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Dailey v. City of San Diego

California Court of Appeals, Fourth District, First Division

December 26, 2013

DENISE DAILEY, Plaintiff and Appellant,
v.
CITY OF SAN DIEGO, Defendant and Respondent.

Pub. order 1/23/14

APPEAL from a judgment of the Superior Court of San Diego County No. 37-2010-00094272- CU-OE-CTL, Ronald S. Prager, Judge.

Law Office of Michael A. Conger, Michael A. Conger; and Richard H. Benes for Plaintiff and Appellant.

Jan I. Goldsmith, City Attorney, and Walter C. Chung, Deputy City Attorney, for Defendant and Respondent.

NARES, J.

Plaintiff Denise Dailey (Dailey) asserts the court erred in granting the City of San Diego's (City's) motion for summary judgment on her first cause of action for declaratory relief. In that cause of action Dailey alleged that the City improperly capped her retiree health benefit at $8, 880, which she alleges is approximately $600 less than the cost of her actual premiums. She alleges that because the retiree health benefit is a benefit under the City's retirement system, an affirmative vote by all members of the City's pension system was required to implement that change. She also asserts that the court erred in sustaining the City's demurrer to her second cause of action for declaratory relief based on the doctrine of collateral estoppel because several exceptions to application of that doctrine are present in this case. In that cause of action Dailey sought to relitigate the Ninth Circuit Court of Appeals' decision in San Diego Police Officers' Association v. San Diego City Employees' Retirement System (2009) 568 F.3d 725, 731-732 (SDPOA v. SDCERS), which held that her retiree health benefit is an employment benefit, not a vested contractual right.

For reasons we shall explain in more detail, post, we conclude that the retiree health benefit is not a benefit under the City's retirement system, and therefore an affirmative vote by all members of the pension system was not required to implement the cap on employees' health benefit. We also conclude that Dailey's second cause of action is barred by the doctrine of collateral estoppel.

INTRODUCTION

In 2009 Dailey's labor union, the San Diego Police Officer's Association (POA), failed to reach agreement with defendant City on a successor memorandum of understanding regarding the wages, hours and working conditions of Dailey and all other members of the POA, and thereafter the City imposed its last, best and final offer. The imposition of this offer modified the City's postemployment health benefit.

Specifically, the modification to the retiree health benefit froze the maximum amount the City would reimburse members of the POA who retired during the effective term, 2009 through 2011, of the imposed memorandum of understanding at $8, 880 per year. Dailey retired during the effectiveness of this imposed change.

Dailey thereafter instituted this action against the City, alleging the $8, 880 per year reimbursement is approximately $600 less than the cost of her actual annual medical insurance premiums. Dailey asserted two causes of action. In her first cause of action, Dailey alleged the City's imposed change to the retiree health benefit was improper because section 143.1 of the City's Charter (Charter) requires an affirmative vote of all the members of the City's pension system before modifications can be made to her postemployment health benefit because that benefit falls under the City's retirement system.

On cross-motions for summary judgment, the Superior Court of San Diego County, the Honorable Ronald S. Prager, found that the City's retiree health benefit is not a benefit of the City's retirement system. The trial court based its decision on the fact that (1) the City's retiree health benefit is not a mandated benefit, but is provided solely at the option of the City; (2) the benefit is not funded by any assets of the City's pension plan; (3) the City and its labor unions have historically negotiated modifications to the benefit; and (4) the Ninth Circuit Court of Appeals in SDPOA v. SDCERS, supra, 568 F.3d 725, ruled that Dailey's retiree health benefit is an employment benefit, not a vested contractual right.

Because the Ninth Circuit's determination in SDPOA v. SDCERS rejected Dailey's argument that the City's retiree health benefit is a vested pension benefit, in her second cause of action, Dailey asserted that the trial court should disregard the decision in SDPOA v. SDCERS and allow Dailey to relitigate the issue of whether or not her retiree health is a vested pension benefit. The trial court sustained the City's demurrer to the second cause of action, finding that based upon the Ninth Circuit's decision in SDPOA v. SDCERS, collateral estoppel applied so as to bar relitigation of that cause of action.

On appeal, Dailey asserts the court erred in (1) granting summary judgment on the first cause of action because the retiree health benefit is a benefit under the retirement system, (2) not granting her cross-motion for summary judgment for the same reason, and (3) sustaining the City's demurrer as to the second cause of action because exceptions to the doctrine of collateral estoppel apply such that her claim is not barred. We affirm.

I. FACTUAL BACKGROUND

A. City's Withdrawal from Social Security System

In late 1981 the City considered withdrawing from the Social Security system. On November 4, 1981, the City Council authorized an election of the then-City employees participating in the Social Security system to vote on the City's withdrawal. If the City withdrew from the Social Security system, the City would create a new supplemental pension plan. City employees then participating in Social Security voted for the City to withdraw from the Social Security system.

On June 1, 1982, based on that vote for the City to withdraw from Social Security, the City adopted Ordinance No. 0-15758. In that ordinance, the City declared that, in lieu of Social Security, certain benefits would be provided. One of those benefits was a City-sponsored group health insurance program for eligible retirees. The City stated that it intended to provide such coverage as a permanent benefit for eligible retirees.

B. Retiree Health Program

Ordinance No. 0-15758 amended chapter II, article 4 of the San Diego Municipal Code (SDMC) by amending section 24.0907.1 and adding section 24.0907.2 to define those retirees who were eligible for participation in the retiree health benefit program. To be eligible for the benefit, safety employees must be "[s]afety members covered by Social Security coverage as of December 31, 1981." (SDMC, § 24.0907.2, subd. (a)(3).) Dailey, however, did not begin working as a police officer for the City until 1983.

Further, in Ordinance No. 0-15758, the City reserved the right to make modifications to the retiree health program without the consent of either the City employees or those eligible for the benefit: "Health plan coverage for retirees and eligible dependents is subject to modification by the City and the provider of health care services, and may be modified periodically as deemed necessary and appropriate."

In 1985, pursuant to Ordinance No. 0-16449, Dailey's labor union, the POA, negotiated with the City concerning the terms and conditions of its members' wages, hours and working conditions with the City. As a result of those negotiations, the City agreed to expand the eligibility for retiree health benefits to include safety members not previously covered by the original adoption of the retiree health program in 1982. Specifically, Ordinance No. 0-16449 amended SDMC section 24.0907.2, subdivision (a) to add subdivision (a)(4), to include "[a]ll other safety members effective July 1, 1985, " to the definition of those persons eligible for the retiree health program. Thus, the expanded definition of persons eligible for postemployment health benefits now included Dailey.

However, unlike the original retiree health ordinance, Ordinance No. O-16449 did not state that the inclusion of new eligible employees to the City's retiree health program was intended to be a permanent benefit. Ordinance No. 0-16449 also did not amend SDMC section 24.0907.2 to remove the City's right to periodically modify the retiree health program without the consent of City employees or those eligible for the program. Following the expansion of eligibility of the retiree health program to include employees such as Dailey, SDMC section 24.0907.2 still retained the language "[h]ealth plan coverage for eligible retirees and eligible dependents is subject to modification by the City and the provider of health care services, and may be modified periodically as deemed necessary and appropriate."

In the general election of 1996, pursuant to Proposition D, the voters of the City were asked to approve an amendment to the City's Charter "to authorize the City Council to provide [retiree health] benefits through the San Diego City Retirement System" instead of "directly from the City's operating funds, as is the current practice." The ballot for this proposition stated: "Proposition D would change the City Charter to permit shifting this costly item from the city's General Fund paid by all taxpayers—to the city's retirement system, paid for by the retirement system's investment earnings and assets. This shift would save city taxpayers between $5 million and $6 million each year." (Italics added.) Proposition D passed, receiving 231, 410 votes in favor and 88, 537 votes against.

C. Negotiated Changes to the Retiree Health Program

In 1997 all of the City's labor unions met and conferred with the City regarding potential changes to the amount the City would reimburse retirees for their retiree health benefits. On "February 6, 1997, a task force of the four labor organizations reached agreement with the City Management Team on the level of health benefits to be provided by the Retirement System." The agreed-upon changes to the retiree health benefit were implemented pursuant to Ordinance No. 0-18392.

In 2002 the City and its four labor unions, including Dailey's labor union, again met and conferred regarding potential changes to the retiree health benefit, and thereafter "the four labor organizations... reached an agreement with the City Management Team on the level of health benefits to be provided to Health Eligible Retirees...."

In Ordinance No. 0-19121, retiree health benefits are not referred to as retirement benefits. Rather, the retirement benefits and retiree health benefits are listed as separate items: "WHEREAS, the City Council has approved the agreements on retirement benefits and retiree health benefits; and [¶] WHEREAS, the Municipal Code must now be amended to reflect the changes to retirement benefits and retiree health benefits approved by the City Council...." (Italics added.)

In August 2005 the City and the POA engaged in labor negotiations related to a successor memorandum of understanding addressing the POA members' wages, hours and working conditions. (SDPOA v. SDCERS, supra, 568 F.3d at pp. 731-732.) The POA and the City were unable to agree on a successor memorandum of understanding. (SDPOA v. SDCERS, supra, 568 F.3d at p. 732.) Accordingly, the City imposed its last, best and final offer on the POA. (Ibid.) The imposition included changes to the retiree health benefits of the members of the POA.[1]

D. Federal Court Litigation

As a result of the City imposing its last, best and final offer, the POA, on behalf of Dailey and all its other members, sued the City in federal court. In that action the POA alleged that the City's "Last, Best and Final Offer unlawfully deprived, eliminated and reduced Member's vested benefits, including but not limited to the following [¶]... [¶] (c) capping and limiting Retiree Medical Benefits in a manner that deprives Plaintiff Members of medical benefits equal to those of social security recipients during their lifetime, contrary to the voters' mandate in 1981 as set forth herein and in violation of Defendant City's Social Security Opt-out Agreement."

In 2007 the United States District Court for the Southern District of California, the Honorable Marilyn L. Huff, issued a ruling granting the City's motion for summary judgment and denying the POA's motion for summary judgment. On the question of whether the City's retiree health benefit was a vested contractual right that the City impermissibly violated when, in 2005, the City imposed its last, best and final offer, the District Court, relying on California substantive law, held that the City's retiree health benefit is not a vested right subject to protection by the contracts clause of the United States Constitution.

Thereafter, the POA filed an appeal of the District Court's decision with the Ninth Circuit Court of Appeals, and the Ninth Circuit upheld the District Court's decision. (SDPOA v. SDCERS, supra, 568 F.3d. at pp. 731-732.) The Ninth Circuit held that the City's retiree health benefit is an employment benefit, not a vested pension benefit. (Id. at p. 740.)

E. IRS Settlement

In 2008, following a review of the City's pension plan by the Internal Revenue Service (IRS), which was voluntarily initiated by SDCERS, the IRS found several benefits that did not comply with the Internal Revenue Code and jeopardized the tax-exempt qualification of the City's pension plan.

As to the City's retiree health benefit, the IRS found two failures. The IRS found that in failure No. 6 that "[d]uring the plan years that ended in 1983 through 1991 retiree health benefits were paid by the Plan even though the terms of the Plan did not provide for such benefits." The IRS also found in failure No. 7 that "[d]uring the plan years that ended in 1998 through 2005 the terms of the Plan and its operation did not comply with all of the requirements of [SDMC] sections 401[, subdivision] (a)(2) and 401[, subdivision] (h) as they relate to retiree health benefits because the terms of the Plan provided that earnings of the trust would ultimately be used to fund these benefits resulting in the underfunding of the Plan."

In order to correct these (and other) violations so that the IRS would not seek monetary penalties and/or seek to disqualify the City's pension plan's tax exempt status, the City and SDCERS entered into a settlement with the IRS.

With regard to the retiree health benefit, the City corrected failure No. 6 by reimbursing SDCERS for the $33, 830, 251 in health care premium reimbursements improperly made from the assets of the pension plan since 1983. Addressing failure No. 7, the City and SDCERS agreed that "in order to comply with all of the requirements of [SDMC] sections 401[, subdivision] (a) and 401[, subdivision] (h) the payment of retiree health benefits must be funded by separately designated employer contributions and cannot be funded (directly or indirectly) from pension assets, including plan earnings." The IRS also required the City to ...


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