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O'Neal v. Stanislaus County Employees' Retirement Association

California Court of Appeals, Fifth District

February 23, 2017

MICHAEL R. O'NEAL et al., Plaintiffs and Appellants,
v.
STANISLAUS COUNTY EMPLOYEES' RETIREMENT ASSOCIATION, Defendant and Respondent, COUNTY OF STANISLAUS, Intervenor and Respondent.

         APPEAL 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.)

          Law Office of Michael A. Conger and Michael A. Conger; Richard H. Benes for Plaintiffs and Appellants.

          Reed Smith, Harvey L. Leiderman and Jeffrey R. Rieger for Defendant and Respondent.

          Hanson Bridgett, Raymond F. Lynch, Adam W. Hofmann, and Jay Rapaport for Intervenor and Respondent.

          OPINION

          DETJEN, J.

         OVERVIEW

         Appellants, 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.

         In the 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.

         Upon 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.

         For the 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.

         FACTUAL AND PROCEDURAL BACKGROUND

         This 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.

         Although 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.

         StanCERA 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.

         I. USE AND MANAGEMENT OF EXCESS FUNDS PRE-2007.

         Up 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[1] 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.

         II. EVENTS FROM 2008 THROUGH THE COMPLAINT.

         In 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.

         By the 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.

         StanCERA 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.

         First, 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.

         Second, 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.

         Third, 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.

         The 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 debt.

         With 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 calculations.

         Since 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.

         III. THE INITIAL OPERATIVE COMPLAINT.

         Appellants 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.

         IV. O'NEAL I.

         Appellants' 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.

         V. THE TRIAL COURT'S SUMMARY JUDGMENT AND EVIDENTIARY RULINGS.

         Following 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.

         The 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.”

         As part 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.

         This appeal timely followed.

         DISCUSSION

         I. STANDARDS OF REVIEW.

         Appellants 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.)

         Appellants 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].)

         II. THE RELEVANT LEGAL PRINCIPLES.

         This case is governed by several related legal principles. We begin by laying out these principles before applying them to the facts of the case.

         A. CERL.

         In 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.

         StanCERA was formed and operates under the provisions of the County Employees Retirement Law of 1937 (CERL), section 31450 et seq.[2] “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 ...


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