California Court of Appeals, First District, Fifth Division
San Francisco County Superior Court Case No. CPF13512788, Richard A. Kramer, Judge.
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
Clisham & Sortor, David P. Clisham, William H. Sortor, Justine L. Clisham; Law Offices of Donald T. Ramsey and Donald T. Ramsey for Plaintiff and Appellant.
Davis, Cowell & Bowe and W. David Holsberry for Retired Firemen and Widows Association of the San Francisco Fire Department as Amicus Curiae on behalf of Plaintiff and Appellant.
Dennis J. Herrera, City Attorney, and Wayne K. Snodgrass, Deputy City Attorney, for Defendant and Respondent.
Since 1996, retired employees of the City and County of San Francisco (the City) have been eligible to receive a supplemental cost of living allowance (supplemental COLA) as part of their pension benefits when the retirement fund’s earnings from the previous year exceeded projected earnings. On November 8, 2011, City voters passed Proposition C, an initiative measure that, among other things, amended the Charter of the City and County of San Francisco to condition the payment of the supplemental COLA on the retirement fund being “fully funded” based on the market value of the assets for the previous year.
Protect Our Benefits (POB), a political action committee representing the interests of retired City employees, appeals from a superior court order denying its petition for writ of mandate seeking to invalidate this amendment as an impairment of a vested contractual pension right under the contract clauses of the federal and state Constitutions. With respect to current City employees and employees who retired after the supplemental COLA first went into effect on November 6, 1996, we agree the full funding requirement cannot stand. With respect to employees who retired prior to November 6, 1996, we conclude they had no vested contractual right in the supplemental COLA and that consequently, the 2011 amendment may be applied to their
pensions. We reject POB’s claim that the full funding requirement must be set aside for the additional reason that the Board of Supervisors for the City and County of San Francisco (Board of Supervisors) failed to obtain an adequate actuarial report before placing Proposition C on the November 8, 2011, ballot.
I. FACTUAL AND PROCEDURAL HISTORY
A. San Francisco’s Public Pension Plan
The City operates its own retirement system, which is known as the San Francisco Employees’ Retirement System (SFERS) and is overseen by the City’s Retirement Board. SFERS administers a pension plan that pays defined benefits to retired City employees based on their years of service, age of retirement and the highest amount of their compensation for a specified period. (See Mason v. Retirement Board (2003) 111 Cal.App.4th 1221, 1223-1224 [4 Cal.Rptr.3d 619].) The funding for pension benefits comes from three sources: contributions from current City employees, contributions from the City, and investment earnings on assets SFERS holds in trust for retirees (the Fund).
As part of its administration of the Fund, the retirement board retains an independent actuary to produce an actuarial valuation of the Fund each year. The actuarial valuation method used for the Fund includes a “five-year smoothing” technique in which gains or losses in asset values are spread out over a five-year period, thus dampening the volatility of the valuation of the Fund’s assets. The actuary also calculates the “funding ratio, ” that is, the ratio of the Fund’s assets to its actuarial liabilities. When the Fund’s assets exceed its actuarial liabilities, it is said to be “fully funded.” The valuation of the Fund and its funding ratio can also be calculated on a “market” basis, which measures the fair market value of the Fund’s assets if the entire portfolio
were to be liquidated as of a certain date, and compares that valuation to the Fund’s actuarial liabilities. In any given year, the actuarial valuation of the Fund might exceed the market valuation, or vice versa.
According to a 2012 actuarial valuation report, the Fund was fully funded, on both an actuarial and a market basis, during each fiscal year from 1994–1995 through 2007–2008. The Fund was not fully funded during fiscal years 2008–2009 through 2011–2012, the years coinciding with the national financial crisis that began in 2008.
B. Basic COLA
Retired City employees have long been eligible to receive an annual cost of living adjustment to their pension payments based on changes in the Consumer Price Index (the basic COLA), generally of up to two percent. (S.F. Charter, § A8.526.)
C. 1996-Supplemental COLA
In the election held on November 5, 1996, City voters adopted Proposition C, an initiative measure amending the City’s Charter (Charter) to establish a supplemental COLA for City retirees in addition to the basic COLA. Proposition C added Charter section A8.526 1, which required “all earnings of the Retirement Fund in the previous fiscal year which are in excess of the expected earnings on the actuarial value of the assets” to be placed in a reserve account and used to pay a supplemental COLA of up to 3 percent of current benefits, inclusive of the basic COLA. (Charter, § A8.526-1, added Nov. 5, 1996.) “Expected earnings” were defined as “the earnings projected by the actuarial assumption for return on assets that was in place for that fiscal year.” (Ibid.)
Charter section A8.526-1 did not initially provide that the supplemental COLA would be added to a retiree’s pension on a permanent basis. Rather, in years when the funds in the reserve account were insufficient to pay the supplemental COLA, pensions would “revert to the level they would have been if supplemental cost of living adjustments had never been made.” (Charter, former § A8.526 1(b), added Nov. 5, 1996.) The amount of money placed in the reserve account would not exceed the amount necessary for the immediate fiscal year and the following two years, and, as the ballot digest explained: “The Reserve Account would not be used to offset years of below-estimate investment income, or to reduce the City’s contributions to the retirement system. However, when the Reserve Account had enough money to fund three years of COLA increases, any additional money would be used to offset below-estimate years and to reduce the City’s contributions to the retirement system.” (S.F. Voter Information Pamp. (Nov. 5, 1996) p. 97.)
D. 2002-Supplemental COLA Made Permanent
On March 5, 2002, City voters passed Proposition B, an initiative making the supplemental COLA permanent, in the sense that once it had been added to an employee’s pension payment, it could not be reduced. Proposition B amended Charter section A8.526-1 as follows: “(c) On and after June 30, 2003, any supplemental cost of living benefit adjustment, once paid to a member, shall not be reduced thereafter. [¶] (d) On and after June 30, 2003, the Reserve Account set forth in this section shall be used to finance only the increase in the supplemental cost of living benefit adjustments for the next ensuing fiscal year as set forth in section (a). If there are insufficient funds in the Reserve Account to pay the increase in the supplemental cost of living benefit adjustments for the next ensuing fiscal year, then the increase in the supplemental cost of living benefit adjustments for that fiscal year shall not be paid. However, any excess earnings as defined in this section shall be accumulated until an amount sufficient to make one fiscal year’s increase in the supplemental cost of living benefit adjustments is reached.” (Charter, § A8.526 1(c) & (d), as amended Mar. 5, 2002.)
E. 2008-Supplemental COLA Increased
On June 3, 2008, City voters passed Proposition B, which changed the qualifications for retiree health and pension benefits, established a retiree health care trust fund, and raised the maximum annual amount of the supplemental COLA from 3 percent to 3.5 percent, less the amount of any basic COLA. The supplemental COLA provisions were placed in newly enacted Charter section A8.526-3, which stated that if the excess earnings in a particular year are insufficient to pay a 3.5 percent supplemental COLA, “then to the extent of excess earning, said allowances shall be increased in increments of one-half percent (.5%) up to the maximum three and one-half percent (3.5%) of the allowance as of June 30, less the amount of any cost of living adjustment....” (Charter, § A8.526 3(b)(2), added June 3, 2008.) When the previous year’s earnings exceeded the expected earnings but were not sufficient to fund any supplemental COLA, “the retirement board shall reserve the excess earnings for that year. Said reserved earnings shall accumulate only until such time that said reserved earnings, plus the next year’s earnings in excess of the expected earnings on the actuarial value of the assets, are sufficient to fund one fiscal year’s increase in the supplemental cost of living benefit adjustment, at which time the earnings in reserve shall be withdrawn and used to fund a supplemental cost of living benefit adjustment....” (Id., § A.8.526-3(c), added June 3, 2008.) As under prior law, “[a]ny supplemental cost of living benefit adjustment, once paid to a member, shall not be reduced thereafter.” (Id., former § A.8.526-3(d), added June 3, 2008.)
F. Financial Crisis and Effect on the Fund
In fiscal year 2008–2009, the Fund lost about 25 percent of its value due to the financial crisis and economic downturn of that period. Consequently, the Fund was no longer fully funded, meaning it no longer contained assets sufficient to pay its actuarial liabilities. Measured by the actuarial value of its assets, the Fund fell from 104 percent funded as of July 1, 2008, to only 97 percent funded as of July 1, 2009. Measured by the market value of its assets, the Fund went from 103 percent funded as of July 1, 2008, to 72 percent funded as of July 1, 2009.
G. November 8, 2011, Election-Proposition C
In the general election held November 8, 2011, City voters adopted Proposition C, an initiative measure making numerous changes to the financing and scope of SFERS pension benefits and retiree health care. The “Findings and Purpose" (underscoring and some capitalization omitted) section of the ballot explained: “Between June 2007 and January 2009, the Dow Jones Industrial Average declined 40%. This historic decline and the subsequent great recession have harmed the City’s budget in two ways. First, it caused the City’s tax and fee revenues to be significantly lower than expected, worsening the City’s deficit. Second, it caused the retirement fund to drop from being fully funded (based on the actuarial value of the assets)-or more than fully funded-to being only partially funded. As a result, to make up the shortfall in the retirement fund, the City has had to increase substantially its employer contributions, further exacerbating the City’s deficit.” (S.F. Voter Information Pamp. (Nov. 8, 2011) p. 111.)
Although the changes effected by Proposition C were extensive, only one is germane to this case-the amendment of Charter section A8.526-3(d) (hereafter section A8.526 3(d)) to provide: “To clarify the intent of the voters when originally enacting this Section in 2008, beginning on July 1, 2012 and July 1 of each succeeding year, no supplemental cost of living benefit adjustment shall be payable unless the Retirement System was also fully funded based on the market value of its assets for the previous year.” (§ A8.526-3(d), as amended Nov. 8, 2011.) The amendment did not change the requirement that excess earnings be reserved when insufficient to fund a supplemental COLA and accumulated until they were sufficient to fund a supplemental COLA payment. (§ A8.526-3(c), as amended Nov. 8, 2011.)
H. Petition for Writ of Mandate
POB filed a petition for writ of mandate (Code Civ. Proc., § 1085) challenging the constitutionality of section ...