Ignoring the law

At last week’s Council meeting, when the topic of reducing the City’s liability for Other Post-Employment Benefits (“OPEB”) by capping retiree health benefits came up, the following dialog occurred:

Mayor Marie Gilmore: Can I just be very clear here? There are very strict legal restrictions in terms of people who are already retired.  You can’t change their benefits.

Councilwoman Lena Tam:  The City’s been sued and it’s been adjudicated in the courts with the police officers’ association.

Finance Director Fred Marsh: Right. . . . You’re absolutely right.  One of the case laws basically says the day you start employment with the city, related to OPEB and pension, it vests day one.

These comments demonstrate that Alameda’s politicians and staff are, to put it most charitably, misinformed about the law governing a public employer’s ability to change its retiree health benefit plan.  As a result, facing what City Manager John Russo described as “the largest threat to the long term fiscal stability of the City of Alameda,” ignorance of the law threatens to become an excuse for inaction.

We’ll start with Councilwoman Tam’s comments.  The day after Council met, the Merry-Go-Round asked her what case she was referring to and she responded promptly and graciously.  It turns out her reference was to an opinion written by an arbitrator – an Oakland lawyer named Matthew Goldberg — about the meaning of the phrase “City sponsored health plans” as used in the contract transferring retirees from a City-run retirement system to the CalPERS system in January 1991.  The arbitrator agreed with the union that this phrase encompassed health insurance plans other than the two available at the time of the transfer.  The case did not involve, nor did the arbitrator opine about, the scope of the City’s future obligation to provide retiree health benefits.

Councilwoman Tam was entirely correct in remembering that the police union had sued the City over retiree health benefits and that the union won.  But if someone told her that a judge had ruled that the City legally could not reduce health benefits being provided to retirees, well, he or she misled Ms. Tam.

Now for the Mayor and Mr. Marsh.  First a word about terminology:  Mr. Marsh used the word “vested”; the Mayor referred to benefits that can’t be changed.  They were stating the same concept:  A benefit is deemed “vested” – Mr. Marsh’s word – when it becomes impossible to change – the Mayor’s phrase.  So what the Mayor and Mr. Marsh were telling Council was that it would be illegal for the City to change the health benefits it is providing to already retired employees because those benefits “vested” on the day they became employed.

It just isn’t so.

In fact, as we discussed last week, the issue of whether, and, if so, under what circumstances retiree health benefits “vest” is still very much unsettled.  The focal point of this debate is a series of cases involving Orange County.  For many years, the County offered health insurance to retirees at their expense.  The premium was calculated by “pooling” the retirees with active employers, which had the effect of lowering premiums for retirees.  Later, the County agreed to subsidize a part of those premiums.  After the County realized the extent of its unfunded liabilities, it decided to stop pooling active and retired employees and to change the formula used to compute the subsidy.  As a result, retirees’ health insurance premiums went up significantly.

The retirees sued, alleging that they had a “vested right” to continuation of the same pooling and subsidy formula in effect when they retired.  The litigation has wound its way through the state and federal appellate courts.  Those courts have held that, to prevail on their claim, the retirees must allege and prove that the County promised to continue its pooling and subsidy practices indefinitely.  The promise doesn’t have to be express; it can be implied from the circumstances.  But in such a case, “as with any contractual obligation that would bind one party for a period extending far beyond the term of the contract of employment, implied rights to vested benefits should not be inferred without a clear basis in the contract or convincing extrinsic evidence.”  Absent such evidence, the County was free to stop pooling and to revamp the subsidy, not just prospectively for current employees when they retired, but also for employees who had retired already.

So far the County is winning the legal battle.  A federal trial judge ruled that the plaintiff retirees had failed to show any express or implied promise by the County to continue providing these specific benefits indefinitely and dismissed both the pooling and subsidy claims.  The judge’s rulings are being appealed, and other cases involving, among others, Contra Costa County, Sacramento County, Sonoma County, and the City of Redding are in the initial stages.  But no knowledgeable lawyer would advise a public employer these days that it should banish any thought of changing retiree health benefits because those benefits “vested” on the date of employment.

Neither Councilwoman Tam nor Finance Director Marsh is, as far as we know, a lawyer, and they may be forgiven for not knowing the current state of law.  But Mayor Gilmore is a lawyer, and one would have expected her to take care that her public pronouncements on legal issues are accurate and precise.  One can only hope that she was simply too focused on her other responsibilities to keep up to date on the law in this area.  But having opined without qualification that changing retiree health benefits would be illegal, the Mayor went on to rule out that option for further consideration altogether.  As she put it, “So if I had to say, Don’t pursue one, that’s probably the one I would pick.”

The Mayor thus compounded her mistake.  As we pointed out last week, of the options listed by staff for attacking the City’s OPEB problem, the one with greatest financial impact would be capping the amount paid per retiree by the City for health insurance for retired cops and firefighters.  This would reduce not only current OPEB expense ($2.4 million in fiscal year 2011-12) but also accrued future OPEB liabilities ($86.1 million as of January 1, 2011).  At last week’s meeting, Councilman Tony Daysog suggested that staff ask the City’s actuarial consultants, Bartel and Associates, to estimate the cost savings generated by the options on staff’s list.  If the mistaken conviction that any reduction in retiree health benefits would be illegal causes staff not even to investigate the amount that would be saved by a payment cap, a significant option got taken off the table unnecessarily.

The option preferred by the Mayor and Council for addressing the City’s OPEB problem is, of course, far less risky than a decision to limit the amount paid by the City for health insurance for retired cops and firefighters.  One doubts that anyone would sue the City for setting up an empty OPEB trust to be filled with money if and when the City gets an unexpected windfall in an undetermined amount from an unknown source.  By contrast, Alameda retirees, like their counterparts in other California counties and cities, may sue if the City reduces their retiree health benefits.

At last week’s meeting, Mayor Gilmore and Councilwoman Tam expressed their shared view that the City would face a “huge potential” of losing such a suit.  And if reducing retiree health benefits truly was illegal under any circumstances, they’d have a point.  But a better-informed analysis of the litigation risk requires a careful look at whether Alameda retirees could prove what the Orange County retirees could not: an express or implied promise to continue specific retiree benefits indefinitely.  In this regard, the City of Redding case is instructive.  There, the result turned on language in the MOU between the city and the union requiring the city to pay 50% of health insurance premiums not just for current retirees but for “each retiree in the future.”   By pointing to this language, the appellate court held, the complaint adequately alleged a “vested right” to the 50% subsidy.  Maybe our own outside counsel should be asked to scour the City of Alameda’s MOUs to see if they can find similar language there.

In any event, cost savings and litigation risk aren’t the only factors to consider.  There may indeed be policy arguments for leaving retiree health benefits exactly as they are.  For example, Councilman Stewart Chen, a chiropractor by trade, observed that older people have more health problems than younger people do.  In addition, without sounding like a moralist, one might argue that retirees who have served their City long and well deserve only the best.  And there are, of course, also political reasons for opposing any change affecting public safety union members.  (Councilwoman Tam made sure that the audience understood that, by authorizing staff to do further work, she was not voting to re-open the public safety MOUs).  But before the politicians dismiss a significant cost-saving alternative on legal grounds, the least we can expect is that they’ll get the law right and assess, rather than assume, how it applies to Alameda.

Sources:

Arbitrator’s award re transfer of retirement plans: APOA v. City of Alameda arbitration award (2003)

Retired Employees Association of Orange County v. County of Orange:

California Supreme Court opinion: REAOC, 52 Cal.4th 1171 (CA S. Ct. 2011)

U.S. District Court opinion: REAOC slip op (C.D. Cal 2012)

Harris v. County of Orange:

U.S. Court of Appeals for the Ninth Circuit opinion: Harris v. County of Orange, 682 F.3d 1126 (9th Cir. 2012)

U.S. District Court order: Harris slip op. (C.D.Cal. 2013)

Sonoma County Association of Retired Employees v. Sonoma County: Sonoma County Association of Retired Employees v. Sonoma County, 708 F.3d 1109 (9th Cir. 2013)

About Robert Sullwold

Partner, Sullwold & Hughes Specializes in investment litigation
This entry was posted in Budget, City Council, Firefighters, Pensions and tagged , , , , , , , . Bookmark the permalink.

One Response to Ignoring the law

  1. not mayberry says:

    Consider the sources: Marie Robinson [Gilmore]’s State Bar license has been Inactive since 1992. She did go to law school, but does not seem to have spent much time practicing the law. With all due respect, perhaps that makes a difference. Lena Tam & Fred Marsh are not attorneys.

    Maybe no one should be proffering a legal opinion in a City Council meeting unless s/he has an active bar license.

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