Federal Court Upholds City's Right to Modify Terms of Pension and Retiree Health Benefits

The 9th Circuit Court of Appeals issued a ruling in San Diego Police Officers’ Association v. San Diego City Employees’ Retirement System, et al., that could provide public employers with greater flexibility in modifying collectively-bargained terms of employment affecting retirement benefit calculations and/or eligibility.  The court’s conclusions were based on its interpretation of federal constitutional principles rather than the California constitution.  It is, however, the most definitive authority available to date regarding the characterization and treatment of certain retirement-related benefits in a collectively bargained context and more clearly defines the distinction between vested benefits and terms of employment.

The City of San Diego imposed a salary ordinance on the members of the San Diego Police Officers’ Association (Association) after labor negotiations collapsed.  The ordinance resulted in modifications to the City pension plan and retiree health plan including a reduction in the City’s subsidy of the employees’ contributions to fund the pension plan and an extension of the service requirement for retiree health benefits from five years for 100% entitlement to ten years.  For employees participating in a non-subsidized alternative retirement benefit, the ordinance provided for a reduction in salary in lieu of the subsidy reduction. 

The Association argued that these changes amounted to an impairment of the vested contractual rights of the employees in the Association under the federal Constitution.  The court, however, observed that “under federal law the state’s statutory language must evince a clear and unmistakable indication that the legislature intends to bind itself contractually before a state legislative enactment may be deemed a contract for purposes of the Contract Clause.”  In the court’s opinion, any benefit falling short of that standard would be deemed a term of employment, which can be modified without federal constitutional consequences, rather than a vested contractual right.

The court distinguished an employee’s vested contractual right to earn a certain level of pension benefit upon the acceptance of public employment from a term of employment subject to modification in the bargaining process.  In this regard, it recognized an employee’s compensation to be a condition of employment which can be modified without violating any vested rights.  The court concluded that the City’s subsidy of the employee contributions was simply a component of compensation.  The same was true of a reduction in compensation for the non-subsidized employees. 

With respect to the extension of eligibility requirements for retiree health benefits, the count also concluded that this was not an impairment of a vested contractual right.  It was the court’s opinion that “retiree medical benefits ... [are] considered a term of employment that could be negotiated through the collective bargaining process.”  In the absence of the City’s clear intent to create a contractual right to retiree health benefits, those benefits “were longevity-based benefits that continued only insofar as they were renegotiated as part of a new agreement and were not protectible contract rights.”