California Court Vests Retirees' Medical Benefits

The decision sends the Orange County case back to federal court.

Photo by jasleen_kaur
California's supreme court ruled last month that certain retirees' medical benefits are vested and thus protected from reduction by employers seeking modifications to reduce costs. The court also ruled that ordinances and resolutions of the employer are important source documents for determining the contractual nature of such other post-employment benefits (OPEB).

"Under California law, a vested right to health benefits for retired county employees can be implied under certain circumstances from a county ordinance or resolution," wrote Justice Marvin R. Baxter for the court in a decision involving Orange County employees and retirees.

Unlike pensions, which have long been held to be vested and protected under state law, retiree medical benefits have occupied a gray zone in California jurisprudence. The state supreme court's decision was rendered at the request of the federal circuit court which is reviewing contract law complaints by county employees. It will now be up to the federal court to determine whether the implied contract referenced by the California decision can be abridged.

The California decision clearly informs employers that their basic legal documents setting up OPEB plans will be important evidence in determining the extent of any claims that a contract was entered into implicitly when the employer began offering retiree medical benefits and when each employee was hired on. Attorneys for public employers are telling me that they now believe that the court has at least clarified the landscape by focusing its attention on ordinances and resolutions (rather than human resources documents, orientation materials and other potential indicia of employers' intent). Ordinances and resolutions that make such benefits subject to legislative appropriation, or treat them as a variable or negotiable benefit, will be easier for employers to wiggle out of. Those that make what appears to be long-term or lifetime promises will be prone to treatment as implied contracts.

Retirees and labor unions will justifiably latch onto the courts' findings regarding vesting of benefits for retirees. Most attorneys now agree that employers will find it much more difficult to change benefits for retirees unless the source documents are little more than labor agreements that can be changed in the next bargaining round, as was the case in San Diego earlier this year.

What the California court did not decide is whether implied "OPEB" contracts can be broken, abridged or modified under the same kinds of dire circumstances that federal courts have previously allowed employers and their pension funds to use as the rationale for pension benefits roll-backs. Using the 2011 Colorado and Minnesota pension COLA decisions as a point of reference, it is conceivable that we will eventually see a federal court test of whether a public employer could freeze the value of retirees' OPEB benefits in dollar terms and leave the medical inflation problem to the employees, upon demonstration that the employer is unable to sustain the plan otherwise. From an evidentiary standpoint, the funding status of OPEB plans nationwide is almost infinitely worse than any of the pension funds that have been dragged into court. It won't take much to prove that such OPEB plans are distressed and require remedies.

Those interested in the exact scope of the California decision are encouraged to read the entire ruling. Here are the key issues as recited by the court:

"The certified question from the Ninth Circuit asks us to decide whether California law prohibits a county and its employees from agreeing, by means of an implied contract, to confer vested rights to health benefits on retired county employees. County contends that California law does contain such a prohibition, and presents in this proceeding a three-pronged argument: (1) that a county government and its employees cannot form an implied contract; (2) that even if implied contracts are cognizable in the public employment context, such contracts cannot create vested rights; and (3) that even if vested contractual rights for county employees may be implied, such rights cannot include health benefits. We examine each argument in turn."
Needless to say, things did not go well for the county on this round. That said, the federal circuit court's rulings in the Orange County case may be more important in the long run, as far as precedents go. That said, the state court's decisions are landmark cases that will be widely referenced. Meanwhile, employers are well advised to approach their collective bargaining carefully with a clear strategy to mitigate OPEB costs as much as possible through negotiations that eliminate or reduce the taxpayer's exposure to lifetime liabilities. Whereas the battle has now been joined in the pension reform wars, the recent OPEB disputes are just opening skirmishes.

Elizabeth Daigneau is GOVERNING's managing editor.