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City of Pleasanton et al v. Board of Administration of the California Public Employees' Retirement

November 29, 2012

CITY OF PLEASANTON ET AL., PLAINTIFFS AND RESPONDENTS,
v.
BOARD OF ADMINISTRATION OF THE CALIFORNIA PUBLIC EMPLOYEES' RETIREMENT SYSTEM, DEFENDANT AND APPELLANT.



(Alameda County Super. Ct. No. VG10520768) Trial Court: Alameda County Superior Court Trial Judge: Hon. Frank Roesch

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

CERTIFIED FOR PUBLICATION

The City of Pleasanton (Pleasanton) and a retired Pleasanton employee, James Linhart, petitioned for a writ of mandate to compel the California Public Employees' Retirement System (PERS) and its Board of Administration (board) to retroactively increase Linhart's monthly retirement allowance. Linhart contended the board erred in determining a portion of his compensation as a division chief for the Livermore-Pleasanton Fire Department was not pensionable. The trial court agreed and entered a judgment directing PERS to increase Linhart's monthly pension allowance retroactively from the date of his retirement in 2006. We reverse the judgment and remand the matter back to the trial court for entry of a new judgment denying the petition.

I. FACTUAL AND PROCEDURAL BACKGROUND

A. Factual Background

Linhart joined the Pleasanton Fire Department in 1984. Due to his employment he became a local safety member of PERS. After being promoted to fire captain in 1992, Linhart became a division chief in 1998, when the Pleasanton and Livermore fire departments merged. Linhart retired at the rank of division chief in 2006, after 22 years of service, and began receiving a retirement allowance from PERS. The central issue in this case is whether a portion of Linhart's compensation as division chief, denominated "standby pay" in his labor agreement, should be considered part of his pensionable earnings for purposes of calculating his monthly PERS retirement allowance.

As a fire captain in Pleasanton before the merger, Linhart worked a 56-hour workweek: 24 hours on followed by 24 hours off, two times, followed by 24 hours on and four days off. Linhart and others on the 56-hour workweek received an additional 7.5 percent of salary as "in lieu" holiday pay to compensate them for the fact their shift pattern required them to work on holidays. Until 1994, battalion chiefs worked the same 56-hour workweek and, like line personnel, received an additional 7.5 percent of salary as "in lieu" holiday pay. However, in that year, battalion chiefs were moved from the 56-hour workweek to a normal 40-hour workweek, 8:00 a.m. to 5:00 p.m., Monday through Friday. As a result of this change in schedule, battalion chiefs were no longer paid in lieu holiday pay. To avoid a reduction in their pay, Pleasanton chose to raise battalion chief salaries by 7.5 percent.

At the time of the merger in 1998, the Livermore Fire Department included a management classification of division chief. A division chief worked a modified 56-hour workweek. In general, the division chief worked the same schedule as his platoon but, when his platoon was at the station after 5:00 p.m., the division chief was allowed to go home and remain on call. Division chiefs in the Livermore Fire Department received in lieu holiday pay, like their management counterparts in the Pleasanton Fire Department had received prior to 1994.

The Livermore-Pleasanton Fire Department was formed in 1998, or shortly before. Pleasanton's battalion chiefs became division chiefs in the merged department. Linhart was promoted to division chief and given the position of training division chief, which he held until his retirement. The new department adopted an "Interim Compensation Plan" under which "Operations Division Chiefs"--division chiefs who supervised and managed an operations division--were assigned a modified 56-hour workweek like that worked by Livermore division chiefs before the merger.

Under the Interim Compensation Plan, Linhart was not assigned a modified 56-hour workweek. He worked a 40-hour workweek, 8:00 a.m. to 5:00 p.m., Monday through Friday, and was off work on the city's 12 annual observed holidays. However, he was assigned to a "back-up schedule" which required him to be available to report for emergencies, as necessary, during certain times. Linhart's back-up schedule applied only to him and to the chief and deputy chief of the department. He occasionally filled in for operations division chiefs when they were ill, injured, or on vacation, in which case he would work the modified 56-hour schedule of the officer for whom he was filling in. On those occasions, or when he was required to respond to emergencies on the back-up schedule, he would sometimes work on holidays. When required by the press of work, Linhart worked additional hours beyond his 40-hour workweek.

Section 5.1 of the Interim Compensation Plan, entitled "Standby Pay," provided in relevant part as follows: "Division Chiefs assigned to a standby schedule shall be compensated in an amount equal to seven and one-half percent (7.5%) of the Division Chief control point listed in Appendix A.[*fn1 ] Standby pay shall be paid biweekly." The standby pay provision remained in effect through revised compensation plans and Linhart continued to receive standby pay under it until his retirement in 2006.

Under the Public Employees' Retirement Law, Government Code,*fn2 section 20000 et seq. (PERL) and PERS regulations, a PERS member's benefits are determined according to a statutory formula that takes into account the member's base salary and certain items of special compensation received during the year in which the member's compensation is highest. Not all items of compensation paid in addition to the member's base salary count as pensionable special compensation. To qualify as special compensation, the payment must be received (1) "for special skills, knowledge, abilities, work assignment, workdays or hours, or other work conditions"; (2) "pursuant to a labor policy or agreement" applicable to a group or class of similarly situated employees; (3) "for services rendered during normal working hours." (§ 20636, subds. (c)(1), (2), (3).) Further, pensionable special compensation includes only payments the PERS board has "affirmatively determined to be special compensation," as reflected in board regulations promulgated for that purpose. (§ 20636, subds. (c)(6), (7); Cal. Code Regs., tit. 2, § 571(a), (d) (Regulation 571).) An item of special compensation not listed in subparagraph (a) of Regulation 571 cannot be used in determining a member's final compensation for pension purposes. (Regulation 571(d).)

From 1998 to 2006, Pleasanton made PERS contributions on behalf of six public safety employees, including Linhart, calculated by including standby pay they received as pensionable special compensation. Pleasanton and the employees believed the employees' retirement benefits would, in part, be based on standby pay. PERS itself never made any representation to that effect to them. Although PERS has a procedure for alerting contracting public agencies when there are discrepancies in the member earnings and retirement contributions reported to PERS, no such report was generated in this case.*fn3

PERS first became aware standby pay was included in Linhart's reported base pay in July 2006. On July 24, 2006, PERS's payroll processing unit informed Pleasanton standby pay was not reportable compensation for retirement purposes and that payroll reporting for Linhart had to be corrected to exclude it. Although the estimate Pleasanton provided Linhart of his retirement allowance in 2006 included standby pay as part of his pensionable final compensation, there is no evidence PERS ever represented to Linhart that his pension benefit would be calculated by including standby pay as part of his final compensation. None of the other similarly situated Pleasanton employees who retired before Linhart received PERS pension benefits based on the inclusion of standby pay.

B. Administrative Proceedings

After initially acceding to PERS's position that standby pay was not includable as compensation for retirement purposes, Pleasanton requested PERS to reconsider that determination in June 2007. After PERS affirmed its original position, Pleasanton initiated an administrative appeal on behalf of itself and several retired former employees in November 2007, asserting PERS was refusing to pay the concerned retirees "the retirement benefits to which they are entitled."

The appeal was assigned for hearing to an administrative law judge (ALJ) under the auspices of the Office of Administrative Hearings (OAH).*fn4 (See § 20134 [requiring this procedure when the PERS board hears appeals of benefit determinations]; § 11517, subd. (a) [authorizing the use of ALJ's to conduct original hearings on contested matters]; Cal. Code Regs., tit. 2, § 555 et seq. [specifying procedures for administrative appeal of PERS decisions].) The OAH is part of the Department of General Services, a state agency that is independent of PERS. (§ 11370.2, subd. (a).) In that contested proceeding, Pleasanton and Linhart were represented by Michael Roush, special counsel for Pleasanton, and PERS was represented by Patricia Miles, a senior staff counsel at PERS.*fn5 An evidentiary hearing was held before the ALJ on September 15 and 16, 2009. Linhart and PERS called and cross-examined witnesses, introduced documentary evidence, and submitted written opening and closing arguments to the ALJ in accordance with the hearing procedures of the California Administrative Procedure Act (APA). (See § 11400 et seq.)

The ALJ issued a proposed decision on December 24, 2009, finding Linhart's standby pay "was not special compensation, because it was paid for services rendered outside of his normal working hours." The ALJ also concluded the payments could not be construed as holiday pay, training premium pay, or shift differential pay, which PERS has determined, in general, to be special compensation in Regulation 571. (Regulation 571(a)(4), (5).) Further, the ALJ rejected Linhart's arguments that PERS breached its fiduciary duty to him and/or should be estopped by its conduct from excluding his standby pay from his pension calculation. The ALJ found (1) no breach of duty because Pleasanton was in at least as good a position as PERS to discover it was misreporting Linhart's compensation, and (2) no estoppel because PERS never represented to Linhart standby pay would be included in his pension calculation. The ALJ accordingly issued a proposed decision denying Linhart's appeal.

In accordance with section 11517, subdivision (c), the ALJ's proposed decision was timely submitted to the board for a determination whether to adopt the ALJ's decision or take any of the other actions allowed by that subdivision.*fn6 The matter was originally set for public hearing on February 18, 2010. In conjunction with that hearing, PERS staff submitted a packet of materials to the board members, a copy of which was received by Linhart's counsel on February 16. In addition to a copy of the ALJ's proposed decision, the packet included: (1) a cover memorandum signed by Patricia Miles stating in relevant part, "Staff recommends that the Board of Administration adopt the Proposed Decision" and neutrally spelling out all of the board's options for responding to the proposed decision; (2) a two-page, single-spaced document entitled, "STAFF'S ARGUMENT TO ADOPT THE PROPOSED DECISION," which summarized the evidence presented to the ALJ, the positions of the parties, and the ALJ's proposed decision, and recommended the board adopt the proposed decision because it was "consistent with the law and the facts"; and (3) a six-page, double-spaced document entitled, "RESPONDENTS' ARGUMENTS TO REJECT THE PROPOSED DECISION," prepared by Linhart's counsel, Michael Roush, which contended the ALJ's factual findings were not supported by the evidence, his legal conclusions were not supported by the findings or the evidence, and his proposed decision should be rejected by the board.

After receiving the agenda materials to be provided to board members on February 16, Michael Roush wrote to the board complaining the cover memorandum and recommendation by Patricia Miles was improper because she was the same attorney who had represented PERS in the administrative hearing before the ALJ. Roush asserted this violated Linhart's due process rights. Following postponement of the hearing until March 17, PERS's assistant chief counsel responded to Roush's letter, explaining why the legal department believed his due process claim was misplaced. Roush wrote back, responding to the authorities cited in the legal department's letter.

Roush was present at the PERS board meeting on March 17, 2010, when the board took up the ALJ's proposed decision in Linhart's case. He addressed the board to express concern that none of his correspondence concerning the due process issue had been made part of the agenda materials presented to the board, and to seek a continuance of the Linhart matter so board members would have a chance to read those letters before it decided the case. Following the advice of its chief legal counsel that the due process issue was not before the board, the board voted to adopt the ALJ's proposed decision.

Linhart petitioned the board for reconsideration on the grounds his due process rights had been violated because PERS had not properly separated its "adjudicative" function from its "investigative, prosecutorial and advocacy" functions. He argued the only adequate remedy was for the board to grant him the relief he sought in the ...


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