Contributing Author: Dianne Schechter
On December 30, 2016, a California appellate court ruled that the California Legislature’s elimination of a public employee’s ability to purchase “airtime” did not violate the California Contract Clause. Cal Fire Local 2881, et al. v. California Public Employees’ Retirement System, et al, 2016 WL 7488338. The appellate court determined that the elimination of public employees’ option to buy up to five years of retirement service credit did not violate any pension right because the option was not a vested benefit and, even if it was, the Legislature lawfully eliminated the benefit.
The facts of this case began in 2003 when the Legislature enacted Government Code section 20909. This section allowed eligible public employees the option to purchase at cost up to five years of non-qualifying service credit (commonly referred to as “airtime”). To be eligible, the employee had to have at least five years of service, be presently employed, and cover the cost of the increased benefit due to the additional service credit.
This option was available to eligible employees from January 1, 2003 through the end of 2012. In 2012, the Legislature enacted the Public Employees’ Pension Reform Act of 2013 (“PEPRA”), which eliminated the option provided under section 20909, effective January 1, 2013. PEPRA gave eligible members one last 15-week window to purchase airtime before the option ceased to exist.
The plaintiffs (a group of professional firefighters who were eligible to, but did not, purchase any “airtime” during the 15-week window before the elimination of this option) alleged they had a vested right to continue what is referred to as “buying airtime” because it had been permitted for years.
Plaintiffs claimed that section 20909 clearly stated they had a vested contractual right to purchase up to five years of airtime service credit that is not subject to elimination by legislative amendment or repeal, even before the benefit has been accessed or the time for retirement has arrived. However, the appellate court disagreed and determined that the statute’s language and its legislative history did not create a vested contractual right to purchase the additional credit.
Even if this were a vested right, the Legislature can modify or eliminate vested pension rights in order to keep a pension system flexible to permit adjustments in accord with changing conditions and to maintain the integrity of the system. Such changes have to be reasonable, and it is for the court to decide in each case whether the action constitutes a permissible change. To be “reasonable,” the change must relate to the theory of a pension system and its successful operation.
In this case, the appellate court determined that the Legislature had ample authority to eliminate the option, as doing so restricted the pension system to providing benefits based on work actually performed, which is its primary purpose. In other words, pension benefits are “deferred compensation that has been earned through the actual performance of work.”
This change eliminated an option that allowed for the purchase of non-qualifying service credit that was completely unconnected to actual services provided or work performed. Therefore, the Legislature was eliminating something that was not related to the theory of a pension system and was, in fact, detrimental to its successful operation.
As previously noted, changes to employees’ pension rights must bear some material relation to the theory of a pension system and its successful operation, and changes to the pension plan resulting in disadvantage to employees should be accompanied by comparable new advantages. However, and arguably most important to note, this is a recommendation, not a mandate. The Legislature is not required to provide a comparable new advantage.
The appellate court decided that there was no disadvantage to employees by eliminating their right to purchase airtime service credit. While it provided something valuable for those employees who purchased it, it was the employees, not the state, who paid for this benefit. Consequently, the appellate court reasoned that this was not a case where the state provided a retirement benefit in exchange for work, and then took the benefit away. Instead, this was a benefit that employees provided to themselves.
If you have questions regarding the new legislation or a prior purchase of airtime service credit, contact Butterfield Schechter LLP- San Diego’s largest law firm focusing its practice on employee benefits.