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County of Orange v. Association of Orange County Deputy Sheriffs et al

January 26, 2011

COUNTY OF ORANGE, PLAINTIFF AND APPELLANT,
v.
ASSOCIATION OF ORANGE COUNTY DEPUTY SHERIFFS ET AL., DEFENDANTS AND RESPONDENTS.



(Los Angeles County Super. Ct. No. BC389758) APPEAL from a judgment of the Superior Court of Los Angeles County, Helen I. Bendix, Judge. Affirmed.

The opinion of the court was delivered by: Johnson, J.

CERTIFIED FOR PUBLICATION

In 2008, the County of Orange (Orange County or the County) sued the board of the County's retirement plan, claiming that an enhanced retirement formula for prior years of service adopted in 2001 by the County Board of Supervisors violated the California Constitution. The County now appeals from the trial court's grant of motions for judgment on the pleadings and entry of judgment in favor of the Association of Orange County Deputy Sheriffs and the Board of Retirement of the Orange County Employees' Retirement System. We conclude that the past service portion of the enhanced retirement formula does not violate the Constitution, and we affirm.

BACKGROUND

I. The Orange County retirement system

The Orange County Employees' Retirement System (OCERS) is a public employees' retirement trust fund, an independent entity that administers the County's retirement system. OCERS is governed by the County Employees Retirement Law of 1937 (CERL). (Gov. Code, §§ 31450, 31468, subd. (l)(1).)*fn1 Orange County employees, including law enforcement (safety members), receive retirement and other benefits under CERL, which vests the management and funding of the retirement system in a board of retirement (OCERS Board). (§§ 31558, 31520.)

The County funds its retirement benefits through employee and employer contributions, and the retirement system investment earnings; the retirement fund is overseen by the OCERS Board. (§§ 31453.5, 31587.) These annual contributions are intended to fund the retirement benefits earned in the year the contributions are made. (§§ 31620 et seq., 31639 et seq.) The amount of the contributions is set based upon a normal contribution rate, which is a percentage of compensation required to fund the retirement benefits allocated to the current year of service being worked by county employees. Any shortfall between the normal cost and the actual amount determined to be necessary to fund future benefits (an amount based on actual experience) is made up through increases in employer contributions, and is amortized over a period of up to thirty years. (§ 31453.5.)

The benefits that an employee receives upon retirement are calculated according to a statutory formula that takes into account the employee's final compensation,*fn2 the number of credited years of service the employee had with the County, and a statutory multiplier. CERL provides for a variety of possible formulas for safety members. These include what is commonly called the "2% at 50" formula, which means two percent of final compensation, multiplied by the number of service years, for employees retiring at the age of 50. (§ 31664.) Section 31664.1, enacted in 2000, provides for an "additional pension for safety members," commonly called the "3% at 50" formula, which similarly means three percent of final compensation, multiplied by the number of service years, for employees retiring at the age of 50. (§ 31664.1, subd. (b).)

II. December 2001 vote: 3% at 50

The Association of Orange County Deputy Sheriffs (AOCDS) is the exclusive representative of Orange County deputy sheriffs, sergeants, and investigators for the district attorney's office, all of whom are safety members entitled to OCERS retirement benefits. (§§ 31469.3, 31470, 31470.2.) In May 2001, AOCDS's 1999 memorandum of understanding, reached after collective bargaining with the County and set to expire in October 2002, provided that AOCDS members were entitled to retirement under the 2% at 50 formula.*fn3 In May 2001, AOCDS formally asked the County to restructure the retirement terms to the enhanced 3% at 50 formula. After negotiations, in October 2001 the County negotiators and AOCDS representatives signed a tentative agreement to amend the AOCDS contract to adopt the 3% at 50 formula for members retiring on or after June 28, 2002. AOCDS agreed that its members would contribute 1.78 percent of their base salary for fifteen months, toward part of the cost of increased payouts under the increased formula. The agreement extended the AOCDS contract for an additional year, to October 2003.

On December 4, 2001, the County Board of Supervisors unanimously approved the amended AOCDS contract. The board voted to adopt Resolution No. 01-410, which authorized the 3% at 50 formula for AOCDS members, effective June 28, 2002. The accompanying memorandum of understanding between the County and AOCDS provided that the increased retirement formula would apply to "all years of service," including those years served before the date of the resolution. This portion of the new retirement formula was authorized by section 31678.2, subdivision (a), enacted in 2000, which provides that the board of supervisors could, by resolution, make the benefit formula "applicable to service credit earned on and after the date specified in the resolution, which date may be earlier than the date the resolution is adopted." Pursuant to section 31678.2, subdivision (c), members who had already retired before June 28, 2002 did not receive any increase in pension benefits.

The County had secured an actuarial report in November 2000, which analyzed (among other options) the financial impact of adopting the 3% at 50 formula for all years of service, both past and future. The analysis estimated that the increase in the County's "actuarial accrued liability" for the benefit enhancement for past service was between $99 and $100 million.

The board of supervisors approved and renewed the 3% at 50 formula in subsequent contracts with AOCDS in 2003, 2005, and 2007.

On January 29, 2008, however, the County had a change of heart. The board of supervisors unanimously voted to approve Resolution No. 08-005, which stated that the past service portion of the 3% at 50 formula (applying the enhanced benefit formula to past years of service), as adopted in 2001 by the board of supervisors then in office, "was unconstitutional at the time of its adoption and remains unconstitutional today." The board cited a September 2007 actuarial analysis*fn4 which concluded that the past service portion of the increased retirement benefit totaled $187 million. The resolution authorized the County's attorneys to "seek to obtain a declaration of unconstitutionality and an injunction against OCERS prohibiting it from paying out any benefit increases arising from Board Resolution 01-410 and based on years of service rendered before June 28, 2002, the effective date of that Resolution." The resolution also provided that the County would not seek to recover any amounts already paid out to retirees under the enhanced benefit formula.

III. The County's lawsuit

On February 1, 2008, the County filed the initial complaint in this action in Orange County Superior Court, naming as the sole defendant the OCERS Board. OCERS filed a motion to transfer venue to Los Angeles County and AOCDS intervened by stipulation. The case was transferred to Los Angeles Superior Court in April 2008. Following a demurrer by OCERS, on July 23, 2008 the County filed a first amended complaint adding AOCDS as a defendant.

The first amended complaint alleged in its first cause of action that the 2001 action by the prior board of supervisors adopting the past service portion of the enhanced 3% at 50 retirement formula violated the California Constitution's municipal debt limitation in article XVI, section 18, subdivision (a), because without voter approval, the resolution created an immediately incurred and legally enforceable debt or liability of more than $99 million, which exceeded the County's available unappropriated funds for the year. The second cause of action alleged that the past service portion also violated article XI, section 10 of the California Constitution, which prohibits the payment of extra compensation to public employees, because the retroactive portion "grants extra compensation to public employees 'after service has been rendered.'" The complaint requested declaratory and injunctive relief, including an injunction to prevent the County from commencing or continuing to pay the past service portion of the enhanced benefits to retired AOCDS members.

In January 2009, AOCDS filed a motion for judgment on the pleadings, in which OCERS joined. In an order filed February 27, 2009, the trial court granted AOCDS's motion, allowing the County leave to amend the municipal debt limitation cause of action "to the extent the County can allege that its liability for that portion of the 3% at 50 pension benefit attributable to past service as of 6/28/02 caused its indebtedness to exceed revenue in any given year since 6/28/02." The order granted the motion without leave to amend on the cause of action alleging extra compensation, concluding "the extra compensation clause does not apply to pension benefits."

The County filed a second amended complaint in April 2009, limited to the municipal debt limitation cause of action. AOCDS, joined by OCERS, filed a motion to strike the new pleading on the ground that it exceeded the limitation imposed by the trial court in its order granting the demurrer. The trial court construed the motion to strike as a motion for judgment on the pleadings, and in an order filed May 22, 2009, the court granted the motion without leave to amend.

The County appeals from the judgment filed July 15, 2009.

DISCUSSION

In reviewing the trial court's grant of the motions for judgment on the pleadings under Code of Civil Procedure section 438, subdivision (b)(1), we apply the same rules governing the review of an order sustaining a general demurrer. (Smiley v. Citibank (1995) 11 Cal.4th 138, 146.) A defendant's motion for judgment on the pleadings should be granted if, under the facts as alleged in the pleading or subject to judicial notice, the complaint fails to state facts sufficient to constitute a cause of action. (Code Civ. Proc., § 438, subd. (c)(1)(B)(ii).) We accept the complaint's properly pleaded factual allegations as true and give them a liberal construction. (Angelucci v. Century Supper Club (2007) 41 Cal.4th 160, 166; Boblitt v. Boblitt (2010) 190 Cal.App.4th 603, 606, fn. 2.) We do not accept as true "any contentions, deductions or conclusions of fact or law contained therein." (Dunn v. County of Santa Barbara (2006) 135 Cal.App.4th 1281, 1298.) We review de novo, and "'are required to render our independent judgment on whether a cause of action has been stated'" (Mendoza v. Continental Sales Co. (2006) 140 Cal.App.4th 1395, 1401), without regard for the trial court's reasons for granting the motion. (Ott v. Alfa-Laval Agri, Inc. (1995) 31 Cal.App.4th 1439, 1448.)

I. The municipal debt limitation

Article XVI, section 18, subdivision (a) of the California Constitution provides: "No county . . . shall incur any indebtedness or liability in any manner or for any purpose exceeding in any year the income and revenue provided for such year, without the assent of two-thirds of the voters of the public entity voting at an election to be held for that purpose . . . ." This municipal debt limitation means "'the legislative body may not encumber the general funds of the city beyond the year's income without first obtaining the consent of two thirds of the electorate.' [Citation.]" (Starr v. City and County of San Francisco (1977) 72 Cal.App.3d 164, 175.) This "establish[ed] the 'pay as you go' principle as a cardinal rule of municipal finance." (Westbrook v. Mihaly (1970) 2 Cal.3d 765, 776, vacated on other grounds, Mihaly v. Westbrook (1971) 403 U.S. 915.) "Each year's income and revenue must pay each year's indebtedness and liability, and no indebtedness or liability incurred in one year shall be paid out of the income or revenue of any ...


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