# Appendix — City of Los Angeles v. United Firefighters of Los Angeles City, Local 112

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1990
- **Citation:** 493 U.S. 1045

## Text

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~ 8 9 7 8 1 6 Supreme Court, U.S.

FILED
NOV 16 988
No. 89-
ANIOL, JR.
CLERK
In The ?

= entree
Supreme Court of the United States

OcTOBER TERM, 1989

City oF Los ANGELES;
BOARD OF PENSION COMMISSIONERS
OF THE CiTy OF LOs ANGELES,
Petitioners,
A
_ UNITED FIREFIGHTERS OF LOS ANGELES CITY,
Local 112, IAFF, AFL-CIO;

Los ANGELES POLICE PROTECTIVE LEAGUE;
RONALD DEAN Gray; DAVID BACA, JR.;
GREGORY PAUL DusT; Bit, G. MCDANIEL;
and Frep A. TREDY,

Respondents.

APPENDIX TO PETITION FOR A WRIT OF
CERTIORARI
TO THE COURT OF APPEAL OF THE
STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT

JAMES K. HAHN JOHN F. DauM*
City Attorney KAREN R. GROWDON
FREDERICK N. MERKIN SHARONA HOFFMAN
Senior Assistant O'MELVENY & MYERS
City Attorney 400 South Hope Street
1700 City Hall East Los Angeles, CA 90071
Los Angeles, CA 90012 (213) 669-6000

Counsel for Petitioners

* Counsel of Record

i

TABLE OF CONTENTS

Appendix A — Opinion of the California Court of
Appeal, Second Appellate District,
as modified, 210 Cal.App.3d 1095,
259 Cal. Rptr. 65 (April 26, 1989)

Appendix B — Order of the California Court of
Appeal, Second Appellate District,
Modifying Opinion and Certifying
Opinion for Publication upon Denial
of Petition for Rehearing, filed May
BN Re Ae er area

Appendix C — Order of the California Supreme
Court Denying Review, filed July
he rrr er rae

Appendix D — Statement of Decision of the Cali-
fornia Superior Court, filed March
Gas a4 Chin Rena wee eee ae ks

Appendix E — Judgment of the California Supe-
rior Court, entered April 6, 1987 ..

Appendix F — Order of the California Superior
Court Denying Plaintiffs’ Motion
for Summary Judgment and Speci-
fying Issues Without Substantial
Controversy, filed November 8, 1985

Appendix G — Order of the California Superior
Court Adjudiecating Issues as Being
Without Substantial Controversy
and Ruling on Other Pending Mo-
tions, filed June 6, 1983 ..........

Appendix H — Provisions of the Charter of the City
gy ee ae

SE PEE Sve chek skeen es

Page

la

28a

3la

32a

69a

T2a

Appendix I

il

Ballot Argument for Charter
Amendment H, June 8, i982...... 202a

Opinion of the Fourth Cireuit Court
of Appeals in Maryland State Teach-
ers Association v. Hughes, No. 84-
2213, dated December 5, 1985 ...2lla

APPENDIX A

la

[No. B027960. Second Dist., Div. One. Apr. 26, 1989.]
[As modified May 22, 1989.]

UNITED FIREFIGHTERS OF LOS ANGELES CITY
et al.,

Plaintiffs and Respondents, v.

CITY OF LOS ANGELES et al., Defendants and
Appellants.

[Headnotes and appearances of counsel deleted]

OPINION
SPENCER, P. J.—

INTRODUCTION

Defendants City of Los Angeles and Board of Pension
Commissioners appeal from a judgment entered in favor
of plaintiffs United Firefighters of Los Angeles City, Los
Angeles Police Protective League and individual mem-
bers thereof.

STATEMENT OF FACTS'

Prior to 1966, the police and firefighter pension systems
made no provision for the adjustment of benefits to reflect
inflation. In that year, voters adopted a charter amend-
ment which provided for such adjustments, based on the
Consumer Price Index, but imposed a yearly cap of 2
percent on the adjustments. In 1971, voters approved
another charter amendment which removed the cap on

‘As they are necessary to the discussion of the issues raised, more
detailed facts will appear in the body of the opinion.

Za oo
cost of living adjustments, permitting them instead to
fully reflect the rate of inflation each year.

In June 1982, defendants placed charter amendment H
on the ballot. It was passed by the voters and thencefor-
ward became part of the city charter. The amendment
placed a 3 percent cap on police and firefighter pension
benefit cost of living adjustments based on the Consumer
Price Index. As to presently employed members of the
pension system, the amendment applied only prospec-
tively to future years of service credited toward retire-
ment. Each of the plaintiffs in the instant action accepted
employment as a police officer or firefighter before or
after the passage of the 1971 charter amendment, but in
every instance before December 1980."

CONTENTIONS
I

Defendants contend the trial court erred in viewing the
change effected by charter amendment H as an impair-
ment of the vested contractual pension rights of plaintiffs.

II

Defendants further contend the trial court applied the
wrong legal standard in determining whether charter
amendment H impermissibly violated the contract clause.

“Employees hired after December 1980 are members of a separate
pension system embodied in article XXXV of the city charter. They
are not affected by the instant litigation.

3a

DISCUSSION
I

Defendants contend the trial court erred in viewing the
change effected by charter amendment H as an impair-
ment of the vested contractual pension rights of plaintiffs.

We disagree.

As defendants acknowledge, this issue was decided
adversely to their position in Pasadena Police Officers
Assn. v. City of Pasadena (1983) 147 Cal.App.3d 695 [195
Cal.Rptr. 339]. They suggest, however, that this court
disregard Pasadena Police Officers Assn., in that the deci-
sion directly conflicts with preexisting law, is anomalous
and is contrary to the law as expressed in California
Supreme Court opinions. This is, as Presiding Justice
Seoville said in another context, “a paradigm of disingen-
uousness.” (People v. Sellers (1988) 203 Cal.App.3d 1042,
1051 [250 Cal.Rptr. 345].)

A publie employee's entitlement to a pension “is among
those rights clearly ‘favored’ by the law.” (Hittle v. Santa
Barbara County Employees Retirement Assn. (1985) 39
Cal.3d 374, 390 [216 Cal.Rptr. 733, 703 P.2d 73].) Ae-
cordingly, pension laws are to be liberally construed to
protect pensioners and their dependents from economic
insecurity. (Jbid.) Unlike other terms of public employ-
ment, which are wholly a matter of statute, pension rights
are obligations protected by the contract clause of the
federal and state Constitutions (U.S. Const., art. I, § 10,
el. 1; Cal. Const., art. I, § 9). (Miller v. State of California
(1977) 18 Cal.3d 808, 814 [135 Cal.Rptr. 386, 557 P.2d
970]; see also Hittle v. Santa Barbara County Employees
Retirement Assn., supra, 39 Cal.3d at p. 390.)

Miller nieely reeapitulates the modern law of public
employment pension rights. As the Supreme Court notes,

4a

“upon acceptance of public employment [one] acquire[s}
a vested right to a pension based on the system then in
effect.” (18 Cal.3d at p. 817, italics added; accord, Carman
v. Alvord (1982) 31 Cal.3d 318, 325 [182 Cal.Rptr. 506,
644 P.2d 192].)® “The scope of permissible modifications
of vested pension rights was established in Allen v. City of
Long Beach (1955) 45 Cal.2d 128... , and Abbott v. City of
Los Angeles (1958) 50 Cal.2d 438 ...: ‘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 rela-
tion 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.’ [Citation.] ‘[I]t is advan-
tage or disadvantage to the particular employees whose
own contractual pension rights, already earned, are in-
volved which are the eriteria by which modifications to
pension plans must be measured.’ [Citation.]” (Miller,
supra, 18 Cal.3d at p. 816.)

Miller reaches the conelusion the plaintiff had, wnder
the system in effect when he accepted public employment,
acquired a vested right to achieve maximum benefits by
working to age 70. (/d., at p. 817.) Before he reached that
age, the state changed the mandatory retirement age from
70 to 67. It was free to do so, since the duration of public
employment is a matter of statute rather than contract.
(Id., at pp. 813-814.)

°A public employee likewise acquires a vested right to additional
pension benefits thereafter conferred during his or her subsequent
employment. (Betts v. Board of Administration (1978) 21 Cal.3d 859,
866 [148 Cal.Rptr. 158, 582 P.2d 614]; accord, Olson v. Cory (1980)
27 Cal.3d 532, 540 [178 Cal.Rptr. 568, 636 P.2d 532].)

5a

The Supreme Court then holds: “Although [plaintiff's]
right to a pension based on this system was vested,
plaintiff was not assured of receiving maximum pension
benefits. His right to receive such benefits was subject to
conditions and contingencies; specifically, that he remain
in state employment until age 70. Plaintiff failed to
satisfy that condition since he was lawfully placed on
retirement at age 67. Thus, his right to a maximum
pension based on retirement at age 70 never matured. []
... Although [plaintiff] was entitled to earn increased
pension benefits so long as he remained in state employ-
ment..., plaintiff had no vested centractual right to
continue working for any specified period of time.... [{]
... The faet that a pension right is vested will not, of
course, prevent its loss upon the oceurrence of a condition
subsequent such as lawful termination of employment
before completion of the period of service designated in
the pension plan.’ [Citation.]” (Miller, supra, 18 Cal.3d at
p. 817, italies added.) In such a situation, it is unneces-
sary to “undertake the method of analysis required by
Allen and Abbott for determining whether the changes in
the state’s pension system were reasonable.” (Jd., at
_p. 818.)

Pasadena Police Officers Assn. accurately states the law
as expressed in Miller and Betts, supra, 21 Cal.3d 859.
(147 Cal.App.3d at pp. 701-702.) In both Pasadena Police
Officers Assn. and the instant matter, there is no question
of a change in the duration or any term of employment
except the pension benefits to be afforded the plaintiffs.
Without question, a reduction in the cost of living adjust-
ments to pension benefits does not impose a condition
subsequent which affects the maturation of the plaintiffs’
pension rights, but burdens them with a disadvantage. It
is equally clear charter amendment H affords plaintiffs no
comparable advantage. It neither reduces the contribu-

6a

tions they must make from their salaries (see, e.g., Hough-
ton v. City of Long Beach (1958) 164 Cal.App.2d 298, 311-
312 [330 P.2d 918]) nor confers on them any new advan-
tage. This, too, is the conclusion reached in Pasadena
Police Officers Assn., supra, 147 Cal.App.3d
at p. 702.)

Notwithstanding the clarity of the law as expressed in
Miller v. State of California, supra, 18 Cal.3d 808 and Betts
v. Board of Administration, supra, 21 Cal.3d 859 and
accurately applied in Pasadena Police Officers Assn., de-
fendants insist preexisting law is contrary to that ex-
pressed in Pasadena Police Officers Assn. and is instead
embodied in Houghton v. City of Long Beach, supra, 164
Cal.App.2d 298. Houghton considers a 1945 charter
amendment by which the city attempted to repeal all
police and firefighter pensions. The amendment permitted
a member of the pension system who, on its effective date,
had served for 20 years (the first point at which a pension
was payable) or more to retire within five years and
receive a pension based on his years of service to the
effective date of the amendment (Jd., at pp. 306-307.)
This particular aspect of the amendment had been held
valid in three previous decisions, beginning with Palaske
v. City of Long Beach (1949) 93 Cal.App.2d 120 [208 P.2d
764] and continuing through Allen v. City of Long Beach
(1950) 101 Cal.App.2d 15 [224 P.2d 792] and Allstot v.
City of Long Beach (1951) 104 Cal.App.2d 441 [231 P.2d
498].

In Houghton, plaintiffs argued the preceding decisions
had been implicitly overruled by Allen v. City of Long
Beach (1955) 45 Cal.2d 128 [287 P.2d 765]. Houghton
rejects this position, correctly noting the Supreme Court
ease dealt with entirely separate portions of the amend-
ment and distinguished the earlier appellate cases. (164

Ta

Cal.App.2d at pp. 309-310.) The three earlier cases relied
on Kern v. City of Long Beach (1947) 29 Cal.App.2d 848
[179 P.2d 799]. Palaske concludes, “the employee has a
vested right only to a substantial or reasonable pension.
His contractual right to such a pension has not been
impaired by legislation which, operating prospectively,
merely withdraws any right or option to earn a bonus by
continuing in employment after he has become eligible for
retirement.” (93 Cal.App.2d at p. 132.) Houghton follows
this reasoning and the Palaske line of cases in part
because the city long had relied on these decisions. (164
Cal.App.2d at p. 311.) However, the court also notes,
without labeling it as such, the comparable advantage
plaintiffs gained for suffering the disadvantage worked by
the amendment, i.e., they were not required after the
effective date of the amendment to contribute 2 percent of
their salaries to the pension fund. (Jd., at pp. 311-312.)
Clearly, the case is correctly decided on this basis in
accord with the principles set forth in Allen v. City of
Long Beach, supra, 45 Cal.2d 128.

Pasadena Police Officers Assn. reaches a different con-
clusion, finding “the Palaske line of cases cannot be
reconciled with the comparable new advantages test of
Allen and subsequent eases.’ (147 Cal.App.3d at p. 705.)
While we disagree, the foregoing conclusion is not neces-
sary to the decision in Pasadena Police Officers Assn.
Moreover, it neither makes the case “bad law” nor con-
flicts with preexisting law. If defendants did indeed rely
on Houghton, they did so without justification and with
unequivocal disregard for the law as it is expressed in
Miller v. State of California, supra, 18 Cal.3d 808 and Betts
v. Board of Administration, supra, 21 Cal.3d 859.

Defendants also argue Pasadena Police Officers Assn. is
an anomaly in the law, in that an employee’s rights to

8a

compensation are set by the law applicable at the time his
or her services are rendered. (Longshore v. County of
Ventura (1979) 25 Cal.3d 14, 23 [157 Cal.Rptr. 706, 598
P.2d 866].) Longshore deals with direct, not deferred,
compensation and an attempt to claim retroactively the
benefit of a subsequently-enacted ordinance to receive
money in lieu of compensatory time off for overtime hours
worked. (Jbid.) It is well settled that a public employer is
constitutionally prohibited from awarding compensation
retroactively. (Jbid.) As explained ante, all terms of
public employment other than pension rights, including
hours to be compensated, are wholly a matter of statute.
(Miller v. State of California, supra, 18 Cal.3d at pp. 813-
814.) These aspects of public employment ripen into
obligations protected by the contract clause of the federal
and state Constitutions only upon an employee’s actual
performance. (Longshore, supra, at p. 23) In contrast,
deferred compensation in the form of pension rights has
the status of a contractual obligation from the moment
one accepts public employment. (Miller, supra, at pp. 814,
817.) If this creates an anomaly in the law, it is one
sanctioned by the California Supreme Court.

Defendants next argue, even if vested contractual
rights are at issue, charter amendment H was permissi-
ble, in that plaintiffs’ contract with the city has not been
breached. Defendants rely on International Assn. of
Firefighters v. City of San Diego (1983) 34 Cal.3d 292 [193
Cal.Rptr. 871, 667 P.2d 675] for this proposition. Interna-
tional Assn. of Firefighters deals with a publie employer's
attempt to raise the contribution rate required of its
firefighter members in support of an actuarially based
retirement system.

The Supreme Court examines the prior case law relat-
ing to vested pension rights noting: “What distinguishes

9a

each of these cases from the one before us is the nature of
the contractual rights which became vested in plaintiff's
members upon their acceptance [or continuation] of_em-
ployment. In the cases relied upon by plaintiff, employees’
vested contractual rights were modified by amendment of
the controlling provisions of the retirement system in
question to reduce (or abolish) the net benefit available to
the employees. In the present case, no modification was
made in the retirement system; instead, the revi-
sion[s]... were made pursuant te the charter and ordi-
naneces which delineate City’s retirement system and
prescribe the employees’ vested rights.” (Jd., at p. 302,
italies original.) Clearly, the instant matter falls into the
former category and not the latter. International Assn. of
Firefighters thus is of no assistance to defendants.

Defendants also rely on the following well-settled prin-
ciple of contract law: “[I]f it appears that the parties
contracted in contemplation of the continued existence of
a thing, so that, reasonably construed, the contract re-
quires that thing to be in existence, its destruction or
such impairment as makes it unavailable excuses the
promisor, unless he has in the contract assumed the risk
of its destruction.” (1 Witkin, Summary of Cal. Law (9th
ed. 1987) Contracts, § 785, p. 708, italics deleted.) It is
defendants’ position that the charter provisions establish-
ing articles XVII and XVIII in 1966 and uneapping the
cost of living adjustment in 1971 were enacted in contem-
plation of the continued existence of specific funding
through inereases in the property tax levies, a prospect
which evaporated upon the enactment of Proposition 13
and its limitations on real property taxes. They view
charter sections 186.2 and 190.09 as demonstrating this
reliance.

10a

Sections 186.2 and 190.09 provide that the city council
or controller annually shall “levy, in addition to all other
taxes levied by the City, a tax clearly sufficient to provide
the total amount of all items in [the pension system]
budget.” To levy is simply te impose or collect a
tax — any tax. (Webster’s New Collegiate Dict. (6th ed.
1979) p. 655, col. 2.) Nothing in the language of these
charter sections limits the source of revenue to property
taxes (indeed, the sections refer to “all other taxes’’)
and, contrary to defendants’ assertion, McAlpine v. Baum-
gartner (1937) 10 Cal.2d 409 [74 P.2d 753] does not
construe similar language as so limited. This language
clearly creates a general funding obligation, not a specific
one. In any event, the passage of Proposition 13 did not
impair the city’s ability to levy an additional property tax
to meet this pre-1978 voter-approved indebtedness. (Car-
man v. Alvord, supra, 31 Cal.3d at p. 322.)

In view of the foregoing conclusions, it is clear the
city’s ability to meet its obligation to fund the pension
systems remained unimpaired, notwithstanding Proposi-
tion 13. Henee, the passage of Proposition 13 did not
make unavailable an item specifically contemplated as
continuing in existence. It necessarily follows that this
event could not serve to excuse the city’s contractual
obligations to plaintiffs. As Pasadena Police Officers Assn.
v. City of Pasadena, supra, 147 Cal.App.3d notes at page
704, footnote 3, it is settled law that, “in the absence of a
clear and unequivocal declaration in the pension provi-
sions that benefits are payable only to the extent of
available funds from specified contributions, the liability
to pay promised pension benefits is a general obligation of
the city.” (Accord, Bellus v. City of Eureka (1968) 69
Cal.2d 336, 348-352 [71 Cal.Rptr. 135, 444 P.2d 711].)

7

lla

Defendants further rely on the principle that any con-
tract incorporates the law existing as of the time of its
formation, i.e., the nature and extent of the obligation
“must be ascertained not only from the language of the
pension provisions but also from the judicial construction
of this or similar legislation at the time the contractual
relationship was established.” (Kern v. City Long Beach, ~
supra, 29 Cal.2d at p. 850; see also City of Torrance v.
Workers’ Comp. Appeals Bd. (1982) 32 Cal.3d 111, 378
[185 Cal.Rptr. 645, 650 P.2d 1162].) Their reliance is
misplaced. As noted ante, the applicable law is embodied
in Miller v. State of California, supra, 18 Cal.3d 808 and
Betts v. Board of Administration, supra, 21 Cal.3d 859, not
in Houghton v. City of Long Beach, supra, 164 Cal.App.2d
298.

Finally, defendants argue charter amendment H can-
not be viewed as “substantially” impairing plaintiffs’
vested rights, in that their reasonable expectations have
not been defeated; thus, it is not subject to attack under
the contract clause even though it technically alters a
contractual obligation. (Allen v. Board of Administration
(1983) 34 Cal.3d 114, 124 [192 Cal.Rptr. 762, 665 P.2d
534].) Defendants note it is entirely permissible to adjust
a contract to prevent a party from receiving a windfall
profit (Energy Reserves Group v. Kansas Power & Light
(1983) 459 U.S. 400, 412 [74 L.Ed.2d 569, 581, 103 S.Ct.
697]|), and take the position those system members who
beeame publie employees prior to 1971 received just that
from the uneapping of the cost of living adjustment.

Again it is clear this argument will not withstand
scrutiny. As noted ante, plaintiffs have a vested right not
only to benefits substantially similar to those in effect
when they accepted public employment (Carman v. Al-
vord, supra, 31 Cal.3d at p. 325; Miller v. State of Califor-

l2a

nia, supra, 18 Cal.3d at p. 817), but also to additional
benefits offered later by the public employer (Betts v.
Board of Administration, supra, 21 Cal.3d at p. 866).
Accordingly, those system members who accepted public
employment prior to 1971 have not received a “windfall
profit” from the uneapping of the cost of living adjust-
ment in 1971, but only their due. While it is true reasona-
ble contractual expectations generally are to be measured
as of the date the contractual relationship began (Allen v.
Board of Administration, supra, 34 Cal.3d at pp. 124-125),
the contractual relationship at issue here was modified by
uneapping of the cost of living adjustment in 1971. Thus,
in aecord with Betts, supra, the reasonable expectations of
plaintiffs in the instant matter must be measured as of
that date.

In defendants’ eyes, plaintiffs could have had only one
reasonable post-1971 expectation — that their standard
of living in retirement, despite inflation, would be as high
as their standard of living during their terms of active
service. This utterly misconstrues the city’s retirement
system. The expectation defendants describe as reasona-
ble would, in truth, be wholly unreasonable. Plaintiffs do
not now and never have had an opportunity to earn a
pension equivalent to their salaries upon retirement; the
opportunity is limited to a minimum pension benefit of 40
percent of salary and a maximum benefit of 70 percent. It
is clear plaintiffs must expect a postretirement diminu-
tion in their standard of living. However, once the cost of
living adjustment was uneapped in 1971, plaintiffs did
have a reasonable expectation that pension benefits
earned thereafter would be fully adjusted for inflation
and their post-retirement standards of living thus would
be protected from any further diminution. Without ques-

13a

tion, charter amendment H defeats this expectation.*
Moreover, the modification embodied in charter amend-
ment H is not consistent with existing state law and thus
cannot be viewed as working no substantial impairment of
plaintiffs’ reasonable expectations. (Cf. City of Torrance
v. Workers’ Comp. Appeals Bd., supra, 32 Cal.3d at p.
378.)

Il

Defendants further contend the trial court applied the
wrong legal standard in determining whether charter
amendment H impermissibly violated the contract clause.
Again, we disagree.

A law or ordinance which substantially impairs a con-
tractual obligation nunetheless may be constitutional. As
the United States Supreme Court has noted, “[a]lthough
the language of the Contract Clause is facially absolute,
its prohibition must be accommodated to the inherent
police power of the State ‘to safeguard the vital interests

‘Defendants claim to have evidence, in the form of an economic
analysis by Professor Shoven which was erroneously excluded at
trial, which demonstrates the standard of living of a retired police
officer or firefighter throughout retirement would be higher than in
his or her last year of active service — even after allowing for the
effect of charter amendment H. The assertion that exclusion of this
evidence was erroneous is made in passing, without legal argument,
the citation of authority or explication of the ground upon which the
evidence was excluded. Therefore, the point properly may be deemed
waived on appeal. (Henderson v. Security Nat. Bank (1977) 72
Cal.App.3d 764, 769 [140 Cal.Rptr. 388].) In any event, the proposi-
tion this evidence purportedly “proves” is impossible. There is no
conceivable way in which an officer retiring on 40 to 70 percent of his
or her salary and thereafter receiving cost of living adjustments equal
only to actual inflation in that cost ever could equal, let alone exceed,
the standard of living he or she enjoyed in the last year of active
service

l4a

of its people.’ [Citing Home Bidg. & Loan Assn. v. Blais-
dell (1934) 290 U.S. 398, 434 (78 L.Ed. 413, 426-427, 54
S.Ct. 231).] In Blaisdell, the Court ... balanced the lan-
guage of the Contract Clause against the State’s interest
in exercising its police power.... {The Court listed five
factors that were then deemed to be significan. in its
analysis: whether the Act (1) was an emergency measure;
(2) was one to protect a basic societal interest, rather
than particular individuals; (3) was tailored appropri-
ately to its purpose; (4) imposed reasonable conditions;
and (5) was limited to the duration of the emergency.
(Citation.) |” (Energy Reserves Group v. Kansas Power &
Light, supra, 459 U.S. at p. 410 and fn. 11 [74 L.Ed.2d at
p. 580].)

Energy Reserves Group continues: “The threshold in-
quiry is ‘whether the state law has, in fact, operated as a
substantial impairment of a contractual relationship.’
[Citing Allied Structural Steel Co. v. Spannaus (1978) 438
U.S. 234, 244 (57 L.Ed.2d 727, 736, 98 S.Ct. 2716) and
United States Trust Co. v. New Jersey (1977) 431 U.S. 1, 17
(52 L.Ed.2d 92, 106, 97 S.Ct. 1505).] The severity of the
impairment is said to increase the level of scrutiny to
which the legislation will be subjected. [Citing Allied
Structural Steel Co., supra, at p. 245 (57 L.Ed.2d at p.
737).| Total destruction of contractual expectations is
not necessary for a finding of substantial impairment.
[Citing United States Trust Co., supra, at pp. 26-27 (52
L.Ed.2d at p. 106).] On the other hand, state regulation
that restricts a party to gains it reasonably expected from
the contract does not necessarily constitute a substantial
impairment. [Citing 431 U.S. at p. 31 (52 L.Ed.2d at p.
115) and El Paso v. Simmons (1965) 379 U.S. 497, 515 (13
L.Ed.2d 446, 458, 85 S.Ct. 577).]...

Ses

15a

“If the State regulation constitutes a substantial im-
pairment, the State, in justification, must have a signifi-
eant and legitimate public purpose behind the regulation
[citing United States Trust Co. v. New Jersey, supra, 431
U.S. at p. 22 (52 L.Ed.2d at p. 109)], such as the
remedying of a broad and general social or economic
problem. [Citing Allied Structural Steel Co. v. Spannaus,
supra, 438 U.S. at pp. 247; 249 (57 L.Ed.2d at pp. 738-
739).] Furthermore, since Blaisdell, the Court has indi-
cated that the public purpose need not be addressed to an
emergency or temporary situation. [Citing United States
Trust Co., supra, at p. 22, fn. 19 (52 L.Ed.2d at p. 110)
and Veiz v. Sixth Ward Assn. (1940) 310 U.S. 32, 39-40
(84 L.Ed. 1061, 1066-1067, 60 S.Ct. 792).]...The re-
quirement of a legitimate public purpose guarantees that
the State is exercising its police power, rather than
providing a benefit to special interests.

“Onee a legitimate public purpose has been identified,
the next inquiry is whether the adjustment of ‘the nights
and responsibilities of contracting parties [is based]
upon reasonable conditions and [is] of a character appro-
priate to the public purpose justifying [the legislation’s]
adoption.’ [Citing United States Trust Co. v. New Jersey,
supra, 431 U.S. at p. 22 (52 L.Ed.2d at pp. 109-110).]
Unless the State itself is a contracting party [citing 431
U.S. at p. 23 (52 L.Ed.2d at p. 110)], ‘[a]s is eustomary
in reviewing economic and social regulation, ... courts
properly defer to legislative judgment as to the necessity
and reasonableness of a particular measure.’ [Citing 421
U.S. at pp. 22-23 (52 L.Ed.2d at pp. 109-110).] [When a
State itself enters into a contract, it cannot simply walk
away from its financial obligations. In almost every case,
the Court has held a governmental unit to its contractual
obligations when it enters financial or other markets.
(Citations.) When the State is a party to the contract,

el

l6a

‘complete deference to a legislative assessment of reason-
-ableness and necessity is not appropriate because the
State's self-interest is at stake.’ (Citing 431 U.S. at p. 26
(52 L.Ed.2d at p. 112).]” (459 U.S. at pp. 411-413 and fn.
14 [74 L.Ed.2d at pp. 580-581], italies added, some fns.
omitted.)

In other words, “[{a] governmental entity can always
find a use for extra money, especially when taxes do not
have to be raised. 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.”
(United States Trust Co. v. New Jersey, supra, 431 U.S. at
p. 26 [52 L.Ed.2d at p. 112].) Therefore, the existence of
an important public purpose is not necessarily enough in
itself to justify a substantial contractual impairment.
(Id., at p. 21 [52 L.Ed.2d at p. 109].) It is settled that
governmental entities are bound by their debt obligations.
(/d., at p. 24 [52 L.Ed.2d at p. 111].} Thus, “a State
eannot 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 ereditors. [A court] can only sustain [an impairment]
if that impairment [is] both reasonable and necessary to
serve the...important purposes claimed by the State.”
(Id., at p. 29 [52 L.Ed.2d at p. 114]; Sonoma County
Organization of Public Employees v. County of Sonoma
(1979) 23 Cal.3d 296, 307-308 [152 Cal.Rptr. 903, 591
P.2d 1].)

A determination of necessity requires an evaluation of
whether a less drastic modification of the contractual
obligation or other steps which entailed no modification
would have permitted the governmental entity to meet its
goals, for “a State is not completely free to consider

17a

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.” (United States Trust Co. v. New Jersey, supra, 431
U.S. at pp. 30-31 [52 L.Ed.2d at p. 115].) In addition, a
change of circumstances will not justify a substantial
impairment unless it was unforeseen and unforeseeable.
(/d., at pp. 31-32 [52 L.Ed.2d at pp. 115-116]; Sonoma
County Organization of Public Employees v. County of
Sonoma, supra, 23 Cal.3d at p. 308.)

Where a change in law works “a ‘severe, permanent and
immediate change’ in contractual rights, an assessment
of constitutionality requires “‘a careful examination of
... [its] nature and purpose.’” (/d., at p. 309, quoting
from Allied Structural Steel Co. v. Spannaus, supra, 438
U.S. at pp. 245, 250 [57 L.Ed.2d at pp. 737, 740].) In
these circumstances, the impairment requires a ‘“compel-
ling state interest,” as well as necessity. (See, e.g., 438
U.S. at pp. 242, 247 [57 L.Ed.2d at pp. 735, 738].) Only
the minimal impairment necessary to attain the govern-
mental entity’s preposed legitimate end may be visited
upon parties to contracts. However, this concept “has no
proper application as a vague license for the state to
impair its obligation so long as it is only ‘a little bit.”
(California Teachers Assn. v. Cory (1984) 155 Cal. App.3d
494, 511 [202 Cal. Rptr. 611].)

Defendants contend the trial court erroneously relied
on the five factors identified in Home Bldg. & Loan Assn.
v. Blaisdell, supra, 290 U.S. 398, instead of assessing
whether charter amendment H is reasonable and neces-
sary to serve legitimate and iinportant public purposes
identified by defendants (United States Trust Co. v. New
Jersey, supra, 431 U.S. at p. 29 [52 L.Ed.2d at p. 114]). In

18a

particular, they point to the court’s finding that defend-
ants had not met their burden of proving the enactment of
charter amendment H was justified by an emergency or
serious fiscal erisis. What defendants overlook is that
they in large part relied on the existence of such an
emergency or fiseal crisis.

Defendants argued the charter amendment was reason-
able and necessary to effect the following public purposes:
(1) preserve the city’s financial soundness by reducing
publie spending on pension costs, (2) enhance the ability
to predict and plan for long-range city budgeting and
finaneing, (3) enable the city to continue providing essen-
tial publie services, (4) preserve the soundness and integ-
rity of the pension system itself and (5) respond to the
declining morale of noneovered public employees. Pur-
poses (1), (3) and (4) clearly portend the imminence of
an emergency or serious fiscal crisis in this particular
context.

Defendants took the position that unexpected and un-
foreseen increases in the rate of inflation had caused
pension costs to escalate sharply, exceeding salary in-
creases, the enactment of Proposition 13 destroyed the
traditional funding mechanism for the pension systems
and these factors combined to create a budgetary crisis in
an era of increasingly searce sources of publie revenue.
The trial court first noted the established principle that a
desire to reduce costs or limit public spending does not
justify the abrogation or impairment of a public entity’s
contractual obligations notwithstanding the legitimacy of
such a publie purpose. (Lynch v. United States (1934) 292
U.S. 571, 580 [78 L.Ed. 1434, 1441, 54 S.Ct. 840], cited
with approval in United States Trust Co. v. New Jersey,
supra, 431 U.S. at p. 26, fn. 25 [52 L.Ed.2d at p. 112];
Abbott v. City of Los Angeles (1958) 50 Cal.2d 438, 455

19a

[326 P.2d 484]; Larionoff v. United States (D.C. Cir. 1976)
533 F.2d 1167, 1179-1180; see also Continental Ill. Nat.
Bank, Etc. v. State of Wash. (9th Cir. 1983) 696 F.2d 692,
702, appeal dism. (1983) 460 U.S. 1077 [76 L.Ed.2d 338,
103 S.Ct. 1762].) Thereafter, the court examined the
evidentiary underpinnings of defendants’ stance.

The court noted the evidence established that the
growth of the pension systems’ unfunded liabilities to
$3.37 billion occurred primarily because defendants took
a number of actions which failed to conform to sound
actuarial practice in the area of pension funding. Specifi-
eally, the article XVII pension system had been funded on
a “pay-as-you-go” basis from 1923 until 1959. Conse-
quently, when the article XVIII pension system was
created in 1967, it had unfunded liabilities of $258 million
from the outset. In addition, the initial amortization
period of 50 years during which to retire unfunded liabili-
ties, which was adopted in 1959, was changed to a period
of 70 years in 1967, thereby decreasing the stability of the
pension systems.

For many years, the pension board failed to assume
realistic projections of annual increases in the Consumer
Price Index and failed to consider at all the impact of
active pension system members’ annual salary increases.
Further, when the pension board began in 1976 to factor
projected salary increases into its actuarial funding eval-
uations, it failed to make realistic assumptions concern-
ing such increases. Finally, in 1976, defendants decided
to change the city’s contributions to the pension systems
from a level dollar amount to a payroll percentage; this
led to a short-term reduction in the size of the contribu-
tions to the pension system, but in the long run increased
the required level of contribution.

20a

Based on the evidence, the trial court thus coneluded
any instability or loss of integrity and soundness in the
pension systems resulted principally from the foregoing
acts and omissions, not from full cost of living adjust-
ments indexed to the Consumer Price Index. Since the
latter did not cause the problem, the trial court reasona-
bly inferred capping the cost of living adjustment at 3
percent could not sensibly be viewed as a cure for the
problem, in that a publie entity cannot justify the impair-
ment of its contractual obligations on the basis of the
existence of a fiscal crisis created by its own voluntary
conduct. (See Sonoma County Orgamization of Public Em-
ployees v. County of Sonoma, supra, 23 Cal.3d at p. 313.)
This conelusion was buttressed by evidence which indi-
eated funding a full cost of living adjustment would
require $43 million in additional annual funding, which
amounted to less than 1 percent of the city’s total budget
and less than 2 percent of the city’s general budget.

Moreover, the trial court correctly recognized that
charter amendment H bears no material relation to the
theory of a pension system and its successful operation.
Basically, the theory of a pension system is affording
retirees with a reasonable degree of economic security
(Hittle v. Santa Barbara County Employees Retirement
Assn., supra, 39 Cal.3d at p. 390) and the sole legitimate
purpose of a cost of living adjustment is the preservation
of a retiree’s standard of living (Allen v. Board of Admin-
istration, supra, 34 Cal.3d at p. 122). Charter amendment
H has no tendeney to effectuate these aims; rather, it
lessens a retiree’s economic security, impairing rather
than preserving his or her standard of living. Neither
does it have any particular relation to the successful
operation of the pension systems. While it reduces the
benefits which must be paid, it in no manner enhances the
integrity or soundness of the funds, for it does not require

— —

2la

the maintenance of the same or a similar level of funding.
Indeed, after the enactment of charter amendment H,
defendants contributed to the pension systems no portion
of the additional $43 million which otherwise would be
required annually to fully fund a Consumer Price Index-
related cost of living adjustment; instead, they either
spent this sum on other items or added it to the city’s
general reserve fund. The amendment’s lack of any mate-
rial relation to the theory of a pension system or its
successful operation clearly supports the conclusion it
was neither reasonable nor necessary to the maintenance
of the integrity and soundness of the pension systems.

The trial court also noted that the chief administrative
officer had recommended against uncapping the cost of
living adjustment in 1971, pointing out the risk of intro-
ducing budgeting unpredictability due to the fluctuating,
eyclical nature of inflation. City officials acknowledged
this and admitted they chose to assume the risk. Hence,
the evidence clearly establishes the escalating cost of
living adjustments caused by the ensuing rises in the rate
of inflation was not an unforeseen and unforeseeable
change in circumstances. Inasmuch as it was not unfore-
seen and the change in circumstances was “of degree and
not kind,” the enactment of charter amendment H was
not justified on this ground as a reasonable response to
the problem. (United States Trust Co. v. New Jersey, supra,
431 U.S. at p. 31 [52 L.Ed.2d at p. 115]; Sonoma County
Organization of Public Employees v. County of Sonoma,
supra, 23 Cal.3d at p. 308; Continental Ill. Nat. Bank, Ete.
v. State of Wash., supra, 696 F.2d at p. 702.)

As to the passage of Proposition 13, contrary to defend-
ants’ stance, this did not impair their ability to assess an
ad valorem property tax to meet the funding requirements
of the pension funds. (Carman v. Alvord, supra, 31 Cal.3d

22a

at pp. 332, 333-334.) This was a settled question of law in
1981, prior to the placement of charter amendment H on
the ballot. Moreover, as the trial court noted, the passage
of Proposition 13 was itself state action and thus could
not constitutionally disable defendants from paying the
city’s legitimate legal obligations by depriving them of the
taxing power necessary to raise the required funds. (Lowi-
siana ex rel. Hubert v. New Orleans (1909) 215 U.S. 170,
175-176 [54 L.Ed. 144, 147-148, 30 S.Ct. 40]; see also
United States Trust Co. v. New Orleans, supra, 431 U.S. at
p. 24, fn. 22 [52 L.Ed.2d at p. 111].) Hence, however
unforeseen and unforeseeable it might have been, the
passage of Proposition 13 cannot reasonably be viewed as
creating a fiscal crisis which justified the impairment of
the city’s contractual obligations.”

At this point, it is clear the trial court was eminently
justified in econeluding defendants had failed to carry
their burden of proving the existence of a genuine emer-
gency or severe fiscal crisis of a sort which reasonably and
necessarily would be ameliorated by the enactment of
charter amendment H. Defendants’ proffered “important
publie purposes” thus are reduced to three: their desire to
(1) spend city revenues on other things they deemed
more important, (2) enhance the ability to predict and
plan for long-range city budgeting and financing and (3)
respond to the declining morale of noncovered city em-
ployees. The first never justifies the impairment of a
publie entity’s contractual obligations (United States

*Defendants argue Revenue and Taxation Code sections 97.2 and
97.6 (enacted by Stats. 1983, ch. 491, $$ 1, 3) cut off this avenue of
financing. This is not at all clear (see Rev. & Tax. Code, § 97.65) and,
in any event, were it the case these code sections would be subject to
the same constitutional objection as is article XIIIA of the California
Constitution (Proposition 13) itself.

23a

Trust Co. v. New Jersey, supra, 431 U.S. at p. 26 [52
L.Ed.2d at p. 112]) and neither does the third (Allen v.
City of Long Beach, supra, 45 Cal.2d at p. 133). This
leaves only the second proffered purpose.

Unquestionably, enhancing the ability to predict and
plan for long-range city budgeting and financing is an
important public purpose. However, as the trial court
recognized, when the city’s own contractual obligation is
at issue and the impairment is severe, it is not enough
that city officials reached the conclusion the enactment of
charter amendment H was reasonable and necessary to
achieve that purpose; this judgment must be subjected to
careful scrutiny. (Energy Reserves Group v. Kansas Power
& Light, supra, 459 U.S. at pp. 411, 412-413, fn. 14 [74
L.Ed.2d at pp. 580-581]; Allied Structural Steel Co. v.
Spannaus, supra, 438 U.S. at p. 245 [57 L.Ed.2d at
p. 737]; Sonoma County Organization of Public Employees
v. County of Sonoma, supra, 23 Cal.3d at p. 309.)°

Where an enactment appears to be somewhat narrowly
tailored to modify a particular contractual obligation,
rather than to be part of a broad publie program which
incidentally has the effect of impairing the particular
contract, it fails the test. (See, e.g., Continental Ill. Nat.
Bank, Etc. v. State of Wash., supra, 696 F.2d at p. 702.)
This is the ease here, particularly since the passage of
Proposition 13 did not in fact impair defendants’ ability
to levy a separate ad valorem property tax specifically to
meet the pension system funding requirements. Further,
in adopting cost-cutting measures to further an important
publie purpose, there must be some indication the publie
entity has given considered thought to the severity of the

"This disposes of defendants’ claim that the trial court failed to
give appropriate deference to defendants’ conclusions.

24a

effect an enactment might have on the particular contrac-
tual scheme at issue and to the possibility of alternative,
less drastic, means of accomplishing the public goal.
(Valdes v. Cory (1983) 139 Cal.App.3d 773, 791 [189
Cal.Rptr. 212]; see also United States Trust Co v. New
Jersey, supra, 431 U.S. at p. 30 [52 L.Ed.2d at pp. 114-
115].) Here, there is no such indication.

Notwithstanding the foregoing, defendants rely heavily
on Md. State Teachers Ass’n. v. Hughes (D.Md. 1984) 594
F.Supp. 1353, which they view as squarely on point with
the instant matter. Of course, even if that view were
correct, a decision of a federal district court has no
precedential value in this court; at best, it is persuasive
authority only. (Rohr Aircraft Corp. v. County of San
Diego (1959) 51 Cal.2d 759, 764 [336 P.2d 521]; Debtor
Reorgamizers, Inc. v. State Bd. of Equalization (1976) 58
Cal.App.3d 691, 696 [130 Cal.Rptr. 64].)

More importantly, Md. State Teachers Ass’n. clearly is
distinguishable from this ease. The original Maryland
retirement system provided full postretirement cost of
living adjustments and other defined benefits in exchange
for required contributions of 5 percent of salary. In 1979,
Maryland created a two-tiered retirement system. An
employee could elect to transfer to a new pension system,
which capped cost of living adjustments at 3 percent; if
the employee did so, he or she would not be required to
make any contributions from salary except to the extent
the salary exceeded the Social Security wage base. An
employee who elected to remain in the present pension
system retained fully indexed cost of living adjustments
and eontinued to make contributions of 5 percent of
salary. In 1984, Maryland offered four retirement benefit
options: (1) transfer to the pension system created in
1979 with a partial refund of the employee’s contribu-

25a

tions; (2) a bifurcation under which an employee retained
~ fully indexed cost of living adjustments to the effective
date of the legislation and thereafter accrued benefits
with a 3 percent cost of living adjustment cap, in which
event future contributions would be required only from
salary which exceeded the Social Security wage base;
(3) the retention of past and future credits in the retire-
ment system, all subject to a 5 percent cost of living
adjustment cap and to contributions of 5 percent of salary
or (4) the retention of a fully indexed cost of living
adjustment with an increase in required salary contribu-
tions from 5 to 7 percent. (594 F.Supp. at pp. 1357-1358.)

Under Maryland law, future pension benefits vest as
they are proratedly earned. (Id., at pp. 1362-1363; City of
Frederick v. Quinn (1977) 35 Md.App. 626 [371 A.2d 724,
726].) This is contrary to California law. (Miller v. State
of California, supra, 18 Cal.3d at p. 817; accord, Carman v.
Alvord, supra, 31 Cal.3d at p. 325.) Moreover, in Mary-
land, a governmental entity may modify benefits not only
if there is an offsetting new benefit or liberalized qualify-
ing condition, as in California, but also if the modification
is justified by countervailing public welfare equities. (Vd.
State Teachers Ass’n. v. Hughes, supra, 594 F.Supp. at p.
1362; City of Frederick v. Quinn, supra, 371 A.2d at p.
726.) Based on the foregoing, the district court con-
eludes, “the challenged legislation does not operate to
deny vested or merely earned pension rights retroac-
tively.” (Md. State Teachers Ass’n., supra, at p. 1363,
italies original.) Again, this is contrary to California law.
(Pasadena Police Officers Assn. v. City of Pasadena, supra,
147 Cal.App.3d at pp. 701-702.)

Given this analysis, it is apparent the district court's
subsequent conelusions that, if any vested contractual
rights were impaired, there was no need to apply height-

26a

ened serutiny to the state’s asserted justification and the
modifications were reasonable and necessary to accom-
plish important public purposes (Md. State Teachers
Ass’n., supra, 594 F.Supp. at pp. 1370-1372) are at most
dicta. Moreover, the former conclusion clearly is errone-
ous (see Allied Structural Steel Co. v. Spannaus, supra,
438 U.S. at p. 245 [57 L.Ed.2d at p. 737]) and, in view of
that error, the latter dictum has little persuasive force.

In sum, we conclude tie trial court applied the correct
legal standards and reasonably found defendants failed
to justify the impairment of plaintiffs’ contractual rights.
Accordingly, there is no error requiring reversal.

Defendants make similar arguments concerning the
proration provision of charter amendment H. Prior to the
enactment of charter amendment H, the pension board
met each year and determined the percentage by which
the Consumer Price Index had increased during the 12
months preceeding March 1, then adjusted the pensions of
retired members by this percentage, effective July 1, the
beginning of the next fiseal year. The proration provision
of charter amendment H ended this practice. Instead, the
eost of living adjustment would be prorated according to
the number of months since January 1 of each year an
employee retiring in that calendar year had been retired.

Defendants argue this provision of charter amendment
H did nothing but deprive retiring employees of a wind-
fall. As they perceive matters, the mechanics of the
former system produced an obvious abuse: An employee
could retire on June 1, collect a pension for one month at
the existing rate, and then collect a cost of living adjusted
pension effective July 1 even though the employee had not
retired prior to the March 1 evaluation date. Defendants’
mispereeption is based upon an erroneous analysis of the
city’s fiseal operation.

27a

The city’s budget covers a fiscal year extending from
July 1 to June 30; thus, any cost of living adjustments to
pensions necessarily must become operative at the begin-
ning of each budgetary period, i.e; each fiscal year. Such
an increase is intended to compensate for the decrease in
purchasing power which has occurred during the preced-
ing fiseal year. However, it takes time to collect, absorb
and process data concerning the rate of inflation. This
results in a time lag of approximately four months. Were
the pension board to wait until data to June 1 was
available, there would be insufficient time to inelude
adjustments in the budget to become effective on July 1.
This, however, results in no windfall to retirees.

An employee retiring at any point in any particular
fiseal year receives pension benefits entirely unadjusted
for the ereeping effects of inflation during that fiscal year.
It is only during the second fiscal year of retirement that
an employee receives an adjustment for the diminution in
purchasing power that occurred in the preceding year.
Rather than receiving a windfall, such an employee then
receives less than a full adjustment for the preceding
fiseal year’s diminution in the purchasing power of the
pension. Since the proration provision of charter amend-
ment H elearly does not serve to eliminate a “windfall,” it
is no less constitutionally defective than the remainder of
the charter amendment.

The judgment is affirmed.

Devich, J., and Ortega, J., coneurred.

es

! ie

APPENDIX B

28a

CERTIFIED FOR PUBLICATION
BO027960 (Super. Ct. Nos. C413752, C418547)

IN THE COURT OF APPEAL
OF THE
STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT
DIVISION ONE

UNITED FIREFIGHTERS OF LOS ANGELES CITY, ete.,
Los ANGELES POLICE PROTECTIVE LEAGUE et al.,

Plaintiffs and Respondents,
v.
City oF Los ANGELES, BOARD OF PENSION
COMMISSIONERS OF THE CITY OF LOS ANGELES,

Defendants and Appellants.

ORDER MODIFYING OPINION AND CERTIFYING
OPINION FOR PUBLICATION UPON DENIAL
OF PETITION FOR REHEARING

THE COURT:

The opinion filed in the above-captioned matter on
April 26, 1989 is modified as follows:

On page 32, following line 7 and preceding line 9, insert
the following:

“Defendants make similar arguments concerning the
proration provisions of charter amendment H. Prior to
the enactment of charter amendment H, the pension
board met each year and determined the percentage by
which the Consumer Price Index had inereased during
the 12 months preceding March 1, then adjusted the

29a

pensions of retired members by this percentage, effective
July 1, the beginning of the next fiscal year. The proration
provision of charter amendment H ended this practice.
Instead, the cost of living adjustment would be prorated
according to the number of months since January 1 of
each year an employee retiring in that calendar year had
been retired.

“Defendants argue this provision of charter amend-
ment H did nothing but deprive retiring employees of a
windfall. As they perceive matters, the mechanics of the
former system produced an obvious abuse: An employee
could retire on June 1, collect a pension for one month at
the existing rate, and then collect a cost of living adjusted
pension effective July 1 even though the employee had not
retired prior to the March 1 evaluation date. Defendants’
misperception is based upon an erroneous analysis of the
city’s fiseal operation.

“The city’s budget covers a fiscal year extending from
July 1 to June 30; thus, any cost of living adjustments to
pensions necessarily must become operative at the begin-
ning of each budgetary period, i.e., each fiseal year. Such
an inerease is intended to compensate for the decrease in
purchasing power which has occurred during the preced-
ing fiseal year. However, it takes time to collect, absorb
and process data concerning the rate of inflation. This
results in a time lag of approximately four months. Were
the pension board to wait until data to June 1 was
available, there would be insufficient time to include
adjustments in the budget to become effective on July 1.
This, however, results in no windfall to retirees.

“An employee retiring at any point in any particular
fiseal year receives pension benefits entirely unadjusted
for the creeping effects of inflation during that fiscal year.
It is only during the second fiseal year of retirement that

30a

an employee receives an adjustment for the diminution in
purchasing power that occurred in the preceding year.
Rather than receiving a windfall, such an employee then
receives less than a full adjustment for the preceding
fiseal year’s diminution in the purchasing power of the
pension. Since the proration provision of charter amend-
ment H clearly does not serve to eliminate a ‘windfall,’ it
is no less constitutionally defective than the remainder of
the charter amendment.”

Good cause appearing therefor, the opinion filed in the
above-captioned matter on April 26, 1989, as modified on
this date, is certified for publication.

The petition for rehearing filed herein on May 11, 1989,
is denied.

a %

S —_

on ess ee ee

av

3la

ORDER DENYING REVIEW
AFTER JUDGMENT BY THE COURT OF APPEAL

Second Appellate District, Division One, No. B027960
$010518

IN THE SUPREME COURT OF THE
STATE OF CALIFORNIA

IN BANK

UNITED FIREFIGHTERS OF LOS ANGELES
City, Etc. Et Al.,

Respondents,
Vv.

City oF Los ANGELES Et ALl.,
Appellants.

Appellants’ petition for review DENIED.

LUCAS

Chief Justice

er nen Tala

a
:

APPENDIX D

Pay

32a

SUPERIOR COURT OF
THE STATE OF CALIFORNIA
FOR THE COUNTY OF LOS ANGELES

UNITED FIREFIGHTERS OF LOS ANGELES CITY,
Plaintvff,

Vs.

City oF Los ANGELES; BOARD OF PENSION
COMMISSIONERS OF THE CITy OF LOS ANGELES,

Defendants.

Los ANGELES POLICE PROTECTIVE LEAGUE, et al.,
Plaintiffs,

VS.

City oF Los ANGELES; BOARD OF PENSION
COMMISSIONERS OF THE CITY OF LOS ANGELES,

Defendants.

Case No. C 413 751 Consolidated with
Case No. C 418 547

STATEMENT OF DECISION

i I.
FACTUAL BACKGROUND

Plaintiff, United Firefighters of Los Angeles City
(“UFLAC”), a certified representative of firefighters
(C 413 752); and plaintiff Los Angeles Police Protective
League, a public employee organization (Govt. Code |
§ 3501(b)) representing uniformed personnel of the Los —
Angeles Police Department, and plaintiffs, five individual
police offieers (C 418 547), in these actions consolidated
for trial seek declaratory relief [Firefighters fourth cause

33a

of action and Police first cause of action] with respect to
the validity of City Charter sections 184.96 and 190,143,
enacted by Charter Amendment H effective July 1, 1982.
All other causes of action were dismissed prior to trial.

The Charter sections in question (“Amendment H’’)
impose a three percent limitation (“3% Cap.”) on the
annual cost of living adjustments (“COLA”) of the pen-
sion benefits of members of Article XVII and Article
XVIII pension systems who were in active service after
July 1, 1982.

Prior to Amendment H, pensions of those members
were subject to annual cost of living adjustment accord-
ing to the Consumer Price Index, without “Cap” or
limitation.

Under the terms of Amendment H, the 3% Cap would
apply only to that portion of the pension attributable to a
pro rata share of the pension benefits earned by years of
active service after July 1, 1982 (as compared with the
years of service before July 1, 1982). The 3% Cap would
not affect the pensions of those members who retired
before July 1, 1982 with 25 years of service, and who
would continue to receive an annual cost of living increase
measured by the Consumer Price Index without any
limitation.

Before the passage of Amendment H, members who
retired with 25 years or more of service received a full
eost of living adjustment on July Ist following their
retirement regardless of when they retired during the
preceding year. Amendment H Subsection (A)(3) of
sections 184.96 and 190.143 (hereinafter referred to as
the “Proration” section) modified this by providing that
such a retired member's cost of living adjustment on the
first July 1 after “retirement” would be ‘/jeth the annual

34a

eost of living adjustment multiplied by the number of
months since retirement.

The Article XVII and Article XVIII Pension Systems
were closed and a new Pension System Article XXXV
was established by City Charter Amendment, enacted by
the voters as Proposition G in 1980. Any new employee
employed on December 1, 1980 or thereafter would be a
member of the new Article XXXV Pension System with a
capped 3% Annual Cost of Living Adjustment on the
pension benefits. The parties agree that this change cap-
ping the COLA for new employees entering the force on
or after December 1, 1980 was legally permissible. The
validity of this change is not challenged.

A brief chronology of benefits of the Article XVII and
XVIII pension systems is necessary background. (See
Stipulated Facts attached at end of Vol. I Rptr. Tr.)

In 1967, Proposition P established the Article XVIII
Pension System with the first Consumer Price Index
(“CPI”) cost of living allowance up to 2%. Proposition P
increased the maximum service pension to 70% after 30
years of service, provided that employee members would
contribute an additional 1% of their salary over the
regular contribution of 6% of salary and permitted the
members of the prior Article XVII pension system to
transfer to the new Article XVIII system. This transfer
created a substantial unfunded liability of $258 million
for the new Article XVIII system at its inception. (City
Charter Section 190.09) The amortization period for pay-
ment of unfunded liabilities was extended from 50 years
to 70 years.

In 1971 Charter Amendment 2 was approved by the
voters effective July 1, 1971 which provided for an unlim-

35a

ited Cost-of-Living Allowance for all pensions (uncapped
COLA).

In 1975 Charter Amendment 9 provided for the uncap-
ped COLA for service-connected disability pensions.

In 1980, Proposition G was approved by the voters
creating Article XXXV system for all new employees
hired on or after December 1, 1980 and for capping the
COLA at 3%. Thus after December 1, 1980, no new
members came into the Article XVII and XVIII pension
systems.

On June 8, 1982, Proposition H was approved by the
voters. It capped the COLA at 3% for pension benefits
earned after June 8, 1982 by future service, for Article
XVII and XVIII members, and prorated the COLA ad-
justments for the first year of retirement. It had no effect
on those already retired. Further, it provided for City
Council diseretion to grant COLA increases up to % of
the excess CPI above 3%. Proposition H also provided for
a refund of employee contributions to the pension system
with 6% interest for an employee who terminated employ-
ment without retiring.

As of July 1, 1982, the effective date of Amendment H, —

there were 8,571 active members (firefighters and police)
of the Article XVII and XVIII systems. Of these 5,309
(62 percent) had joined the system before the uncapped
COLA was first provided in July of 1971; 2,748 (32
percent) had joined before 1967 when no cost of living
benefit was allowed; and 2,566 (30 percent) joined be-
tween 1967 and 1971, when a cost of living adjustment
eapped at 2% was in place.

In general, the funding for these systems is provided by
employee contributions, plus earnings thereon, and con-

| .

36a

tributions by the City from taxes levied and monies
appropriated thereto by the City Council and Controller.

The City Charter sets out procedures for the Pension
Board’s Consulting Actuary using actuarial economic
assumptions (e. g., future cost of living increases, salary
inereases and interest rates or yield on investment) and
noneconomic assumptions (e. g., life expectancies of mem-
bers and spouses and probability of retirement) to caleu-
late and recommend to the Pension Board the annual City
contributions necessary to pay all of the projected liabili-
ties of each pension system over its entire life.

Before “Proposition 13” (Article XIII A of the Califor-
nia Constitution) was enacted by the voters of the State
of California in 1978, the City Council simply voted a real
property tax override for the amount of the City contribu-
tion recommended by the Actuary to the Pension Board.
City Charter Sections 186.2 and 190.9 provide that the
City Council or Controller annually shall levy a tax [no
particular kind of tax is specified] in an amount sufficient
to satisfy the City’s contribution to the Pension Systems.
{Emphasis added.] Since Proposition 13 became effec-
tive, the Council has net enacted any real property tax
overrides.

Before 1959, contributions by the City to the Article
XVII pension system were made on a “pay-as-you-go
basis”. The City contributed only that amount needed
over and above employee contributions to pay the benefits
actually paid and current system expenses in a given
year. In 1959, this was changed to an “actuarially funded
basis.” The Actuary calculated the amount of annual
contributions that would be needed if the liabilities were
to be paid over a 50-year amortization period by the
~ accumulation and investment of such contributions. In
1967, the 50-year amortization period was lengthened to

37a

70 years as a result of Proposition P creating the Article
XVIII system and granting a cost of living adjustment.

The unfunded liability is the difference between the
present value of what each pension system is scheduled to
pay to present and future beneficiaries and the present
value of what the pension system expects to receive from
City employer normal cost contributions, employee pay-
roll contributions, and return on system assets through
the life of the system.

In 1976, for the first time, the Actuaries recommended
and the Pension Board adopted a new economic assump-
tion, namely that salaries of active members would in-
crease by a certain percentage each year. This long term
salary increase assumption would have required an in-
crease of over $30 million in the City’s 1977-78 contribu-
tion to the system. This in turn led the Pension Board to
establish an amortization schedule based on annual con-
tribution by the City of a constant percentage of payroll
throughout the 70 year funding period, rather than an
annual fixed dollar amount contribution to the Article
XVIII system.

This change resulted in the short term, of much lower
contributions by the City but toward the end of the
funding period (the year 2036-37) payments will be much
greater than under the old fixed dollar amount funding
plan, leaving much of the debt to future generations. (See
Exh. 44 for yearly projections of annual City contribu-
tions to pay for the unfunded liability projected to 2037,
and comparison between the amounts required when the
eost of living is uncapped and when the cost of living is
eapped at 3%, expressed in millions of dollars and per-
centage of total payroll salary.)

38a

In 1976-77, the year of the funding change, the City’s
contribution to all three of the pension systems (Article
XVII, XVIII and Article XXXV) was $112,730,821, and
by 1984-85 the actual City contribution was $220,099,118.

From Exhibit 44 we see that, assuming Amendment H
is valid and all pensions are capped for cost of living
adjustments at 3%, that the normal cost for 1986-87 City
contributions is $102 million and payment on unfunded
liability is an additional $162 million and that it continues
to rise to the year 2036-37 to approximately $1.3 billion
for the normal cost and $1.8 billion payment on the
unfunded liability. If there is no Cost of Living Cap (i.e.,
If Amendment H were invalid), the City’s contributions,
both for the normal cost and the unfunded liability, would
be increased as reflected in Exhibit 44 and Exh. 44A.

Plaintiffs and defendant agree that $43 million per year
additional contribution to the unfunded liability would be
required if the COLA is not capped. For 1986-87, this
figure represents less than 1% of the City’s total budget
and less than 2% of the City’s general budget (over $2.3
billion) (Rptr. Tr. pp. 686-689).

In 1982, the total City Budget was $1,414,588,025 and
the total City contribution to the pension systems was
$233,545,649 or 16.5% of the budget.

The Actuarial economic assumptions adopted by the
pension systems for the projections for City contributions
to the year 2037 are; that inflation will rise at a rate of
5.5% per year; that salary increases for employed active
members will rise at a rate of 6.5% per year; and that the
yield on investments will be 8.5% (a projected City
Budget for the year 2037 based on these actuarial as-
sumptions was not presented by the evidence).

39a

The stipulated facts (Rptr. Tr. Vol I, at pp. 26, 29, 48;
Stipulation of Facts attached to Rptr. Tr. and end of Vol.
I) demonstrate that for the years 1982 through 1986 the
actual salary increases to members were 5.0%, 8.5%, 6.5%,
5.0%, and 5.0% respectively, whereas the actual cost of
living per the CPI increase rose 9.1%, 0.5%, 4.7%, 4.6%,
and 4.0%.

Assuming no capped COLA, the salary increases for
active members would have been greater than cost of
living increases for retired members, and except for the
year 1982, in each successive year through 1986, the CPI
rose less than the 5.5% assumed by the Actuaries.

Il.
ISSUES AND CONTENTIONS

Plaintiffs contend that Amendment H capping the Cost
of Living Adjustment to 3% and prorating those adjust-
ments for the first year of retirement constitute a consti-
tutionally impermissible impairment of vested contract
rights by the City under both the State Constitution
Article I § 9 and U.S. Constitution Article I § 10 Cl. 1 as
to those members of the Article XVII and XVIII Pension
Systems employed before July 1, 1982 and still active
after July 1, 1982.

Defendants contend (generally) first, that Charter
Amendment H does not impair vested contract rights
because it operates prospectively and only imposes the 3%
eap on COLA for pension benefits earned in the future
after its effective date, i.e., the right to earn pension
benefits in the future is not a vested right.

Secondly, that if Amendment H does impair vested
eontract rights it is not a substantial impairment. The
terms of. public employment have always been regulated

40a

and there is no vested right to public employment. Defen-
dant contends that the Amendment only restricts mem-
bers to gains they reasonably expected. Some of the
members joined the force before the COLA was uncapped.
In 1971 when the 2% COLA limitation was uncapped,
California case law (under Houghton v. City of Long Beach
(1958) 164 Cal.App.2d 298) permitted unearned pension
benefits to be unilaterally reduced, and hence changes
reducing pension benefits were within the reasonable
expectations of the parties and were impliedly incorpo-
rated in any pension “contract”.

And finally, if Amendment H does constitute a substan-
tial impairment of vested contract rights, it is constitu-
tionally permissible as an exception under the inherent
“police power” of the state. It was a reasonable and
necessary response to a perceived fiscal crisis created by
increasing and unpredictable pension costs and restricted _
means of raising revenues (in the wake of Proposition
13). Uneapped COLA benefits could be funded in future
years only by reducing city services essential to the
health, safety and welfare of city residents. It was also a
necessary step to ensure the economic viability of the
pension systems and to enable the City to continue to
fund the pension systems.

The basic issues for decision by the Court are whether:

1. City Charter Amendment H constitutes “gov-
ernmental” action which substantially impairs vested
contract rights in violation of the contract clauses of
the California and United States Constitutions.

2. If so, whether Amendment H constitutes gov-
ernmental action which was reasonable and neces-
sary to accomplish an important legitimate public
purpose (a legally permissible exception to impair-

4la

ment of vested contractual rights under the inherent
“nolice” powers of the municipality).

Ill.
DISCUSSION:

A. AMENDMENT H SUBSTANTIALLY IMPAIRS
VESTED CONTRACT RIGHTS OF PLAINTIFFS.

The United States Constitution provides: “No state
shall... pass any... law impairing the obligation of con-
tracts....” (Art. I, § 10, Cl. 1.)

The California Constitution contains the same prohibi-
tion: “A... law impairing the obligation of contracts may
not be passed.” (Art. I, § 9.)

The contract clauses of both state and federal contitu-
tions have been the subject of judicial interpretation in
numerous eases, but with respect to the precise issue and
facts of the ease before this court, Pasadena Police Officers
v. City of Pasadena (1983) 147 Cal.App.3d 695 is directly
in point and controlling on this aspect of the case.

By Charter Amendment, in June 1981, following an
unfavorable fiscal experience, the City of Pasadena at-
tempted, just as the City of Los Angeles did a year later,
to limit the COLA to 2% on that portion of the pension
earned after its effective date. Previously, since 1969,
there had been no cap on the COLA and cost of living
increases were granted in conformance with the CPI.
Declaratory relief was granted in favor of the fire and
police members of the retirement system. The Amend-
ment was dec.ared invalid as violative of vested contract
rights. As to active members of the retirement system, the
Court in the Pasadena ease held (p. 701):

42a

“It has long been the rule in California that a
public employee pension constitutes an element of
compensation and that the right to pension benefits
vests upon the acceptance of employment even
though the right to immediate payment of a full
pension may not mature until certain conditions are
satisfied. (Miller v. State of California (1977) 18
Cal.3d 808, 815; Betts v. Board of Administration
(1978) 21 Cal.3d 859, 863; Kern vs. City of Long
Beach (1947) 29 Cal.2d 848, 855; Dryden v. Board of
Pension Commissioners (1936) 6 Cal.2d 575, 579.)
Such a pension right may not be destroyed, once
vested, without impairing a contractual obligation of
the employing publie entity. (Betts v. Board of Ad-
ministration, supra, 21 Cal.3d 859.) Very recently the
Supreme Court has summarized this rule as follows:
“By entering public service an employee obtains a
vested contractual right to earn a pension on terms
substantially equivalent to those then offered by the
employer. [Citations.] On the employees’ retirement
after he has fulfilled pension conditions an immedi-
ate obligation arises to pay benefits earned. (Carman
v. Alvord (1982) 31 Cal.3d 318, 325).”

The Court in the Pasadena case (p. 702) specifically
rejected that City’s contention, similarly urged by defen-
dant City of Los Angeles in the present case, that as to
active members the COLA cap provisions were prospec-
tive only because the right to an unlimited COLA was
preserved on that portion of the pension which had al-
ready been earned by years of service prior to July 13,
1981. The Court stated that the Amendment eapping the
COLA was obviously disadvantageous to employees and
limited the protection which had previously been offered
by a pension fully adjustable to changes in the cost of
living.

43a

In 1978, the California Supreme Court had made it very
clear that the right to earn pension benefits conferred by
the public employer during the course of employment, as
well as those benefits in effect when the employment
commenced, constituted the measure of expectations of
the employee in accepting as well as continuing employ-
ment. The right to earn those benefits is vested when
conferred. Betts v. Board of Administration (1978) 21
Cal.3d 895, 866.

The very purpose of the Cost of Living Adjustment is to
maintain the purchasing power of the pension against
inflation. The actuarial assumption adopted by the City
and the Pension System is that the cost of living will rise
at a rate of 5.5% per year and that active employees will
receive a 6.5% per year salary increase. On that assump-
tion, if the pensioner retires at a fixed percentage of his
highest salary while active, and is limited to a 3% COLA
Cap, the purchasing power of his pension is declining at
2.5% per year.

One of the primary objectives in providing pensions for
government employees is to induce competent persons to
enter and remain in public employment. A pension is not
just a gratuity. It is compensation for services previously
rendered. In effect, pay is withheld to induce long contin-
ued employment. Kern v. City of Long Beach (1947) 29
Cal.2d 848, pp. 852, 856.

As reflected in Exhibit 5-8, if we do assume the Actu-
ary’s economic assumptions for the life expectancy of the
retiree and spouse, i.e., that salaries will increase 6.5%
and that the cost of living will rise 5.5%, but that the
COLA for retired members under Amendment H will be
capped at 3% (for that proportion of pension benefits
earned after 1982), we note from Exhibit 5 that the lost
Service Pension Benefits for the life-expectancy for each

a

44a

of five individual representative members (depending on
years of service, entry date and percent of projected
salary at age of retirement) range from $239,940 to
$1,038,640, a significant loss per individual member.
(Exh. 1; Pltf’s. expert actuary Prien, Rptr. Tr. Vol. I, pp.
98-109.)

Judge John Cole in his pretrial order of November 8,
1985 granting a partial summary adjudication of issues,
found to be without substantial controversy, that as of
July 1, 1982 active members of the Article XVII and
XVIII pension systems had (1) contract rights to receive
annual cost of living adjustments to their pension equal to
the percentage fluctuations in the cost of living during the
foregoing year as determined by the Pension Board, and
(2) the right to receive in their first cost of living
adjustment, on July 1 in their first year of retirement, an
amount equal to the full cost of living adjustment without
regard to the date of retirement during that fiscal year.

The Court concludes, therefore, that the provisions of
Amendment H which purport to CAP the previously
uneapped COLA to 3%, and the “proration” provisions,
constitute a substantial impairment by the City vested
contractual rights of members of the Article XVII and
XVIII pension systems.

B. THE PROVISIONS OF AMENDMENT H CAP.
PING THE COLA AND PROVIDING FOR PRO.
RATION RESULT IN DISADVANTAGES TO
EMPLOYEES AND ARE INVALID BECAUSE
THEY ARE NOT ACCOMPANIED BY COMPA-
RABLE NEW ADVANTAGES TO THOSE EM-
PLOYEES AFFECTED.

Although the California cases state that employees’
vested contractual pension rights may be modified prior

45a

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, the landmark case of Allen v. City of Long
Beach (1955) 45 Cal.2d 128, 131 placed strict limitations
on the conditions which may modify the pension system in
effect during employment. “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.’ (Emphasis added.)

This principle has been strongly reaffirmed and
emphasized.

Abbott v. City of Los Angeles (1958) 50 Cal.2d 438,
447-448;

Miller v. State of California (1977) 18 Cal.3d 808,
816;

Betts v. Board of Administration (1978) 21 Cal.3d
859, 864-865;

Olson v. Cory (1980) 27 Cal.3d 532, 534;

Allen v. Board of Administration (1983) 34 Cal.3d
114, 120;

Pasadena Police Officers Assn v. City of Pasadena
(1983) 147 Cal.App.3d 695, 701.

The defendant argues that Houghton v. City of Long
Beach (1958) 164 Cal.App.2d 298 should be followed
rather then [sie] Pasadena Police Offices v. City of
Pasadena, supra, a 1983 ease, and that Houghton holds

ih dae

46a

that pension benefits to be earned through future years of
service are not vested contractual rights and therefore
ean be freely modified without constitutional violation.

In any event, defendant argues that Houghton; Palaske
v. City of Long Beach (1949) 93 Cal.App.2d 120; Abion
Allen v. City of Long Beach (1950) 101 Cal.App.2d 15; and
Allstot v. City of Long Beach (1951) 104 Cal.App.2d 441
all involving the same Long Beach Charter Amendment,
were the law of California in 1971 when the COLA was
uncapped by the City of Los Angeles, and in 1982 when
the City of Los Angeles enacted Amendment H and
attempted to cap the COLA at 3%. Therefore, defendants
reason, that the right to modify future unearned pension
benefits was part of plaintiff's “contract” with the City of
Los Angeles and that the reasonable expectation of the
members of the Los Angeles pension systems were that
their pension rights to be earned after the effective date
of Amendment H could be modified.

In the Long Beach Palaske and Houghton line of cases,
the basic pension benefits for the first twenty years of
service were not affected, only the additional benefits to
be earned by serving more than twenty years after the
“twenty year” pension had vested.

The Court in Pasadena Police Officers v. City of
Pasadena, 147 Cal.App.3d 695, at pp. 704, 706 supra,
diseussed Houghton and Palaske and held that the Hough-
ton and Palaske discussions should be confined to the
particular Long Beach Charter provisions. It was after the
Palaske decision in 1949, that the California Supreme
Court in 1955 decided Allen v. City of Long Beach, 45
Cal.2d 128, 131 and announced the additional require-
ment “that damages in a pension plan which result in
disadvantages to employees should be accompanied by
comparable new advantages” [emphasis added]. This

47a

holding has been reaffirmed by a number of cases cited
above after Houghton was decided but before Pasadena
Police Officers.

If the reasonable expectations of plaintiffs have any
legal significance in this context, their reasonable expec-
tations were that their pension benefits could not be
diminished except by providing comparable new
advantages.

In the Pasadena case, supra at p. 703, the Court ex-
pressly rejected defendant City’s argument that the Allen
case meant only that comparable new advantages must be
provided when benefits already earned are modified retro-
actively, and applied the “comparable new advantages
test” to prospective benefits.

Betts v. Board of Administration (1978) 21 Cal.3d 859,
864-865 further defined and qualified the “comparable
new advantage test”. The new advantage must relate to
the benefit which is diminished and it must focus on the
particular employee whose benefits are diminished, not on
other employees.

Under Amendment H, the Cost of Living Adjustment is
limited to 3% for all active members of the Article XVII
and XVIII Systems. The refundability provisions of
Amendment H provide that employees who terminate
employment would receive their contributions back with
interest. (Prior to Amendment H, those employees who
terminated employment without retiring, lost their contri-
butions to the pension system.) This provision does not
relate to nor offset the cost of living limitation and it does
not affeet the employees who will complete active service
and retire. Amendment H does not provide comparable
new advantages to the particular employees whose bene-
fits are diminished.

48a

C. THE 3% LIMITATION ON THE COST OF LIV-
ING ADJUSTMENT AND PRORATION PROVI-
SIONS OF AMENDMENT H, FOR ACTIVE
MEMBERS OF THE RETIREMENT SYSTEM,
ARE NOT JUSTIFIED BY AN EXERCISE OF
THE INHERENT “POLICE POWER” AS REA-
SONABLE AND NECESSARY TO AN IMPOR-
TANT PUBLIC PURPOSE.

The City has failed to meet its burden of proving that
the impairment of plaintiffs’ rights are warranted by an
emergency, and are reasonable and necessary to protect
the basic interests of society.

Defendant City contends, somewhat ironically, that the
reduction of pension benefits of police officers and
firefighters is valid as an inherent exercise of the “police
power” of the State.

They assert that, as an exception to the general rule
that vested contract rights of public employees’ pension
benefits may not be impaired without providing compara-
ble new advantages, the reduced benefits are justified.
They contend that the City’s burden under this exception
is met by proving that:

1. The changes were reasonable and necessary to
an important public purpose; namely,

(a) The preservation of the financial soundness
of the City;

(b) The ability to predict and plan for long
range City budgeting and financing;

(ec) To enable the City to continue providing
essential public services; and

(d) The preservation of the pension system
itself.

49a

Pasadena Police Officers v. City of Pasadena (1983) 147
Cal.App.3d 695, was not tried on the theory of fiscal
emergency, i.e., that capping the COLA was necessary to
meet City financial obligations or to save the Pension
system and is not controlling on those issues in the case

at bar.

Recognizing this, the Appellate Court in the Pasadena
ease at page 704 comments on the fiscal emergency
justifieation as follows:

“Allen does state that changes may be made in the
pension system to maintain its integrity. (Allen v.
City of Long Beach, supra, 45 Cal.2d at p. 131.) A
pension system in which benefits are payable only to
the extent funded by specified contributions might be
able to reduce benefits or increase employee contri-
butions in order to save the system from bakruptcy.
(Houghton v. City of Long Beach (1958) 164
Cal.App.2d 298, 304, 306). However, in the absence
of a clear and unequivocal declaration in the pension
provisions that benefits are payable only to the extent
of available funds from specified contributions, the
liability to pay promised pension benefits is a general
obligation of the City. (Bellus v. City of Eureka
(1968) 69 Cal.2d 336, 348-352; Carman v. Alvord, 31
Cal.App.3d at pp. 332-333.) Suggestions of fiscal
emergency have been rejected on the particular facts
of several cases. (Allen v. City of Long Beach, supra,
45 Cal.2d at p. 133; Abbott v. City of Los Angeles,
supra, 50 Cal.2d at p. 455; Wisely v. City of San
Diego, supra, 188 Cal.App.2d 482, 487; Frank v.
Board of Administration (1976) 56 Cal.App.3d 236,
246).”

There is no question that the cost of paying the benefits
due and expenses of the pension systems in question here

- et A cecal a ach Wa ee a ett ~

ne

50a

is a general obligation of the City of Los Angeles. Under
Section 190.09 (Section 190.09 of the Charter of the City
of Los Angeles), the Pension Board is required to pre-
pare and transmit the pension budget each year to the
City Council and to inelude the annual payments as a
pereentage of payroll necessary to fund the system over
an amortization period of 70 years (beginning in 1967-68)
based on the actuarial assumptions, and the sums neces-
sary to cover the cost of benefits and expenses of the
system. Since 1967 Section 190.09 of the City Charter has
expressly provided: “For the purpose of providing funds
to meet the budget of... [the System] ... the Council or
the Controller annually shall levy, in addition to all other
taxes levied by the City, a tax clearly sufficient to provide
the total amount of all item in said [Pension System]
budget.” [Emphasis added. ]

The California Supreme Court in Olson v. Cory (1980)
27 Cal.3d 532, 539, reexamined the factors warranting
legislative impairment of vested contract rights (created
by legislation) to an annual automatic cost of living
inerease in Judicial pensions and salaries commensurate
with the actual California Consumer Price Index. Legisla-
tion purporting to cap that cost of living adjustment was
held an unconstitutional impairment of contractual rights
during the term of office. Citing, Sonoma County Organi-
zation of Public Employees v. County of Sonoma (1979) 23
Cal.3d 296, 305-306, the California Supreme Court reiter-
ated the four factors identified by the United States
Supreme Court in Home Building and Loan Assn. v.
Blaisdell (1934) 290 U.S. 398 justifying such impairment:

1. The enactment serves to protect basic interests
of society.

2. There is an emergency justification for the
enactment.

5la

3. The enactment is appropriate for the emer-
gency, and

4. The enactment is designed as a temporary mea-
sure, during which time the vested contract rights
are not lost but merely deferred for a brief period,
interest running during the temporary deferment.

In applying these standards, the enactment’s severity
must be measured to determine “the height of the hurdle
the state legislation must clear” (citing Allied Structural
Steel Co. v. Spannaus (1978) 438 U.S. 234. Therefore, the
state’s hurdle in applying the four factors is heightened
because the attempt to cap the COLA is an impairment by
the State affecting the heart of the employment contract.
The defendants in Olson v. Cory offered no reason or
justification and failed even to approach their burden of
demonstrating that the impairment is warranted by an
“emergency” serving to protect a basic interest of society
(p. 539).

In Sonoma County Organization of Public Employees v.
County of Sonoma (1979) 23 Cal.3d 296, the state
“bailout” money given to the County following Proposi-
tion 13 was conditioned on a salary freeze and no COLA,
in violation of County contract with sheriffs and firefight-
ers. The California Supreme Court rejected the “fiscal
emergency” justification discussing United States Trust
Co. of New York vs. State of New Jersey (1977) 431 U.S. 1.

In the U.S. Trust Co. case, the state’s attempt to impair

the security of Transit Authority Bonds based on the toll
revenues was held invalid. The United Sates Supreme
Court expressly recognized that a substantial impairment
of contractual rights by state action is not unconstitu-
tional if it is “reasonable and necessary to serve an
important publie purpose.” In applying this standard,

Sri Perma ili a

52a

however, the Court held that: “... complete deference to a
legislative assessment of reasonableness and necessity is
not appropriate because the state’s self-interest is at stake.
A governmental entity can always find a use for extra
money, especially when taxes do not have to be raised. If a
state could reduce its financial obligations whenever it
wanted to spend the money for what it regarded as an
important publie purpose, the Contract Clause would
provide no protection at all.” (pp. 24-25.)

The salary limitation in Sonoma was declared (in an
Urgency declaration) by the Legislature to be a fiscal
emergency and was intended to alleviate the fiseal crisis
ereated by Proposition 13 and to provide for maintaining
essential services. The Legislature relied on the Legisla-
tive Analyst’s report predicting that local entities would
lose $7 billion or a reduction of 57% in property tax
revenues and would require a curtailment of essential
services, and an estimated 270,000 local employees would
have to be laid off. However, 5/7 of the revenues lost to
local entities were replaced by state “bailout” monies, so
the county had not sustained its burden of proving a fiseal
emergency justification.

Significant to the case at bar the Court in Sonoma held
(at p. 311) that, even so, the emergency may cease or the
facts change. Even if the legislation is valid when passed,
it is always open to judicial inquiry whether the exigency
still exists upon which the continued operation of the law
depends. The Court found the argument appealing
(though did not decide the merits) that the passage of
Proposition 13 was an action of the state. If there was an
emergency, it was created by the state itself, and a state
unconstitutionally impairs the obligation of its contracts
if it limits its taxing powers so as to disable itself from
fulfilling its obligations.

53a

In Abbott v. City of Los Angeles (1958) 50 Cal.2d 438,
455, decided thirty years ago, the City of Los Angeles
made the same arguments they are making in the case at
bar. In Abbott, the City in trying to uphold a Charter
Amendment changing rights of certain already retired
pensioners from a fluctuating pension to a fixed one,
argued that had the amendments 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.” The California Supreme
Court soundly rejected that argument holding “this plea,
based on speculation only, is without merit. Rising costs
alone will not excuse the City from meeting its contrac-
tual obligations, the consideration for which has already
been received by it. Moreover, it is not to be assumed that -
the City would have attempted to abolish its pension
system by reason thereof, especially since such systems
are almost universally essential in order to attract quali-
fied employees to police and fire departments.”

California Teachers Assn. v. Cory (1984) 155
Cal.App.3d 494 presents a very similar public financial
erisis in the wake of Proposition 13 reducing revenues. In
that case, mandate was granted to compel a transfer of
funds from the State General Fund to the teacher’s
retirement fund owing as a state contribution. The Court
held (pp. 506-512) that the obligation to fund the retire-
ment system was a continuing contract obligation of the
state. When a promise to fund permanently is accepted by
the employee by initial or continued employment, a con-
tract is established. The fact that the amount saved could
have significant impact in other areas of education with
more pressing needs is not a purpose which justifies
impairment. “If a state could reduce its financial obliga-
tions whenever it wanted to spend the money for what it
regarded as an important publie purpose, the contract

54a

elause would provide no protection at all.” (Quoting
United States Trust Co. v. New Jersey (1977) 431 U.S. 1,
pp. 25-26). Thus, California Teachers and United States
Trust rule out as permissible justification of a compelling
interest for impairment, a legislative purpose to spend the
obligated money for a purpose which is deemed a better
expenditure.

Valdez v. Cory (1983) 139 Cal.App.3d 773, involved the
same attempt by the State Legislature to refrain for 3
months from making the legislatively mandated employer
contribution to the Public Employees Retirement System
(PERS). A writ of mandate was issued to compel contri-
bution. The Court held that the legislative action was a
substantial impairment of contractual rights, and that
employees have a vested interest in the integrity and
source of funding for the payment of benefits which
constituted a general obligation of the state. Citing the
same four factors identified in Olson v. Cory, supra, which
might justify impairment, the Court held that obviously
the legislature’s suspension of employer contributions
neither bears any material relation to the theory of a
pension system and its successful operation nor carries
out the “beneficent policy” of the pension laws. Although
the cost-cutting measures [sic] furthers an important
public interest there was no evidence that the Legislature
gave considered thought to the effect on PERS or the
possibilityt of less drastic means of accomplishing its
goal. In addition, the Court held, there was no intent
merely to defer the employer contributions for a brief
period. The suspended contributions were irretrievably
lost. Finally, the faet that the spending power of the
Legislature is limited by Proposition 13, does not furnish
the necessary justification for unconstitutionally impair-
ing governmental contracts.

55a

Nearly all of the evidence presented to this Court
during 9 days of trial with 15 witnesses and 186 exhibits,
was introduced on the issue of whether Amendment H
was reasonable and necessary to an important public
purpose which would justify the permanent and substan-
tial impairment of the vested contractual rights of the
active members of the Article XVII and Article XVIII
pension system.

No California case has been cited to the Court which
has upheld such a justification. Arguably, the California
eases which discuss the legal standard were tried with
limited evidence on that point. In the Pasadena Police
Officers case, supra, the trial judge apparently excluded
any such evidence. In Sonoma County, supra, “fiscal emer-
gency” resulting from Proposition 13 was raised and
argued but the Court found that there was no fiscal
emergency because the Legislature had provided “bailout
funds” to avert the emergency.

Valdez v. Cory and California State Teachers Assn. v.
Cory come closer to the ease at bar in rejecting a claimed
justification of “reasonable and necessary to a public
purpose’. The legislative declaration of emergency at-
tempting to justify the state’s withholding contributions
to the retirement system relied on the Legislative Ana-
lyst’s report of dire financial predictions in the wake of
Proposition 13. The Governor had pointed out that the
amount saved could have an immediate and significant
impact in other areas of education with more pressing
needs.

Defendant urges that the case in point factually which
should be applied and followed in the instant case is a
federal district case, Maryland State Teachers Association,
Inc. v. Hughes (D.Md. 1984) 594 F. Supp. 1353, affirmed
No. 84-2213 (4th Cir. Dee. 5, 1985). In 1984, the Mary-

a es

neue

56a

land legislature enacted a “Pension Reform Law” cap-
ping the Cost of Living Adjustment for future pension
benefits which had previously been uncapped. The record
in the Maryland case evidenced experience similar to that
of the City of Los Angeles; funding for the pension
system was difficult; inflation was unpredictable and had
risen more rapidly than expected; actuarial experience
was adverse; the unfunded liability of the system had
increased, all of which had led to a substantial instability
in the State fiseal planning process.

The real basis for the decision in the Maryland ease,
upholding the COLA cap, was that the right to earn
pension benefits for future years of service is not a vested
contractual right. Under the laws of Maryland, Maryland
had reserved the right t. modify prospective benefits and
therefore the state may modify those unearned benefits
without violating the contract clause of the United States
Constitution.-This is contrary to California law. The Dis-
trict Court in Maryland, perhaps as an alternative ground
but more likely by way of dicta stated that even assuming
there was an impairment of vested contract rights, the
legislation was reasonable and necessary to prevent se-
vere imbalance in future state budgets. Maryland did not
discuss whether alternative means of solving the fiscal
problems had been explored.

In Continental Illinois National Bank and Trust Co. of
Chicago v. The State of Washington (1983) 696 Fed.2d 692
(U.S. Ct. of App., Ninth Cir.), a Washington State En-
ergy Financing Voter Approval Act was held invalid as a
substantial impairment of contractual obligation of the
Washington Public Power Supply System. The invalid act
was enacted in response to large cost overruns at nuclear
power plants. It provided that the public agency may not
issue or sell bonds to finance any publie energy project

57a

unless it had first obtained authority for the expenditure
of the funds raised by the sale of the bonds at an election
in accordance with the initiative.

In examining the claimed justification that the impair-
ment was reasonable and necessary to achieve valid state
interests in ensuring public accountability and protecting
the state’s financing by placing controls on the Public
Power System’s spending because the project had become
too expensive, the Court found that while a limitation of
public spending is a legitimate state goal, its weight is
diminished in contract clause analysis when the state limits
its own previous financial commitments. The act was held
not reasonable or necessary.

The evidence in the case at bar establishes that: At the
time of the enactment of Amendment H, the police and
fire pension systems had unfunded liabilitities of $3.37
billion in present value, and were being funded over a 70
year period ending in 2037 (Exh. 145, Exh. 127 at 7). This
was caused by the administration of the Article XVII and
XVIII pension systems from their very inception. Defense
actuary expert Smith makes clear that the following acts
and omissions did not conform to sound and responsible
pension funding practice and were a principal cause of
the system’s financial problems (Rptr. Vol. IV, pp. 463-
464, 482-484, 494-496):

A. The funding of the Article XVII system on a
“pay-as-you-go” basis from 1923 until 1959. (Stipu-
lated Facts* § 37. Rptr. Tr. Vol. 3, p. 306.)

*The written Stipulated Facts on file are attached to Volume I of
Reporter's Transcript as an Exhibit, pursuant to oral agreement on
the record.

58a

B. The establishment in 1967 of a 70 year amorti-
zation period for Article XVII and XVIII Systems.
(Stipulated Facts ¢ 38; Rptr. Tr. Vol. IV, p. 463.)

C. The commencement of the Article XVIII pen-
sion system with an actuarially unfunded liability of
$258 million as of July 1, 1967 (City Charter
§ 190.09(2)).

D. The failure of the Pension Board over many
years to assume realistic projections of annual in-
creases in the Consumer Price Index. (Stip. Facts
¢ 42; Rptr. Tr. Vol. III, pp. 353, 356.)

E. The failure of the Pension Board, at any time
before 1976, to consider any salary increase of active
members in its annual valuation of the systems.
(Stip. Facts ¢ 43; Rptr. Tr. Vol. III, p. 356; Vol. IV,
pp. 482, 483-484; Vol. V, p. 585.)

F. The failure of the Pension Board, commencing
in 1976, to make realistic assumptions as to salary
increases which would be granted to active members
(Stip. Facts € 45), and

G. The decision in 1976 to change the City contri-
butions to the system from a level dollar amount to a
percentage of payroll. (Stip. Facts € 44; Rptr. Tr.
Vol. IV, pp. 486-487; Vol. V, p. 586.)

In contrast, as of June 1985, the Article XXXV Safety
Members Pension System, established in 1980 for all new
members joining the force on or after December 1, 1980
(as of today there are about 3,000 members of the Article
XXXV System, Hutchison Testimony, Rptr. Tr. Vol. II, p.
245), showed the unfunded actuarial liability “in the
black” by $4,762,759.

59a

Defendants argue that no one could be expected to
foresee the rate of inflation nor the passage of Proposi-
tion 13 and that the costs of the pension benefits exceeded
their expectations. No California case has accepted these
arguments to justify impairment of public employee bene-
fit contracts.

In 1971, before the COLA was uncapped, the then Chief
_ Administrative Officer Piper pointed out the risk of un-
predictability in uneapping the COLA and recommended
a 3% eap (Exh. 159). Councilman Braude Agreed that
they had been so advised but testified that they didn’t
want to bother negotiating every year. The City Council
was willing to and did assume that risk. Mayor Bradley
thought in 1971 that they could later uncap the COLA if
necessary. They failed to include that express reservation
in the 1971 Charter Amendment uncapping the COLA.

By 1982, the recommended contribution by the City to
the pension systems was $227 million.

If Amendment H is not valid, i.e., if the COLA remains
uneapped, both plaintiffs and defendants agree that an
additional $43 million per year would be recommended to
be contributed by the City to the Article XVII and XVIII
systems on the unfunded liability, if the actuarial assump-
tions are correct. (Rptr. Tr. Marnell, Vol. III, pp. 304,
307.)

This $43 million is less than 1% of the City’s total
budget and less than 2% of the City’s general budget for
1986-87 (CAO Comrie, Rptr. Vol. V, pp. 686-687).

Obviously this sum will represent a diminishing per-
centage as those budgets inevitably increase in the future
and will be paid with inflated dollars having diminished
value.

|
.
|

60a

From 1975 to 1982 numerous committees and reports,
including ad hoe committees, City Council’s Committee
on Revenue and Finance, Blue Ribbon committees, Town
Hall committee; the State Controller’s report for 1979;
and the Chief Administrative Officer’s report had studied
and recommended action to reduce long-range growth of
pension costs (Exhs. 55, 56, 58, 59, 63, 70, 77, Exh. 133).

Proposition 13 and reduction in federal revenue shar-
ing had caused the City to reduce the City payroll by
6,000 positions (or about 20%) from 1978 to 1982; librari-
ans and recreation centers were put on a half-time basis;
street cleaning services, road repairs and maintenance of
city vehicles were reduced.

Proposition 13 had eliminated the City’s property over-
ride tax which was an easy and convenient way of raising
revenue for the pension systems.

In the year 1980 active members received salary in-
creases of only 9-10% and retired members received a
COLA of 17.7% (Stip. Faets (42, Rptr. Tr. pp. 768, 913,
915) which created morale problems with the active
members.

In contrast, however, in 1983, the CPI increase was
only 0.5% whereas the active members received two in-
creases in that year of 2% and 6.5%. In 1984 salary was
increased again by 6.5% and the CPI increase was only
4.7%, in 1985 salaries increased 5% and the CPI by 4.6%
and in 1986 salaries increased 5% and the CPI by 4%. For
the last 4 years the purchasing power of the pension has
fallen, if capped at 3%, and has not kept up with the CPI.
In the three years preceding 1980, salary increases for
active members also exceeded the COLA’s reflecting the
CPI. (Stip. Faets €42, 45.)

6la

Moreover, the actuarial assumptions recommended by
the actuary and accepted by the Pension Board are that
salary increases will continue to grow by 6.5% while the
CPI and COLA’s reflecting it will grow by only 5.5%.

Chief Administrative Officer Comrie, Mayor Bradley
and Councilman Yaroslavsky were concerned that escalat-
ing pension costs would endanger the pension systems.
(Rptr. Tr. Vol. 5, pp. 579-80, Vol. 8, p. 976.) Part of the
danger to the pension system is the “threat” of the
Council to withhold actuarially recommended funding in
the future. (Rptr. Tr. Vol. III, p. 924, Vol. V, pp. 664, 669,
692, Vol. VI, p. 778.) In 1981 the Council held back $22
million from contributions to the pension system in re-
serve. (Exh. 113.)

Defendant contends that the important publie purposes
served by Amendment H were:

1. To preserve the integrity and soundness of the
pension systems — to insure funding for the systems
and that benefits would be paid;

2. To solve unpredictability in recommended City
eontributions that make long term budgeting
difficult;

3. To avoid making cuts in essential public ser-
vices; and

4. To maintain popular support for public
pensions.

Mayor Bradley, Councilmen Yaroslavsky and Braude,
and the Chief Administrative Officer were of the opinion
that Amendment H was reasonable and necessary to
achieve these purposes.

This Court does not question the fact that our elected
publie officials had and have legitimate and serious con-

/

62a

cerns for fiscal management, nor does it question the
motives of the Mayor and City Council in placing Amend-
ment H on the ballot and urging its passage by the voters.
The Court accepts the fact that in the opinion of the City
Officials it was done for important public purposes.

What the court must decide on the evidence under
established case law interpreting the State and Federal
Constitutions however, is whether Amendment H was a
reasonable and necessary means such as to justify a
substantial impairment of vested contractual rights of the
members of the Article XVII and XVIII pension systems,
all of whom were active employees with certain pension
expectations before Amendment H was enacted.

This Court does not substitute its own political judg-
ment for that of elected city officials and staff. It is
unfortunate that pensions for public employees do not
enjoy great popularity as compared with other interests
and needs competing for City revenues. It is not an easy
political decision for elected public officials to decide
whether to raise taxes, cut pension benefits, build metro-
rails, spend more to provide for the homeless, or how to
collect and apportion the spending of City revenues
among the myriad worthy demands and competing
interests.

it is not up to the Court to decide how the City ean or
should raise revenues or to pass judgment on how the
City orders its spending and budget priorities. Obviously
it is not popular to increase taxes.

C.A.0O. Comrie and Councilman Braude speculate that
the City Council might have eut essential City services to
fund the annual contributions to the pension systems had
Amendment H not been enacted, and might do it in the

63a

future if Amendment H is invalid (Rptr. Vol. V, pp. 640,
642, 664-665, Vol. VI, p. 778 and Exh. 103).

Defendants have not convinced the Court that this was
or would be the only course open to the City. The closing
of those Article XVII and XVIII pension systems to new
members and the establishment of the new Article XXXV
system with a capped COLA, for all officers joining the
forees after December 1, 1980, was a reasonable and
lawful means to help achieve those purposes.

The evidence does not demonstrate that the City was
unable to raise additional revenues, or unable at any time
in 1981, 1982, or thereafter to meet its financial obliga-
tions. The evidence is not convincing that there existed
such a financial emergency or grave fiseal crisis which
made it impossible for the City to meet its obligation to
the pension systems.

In 1983-84 when there was a prospective City General
Budget short fall of approximately $142 million the City
imposed new taxes and fees totaling $120-$130 million
and has continued those increased taxes and fees in effect
to date (Comrie, Rptr. Tr., Vol. VI, pp. 717-18; Bradley,
Vol. VIII, p. 986).

The evidence shows that the City budget each fiscal
year beginning with the year 1976-77 and ending with
fiseal year 1985-86, ended each fiscal year with
unexpended funds in amounts ranging up to $70 million
(Comrie, Rptr. Tr., Vol. VI, pp. 702-03, 705). Since 1981-
82 the City’s general budget has increased by 10% or
more each year. The general budget for 1986-87 is almost
$1 billion more than it was in 1981-82 (Comrie, Rptr. Tr.,
Vol. VI, pp. 700-01, Exh. 160).

The City has a duty to levy a tax in addition to all other
taxes, sufficient to finance the pension system. The obliga-

64a

tion to pay pension benefits and expenses of the system is
a general obligation of the City (City Charter §§ 186.2
and 190.09).

Defendants have not carried their burden of proving
that the City is unable to impose any additional taxes,
increase existing taxes, or unable to reorder its spending
priorities.

The decision to try to avoid raising taxes and to spend
for other important public purposes, the money which
would otherwise be contributed by the City to the pension
systems for the difference between the capped and uncap-
ped COLA benefits may make good “political” sense, but
is not justified under the “Contract Clauses” of the
United States and California Constitutions.

The defendants have not convinced this Court that the
fiscal picture for Los Angeles is even as bleak today as it
was in 1981-1982 when Amendment H was debated and
enacted. Certainly inflation has slowed and revenues and
budgets have increased. Nor have defendants convinced
the Court that the future looks bleaker.

A great number of exhibits, and expert witness econo-
mists and actuaries were produced by defense in an
attempt to predict a dire financial future for the City of
Los Angeles characterized as a mature declining city,
with business flight, loss of tax basis, and an increase in
poor population contributing little and requiring vast
inereases in social welfare and related expenditures. Ap-
parently they lack confidence that “L.A.’s the Place.” In
contrast, plaintiffs’ experts point out that the Los Angeles
experience differs from the past experience of older east-
ern cities relied on by defense, in that the Los Angeles
infrastructure is newer, the people immigrating to Los
Angeles tend to be younger, more educated and produc-

65a

tive, and that Los Angeles has and wili continue to have a
much lower population density than those eastern cities.

Without attempting to detail that evidence, the Court
finds the assumptions made to draw those conclusions are
sheer speculation and guesswork.

Some of the economie actuarial assumptions on which
the projected funding to the year 2037 for the pension is
based, such as that salaries will increase at 6.5% per year,
that the CPI will rise at 5.5% per vear and that the annual
yield on investments will be 8.5% per year also fall into
that category. For any given year for those figures to be
proven accurate would be just coincidence. They have not
been proven correct historically for any given year even in
the last decade.

IV.
CONCLUSION:

The evidence in this case in the context of the persua-
sive case law authority interpreting the Contracts Clauses
of the State and Federal Constitutions compels this Court
to eonelude that:

1. That the right to earn pension benefits provided by
the City Charter Amendment 2 (effective July 1, i971),
with an uneapped COLA, for those members who com-
meneced employment prior to December 1, 1980, are
vested contractual rights subject to the contract clauses
of the United States (U.S. Constitution Art. I Section 10
Cl. 1) and California (California Constitution Art. I
Seetion 9).

2. That both the proration and the 3% cap on the
COLA provisions of Amendment H substantially impair
vested contractual rights of those members of Article

66a

XVII and XVIII pension systems who were not retired
prior to July 1, 1982.

3. Charter Amendment H does not bear a material
relation to the theory of the pension systems and its
successful operation.

4. Changes in the pension system under Amendment
H, namely the 3% eap on COLA, and the proration
provision result in disadvantages to the numbers of the
system and are not accompanied by comparable new
advantages. The refund provisions do not relate to the
benefit diminished and do not provide any advantage to
employees who will retire rather than terminate employ-
ment prior to retirement.

5. Amendment H was not reasonable and necessary to
an important publie purpose. no

(a) The purposes for which Amendment H were
enacted were important public purposes;

(b) The defendants have not sustained their bur-
den of proving that the impairment of vested contrac-
tual rights of plaintiff to earn pension benefits
according to the City Charter provisions in effect
before Amendment H was enacted, was reasonable
and necessary to achieve those important public
purposes;

(c) There was no emergency, or fiscal crisis, justi-
fication for the enactment. At no time pertinent
herein has the City been unaole to meet its financial
obligations. The enactment was not necessary to
solve the perceived fiseal crisis;

(d) Defendants have not sustained their burden
of proving that there were no reasonable alternative.

67a

methods available for raising revenues or for solving
budgetary problems of the City;

(e) From the time Amendment H was enacted in
1982, the City has failed to contribute the $43 million
recommended by the actuaries to fund that part of
the City’s contribution attributable to the uncapped
COLA. At the same time the general City Budget,
and taxes and revenues have increased. The City has
either spent the $43 million for other purposes
deemed more important, or maintained it as part of
the general reserve fund.

6. The enactment was not designed as a temporary
measure, rather vested contract rights were permanently
lost.

7. The fiseal difficulties experienced by defendants
with regard to the pension systems were in part a result
of the administration of the systems during prior years
and caused by actions of the Council and Pension Board.

8. Proposition 13, limiting the ability of the City to
raise revenue from real property tax overrides constituted
state action.

9. The obligation to pay the expenses of and benefits
due under the pension system is a general obligation of
the City.

10. The City is mandated by its own Charter to impose
taxes to meet the budget of the Article XVIII pension
system.

THEREFORE IT IS ADJUDGED AND DECLARED
THAT:

Los Angeles City Charter § 184.96 and § 190.143 Sub-
sections (A)(1), (A)(2) and (A)(4) imposing a 3%
limitation on cost of living adjustmeuts to a portion of the

68a

pension benefits under Article XVII and XVIII are in-
valid and unenforceable because each of them is a law
impairing the obligation of contract within the meaning of
Article 1 Section 9 of the Constitution of the State of
California and Article 1 Section 10, Clause 1 of the
Constitution of the United States.

Los Angeles City Charter § 184.96 and § 190.143, sub-
sections (A)(3) providing for a proration method of
ealeulating cost of living adjustment for the first year of
retirement for Article XVII and XVIII pension systems
are invalid and unenforceable because each of them is a
law impairing the obligation of contract within the mean-
ing of Article I Section 9 of the Constitution of the State
of California and Article I Section 10, Clause 1 of the
Constitution of the United States.

Dated: March 6, 1986.

BONNIE LEE MARTIN

BONNIE LEE MARTIN
Judge of the Superior Court

APPENDIX E

a
-
/
!
, Aik aN ae $ ‘ : : ¢
MP pone, ob 4 a en & ie weak a f 4 es ~ ’ Mad
% 4 ae A PO ed ee a ES Fe nt ON PN POMEL, FT eRe wg ad

69a

JOHN R. MeceDONOUGH

J. STEVEN GREENFELD

HARLEE M. GASMER

BALL, HUNT, HART, BROWN & BAERWITZ
4525 Wilshire Boulevard, Third Floor

Los Angeles, California 90010-3886

(213) 937-8999

LESTER G. OSTROV

FOGEL, ROTHSCHILD, FELDMAN & OSTROV
5900 Wilshire Boulevard, Suite 2600

Los Angeles, California 90036

(213) 937-6250

Attorneys for Plaintiffs

SUPERIOR COURT OF
THE STATE OF CALIFORNIA
FOR THE COUNTY OF LOS ANGELES

UNITED FIREFIGHTERS OF LOS ANGELES, CITY, et al.,
Plaintiffs,
VS.
CiTy OF Los ANGELES, et al.,
Defendants.

Los ANGELES POLICE PROTECTIVE LEAGUE, et al.,
Plaintiffs,
Vs.
City oF LOS ANGELES, et al.,
Defendants.

Case No. C 413 752 Consolidated with
Case No. C 418 547

PROPOSED JUDGMENT

Dept: 15
Date: April 1, 1987
Time: 9:00 A.M.

70a

These consolidated actions came on for trial in Depart-
ment 15 of the Superior Court of the State of California in
and for the County of Los Angeles, the Honorable Bonnie
Lee Martin presiding, on Februrary 3, 4, 5, 6, 9, 10, 11, 12
and 13, 1987. Plaintiffs in action No. C 413 752 were
represented by Lester G. Ostrov of the law firm of Fogel,
Rothschild, Feldman & Ostrov; plaintiffs in action No.
C 418 547 were represented by John R. McDonough, J.
Steven Greenfeld and Harlee M. Gasmer of the law firm
of Ball, Hunt, Hart, Brown and Baerwitz; and defendants
in both actions were represented by John F. Daum, Holly
E. Kendig and Gary R. Clouse of the law firm of
O'Melveny & Myers. The Court, having considered testi-
mony and documentary evidence and the written and oral
arguments of counsel and being fully informed in the
matter, it is hereby

ORDERED, ADJUDGED, DECREED AND DE-
CLARED that:

1. Los Angeles City Charter § 184.96 and § 190.143
Subsections (A)(1), (A) (2) and (A) (4) imposing a 3%
limitation on cost of living adjustments to a portion of the
pension benefits under Article XVII and XVIII are inva-
lid and unenforeeable because each of them is a law
impairing the obligation of contract within the meaning of
Article 1 Section 9 of the Constitution of the State of
California and Article 1 Section 10, Clause 1 of the
Constitution of the United States.

2. Los Angeles City Charter § 184.96 and § 190.143
subsections (A) (3) providing for a proration method of
ealeulating cost of living adjustment for the first year of
retirement for Article XVII and XVIII pension systems
are invalid and unenforceable because each of them is a
law impairing the obligation of contract within the mean-
ing of Article I Section 9 of the Constitution of the State

Tla

of California and Article I Section 10, Clause 1 of the
Censtitution of the United States.

3. Plaintiff in Case No. C 431 752 United Firefighters
of Los Angeles City, Loeal 112, IAAF, AFL-CIO, shall
receive from defendants and each of them costs of suit in
the amount of $

4. Plaintiffs in Case No. C 418 547 Los Angeles Police
Protective League, Ronald Dean Gray, David Baea, Jr.,
Gregory Paul Dust, Bill G. MeDaniel and Fred A. Tredy
shall receive from defendants and each of them eosts of
suit in the amount of $

DATED: April 2, 1987.

BONNIE LEE MARTIN
BONNIE LEE MARTIN
Judge of the Superior Court

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7 siggy

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day

APPENDIX F

y

T2a

JAMES K. HAHN
City Attorney
FREDERICK N. MERKIN
Senior Assistant City Attorney
City Hall East
Los Angeles, California 90012
(213) 485-5403

and
O'MELVENY & MYERS
JOHN F. DAUM
KAREN R. GROWDON
400 South Hope Street
Los Angeles, California 90071
(213) 669-6000
Attorneys for Defendants

SUPERIOR COURT OF

THE STATE OF CALIFORNIA
FOR THE COUNTY OF LOS ANGELES

UNITED FIREFIGHTERS OF LOS ANGELES City,
Plaintiff,
Vs.
City OF Los ANGELES, et al.,
Defendants.

Los ANGELES POLICE PROTECTIVE LEAGUE, et al.,
Plaintiffs,
Vs.
City oF Los ANGELES, et al.,
Defendants.

Case No. C 413 752 Consolidated with
Case No. C 418 547

ORDER DENYING PLAINTIFFS’ MOTION FOR
SUMMARY JUDGMENT AND SPECIFYING
ISSUES WITHOUT SUBSTANTIAL CONTROVERSY

Hearing Date: May 30, 1985, Dept. 86

73a

Plaintiffs’ joint motion for summary judgment or for an
order specifying issues without substantial controversy in
these consolidated cases came on regul

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385020_0643%3A2. Public record. Not legal advice.