CHALLENGES IN EMPLOYEE COMPENSATION, PENSION FUNDING, AND POST EMPLOYMENT BENEFITS

Transcription

1 CHALLENGES IN EMPLOYEE COMPENSATION, PENSION FUNDING, AND POST 2009 CITY ATTORNEYS SPRING CONFERENCE LEAGUE OF CALIFORNIA CITIES RESORT AT SQUAW CREEK MAY 6 8, 2009 Charles D. Sakai Genevieve Ng Renne Sloan Holtzman Sakai LLP 350 Sansome Street, Suite 300 San Francisco, CA TEL: (415) FAX: (415) csakai@rshslaw.com

2 INTRODUCTION The recent economic downturn has adversely affected the ability of state and local governments to balance budgets. During healthy economic periods local entities are able to provide services by maintaining a full work force. Tax revenues whether through property, employment or sales tax have been severely impacted by home foreclosures and rising unemployment. As these conditions play out over the coming months and years, the likelihood of larger budget deficits faced by state and local entities is very high. Accordingly, to avoid insolvency difficult but necessary budgetary decisions must be made in regards to employee compensation. Bargaining wage concessions is one avenue a public agency employer may take to begin bringing expenditures back in line with revenues. But wage concessions are only one prong of a multi faceted approach to addressing growing budget deficits during lean economic times. This paper will look at the other avenues layoffs, furloughs, and modifying pension and other post employment benefit obligations to address employee compensation during these difficult economic times. The paper will analyze attendant benefits and issues and provide city attorneys with a legal framework for addressing these issues in their jurisdictions. CHALLENGES in EMPLOYEE COMPENSATION One of the most immediate and dramatic ways to close a budget deficit for any public employer is to lay off employees. A less immediate though similarly dramatic method is to furlough employees. Each method comes with benefits and negatives layoffs are seen as draconian, but remain a managerial prerogative and can be implemented more quickly than negotiating furloughs. Furloughs are less severe but are within the scope of representation and must be bargained with employee organizations. Before embarking on either course, the employer s memoranda of understanding with the various employee organizations and other pertinent documents including Personnel Rules and Regulations must be carefully analyzed to determine the employer s flexibility. A no layoff or furlough clause will preclude these options for an employer quickly, while other restrictions may impact the timing or number of employees who can be released. In considering layoffs, an employer must bear in mind the following: The decision to layoff is a managerial prerogative (unless management has bargained it away). 2

3 The effects of the decision to layoff are negotiable. The union must identify the effects or impacts and then request to bargain those effects. Oftentimes the MOU or applicable Personnel Rules and Regulations address the effects of the layoff and in those instances, there may be little left to negotiate. In the event MOU and Personnel Rules and Regulations are silent, identifiable impacts include: o Order of layoff o Area of layoff o Notice requirements to affected employees o Displacement rights of affected employees Special Considerations of Layoff o Skelly like pre layoff hearing and potential post termination hearing o Interplay with other employment laws (Title VII, ADEA, ADA, FEHA) An employer may consider furloughs as an alternative to layoffs. For furloughs, an employer must take into account: The decision to furlough is most likely negotiable. The employer and employee organization are required to negotiate the decision and the impacts of furlough. If the parties cannot agree, the parties must bargain until impasse is reached. The employer s impasse procedures must be exhausted before the employer is able to unilaterally implement furloughs. Special Considerations of Furlough o What is the timeframe for implementation? o Because employee pay is decreased, this triggers Fair Labor Standards Act issues for exempt employees. The Decision to Layoff is Not Negotiable Though the Impacts of Layoffs are Subject to Negotiation The Decision to Layoff Employees is Not Within the Scope of Representation Under the Meyers Milias Brown Act, the scope of mandatory bargaining encompasses all matters relating to employment conditions and employer employee relations, including, but not limited to, wages, hours, and other terms and conditions of employment. ( MMBA, Cal. Gov. Code 3500 et seq.) The scope of representation 3

4 shall not include consideration of the merits, necessity, or organization of any service or activity provided by law or executive order. (Cal. Gov. Code 3504.) The phrase wages, hours, and other terms and conditions of employment is generally construed liberally, in a manner consistent with (although potentially broader than) federal precedent under the National Labor Relations Act. (29 U.S.C. 151 et seq.; Cal. Gov. Code 3500, 3504; Fire Fighters Union v. City of Vallejo (1974) 12 Cal. 3d 608, ; International Assoc. of Fire Fighters Union v. City of Pleasanton (1976) 56 Cal. App. 3d 959, 968.) The mandatory scope of bargaining does not, however, include legitimate management prerogatives. (City of Vallejo, supra, 12 Cal. 3d at 616; Building Material & Construction Teamster s Union v. Farrell (1986) 41 Cal. 3d 651, 660, 663.) It is well established under California law that, pursuant to this principle, public employers need not negotiate over the decision to layoff employees due to lack of work, lack of funds, or other legitimate reasons. This decision is a policy matter concerning the level of services being provided or the manner in which services may best be provided by management. (City of Vallejo, 12 Cal. 3d at ; see also Engineers and Architects Association v. Community Development Department of City of Los Angeles (1994) 30 Cal. App. 4th 644, [management decision to lay off because of lack of work and/or lack of funds exercise of managerial prerogative exempt from grievance and arbitration]; City of Richmond (2004) PERB Dec. No M [same].) The Impacts and Effects of the Layoff Are Within Scope of Representation Although the decision to layoff employees is not within the scope of representation, the effects of a decision to layoff employees are within scope because of their impact on the terms and conditions of employment. (Fire Fighters Union v. City of Vallejo, supra, 12 Cal.3d at ) The employer is only obligated to negotiate those effects upon request. (Kern Community College District (1983) PERB Decision No. 372 at p. 11.) The Public Employment Relations Board, the administrative agency charged with enforcing the MMBA, does not interpret a demand to bargain the decision also as a demand to bargain the effects of a decision. (Newman Crows Landing Unified School District (1982) PERB Decision No. 223.) Any demand to bargain over the effects of the decision must clearly identify the negotiable areas of impact. (Id.) Where a union requests only to bargain over the decision and gives no notice of the desire to negotiate over identified effects, PERB has deemed that the union has waived its right to bargain the effects. (Id.) Impacts may include timing of layoff, severance pay, displacement, order or layoff. 4

5 Special Issues Related to Layoffs Skelly like Hearing In Levine v. City of Alameda, the Ninth Circuit Court of Appeals found that a city employee s due process rights were violated when he was laid off without first being provided a hearing in which to present his side. (525 F.3d 903 (9th Cir. 2008).) Levine, a property manager for the City of Alameda, was the only employee laid off at the time. He believed his layoff pretextual and demanded a pre termination hearing. The City declined because the MOU between the city and the union did not provide the employee with a pre termination hearing in the event of a layoff. Levine sued for violation of his due process rights. The district court granted Levine s motion for partial summary judgment finding that the city violated his due process rights and that he was entitled to a full evidentiary hearing. The court of appeals affirmed. The court found that Levine, as a civil servant, had a property interest in continued employment and, as a consequence, was entitled to a hearing before his layoff. Because Levine had been laid off, the court held that a post termination full evidentiary hearing before a neutral was appropriate. In Levine v. City of Alameda, the court failed to specifically distinguish between a single layoff for potentially pre textual reasons and a citywide layoff action due to budgetary constraints or change in the level of service. The court s failure to distinguish between the two creates a potential additional layer of bureaucracy and delay for employers implementing layoffs. For employers, a conservative approach is to provide a Skelly like pre layoff hearing for all employees subject to layoff. Then, provide the employee with a notice for a post layoff full evidentiary hearing before a neutral. This will, however, cause delay in the layoff process and be extraordinarily burdensome on the employer. The more aggressive approach is to deny the affected employee prelayoff and post layoff hearings because a mass layoff resulting from budget issues or reorganization does not trigger a Levine esque process. The more circumspect approach is of course a middle ground where the employer notifies employees of the option to request a pre layoff in the layoff notices. The notice could state that the pre layoff hearing will be limited to the issue of whether the layoff is a pretext for discipline. The hearing officer should be instructed to limit their inquiry to whether the layoff is a pretext for disciplinary action. Under this approach, no mention is made of a post layoff hearing. In the event that the employee requests one, the employer can decide whether a hearing is necessary at that time. 1 1 In a traditional disciplinary action, a post termination hearing is typically required in addition to the pretermination Skelly hearing. Arguably Levine can be read only to require a pre layoff hearing. To the 5

6 Given the level of conflict with layoffs, it can be expected that employees may assert that the layoffs are pretextual in an attempt to delay the layoff. Depending on what individual employees allege, there may be an additional obligation for an employer to investigate the allegations of pretext. Just as in a discipline case, action can be taken the layoff effectuated while the investigation is going on and any remedial actions applied as necessary. The Decision to Furlough is Most Likely Negotiable It can be argued that the decision to impose budgetary suspensions should also be treated as a managerial prerogative. At least one arbitrator has even held that furloughs are, in fact, short term periodic layoffs under another name. 2 However, this arbitrator s conclusion is unlikely to be adopted by any other arbitrator or by the courts. 3 Moreover, hours are expressly included within the scope of bargaining under the MMBA, and reductions in hours or changes to assigned schedules are generally negotiable. (Cal. Gov. Code 3504; Placentia Fire Fighters v. City of Placentia (1976) 57 Cal App. 3d 9, [40 hour work week negotiable subject].) While no published MMBA decision directly addresses furloughs, at least one PERB administrative law judge has assumed that furloughs are negotiable under the Dills Act. (California Dept. of Personnel Administration (1992) 16 PERC 23,156.) Moreover, PERB has also found budget motivated reductions in hours negotiable under the Educational Employment Relations Act ( EERA, Cal. Lab. Code 3540 et seq.; San Ysidro School District (1997) 21 PERC 28,095 [budget motivated reductions in hours negotiable absent voluntary consent]; but compare, Oakland Unified School District (1985), 10 PERC 17,009 [ employer may unilaterally reduce the employees work year by means of a layoff and, at the same time, establish a reinstatement date two months hence ].) The National Labor Relations Board has made the same assumption in at least one case. (Long Island Day Care Services, Inc and District Council 1707, Community and Social Employees Union, American Federation of State, County, and Municipal Employees, AFL CIO (1991), 303 NLRB 112, 116 [ furloughs are terms and conditions of employment and therefore a mandatory subject of bargaining ].) extent that an employee can demonstrate that a particular layoff is pretext for discipline, the employee s claim that a post layoff hearing is also required is colorable. 2 The arbitrator failed to address significant and troubling repercussions of treating furloughs as merely a form of layoff for example, potential obligations to pay accrued vacation, eligibility for unemployment payments, or whether separate order of layoff lists would be required before each occurrence. 3 Arbitration decisions are not binding upon the Courts, other arbitrators, or even the same arbitrator addressing different facts. See, e.g., Elkouri & Elkouri, How Arbitration Works (5th Ed., ABA 1997), pp

7 In light of the above principles, any reliance on generic management prerogative to impose furloughs would create significant legal risk. The employer should provide notice to employee organizations of the intention to furlough and permit employee organizations to bargain both the decision and the effects. If the parties cannot agree, the parties must bargain until impasse is reached. The employer s impasse procedures must be exhausted before the employer is able to unilaterally implement furloughs. For law enforcement personnel, impasse procedures may also encompass interest arbitration under Code of Civil Procedure section Because impasse procedures must be exhausted, the employer should be mindful of the timeframe for implementation. Special Considerations of Furlough Furloughs trigger Fair Labor Standards Act issues for exempt employees because employee pay is decreased. Exempt employees lose exempt status for any workweek in which the furlough occurs and for which the employee s pay is reduced. (29 C.F.R (b).) The employee remains exempt in all other weeks that a furlough does not occur. Also, because an employee loses their exempt status during the week of a furlough, the employee must be paid his or her regular hourly rate for all hours worked up to forty (40) in a workweek and are eligible for overtime. (29 U.S.C. 207; 29 C.F.R and [ours worked beyond forty (40) are compensated at time and one half].) Additionally, for those employees near retirement age, furloughs reduce earnings for purposes of calculating final average compensation. CHALLENGES in PENSION FUNDING Other options for an employer to reduce future financial obligations are 1) not enhance retirement benefits for current employees and/or 2) create a second tier retirement benefit for new hires. In recent years many public agency employers and their employee organizations bargained 3% at 50 for their law enforcement personnel and 2.5% at 55 for miscellaneous employees. These pension enhancements come at great expense to the employer. Employer share under these schemes can reach nearly 18% while the employee share is 8% for non safety and 9% for safety employees. 4 For law enforcement personnel, impasse procedures may also encompass interest arbitration under Code of Civil Procedure Currently, the constitutionality of interest arbitration for law enforcement personnel pursuant to Code of Civil Procedure , passed in the aftermath of County of Riverside v. Superior Court (2004) 30 Cal.4th 278 [finding interest arbitration pursuant to SB 402 unconstitutional as an unlawful impingement on a county s plenary authority to set employee compensation] is being litigated at the court of appeals. Previously, all superior courts faced with this issue found that this statute failed to pass constitutional muster. 7

8 Oftentimes, employee organizations negotiate the employer pick up the employee s share requiring the employer to contribute 25% of salary in addition to salary to fund pension obligations. An agency contracting with CalPERS may amend its contract to provide a different level of benefits to members who receive service credit for the first time after the effective date of the amendment. (Cal. Gov. Code ) Any creation of a second tier of benefits for new hires, as more fully set forth below, is subject to collective bargaining obligations. The amendments may reduce the benefit, terminate the benefit or provide different benefits. Creating a second tier of benefits for new hires may be costly to the employer with pooled plans. Generally, there is no rate change at the time of amendment for non pooled plans. Under CalPERS, the amount the employee and the employer pay is set by the PERS actuarial formula depending on the retirement benefit that the agency has adopted. The amount shared between employer and employee is subject to collective bargaining. (Cal. Gov. Code 3504, ) Public Employee Pensions are Protected from Modification by the Contract Clauses of the State and Federal Constitutions, Barring Specific and Exceptional Circumstances In California, the terms and conditions of public employment are controlled by statute or ordinance rather than by contract. (Miller v. State of California (1977) 18 Cal.3d 808, 813; Kim v. Regents of the University of California (2000) 80 Cal.App.4th 160, 164.) Accordingly, public employees have no vested right in any particular measure of compensation or benefits, and their compensation or benefits may be modified or reduced pursuant to proper statutory authority. (Miller, supra, at ; Butterworth v. Boyd (1938) 12 Cal. 2d 140, 150.) But some terms, such as a promise for compensation or pension benefits, give rise to obligations protected by the contract clause of the Constitution, and therefore are vested. (Kern v. City of Long Beach (1947) 29 Cal. 2d 848, [including the right to the payment of salary that has been earned].) Benefits that are so protected may not be legally denied or impaired by an employer. (See, e.g., Cal. Const. Art. I, 9; U.S. Const. Art. 1, 10, cl. 1.) Though the employee s right to receive pension benefits is defined (and commonly limited) by vesting requirements, their contractual right to earn pension benefits on the terms offered is vested on the very first day of employment. (Kern, supra, 29 Cal. 2d at 855; Miller, supra, 18 Cal. 3d at 814.) That right is not subject to forfeiture. Id. Even though an employee may acquire a vested contractual right to a pension, that right is not rigidly fixed by the specific terms of the legislation in effect during any particular period in which he serves. (Kern, supra at 855.) Thus, the employee does not have a right to any fixed or definite benefit, but only to a substantial or reasonable 8

9 pension. (Id.) A governing body may modify the system, but such modifications occur only where necessary to protect the flexibility of the pension system, or to maintain the system in the face of changing conditions. (Id.) To be sustained as reasonable, such modifications must bear some material relation to the theory of a pension system and its successful operation, and changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages. (Allen v. City of Long Beach (1955) 45 Cal. 3d 128, 131.) The validity of attempted changes in vested pension rights depends upon the advantage or disadvantage to the individual employee whose rights are involved, not to other or new employees (Abbott v. City of Los Angeles (1958) 50 Cal.2d 438.) Modifying Existing Pension Obligations is Exceedingly Difficult The standard for modifying pension benefits for current employees is very high and often difficult to meet. (Adler v. City of Pasadena (1962) 57 Cal.2d 609 [where a city s charter was amended to substitute a fluctuating payment for a fixed payment pension was found to be unreasonable and thereby a breach of contract as applied to employees who became employees prior to the date of the amendment]; Wisely v. City of San Diego (1962) 188 Cal.App.2d 482 [increase in pension contributions was invalid where there was no accompanying benefit]; United Firefighters v. City of Los Angeles (1989) 210 Cal.App.3d 1095 [amendment to cap the pension benefit cost of living increases to 3 percent was held unconstitutional since members had a vested right to the pension benefits in effect when they were hired as well as to any additional benefits offered subsequent to hiring].) Employers offsetting disadvantages by providing comparable advantages have been found constitutional. (City of Downey v. Board of Administration (1975) 47 Cal.App.3d 621 [amendments provided for increase in employee contributions but employer offset with an increase in the amount of retirement allowance]; Packer v. Board of Retirement (1950) 35 Cal.2d 212 [amendment of pension plan that provided for a pension to participating employees widows in cases where the employee exercised the option to take a lesser pension during lifetime was permissible].) But an employer would be hard pressed to meet the high standard set for modifications to pensions for current employees and retirees. Current employees have a vested right to earn pension benefits on the terms offered, which includes any improvements to the terms. (Kern, supra, 29 Cal.2d at 855.) Even if an employer s contemplated modification is on a going forward basis only and would not affect any pension benefits already earned, any reduction by the employer of the current terms will likely subject the employer to litigation. 9

10 Under existing case law, any reduction must be accompanied by a comparable advantage to the employees affected by the reductions. But a comparable new advantage to offset the disadvantage may not solve an employer s fiscal concern, which prompted the need for a reduction in the first place. 5 6 Though the language in Kern v. City of Long Beach states that employees only have a vested right in a substantial and reasonable pension, Kern and cases subsequent have consistently held that employees have a vested right to earn pension benefits on the terms offered and that it vests on the very first day of employment. Modifying Pension Benefits for Newly Hired Employees Need Only Comply with Collective Bargaining Obligations An applicant for employment does not have a vested interest in any benefits offered by their prospective employer. Applicants may desire those benefits, but they generally have no right to any such benefit and may not sue an employer for deciding to cease offering those benefits prior to their employment. Even the right to a pension vests on the first day of employment not before. (Kern, supra, 29 Cal.2d at 855; Miller, supra, 18 Cal.3d at 814; Claypool v. Wilson (1992) 4 Cal.App.4th 6464, 662.) An employer may change benefits at any time for future employees subject to the requirements of collective bargaining. The terms and conditions of employment for future employees within the bargaining unit are within the scope of bargaining. (Kohler 5 If an employer fashioned a comparable new advantage to accompany the disadvantage, the employer could propose the modification to all of its employee organizations. If the modification is agreed to by the employee organizations and the reduction is voted on and approved by the governing body, the courts may view this modification as acceptable. Even where a majority of members of the retirement system agree to the modification, an employer may still be at risk where an individual disagrees with the reduction. A law may be unconstitutional in its application to a particular case, yet valid in its general, application especially where, as here, it is apparent that the Legislature would want the act to prevail where it constitutionally may. (Stork v. State of California (1976) 62 Cal.App.3d 465 [finding that notwithstanding the 1972 amendments to the state s pension system of abolishing the miscellaneous classification and creating a general safety classification, plaintiff was entitled to the scale of service retirement allowances prescribed to his former classification].) 6 However, as demonstrated by cases cited above, courts have found modifications made to pension benefits by charter cities, pursuant to their charters, to be unconstitutional. (Adler v. City of Pasadena, supra; Abbott v. City of San Diego, supra.) Where the changes to a pension enacted pursuant to the charter or through modification of the charter have interfered with vested rights, the original obligation remains. (San Francisco Police Officers Ass n v. City and County of San Francisco (1995) 37 Cal.App.4th 283 (unpublished decision) [court citing instance in 1975 where the voters, who have the power to change the retirement allowance formulae, eliminated a cost of living adjustment related to current employees, but the city was still saddled with over $1 billion in unfunded liability because the rights were vested in current employees].) A modification made pursuant to and in compliance with the City charter does not guarantee the constitutionality of the change. 10

11 Company (1989) 292 NLRB [finding that a vacant position is still a position within the bargaining unit and the duties associated with the position cannot be unilaterally transferred out of the unit]; Mendocino County Employees Association v. County of Mendocino (1992) 3 Cal.App.4th 1472.) Any change the employer desires to make to benefits offered to new hires must be negotiated with the appropriate employee organizations before being implemented. (But see California Association of Professional Scientists v. Schwarzenegger (2006) 137 Cal.App.4th 371, 383 [court stated in dicta that when a collective bargaining agreement purports to secure pension rights for future employees, it may well be that the federal and state contract clauses protect the rights of future employees as much as the rights of existing employees ].) CHALLENGES in POST Another avenue where an employer may seek to gain concessions and/or reduce overall liability is in the area of post employment benefits. GASB 43 and 45 requirements now apply to all public agencies. 8 Public agencies should have a firm idea as to the nature and extent of their other post employment benefits liabilities. Depending on the nature of the obligation, a public agency may have options in how to gain concessions and/or reduce its liability. In order to determine whether an employer has the flexibility to modify health benefits for current retirees, the employer must determine the nature of the obligation to current retirees. An employer should consider: What does the language of the MOU provide? Are retirees linked to the benefits received by current employees? Is the level of contribution set by statute? Is there vesting language in the MOU? If there is vesting language, the employer may have less flexibility in modifying the benefit. Aside from the MOU, are there other documents plan documents, materials distributed to retirees that promise maintenance of a certain level of benefit? 7 Case law interpreting the NLRA is persuasive in interpreting the MMBA. (Fire Fighters Union v. City of Vallejo, supra.) Similarly, PERB will look to its interpretation of similar language in other collective bargaining statutes it administers when making its determinations. 8 The Government Accounting Standards Board s standards 43 and 45 obligate public agencies to report costs that pertain to post employment benefits other than pensions. Prior to these standards, employers did not have to book their liability. Requiring employers to book their unfunded liability and begin to address ways of funding the liability has shed light on a significant cost to the employer. 11

12 Are there statutory provisions that preclude vesting? For 1937 Act Counties, there is a presumption against vesting of retiree medical benefits adopted by ordinance. (Cal. Gov. Code ) For current employees, an employer through collective bargaining may reduce future liability by: Changing the health benefit plan including contribution amounts, copays, and plan design with current employees. One such method is to move from a defined benefit to a defined contribution shifting increased health care costs onto the employee. Any increases on the employer side can be negotiated. Moving towards the statutory minimum or capping employer contributions if under CalPERS Health. Implementing a supplemental benefit for current employees with a Section 125, or Cafeteria, Plan. Creating a second tier of benefits for new hires which caps benefit contributions at a fixed level or creating employee health benefit accounts. Whether Retiree Health Benefits are Vested is Undetermined. As we noted above, a promise for compensation or pension benefits gives rise to obligations protected by the contract clause of the Constitution, and therefore are vested. (California League of City Employee Associations v. Palos Verdes Library Dist. (1978) 87 Cal.App.3d 135, 139.) The California Supreme Court has not decided whether retiree health benefits are a term of employment subject to vesting. Interplay with Collective Bargaining Labor management relationships involving California Cities are governed by the MMBA. (Cal. Gov Code 3500 et seq.) The MMBA creates a duty for both an employee representative and an employer to meet and confer in good faith regarding matters affecting wages, hours and other terms and conditions of employment (i.e., within the scope of representation ). (Cal. Gov. Code 3504, 3505.) Group insurance benefits are within the scope of representation. (Social Services Union v. Board of Supervisors (1990) 222 Cal.App.3d 279, 285.) Similarly, future retirement benefits of current employees have been found to be a condition of employment and a mandatory subject of bargaining under both the NLRA and the State Educational Employment Relations Act, governing bargaining for California s K 12 school and community college district. (See, 12

13 e.g., Allied Chemical Workers (1971) 404 U.S. 157; Rincon Valley Union Elementary School District (1988) 12 PERC 19,162, p. 22.). Future Hires Have No Vested Right to any Benefit, and the City may Change Benefits Subject only to Bargaining Obligations Under the MMBA Because those yet to be hired have no vested right to any particular benefit, including post retirement healthcare benefits, an employer may change benefits at any time which may be afforded to future employees. As noted above, the terms and conditions of employment for future employees within the bargaining unit are within the scope of bargaining. (Kohler Company, supra.) Accordingly, any change an employer desires to make to benefits offered to new hires must be negotiated with the appropriate employee organizations before being implemented. An employer can negotiate with employee organizations to create a second tier of benefits under the MOU. Although there is a Split in Authority, More Recent and Better Reasoned Precedent Holds that the City May Renegotiate the Collectively Bargained Post Retirement Benefits of Current Represented Employees Consistent Under the MMBA The Second Appellate District Held in 1978 That Some Other Fundamental Benefits Of Current Employees Are Vested In the Manner Of Pensions, And May Therefore Not Be Modified In 1978, the Second Appellate District of the California Court of Appeal held that fundamental public employee benefits, such as (1) longevity based salary increases, (2) additional vacation awarded after ten years continuous full time service, and (3) a sabbatical awarded after six years of continuous service, were entitled to protection under the constitutional contract clauses in the same manner as pension benefits. (California League of City Employee Associations v. Palos Verdes Library District (1987) 87 Cal.App.3d 135, 140.) Relying on the case of Bixby v. Pierno, (1971) 4 Cal. 3d 130, 144, the Palos Verdes court judged the fundamental nature of the benefits by looking at the effect of [the benefits] in human terms and the importance of [the benefits] to the individual in the life situation. (Id. at 140.) The Palos Verdes Court then held that benefits were fundamental, and therefore vested, if they acted as an inducement to remain employed with the District. (Id.) Such vested benefits may only be modified under the same circumstances as could vested pension rights. (Id.) 13

14 In 1998, The Fourth Appellate District Held Instead That Collectively Bargained Employment Benefits May Properly Be Modified Through The Collective Bargaining Process However, in 1998 the Fourth Appellate District of the California Court of Appeal addressed a similar fact pattern and specifically disavowed the analysis in Palos Verdes. (San Bernardino Public Employees Association v. City of Fontana (1998) 67 Cal. App. 4th 1215, 1223.) We strongly believe that the San Bernardino Court s analysis was more consistent with the purpose and nature of collective bargaining under the MMBA. In San Bernardino, the court held that individual employees may not challenge changes to benefits such as longevity pay or personal leave accrual that were negotiated under California s collective bargaining statutes. 9 San Bernardino, 67 Cal.App.4th at 1220, citing Relyea v. Ventura County Fire Protection Dist. (1992) 2 Cal.App.4th 875, 882.) Specifically disapproving the reliance of the Palos Verdes Court on Bixby, the San Bernardino court s holding that a benefit implicates the constitutional contract clauses only where the circumstances and language of the statute in question evince a legislative intent to create private rights of a contractual nature enforceable against the state. (Id. at 1223, citing Valdes v. Cory (1983) 139 Cal.App.3d 773, 786.) Thus, where a party to the contract (i.e., the exclusive bargaining representative) consents to a change, the change does not implicate the contracts clause. (Id.) Moreover, once a negotiated CBA expires, employees have no legitimate expectation that the benefits will continue unless renegotiated as part of a successor agreement. (Id.) 10 In reaching this conclusion, the San Bernardino court cited with approval the case of Olson v. Cory (1980) 27 Cal. 3d 532, wherein the California Supreme Court found that annual salary increases based on the California consumer price index, guaranteed to judges when beginning their terms, could not be limited during those terms, but that a member who completes one term during which he was entitled to benefits and elects to enter a new term has impliedly agreed to be bound by those benefits only which are offered for the different term. By parity of reasoning, the same principle applies to MOUs governing public employment. (San Bernardino, 67 Cal. App. 4th at ) 9 San Bernardino also included a challenge to modification of post retirement health benefits of current employees; however, the court refused to rule on that issue, finding that it was not ripe because no actual benefits changes had yet been made. (67 Cal. pp.4th at ) 10 The San Bernardino Court also cited Vielehr v. State of California (1980) 104 Cal. App. 3d 392 for a distinction between retirement rights, which may be (but are not necessarily) protected under the contract clause, and employment rights, which may not. (San Bernardino, 67 Cal. App. 4th at 1224.) If PERB or a reviewing court were to adopt this dichotomy, and deem retiree health benefits retirement rights, there is a possibility that those benefits could be found to be vested even under the San Bernardino standard. 14

15 Harmonizing Palos Verdes and San Bernardino Given that two California Circuit Court of Appeals have viewed certain benefits as either vested benefits or employment benefits and the California Supreme Court has not weighed in with its determination, any argument that an employer has for its ability to modify post retirement health care benefits lies in the employer s evidence the language of the MOUs and any other extrinsic materials which demonstrates the employer s historic practice in changing these benefits. Under the Better Reasoned View, an Employer May Renegotiate the Collectively Bargained Post Retirement Benefits of Current Employees Any Time Before Their Retirement Under the standard set forth in San Bernardino, post retirement health care benefits are a term and condition of employment that may be renegotiated consistent with the requirements of the MMBA. (San Bernardino, supra, 67 Cal.App.4th at 1220; See also Madera Unified School District (2007) PERB Decision No [holding that retirement health insurance provisions are within the scope of bargaining insofar as they affect the future retirement benefits of current employees ] 11 ; County of Sacramento (2008) PERB Decision No. 1943M [same].) If an employer can demonstrate that health benefits are constantly changing, this is strong evidence that the employer and its employee representative groups operate under the notion that the terms of an MOU are binding for the specified length of the term. (Id. at 1223.) Such a position is not entirely without risk; because of a current conflict in the California Court of Appeals. A court may adopt the reasoning of Palos Verdes rather than San Bernardino. The California Supreme Court has not settled the issue The Board s decision is potentially problematic in several respects. First, the Board s holding has the potential to swallow the rule that benefits for retirees are a permissive subject of bargaining. This is because almost any change to the current benefits of retirees arguably affects the future benefits of current employees. Secondly, the decision raises an issue regarding remedies. The Board does not have jurisdiction to order a remedy for current retirees, who were the only individuals affected by the alleged conduct. The Board could only order a remedy as to current employees; but here they suffered no harm. Presumably, the Board could order the change rescinded as it applied to the future benefits of current employees. In order words, the Board could order the employer to restore the promised benefit for current employees. The employer s promise would not become actionable until the current employee retired; but once that occurred, the Board would again lose jurisdiction! 12 More recently, in following a long line of precedent in the state, the Washington Supreme Court held that retiree welfare benefits (health care) are vested upon retirement and similar to pension benefits can only be modified to protect the integrity of the pension/welfare system. (Navlet v. Port of Seattle (2008) 194 P.3d 221.) Pension and welfare benefits are not distinguishable. (Id. at ) Welfare benefits make up part of the core compensatory benefits package offered in exchange for continued service and 15

16 Moreover, and potentially of greater concern, is the distinction made between employment rights and retirement rights cited, with approval, in San Bernardino (citing Vielehr, supra, 104 Cal.App.3d 392). If post retirement health care benefits were found to be equal to pension benefits, these health benefits would be subject to the same high standard set forth in Allen, supra, 45 Cal.3d at 131, for modifications to pension benefits. Employers Subject to CalPERS Health and the Public Employees Medical and Hospital Care Act The CalPERS health benefit program offers contracting agencies various plans and programs. In providing health care benefits, PERS is a broker or provider of benefits as compared to its pension arm. For health care benefits, PERS purchases health care products which, in turn, it can provide to its contracting agencies. The rates for insurance are set by the negotiations between PERS Board and health care providers such as Kaiser or Blue Cross. But beyond that, it is up to the contracting agencies to determine contribution amounts for participating employees and retirees and eligibility. A contracting agency must simply inform PERS Health of changes to its contribution for both active and retiree health care benefits. Public agencies can join or drop PERS Health by notification. Employers contracting with PERS to provide health care benefits are regulated by the Public Employees Medical and Hospital Care Act ( PEMHCA ). (Cal Gov. Code et seq.) Under PEMHCA, the contracting agency the employer and each employee shall contribute a portion of the cost of providing the health benefit coverage afforded under the health benefit plan approved or maintained by the board in which the employee or annuitant maybe enrolled. (Cal. Gov. Code ) The division of the health benefit premium is determined through collective bargaining or, where the employees are unrepresented, by the governing body. Madera Unified School District, supra; County of Sacramento, supra.) The employer fixes its contribution by resolution, which is then filed with CalPERS. PEMHCA contains a vesting schedule but it is only applicable to those public agencies that formally adopt the schedule. (Cal. Gov. Code 22893(a), (c).) are deferred compensation which create a vested right in retirees who reach eligibility requirements under the terms of the applicable collective bargaining agreement. (Id.) Though California is not bound by decisions of another state s supreme court, this case may be persuasive. The decisions of another state s supreme court can be persuasive, depending on the point involved and the lack of authority in California. (Savett v. Davis (1994) 29 Cal. App. 4th Supp. 13, 16 n. 2 [ While decisions of sister state courts are not binding on California courts, they have persuasive value where the issues raised involve conflicting policies and the case is one of first impression in California ].) 16

17 Under PEMHCA, an employer can contribute towards health care premiums for active employees and retiree in two ways equal or unequal shares. Under the equal method, the employer contributes the same amount for both an active employee and retiree so long as that amount is equal to or greater than the statutory minimum. (Cal. Gov. Code 22892(b).) The statutory minimum in 2009 is $ (Cal. Gov. Code 22892(b)(2).) Under the unequal method, an employer can set the amount for retirees at less than its contribution for current employees. (Cal. Gov. Code 22892(c).) The employer must then increase the amount contributed for retirees based on a formula. (Id.) Interplay between Requirement of the Public Employee Medical and Hospital Care Act as Applied to Current Employees and Current Retirees As allowed by the PEMHCA, an employer can set its amount of contribution through collective bargaining. PEMHCA does not require that the employer s contribution for retiree health care exceed its contribution for active employee health care premiums. (Id.) Indeed, PEMHCA provisions stress equal contributions. (Cal. Gov. Code 22892(b) and 22892(c).) Also, nothing in PEMCHA prohibits employers from reducing its contribution so long as the employers contribution meets the statutory minimum. PEMHCA s provisions inextricably link contributions for retiree health care premiums to the contributions made for active employees. (Id.) If an employer s contribution for active employees increases, the contribution for retirees also increases and the inverse applies as well if the employer s contribution for active employees decreases, the contribution for retires similarly decreases. No provision in PEMHCA requires that an employer s contribution remain static. Subject to collective bargaining obligations with current employees, an employer can continue to modify the amounts of its contribution for active employees so long as it 1) meets the statutory minimum; and 2) complies with either the equal or unequal method. An employer s ability to negotiate changes for active employees and implement those changes for retirees without bargaining may be subject to an assertion of a right based in promissory estoppel. Retirees may argue that though the statute does not allow any reduction of the employer s contribution. 17