However, the Vested Rights Doctrine Proves Fatal to Core Pension Reform Measures
A tentative decision on the legal challenges to the City of San Jose’s pension reform measure, Measure B, was released late last month. While the court rejected the challenges to most of the provisions, it continued the judicial trend of bolstering the vested rights doctrine where it is demonstrated that a public employer conferred a vested right. At a time when many cities and other public agencies are struggling with pension and retiree health benefit costs, this decision provides some guidance on which reforms may be acceptable.
Measure B, approved by close to 70% of San Jose’s voters in late 2012, includes several pension and retiree health benefit reforms, including increased employee contributions, changes to disability retirement, suspension of cost of living adjustment (COLA) payments and changes to the retiree health benefit program. Six lawsuits, which were later consolidated, were filed shortly thereafter challenging the validity of most of Measure B’s provisions.
The court noted that the implementation of Measure B could move forward for new employees since the application of Measure B to new employees was not challenged. More significantly, the decision struck an early blow to San Jose by concluding that a reservation of rights clause permitting it to alter its retirement system “does not of itself preclude the creation of vested rights.”
On the challenges to Measure B, the court held the following:
The requirement that employees make additional contributions to reduce the city’s unfunded pension liabilities is invalid because employees have a vested right to have the city pay such unfunded liabilities.
The challenge to a provision permitting pay reductions was rejected on the basis that the city has a right to modify employee compensation, subject to applicable laws.
A provision allowing the city to suspend COLA payments upon the declaration of a fiscal and service level emergency was struck down. The court found that employees have a vested right to the benefit and rejected the city’s argument that a vested right can be impaired in an emergency.
Modifications to the disability retirement system, including a requirement that determinations be made by an independent panel of medical experts and that employees be unable to work to be eligible for a disability retirement, were upheld. The court found that these changes do not impair a vested right because they are loyal to the original purpose of the system and are accompanied by a comparable new advantage.
The elimination of the supplemental retiree benefit reserve was upheld. The city demonstrated that distributions from the reserve were within its discretion and, therefore, no vested right exists. It also established that the benefit was intended to apply only in times where the retirement fund experienced superior investment gains.
On the challenges to the city’s modification of its retiree health benefit program, the court found that the city could require that employees pay the unfunded liabilities of retiree health benefits. It also held that plaintiffs do not have a vested right to a particular health plan or benefit but, rather, have a vested right to coverage in general. Thus, while the city could change plans, it could not eliminate access to fully paid health benefits if such a benefit was expressly extended. The court also held that the imposition of retiree health benefit costs greater than 50% was invalid, finding that employees have a vested right to a one to one funding ratio.
While Measure B’s proponents and opponents both count the court’s decision as a win, appeals are expected from both sides.