A Practice or Policy without Clear Legislative Intent Does Not Create Implied Contractual Right to Retiree Health Benefits

A federal appellate court has affirmed a U.S. District Court’s decision to grant Orange County’s motion for summary judgment in Retired Employees Association of Orange County, Inc. v. County of Orange. The Ninth Circuit found that the evidence presented by Retired Employees Association of Orange County, Inc. (REAOC) failed to show the county’s intent to create a contractual right to pooling retirees and active employees when setting health insurance premium rates. Thus, the court upheld the county’s right to terminate its practice of pooling the two groups, which had historically resulted in lower health insurance premium rates for retirees.

The decision last week by the U.S. Ninth Circuit Court of Appeals was the latest in a legal battle spanning almost five years over whether Orange County employees retiring prior to January 1, 2008 have a vested right to pooled premiums. A significant turning point came late in 2011 when, as discussed in our previous legal alert, the California Supreme Court recognized that a vested right to retiree health benefits could be created either explicitly or implicitly. However, it cautioned that the party asserting the existence of such a right bears the burden of demonstrating a clear legislative intent to create a contractual right so the public employer and the public are not blindsided with unexpected obligations. Thus, while a contractual right can be inferred, such inference must be rooted in legislative action which clearly shows that the public employer intends to confer a vested right.

Applying the guidelines established by the California Supreme Court, the Ninth Circuit found that REAOC failed to meet its burden. It first acknowledged the district court’s observation that the county was statutorily barred from conferring any element of employee compensation, including retiree health benefits, absent approval by the county’s Board of Supervisors. Thus, REAOC had to demonstrate that a resolution or ordinance, including one approving a collective bargaining agreement, extended to retirees a vested right to pooled premiums. However, the court held that evidence presented by REAOC did not support retirees’ claim that they had an implied vested contractual right to have health premiums set using a single pool for retirees and active employees. At best, the evidence demonstrated that retirees had a contractual right to a pooled rate for a single year, not a right to a lifetime of pooled premiums. As the Ninth Circuit succinctly stated, “[a] practice or policy extended over a period of time does not translate into an implied contract right without clear legislative intent to create that right – an intent REAOC has not demonstrated here.” 

Although the California Supreme Court’s ruling in 2011 suggested at first blush that the path to establish a vested right to retiree health benefits would be an easy one since a vested right could be implied, this decision highlights that establishing the requisite intent may not be so easy after all. The Ninth Circuit’s decision marks the third time that the REAOC case has hit the court’s docket, and while it may not be the last judicial stop, the tide has been consistently against REAOC. For public employers, these cases provide valuable insight into how California courts will evaluate health benefits provided in retirement.