MICHAEL R. O'NEAL et al., Plaintiffs and Appellants,
STANISLAUS COUNTY EMPLOYEES' RETIREMENT ASSOCIATION, Defendant and Respondent, COUNTY OF STANISLAUS, Intervenor and Respondent.
from a judgment of the Superior Court of Stanislaus County.
No. 648469, Leslie C. Nichols, Judge. (Retired Judge of the
Santa Clara Sup. Ct. assigned by the Chief Justice pursuant
to art. VI, § 6 of the Cal. Const.)
Office of Michael A. Conger and Michael A. Conger; Richard H.
Benes for Plaintiffs and Appellants.
Smith, Harvey L. Leiderman and Jeffrey R. Rieger for
Defendant and Respondent.
Bridgett, Raymond F. Lynch, Adam W. Hofmann, and Jay Rapaport
for Intervenor and Respondent.
Michael R. O'Neal, Rhonda Biesemeier, and Dennis J.
Nasrawi, appeal from the trial court's grant of summary
judgment against them, as well as several related evidentiary
rulings. Appellants are members of the retirement system
operated by respondent Stanislaus County Employees'
Retirement Association (StanCERA) through their retirement
board (the board). The intervener in this case, County of
Stanislaus (County), is one of several employers required to
fund the StanCERA retirement system.
aftermath of the recent recession, StanCERA implemented
several changes to the actuarial calculations used to
determine how to amortize unfunded liabilities within the
system and chose to utilize so-called non-valuation funds,
money not used to ensure the overall system was actuarially
sound, to reduce or replace required employer contributions.
Appellants filed suit, arguing these actions constituted a
breach of the constitutional fiduciary duties placed on the
board of a county retirement system. Specifically, appellants
alleged the adoption of an amortization rate for unfunded
liabilities which included a period of negative amortization
violated state law and constitutional mandates. Appellants
further argued the use of non-valuation funds to reduce or
replace required employer contributions did the same.
cross-motions for summary judgment, the trial court concluded
that none of the actions taken by the board were contrary to
law and, finding no material issue of fact, determined
summary judgment was properly granted to StanCERA and County.
Appellants have appealed this ruling and the related denial
of their cross-motion for summary judgment. Related to the
summary judgment appeal, appellants raise several complaints
with evidentiary rulings made by the trial court which led to
the exclusion of appellants' expert declarations and the
introduction of evidence appellants contend should not have
been considered on summary judgment.
following reasons we conclude the trial court correctly
determined appellants were not entitled to summary judgment,
but erred in determining no material issues of fact remained.
We therefore reverse the grant of summary judgment to
respondents and remand for proceedings consistent with this
opinion. With respect to the evidentiary issues raised, we
generally affirm the trial court, save for one issue, which
has not been contested on appeal.
AND PROCEDURAL BACKGROUND
case reaches us for the second time. Previously, we
considered whether the trial court properly granted
StanCERA's demurrer. The case now returns following the
grant of summary judgment to StanCERA and County. We provide
a brief overview of the claims involved to frame our
discussion of relevant facts and our legal analysis.
detailed more fully below, the claims in this case all
consider whether StanCERA violated constitutional fiduciary
duties when making decisions regarding the management of the
retirement system. The claims break down into two general
types. The first involves StanCERA's management of
certain excess-funds accounts. These accounts contained funds
which are not considered when making actuarial calculations
concerning the health of the retirement system. Normally,
contributions and investment returns are included in the
general retirement fund. However, over time, this fund can
become overfunded if returns exceed expectations. These
excess funds may then be separated from the general fund into
special reserve funds to provide discretionary non-vested
benefits to members. The first type of claim in this case
questions whether money can be transferred from these funds
and for what purposes such money may be used. The second type
of claim involves how StanCERA accounts and corrects for
investment losses and other failures to keep the overall
system properly funded from an actuarial standpoint. When an
actuarial accounting finds fund liabilities exceed fund
assets, the difference is identified as an unfunded
liability. To amortize any unfunded liability, StanCERA is
obligated to increase employer contributions. It does so by
adopting an amortization schedule designed to fund the
unfunded liabilities within a specific period of time. The
question is whether that amortization schedule can include
periods of negative amortization.
filed the initial motion for summary judgment in this case,
attaching most of the evidence that was before the trial
court. In explaining the history of how StanCERA managed
excess funds and its unfunded liabilities, up through and
including the currently contested transactions, StanCERA
submitted the declaration of Kathleen Herman, Operations
Manager for StanCERA since September 10, 2011, and supporting
documents. Excepting certain facts concerning advice given to
the board and the import of adopting a negative amortization
rate, appellants generally conceded the facts identified by
StanCERA were undisputed. Appellants, however, contested
their relevance, legal meaning, or unstated implications.
AND MANAGEMENT OF EXCESS FUNDS PRE-2007.
through 2007, StanCERA appears to have had reasonably good
returns on their investments. There were instances of returns
exceeding expectations. As a result, a multitude of special
reserve funds were created. These included reserves to pay a
$5, 000 death benefit, a Legal Contingency Reserve, a Tier 3
Disability Reserve, a Contingency Reserve, a reserve to make
additional payments under Government Code section 31691 et
seq. (the Health Insurance Reserve), and a reserve to pay
supplemental cost of living increases authorized by section
31874.3 (the Special COL Reserve). These reserves totaled
more than $169 million, with nearly $158 million in the
Health Insurance Reserve and nearly $3 million in the Special
COL Reserve. These fund reserves were generally used, as
intended, to make additional health insurance payments and
annually determined cost of living adjustments. In 2007, the
general retirement fund showed an overall net increase of
nearly $188 million.
EVENTS FROM 2008 THROUGH THE COMPLAINT.
2008, StanCERA began to experience investment losses from the
global downturn. Compounding these losses, StanCERA learned
that its prior actuary had made mistakes that had
overinflated the actuarial calculations for the retirement
fund. In 2008, the fund showed an overall net decrease of
approximately $150 million. This caused the amount of
unfunded liabilities to increase from around $41 million to
around $232 million and the overall funding ratio to drop
from 96.6 percent to 85 percent. As a result of these
changes, County was faced with an actuarial accounting
suggesting it increase its contributions from approximately
$20 million (in 2006) to approximately $45 million (in 2008)
to properly cover its employer obligations.
time StanCERA was working to set County's contribution
levels for the 2009-2010 fiscal year, the actuarially
recommended contribution had risen to over $59 million; an
increase of $22.7 million over the required contribution for
the 2008-2009 fiscal year. At the same time, County was
suffering from a substantial decrease in revenue. County
informed StanCERA that it had experienced a $17 million
decrease in its discretionary revenue and had been forced
over the previous two years to issue layoffs, implement
hiring freezes, and reduce services to balance its budget.
County asked StanCERA to consider alternative ways to
alleviate the burden substantially increasing its
contributions would have on StanCERA members currently
working for County and County itself.
ultimately decided to modify certain accounting procedures
and transfer various funds in order to work with County on
its concerns. Thus, at the board's April 28, 2009,
meeting, the board voted to make three changes affecting the
2009-2010 contribution levels.
the board voted to change StanCERA's amortization
schedule for unfunded liabilities to a 30-year level percent
of pay amortization rather than the 20-year level dollar
amortization initially proposed. This effected two changes in
the amortization schedule. Most obviously, it extended the
amount of time to amortize the unfunded liability from 20
years to 30 years, thus lowering the payments required each
year. It also changed how to calculate the payments owed each
year. Under a level dollar amortization schedule, the same
amount is paid each year such that the amount owed steadily
decreases until eliminated. Under a level percent of pay
schedule, the amount owed each year is tied to the size of
County's payroll and the schedule takes into account
expected payroll growth over time. Under such a schedule,
payments will increase over time and payments early in the
schedule may be insufficient to pay down the principal.
Indeed, under a level percent of pay schedule, if the
amortization period is 17 years or longer, at least the first
year's payment will be less than the interest on the
unfunded amount. If the amortization period is reset
regularly, as it was set to do for a three-year period under
the amendments, this could result in a schedule which could
never repay the existing debt. By utilizing both a 30-year
period and a level percent of pay schedule, StanCERA adopted
a schedule ensuring that after 10 years the funding ratio for
the overall plan would be 10 percent lower than it would have
been under the level dollar schedule.
the board transferred $50 million from the non-valuation
Health Insurance Reserve to valuation reserves. These funds
were directly credited to the valuation assets of the overall
fund. The increase in valuation assets reduced the overall
unfunded liability such that, under the actuarial method
adopted to amortize unfunded liabilities, County's
payments were reduced by approximately $2.9 million.
the board transferred an additional $10 million from the
non-valuation Health Insurance Reserve to reduce the payments
owed by County under the amortization schedule for unfunded
liabilities. This transfer was a dollar for dollar reduction
in the payments owed by County.
board again faced employer budget concerns when it calculated
employer contributions for both the 2010-2011 and 2011-2012
fiscal years. With respect to the 2010-2011 fiscal year,
StanCERA received a letter from County noting a projected
$15.5 million increase in its obligations, explaining that,
despite its efforts, County's budget projected a $20
million shortfall, and asking for additional relief with
respect to County's employer contribution payments.
StanCERA also received a letter from the City of Ceres noting
its revenues had decreased by 20 percent but the proposed
employer contributions were projected to increase from 9.58
percent of payroll to 23.21 percent of payroll, and
requesting relief. In response, the board voted to transfer
$21.4 million (apparently divided as $20 million from the
Health Insurance Reserve and $1.4 million from the Special
COL Reserve to reduce the employer payments owed under the
amortization schedule for unfunded liabilities. This action
was the same type of dollar for dollar reduction in payments
authorized previously. At the same time, the board changed
the amortization period for the unfunded liabilities to 25
years, although that still resulted in a payment which did
not cover the interest accruing on the unfunded liability
respect to the 2011-2012 fiscal year, StanCERA received
another letter from County. Noting it was facing another $28
million budget shortfall, County requested StanCERA authorize
the use of $12.6 million remaining in the non-vested benefit
reserve funds to again reduce County's retirement costs.
StanCERA also received a letter from the Stanislaus County
Superior Court requesting the board's consideration in
offsetting significant proposed increases to the employer
contributions and noting that “[w]ithout a onetime
offset, the impact on the Court will be financially
devastating.” The board again elected to make a
transfer of non-valuation reserve funds, this time in the
amount of $14.3 million, to directly offset the employer
payments owed to amortize unfunded liabilities. At the same
time, the board again adopted a 25-year level percent of pay
amortization schedule, resetting the amortization
2012, the board has further reduced the amortization period
for its unfunded liabilities, adopting a 24-year period in
2012 and a 23-year period in 2013, but continues to use a
level percentage of pay system.
THE INITIAL OPERATIVE COMPLAINT.
filed a lawsuit over the board's decisions. As the case
reached us previously, appellants alleged four causes of
action for various breaches of fiduciary duty. Three of these
breaches allegedly occurred when StanCERA transferred funds
from the non-valuation reserves to either the valuation
reserves or to cover employer contribution obligations for
unfunded liabilities. The accused transfers were the $10
million (claim 1) and $50 million (claim 2) transfers in
2009, and the $21.4 million (claim 4) transfer in 2010. For
each of these claims, appellants asserted the transfer
breached both common law and constitutional fiduciary duties,
resulting in lost assets, lost investment earnings, and
reduced funding ratios. The fourth breach (claim 3) allegedly
occurred when StanCERA adopted the 30-year level percentage
of pay amortization schedule. Appellants alleged this
decision violated both statutory and constitutional fiduciary
duties as well as section 31453.5, resulting in the loss of
trust assets and investment earnings, and reducing the
plan's funding ratio.
complaint was initially dismissed on demurrer.
(O'Neal v. Stanislaus County Employees'
Retirement Association (Apr. 4, 2012, F061439) [nonpub
opn.] (O'Neal I).) On appeal, we reversed. In
our discussion, we made three observations relevant to this
appeal. First, with respect to all four claims raised, we
concluded the violation of a fiduciary duty resulting in harm
to a trust's corpus was a sufficient injury to support a
cause of action. In reaching this conclusion, we noted
appellants had alleged, but still needed to prove, the breach
of certain fiduciary duties. Second, with respect to
appellants' three claims relating to the loss of
supplemental benefits due to allegedly improper transfers of
funds, we observed the breach of fiduciary duty claim raised
in that context would turn on whether StanCERA's
discretionary decisions were consistent with the board's
constitutional duty to act at all times for the benefit of
StanCERA's members and not on the fact the benefits were
not contractually required. The unproven allegation that
StanCERA breached that fiduciary duty was sufficient to
support a cause of action. Third, we recognized the
continuing nature of StanCERA's allegedly improper
conduct and need for corrective action was sufficient to
support an equitable claim for relief. In light of these
narrow observations, we concluded the trial court incorrectly
determined no cause of action for injunctive relief had been
pled and remanded for further proceedings.
TRIAL COURT'S SUMMARY JUDGMENT AND EVIDENTIARY RULINGS.
remand, appellants filed a second lawsuit asserting the 2011
transfer of funds violated common law and constitutional
fiduciary duties and caused damages in the same manner as the
2009 and 2010 transfers. All parties then moved for summary
judgment on all five claims. As part of these proceedings,
several related issues were raised. Appellants moved to
strike evidence submitted by StanCERA on the ground
appellants had been prevented from seeking discovery on that
same evidence. And StanCERA and County moved to strike
portions of the expert declarations submitted by appellants
on foundational and gatekeeping grounds.
trial court granted summary judgment in favor of StanCERA and
County and denied appellants' motion. The court noted how
“counsel all take the strong position that trial is not
necessary and that the main facts are so well established
that this matter should on motion be decided as a matter of
law” and, upon its own review, reached “the
opinion that there are no material disputed issues of fact
which would prevent this court from” granting summary
judgment. The trial court proceeded to recount
appellants' legal argument and took judicial notice of
“the ‘true signification' of the terms
‘amortization' and ‘negative
amortization' ” before considering the legal
implication of the facts asserted. With respect to this
analysis, the trial court determined “that Stan[CERA]
discharged its fiduciary duties in all respects and in no way
abused its discretion” and “that the conduct of
Stan[CERA] fully conformed to the requirements of the
California Constitution, statutes, and controlling
authorities.” In doing so, the court found unpersuasive
the allegation StanCERA violated article XVI, section 17,
subdivision (a) of the California Constitution; any
provisions of the County Employees Retirement Law of 1937,
including section 31453.5; and any allegation StanCERA
violated its fiduciary duties by acting “
‘imprudently.' ” As the court explained, even
if StanCERA's decisions were not “quasi-legislative
decisions of the board to which courts give great deference,
” the evidence provided “no basis for determining
that the board breached its fiduciary duties, abused its
discretion, or violated a requirement of the California
Constitution, statutes, or applicable authorities.”
of its analysis, the trial court rejected appellants'
expert declaration from William Sheffler. The court found
Sheffler failed to review the circumstances then prevailing
when the board made its decisions, did not explain why he
reached his conclusions, and failed to support his opinions
through any established standards or any consensus in any
relevant expert community. The court also noted
Sheffler's opinion had been contradicted by his own
deposition testimony and contradictory case law. The court
further rejected appellants' argument seeking to exclude
evidence from individual board members regarding the
circumstances prevailing at the time the board made its
decisions, finding exclusion of deliberative process evidence
was unnecessary in light of the presumption the board intends
the natural and reasonable effect of their enactments.
Finally, the court concluded the board was legally permitted
to consider the employment interests of StanCERA's active
members in reaching its decisions.
appeal timely followed.
STANDARDS OF REVIEW.
contend the trial court wrongly denied their motion for
summary judgment and wrongly granted summary judgment in
StanCERA's favor. Summary judgment is appropriate only
when “all the papers submitted show that there is no
triable issue as to any material fact and that the moving
party is entitled to a judgment as a matter of law.”
(Code Civ. Proc., § 437c, subd. (c).) “ ‘To
determine whether triable issues of fact do exist, we
independently review the record that was before the trial
court....' ” (Elk Hills Power, LLC v. Board of
Equalization (2013) 57 Cal.4th 593, 606.) We review the
evidence in the light most favorable to the losing party and
resolve any evidentiary doubts and ambiguities in their
favor. (Martinez v. Combs (2010) 49 Cal.4th 35, 68.)
further contend the trial court improperly excluded expert
testimony favoring appellants' position while admitting
inadmissible evidence favoring StanCERA. We review a ruling
on evidentiary objections for abuse of discretion. (See,
e.g., Great American Ins. Cos. v. Gordon Trucking,
Inc. (2008) 65 Cal.App.4th 445');">165 Cal.App.4th 445, 449; Powell v.
Kleinman (2007) 151 Cal.App.4th 112, 122; see also
Howard Entertainment, Inc. v. Kudrow (2012) 208
Cal.App.4th 1102, 1122-1123 (conc. opn. of Turner, P.J.)
[evidentiary issues in summary judgment proceedings reviewed
for abuse of discretion under the majority rule].) The party
challenging the ruling has the burden to establish an abuse
of discretion. (DiCola v. White Brothers Performance
Products, Inc. (2008) 666');">158 Cal.App.4th 666, 679.) We
interfere with the lower court's judgment only if the
party can show that no judge could reasonably have made the
same judgment. (Ibid.; see Lockhart v. MVM,
Inc. (2009) 175 Cal.App.4th 1452, 1456; Jennifer C.
v. Los Angeles Unified School Dist. (2008) 168
Cal.App.4th 1320, 1332 [under abuse of discretion standard,
court's decision left undisturbed unless it exceeds the
bounds of reason].)
RELEVANT LEGAL PRINCIPLES.
case is governed by several related legal principles. We
begin by laying out these principles before applying them to
the facts of the case.
O'Neal I, we provided a statutory background
concerning the laws covering county retirement systems. We
generally repeat that overview here for context, providing
additional information regarding provisions and issues
relevant to the disputes now before us.
was formed and operates under the provisions of the County
Employees Retirement Law of 1937 (CERL), section 31450 et
seq. “Under CERL an employee's
pension is a combination of a retirement annuity based on the
employee's accumulated contributions supplemented by a
pension established with county contributions sufficient to
equal a specified fraction of the employee's ‘final
compensation.' [Citations.]” (Ventura County
Deputy Sheriffs' Assn. v. Board of Retirement (1997)
6 Cal.4th 483');">16 Cal.4th 483, 490.) Retirement benefits “are ...