operation of the plan and are intended to
improve its functioning or adjust to changing conditions, holding
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that “alterations of employees’ pension rights must bear some
material relation to the theory of a pension system and its
successful operation . . . .” (Allen I, supra, 45 Cal.2d at p. 131.)
Our decisions since Allen I have upheld few, if any,
pension modifications as properly motivated. Perhaps the
closest we have come to sustaining such a change was Betts,
supra, 21 Cal.3d 859, in which we considered a modification of
the pension system serving state officers. The plan originally
pegged the amount of officers’ pension benefits to the salary of
persons currently holding the same office held by the pensioner
upon retirement. (Id. at p. 862.) The modification at issue
changed this means of preserving the purchasing power of
pension benefits to an annual cost of living adjustment. (Id. at
p. 865.) We expressed a willingness to entertain the state’s
argument that the change was constitutionally permissible
because it represented the replacement of “one ‘cost of living’
formula” with another, but we concluded that the argument
could not be sustained “[u]nder the circumstances of this case.”
(Ibid.)
Our decisions have more often given substance to this
requirement of Allen I by delineating what is not a
constitutionally permissible purpose. In Wallace and Allen I,
both of which found a violation of contract clause protections,
the defendant cities advanced essentially political reasons for
the pension modifications at issue. In Allen I, the city adopted
three changes to a pension system covering senior employees
that had the effect of increasing the cost of participation in the
plan for employees and diminishing their benefits. The city
characterized the changes as an attempt to equalize the pension
benefits of the senior employees and more recent hires, who
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were covered by a different, less generous pension plan. (Allen I,
supra, 45 Cal.2d at p. 133.) We found this rationale insufficient,
reasoning that “[s]uch purposes, however beneficial to the city,
. . . constitute no justification for materially reducing the vested
contractual rights earned by plaintiffs . . . .” (Ibid.) In Wallace,
supra, 42 Cal.2d 180, we rejected as improperly motivated a
modification that stripped pension benefits from retirees upon
conviction of a felony in order “to meet the objections of
taxpayers who would be opposed to contributing funds for the
maintenance of a pensioner who had been convicted of a felony.”
(Id. at p. 185.) Finally, in Abbott, supra, 50 Cal.2d 438, we
addressed a city’s argument that the modification of its pension
plan was justified as an attempt to stem rising pension costs.
In defense of its switch from a fluctuating pension benefit,
intended to compensate for changes in the cost of living, to a
fixed benefit, the city contended that “if the amendments had
not been made ‘the cost to the City and its taxpayers would have
reached such staggering proportions that, in all probability, the
system would have ceased to exist.’ ” (Id. at p. 455.) We rejected
the argument, observing that the city’s hypothetical prediction
of costs so great as to lead to the pension system’s abolition was
speculative and failed to account for the fact that a pension
system is essential to attract qualified municipal employees.
(Ibid.) This left the city to rely only on rising costs, an argument
we found insufficient, without more, to justify the change.
(Ibid.)
Given our past decisions, we have no difficulty finding that
the PEPRA amendment was enacted to maintain the integrity
of the pension system and “bear[s] some material relation to the
theory of a pension system and its successful operation.”
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(Allen I, supra, 45 Cal.2d at p. 131.) As discussed above, the
Legislature’s primary purpose in enacting the PEPRA
amendment was to modify CERL’s “very broad and general
definition of ‘compensation earnable’ ” to prevent pension
spiking. (Assem. Com. on Public Employees, Retirement and
Social Security, Analysis of Assem. Bill No. 340 (2011–2012 Reg.
Sess.) Apr. 25, 2011, p. 3.) An examination of the changes made
by PEPRA demonstrates that the Legislature accomplished this
objective by introducing new exclusions and limitations that
bring the definition of “compensation earnable” into closer
alignment with the preexisting theory underlying CERL’s
determination of pension benefits. A legislative intent to align
the express language of a pension statute more closely with its
intended manner of functioning directly relates to both the
theory of a pension system and its successful operation.
The definition of “compensation earnable” in section
31461, which specifies the manner in which a retiring
employee’s compensation is used in calculating his or her
pension benefit, is a critical component in establishing the
general theory underlying CERL’s payment of pension benefits.
As discussed above, compensation earnable is based on the
retiring employee’s average daily rate of pay during the final
compensation period, applied over the number of days ordinarily
worked during that time by the employee’s peers, identified as
“persons in the same grade or class of positions during the
period.” (§ 31461, subd. (a); see Ventura County, supra,
16 Cal.4th at p. 504.) Among employees in this peer group,
differences in pension benefits are therefore determined by
variations in individual employees’ average daily compensation
during the final compensation period, rather than by the
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relative amount of time the employees worked. An employee
becomes entitled to a greater pension benefit than his or her
peers by being compensated at higher rate, not by working more
days. This is so because the calculation required by section
31461 assumes that all employees have worked the same
number of days — that is, “the average number of days
ordinarily worked by persons in the same grade or class of
positions during the period” — and excludes overtime pay
earned outside of “normally scheduled or regular working
hours.” (§§ 31461, subd. (a), 31461.6, subd. (a).)
Given this fundamental definition, the inclusion in final
compensation of the items of compensation excluded or limited
by the PEPRA amendment can be viewed as distorting the
pension calculation and increasing pension benefits beyond the
amount anticipated by the underlying theory of compensation
earnable. Section 31461, subdivision (b)(2), for example, limits
the inclusion of payments for unused leave time in
compensation earnable to the amount “earned and payable . . .
during the final average salary period, regardless of when
reported or paid.” Restricting the inclusion of such payments to
those earned in the final compensation period promotes the
underlying theory established by the general language of section
31461. Leave time earned prior to the final compensation period
is, necessarily, awarded in return for work performed prior to
that period. The receipt of cash-out payments for such leave
time during the final compensation period therefore has the
effect of shifting compensation for that earlier work into the
final compensation period, thereby artificially inflating the days
of compensation received during the final compensation period.
This is incompatible with the general approach of section 31461,
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which calculates pensionable compensation on the basis of the
same work time for every employee within a pay class. Limiting
the inclusion of such payments in the compensation earnable
calculation to the amount “earned and payable” during the final
compensation period, as required by section 31461, subdivision
(b)(2), reduces the potential for distortion from this type of
compensation. (See Alameda Sheriffs, supra, 19 Cal.App.5th at
pp. 97–98 [“the touchstone for calculating compensation
earnable is still the compensation that was actually earned by
the retiring employee in ‘the period under consideration’ ”].)31 It
is noteworthy that, since 1995, CERL has treated payments
from a deferred compensation plan in this manner, deeming
deferred compensation to be included in compensation “when
earned, rather than when paid.” (§ 31461, subd. (a); see Stats.
31
The Court of Appeal interpreted section 31461,
subdivision (b)(2) to permit the inclusion of an unlimited
amount of cashed out leave time in compensation earnable,
regardless when accrued, by holding that the phrase “earned
and payable” in subdivision (b)(2) modifies “leave cash-outs,”
rather than the leave time itself. It then concluded that the
cash-out is earned when paid, rather than when the leave time
is accrued. (Alameda Sheriffs, supra, 19 Cal.App.5th at pp. 98-
100.) Although, in practice, an employee can accrue only a
limited amount of leave time in a final compensation period,
there is no similar practical constraint on the amount of leave
time that can be cashed out during that time. The Court of
Appeal’s interpretation therefore renders subdivision (b)(2)
pointless, and an “interpretation of statutory language that
renders the language useless” is, of course, disfavored.
(Williams v. Superior Court (1993) 5 Cal.4th 337, 354.) A better
reading requires “earned and payable” to refer to the amount of
leave time that can be accrued during the final compensation
period.
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1995, ch. 558, § 1.) Subdivision (b)(2) is consistent with this
approach and serves the underlying theory of compensation
earnable in the same manner.
A comparable rationale supports the enactment of section
31461, subdivision (b)(3), which excludes “[p]ayments for
additional services rendered outside of normal working hours.”
Section 31461 bases compensation earnable on the same
number of days worked for all employees within a particular pay
grade. The long-standing exclusion of overtime from
compensation earnable, now embodied in section 31461.6,
confirms that an employee’s pensionable compensation is
generally to be based on pay for work performed during normal
working hours.32 Consistently with this exclusion of overtime,
subdivision (b)(3) requires the exclusion of compensation for
other services rendered outside normal working hours. This
restriction prevents employees from volunteering, during their
final compensation period, to perform additional services
outside normal working hours in order to artificially inflate
their daily rate of pay. Subdivision (b)(3) therefore reinforces
the portion of section 31461 that requires compensation
earnable to be based on the same work year for all employees
within a particular pay grade.
32
This understanding is reinforced by the text of section
31461.6, which excludes “overtime premium pay” unless the pay
is received as compensation “for hours worked within the
normally scheduled or regular working hours that are in excess
of the statutory maximum workweek.” (Id., subd. (a).) In other
words, overtime pay is not excluded if it is ea
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