COUNTY OF ORANGE v. ASSOCIATION OF ORANGE COUNTY DEPUTY SHERIFFS








Filed 1/26/11




CERTIFIED FOR PUBLICATION


IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION ONE

COUNTY OF ORANGE, Plaintiff and Appellant, v. ASSOCIATION OF ORANGE COUNTY DEPUTY SHERIFFS et al., Defendants and Respondents.

B218660 (Los Angeles County Super. Ct. No. BC389758)

APPEAL from a judgment of the Superior Court of Los Angeles County, Helen I. Bendix, Judge. Affirmed.
Kirkland & Ellis, C. Robert Boldt, Elizabeth M. Kim, Robert R. Gasaway and Jeffrey Bossert Clark for Plaintiff and Appellant.
Pacific Legal Foundation, Meriem L. Hubbard and Harold E. Johnson for Pacific Legal Foundation and Fullerton Association of Concerned Taxpayers as Amici Curiae on behalf of Plaintiff and Appellant.
Filice Brown Eassa & McLeod and Paul R. Johnson for California Foundation for Fiscal Responsibility as Amicus Curiae on behalf of Plaintiff and Appellant.
John C. Eastman, Karen J. Lugo; Law Office of Anthony T. Caso and Anthony T. Caso for Center for Constitutional Jurisprudence, as Amicus Curiae on behalf of Plaintiff and Appellant.
Lurie Zepeda Schmalz & Hogan and Andrew W. Zepeda for Accounting Professionals as Amicus Curiae on behalf of Plaintiff and Appellant.
Morrison & Foerster, Miriam A. Vogel, Joseph L. Wyatt, Jr., James P. Bennett, Tritia M. Murata; Manatt, Phelps & Phillips and Thomas J. Umberg for Defendant and Respondent Association of Orange County Deputy Sheriffs.
Reed Smith, Harvey L. Leiderman and Jeffrey R. Rieger for Defendant and Respondent Orange County Employees’ Retirement System.
Carroll, Burdick & McDonough, Gary M. Messing, Gregg McLean Adam, Jonathan Yank and Jason H. Jasmine for State and Local Public Employees as Amicus Curiae on behalf of Defendants and Respondents.
Edmund G. Brown, Jr., Attorney General, Jonathan K. Renne, Assistant Attorney General, Stephen P. Acquisto and Hiren Patel, Deputy Attorneys General, for California Public Employees’ Retirement System as Amicus Curiae on behalf of Defendants and Respondents.
_______________________
In 2008, the County of Orange (Orange County or the County) sued the board of the County’s retirement plan, claiming that an enhanced retirement formula for prior years of service adopted in 2001 by the County Board of Supervisors violated the California Constitution. The County now appeals from the trial court’s grant of motions for judgment on the pleadings and entry of judgment in favor of the Association of Orange County Deputy Sheriffs and the Board of Retirement of the Orange County Employees’ Retirement System. We conclude that the past service portion of the enhanced retirement formula does not violate the Constitution, and we affirm.
BACKGROUND
I. The Orange County retirement system
The Orange County Employees’ Retirement System (OCERS) is a public employees’ retirement trust fund, an independent entity that administers the County’s retirement system. OCERS is governed by the County Employees Retirement Law of 1937 (CERL). (Gov. Code, §§ 31450, 31468, subd. (l)(1).)^[1] Orange County employees, including law enforcement (safety members), receive retirement and other benefits under CERL, which vests the management and funding of the retirement system in a board of retirement (OCERS Board). (§§ 31558, 31520.)
The County funds its retirement benefits through employee and employer contributions, and the retirement system investment earnings; the retirement fund is overseen by the OCERS Board. (§§ 31453.5, 31587.) These annual contributions are intended to fund the retirement benefits earned in the year the contributions are made. (§§ 31620 et seq., 31639 et seq.) The amount of the contributions is set based upon a normal contribution rate, which is a percentage of compensation required to fund the retirement benefits allocated to the current year of service being worked by county employees. Any shortfall between the normal cost and the actual amount determined to be necessary to fund future benefits (an amount based on actual experience) is made up through increases in employer contributions, and is amortized over a period of up to thirty years. (§ 31453.5.)
The benefits that an employee receives upon retirement are calculated according to a statutory formula that takes into account the employee’s final compensation,^[2] the number of credited years of service the employee had with the County, and a statutory multiplier. CERL provides for a variety of possible formulas for safety members. These include what is commonly called the “2% at 50” formula, which means two percent of final compensation, multiplied by the number of service years, for employees retiring at the age of 50. (§ 31664.) Section 31664.1, enacted in 2000, provides for an “additional pension for safety members,” commonly called the “3% at 50” formula, which similarly means three percent of final compensation, multiplied by the number of service years, for employees retiring at the age of 50. (§ 31664.1, subd. (b).)
II. December 2001 vote: 3% at 50
The Association of Orange County Deputy Sheriffs (AOCDS) is the exclusive representative of Orange County deputy sheriffs, sergeants, and investigators for the district attorney’s office, all of whom are safety members entitled to OCERS retirement benefits. (§§ 31469.3, 31470, 31470.2.) In May 2001, AOCDS’s 1999 memorandum of understanding, reached after collective bargaining with the County and set to expire in October 2002, provided that AOCDS members were entitled to retirement under the 2% at 50 formula.^[3] In May 2001, AOCDS formally asked the County to restructure the retirement terms to the enhanced 3% at 50 formula. After negotiations, in October 2001 the County negotiators and AOCDS representatives signed a tentative agreement to amend the AOCDS contract to adopt the 3% at 50 formula for members retiring on or after June 28, 2002. AOCDS agreed that its members would contribute 1.78 percent of their base salary for fifteen months, toward part of the cost of increased payouts under the increased formula. The agreement extended the AOCDS contract for an additional year, to October 2003.
On December 4, 2001, the County Board of Supervisors unanimously approved the amended AOCDS contract. The board voted to adopt Resolution No. 01-410, which authorized the 3% at 50 formula for AOCDS members, effective June 28, 2002. The accompanying memorandum of understanding between the County and AOCDS provided that the increased retirement formula would apply to “all years of service,” including those years served before the date of the resolution. This portion of the new retirement formula was authorized by section 31678.2, subdivision (a), enacted in 2000, which provides that the board of supervisors could, by resolution, make the benefit formula “applicable to service credit earned on and after the date specified in the resolution, which date may be earlier than the date the resolution is adopted.” Pursuant to section 31678.2, subdivision (c), members who had already retired before June 28, 2002 did not receive any increase in pension benefits.
The County had secured an actuarial report in November 2000, which analyzed (among other options) the financial impact of adopting the 3% at 50 formula for all years of service, both past and future. The analysis estimated that the increase in the County’s “actuarial accrued liability” for the benefit enhancement for past service was between $99 and $100 million.
The board of supervisors approved and renewed the 3% at 50 formula in subsequent contracts with AOCDS in 2003, 2005, and 2007.
On January 29, 2008, however, the County had a change of heart. The board of supervisors unanimously voted to approve Resolution No. 08-005, which stated that the past service portion of the 3% at 50 formula (applying the enhanced benefit formula to past years of service), as adopted in 2001 by the board of supervisors then in office, “was unconstitutional at the time of its adoption and remains unconstitutional today.” The board cited a September 2007 actuarial analysis^[4] which concluded that the past service portion of the increased retirement benefit totaled $187 million. The resolution authorized the County’s attorneys to “seek to obtain a declaration of unconstitutionality and an injunction against OCERS prohibiting it from paying out any benefit increases arising from Board Resolution 01-410 and based on years of service rendered before June 28, 2002, the effective date of that Resolution.” The resolution also provided that the County would not seek to recover any amounts already paid out to retirees under the enhanced benefit formula.
III. The County’s lawsuit
On February 1, 2008, the County filed the initial complaint in this action in Orange County Superior Court, naming as the sole defendant the OCERS Board. OCERS filed a motion to transfer venue to Los Angeles County and AOCDS intervened by stipulation. The case was transferred to Los Angeles Superior Court in April 2008. Following a demurrer by OCERS, on July 23, 2008 the County filed a first amended complaint adding AOCDS as a defendant.
The first amended complaint alleged in its first cause of action that the 2001 action by the prior board of supervisors adopting the past service portion of the enhanced 3% at 50 retirement formula violated the California Constitution’s municipal debt limitation in article XVI, section 18, subdivision (a), because without voter approval, the resolution created an immediately incurred and legally enforceable debt or liability of more than $99 million, which exceeded the County’s available unappropriated funds for the year. The second cause of action alleged that the past service portion also violated article XI, section 10 of the California Constitution, which prohibits the payment of extra compensation to public employees, because the retroactive portion “grants extra compensation to public employees ‘after service has been rendered.’” The complaint requested declaratory and injunctive relief, including an injunction to prevent the County from commencing or continuing to pay the past service portion of the enhanced benefits to retired AOCDS members.
In January 2009, AOCDS filed a motion for judgment on the pleadings, in which OCERS joined. In an order filed February 27, 2009, the trial court granted AOCDS’s motion, allowing the County leave to amend the municipal debt limitation cause of action “to the extent the County can allege that its liability for that portion of the 3% at 50 pension benefit attributable to past service as of 6/28/02 caused its indebtedness to exceed revenue in any given year since 6/28/02.” The order granted the motion without leave to amend on the cause of action alleging extra compensation, concluding “the extra compensation clause does not apply to pension benefits.”
The County filed a second amended complaint in April 2009, limited to the municipal debt limitation cause of action. AOCDS, joined by OCERS, filed a motion to strike the new pleading on the ground that it exceeded the limitation imposed by the trial court in its order granting the demurrer. The trial court construed the motion to strike as a motion for judgment on the pleadings, and in an order filed May 22, 2009, the court granted the motion without leave to amend.
The County appeals from the judgment filed July 15, 2009.
DISCUSSION
In reviewing the trial court’s grant of the motions for judgment on the pleadings under Code of Civil Procedure section 438, subdivision (b)(1), we apply the same rules governing the review of an order sustaining a general demurrer. (Smiley v. Citibank (1995) 11 Cal.4th 138, 146.) A defendant’s motion for judgment on the pleadings should be granted if, under the facts as alleged in the pleading or subject to judicial notice, the complaint fails to state facts sufficient to constitute a cause of action. (Code Civ. Proc., § 438, subd. (c)(1)(B)(ii).) We accept the complaint’s properly pleaded factual allegations as true and give them a liberal construction. (Angelucci v. Century Supper Club (2007) 41 Cal.4th 160, 166; Boblitt v. Boblitt (2010) 190 Cal.App.4th 603, 606, fn. 2.) We do not accept as true “any contentions, deductions or conclusions of fact or law contained therein.” (Dunn v. County of Santa Barbara (2006) 135 Cal.App.4th 1281, 1298.) We review de novo, and “‘are required to render our independent judgment on whether a cause of action has been stated’” (Mendoza v. Continental Sales Co. (2006) 140 Cal.App.4th 1395, 1401), without regard for the trial court’s reasons for granting the motion. (Ott v. Alfa-Laval Agri, Inc. (1995) 31 Cal.App.4th 1439, 1448.)
I. The municipal debt limitation
Article XVI, section 18, subdivision (a) of the California Constitution provides: “No county . . . shall incur any indebtedness or liability in any manner or for any purpose exceeding in any year the income and revenue provided for such year, without the assent of two-thirds of the voters of the public entity voting at an election to be held for that purpose . . . .” This municipal debt limitation means “‘the legislative body may not encumber the general funds of the city beyond the year’s income without first obtaining the consent of two thirds of the electorate.’ [Citation.]” (Starr v. City and County of San Francisco (1977) 72 Cal.App.3d 164, 175.) This “establish[ed] the ‘pay as you go’ principle as a cardinal rule of municipal finance.” (Westbrook v. Mihaly (1970) 2 Cal.3d 765, 776, vacated on other grounds, Mihaly v. Westbrook (1971) 403 U.S. 915.) “Each year’s income and revenue must pay each year’s indebtedness and liability, and no indebtedness or liability incurred in one year shall be paid out of the income or revenue of any future year. The taxpayers of [counties] are thus protected against the improvident creation of inordinate debts, which may be charged against them and their property in ever increasing volume from year to year.” (McBean v. City of Fresno (1896) 112 Cal. 159, 164.)
The County’s second amended complaint alleges that in 2001, when the board of supervisors approved the past service portion of the enhanced 3% at 50 retirement formula for AOCDS members, the board created a “$100 million long-term liability (that has since grown to approximately $187 million) . . . .” The County alleges that the board’s action violated article XVI, section 18, subdivision (a), which it characterizes as a “‘balanced budget’ requirement,” because the $100 million was an immediately enforceable debt incurred in a year in which the County’s unappropriated revenue (for fiscal year 2002) totaled less than $99 million, and the County did not hold the required election to obtain voter approval.
AOCDS rejoins that the $100 million amount which the County on this appeal characterizes as a “debt” is not an “‘indebtedness’ or ‘liability’” within the meaning of article XVI, section 18, subdivision (a). Instead, it is an actuarial calculation of what the County’s obligations are likely to be in the future for the past service portion of the 3% at 50 retirement formula for AOCDS members. As an actuarial projection, the $100 million did not belong on the liability side of the County’s balance sheet in the 2002 fiscal year, and it thus escapes the application of the municipal debt limitation.
To evaluate the parties’ arguments, we must explain in some detail what the $100 million figure represents.
A. Unfunded Actuarial Accrued Liability calculations
The OCERS Board, which has “plenary authority and fiduciary responsibility for . . . administration of the [retirement] system . . . [¶] [and] sole and exclusive responsibility to administer the system in a manner that will assure prompt delivery of benefits and related services to the participants and their beneficiaries,” also has “the sole and exclusive power to provide for actuarial services in order to assure the competency of the assets of the public pension or retirement system.” (Cal. Const., art. XVI, § 17, subds. (a), (e).) The OCERS Board is required to conduct regular actuarial evaluations to determine the employer and employee contributions necessary to fund the retirement benefits of county employees, and to “determine the extent to which prior assumptions must be changed.”^[5] (In re Retirement Cases (2003) 110 Cal.App.4th 426, 459–460.) The OCERS Board commissioned an actuarial analysis in November 2000 of the proposed changes to the AOCDS pension benefits. The 2000 actuarial analysis produced the $100 million estimate (educated and justified estimate, but estimate nonetheless) that the County now claims was a debt exceeding the County’s 2002 annual income, and therefore triggered the municipal debt limitation’s requirement of a two-thirds vote of the public.
That $100 million figure was an estimated “unfunded actuarial accrued liability” or UAAL, predicting the unfunded cost of the retroactive portion of the proposed 3% at 50 retirement formula. This UAAL was not projected in earlier actuarial valuations which did not contemplate the enhancement of the AOCDS retirement formula to 3% at 50. “‘Unfunded accrued actuarial liability’ is the difference between actuarial accrued liability and the valuation assets in a fund.” (Bandt v. Board of Retirement (2006) 136 Cal.App.4th 140, 147, fn. 3.) “‘Most retirement systems have [UAAL]. They arise each time new benefits are added and each time an actuarial loss is realized. . . . [UAAL] does not represent a debt that is payable today.’” (Id. at p. 157.)
The County’s 2007 Comprehensive Annual Financial Report explains the assumptions underlying the OCERS UAAL: “The UAAL for OCERS is an estimate based on a series of assumptions that operate on demographic data of OCERS’ membership. This process is necessary to determine, as of the date of the calculation, how sufficient the assets in OCERS are to fund the accrued costs attributable to active, vested[,] terminated and retired employees. This determination of underfunding rests on actuarial assumptions regarding expected return on invested assets, the assumed future pay increases for current employees, assumed rates of disability, the assumed retirement ages of active employees, the assumed marital status at retirement, the post-employment life expectancies of retirees and beneficiaries, salary increases, contributions to OCERS, inflation, and other factors.” Given the multiple assumptions about the future involved in calculating the OCERS UAAL (investment returns, pay increases, marital status at retirement, retiree and beneficiary life expectancies, salary increases, contribution rates, and inflation), it is clear that the UAAL is a highly variable amount, which may or may not prove accurate depending upon actual future events and experience.
An unfunded liability such as a UAAL will affect the contribution rate of an employer such as the County. (In re Retirement Cases, supra, 110 Cal.App.4th at pp. 459–460.) In projecting the cost of funding the benefits provided to OCERS members, OCERS uses a method described in section 31453.5, which (as explained by OCERS) divides the likely cost of future benefits between the “normal cost” (the employer contributions required to fund the benefits allocated to the current year of service) and the UAAL (the shortfall between the past years’ projected normal cost and the actual past experience of the retirement system), which is to be amortized over thirty years.^[6] Section 31453.5 authorizes but does not require OCERS to use this method, providing “the board may determine county or district contributions” (italics added) by dividing the cost into normal cost and UAAL. OCERS therefore is not mandated to calculate a UAAL in projecting what the County’s future contribution rate will need to be to fund the past service portion of the 3% at 50 formula for AOCDS members. OCERS could employ another method to predict the County’s future contributions.
B. 1982 Attorney General opinion
Article XVI, section 1 of the California Constitution, the debt limitation provision applicable at the state level, is similar to and construed in tandem with the municipal debt limitation in issue here, article XVI, section 18, subdivision (a). (Dean v. Kuchel (1950) 35 Cal.2d 444, 446; State ex rel. Pension Obligation Bond Com. v. All Persons Interested etc. (2007) 152 Cal.App.4th 1386, 1397–1401; 67 Ops.Cal.Atty.Gen. 349, 351 (1984).) In 1982, the Attorney General concluded that the state retirement system’s “unfunded liability” did not violate the state debt limitation provision. The Attorney General explained that “[d]etermining how much income to the [state] Fund is necessary to pay all benefits as they become due is the business of actuaries. Actuaries predict the future financial operation of an insurance or retirement system by making certain assumptions regarding the variables in the system.” (65 Ops.Cal.Atty.Gen. 571, 572 (1982).)
The state Public Employees’ Retirement System (PERS) actuarial balance sheet showed an “unfunded actuarial liability” above the state debt limitation amount. The Attorney General concluded: “The actuarial term ‘unfunded liability’ fails to qualify as a legally enforceable obligation of any kind. As previously noted the very existence of such an ‘unfunded liability’ depends upon the making of an actuarial evaluation and the use of an evaluation method which utilizes the concept of an ‘unfunded liability.’ Further the amount of such an ‘unfunded liability’ in the actuarial evaluation of a pension system will depend upon how that term is defined for the particular valuation method employed. Finally the amount of such an ‘unfunded liability,’ however defined for the method used, depends upon many assumptions made regarding future events such as size of work force, benefits, inflation, earnings on investments, etc. In other words an ‘unfunded liability’ is simply a projection made by actuaries based upon assumptions regarding future events. No basis for any legally enforceable obligation arises until the events occur and when they do the amount of liability will be based on actual experience rather than the projections.” (65 Ops.Cal.Atty.Gen., supra, at p. 574, italics added.) Such calculations did not result in a legally binding debt or liability, but instead provided “useful guidance in determining the contributions necessary to fund a pension system.” (Ibid.)
We acknowledge that the Attorney General opinion is not binding, but it is entitled to considerable weight. (Lexin v. Superior Court (2010) 47 Cal.4th 1050, 1087, fn. 17.) “Reliance on Attorney General opinions is particularly appropriate where, as here, no clear case authority exists, and the factual context of the opinions is closely parallel to that under review.” (Thorpe v. Long Beach Community College Dist. (2000) 83 Cal.App.4th 655, 662–663.) There is no clear case authority on this issue, and the 1982 opinion has a similar factual context involving the state’s analogous debt limitation provision. We find the analysis in the 1982 opinion persuasive, and that analysis supports the conclusion that a UAAL such as the $100 million cited by the County in this case is an actuarial estimate projecting the impact of a change in a benefit plan, rather than a legally enforceable obligation measured at the time of the County’s 2001 resolution approving the 3% at 50 formula.
C. The County’s arguments
The County argues that pension obligations are incurred for the purposes of the debt limitation provision at the time of an award of pension benefits, citing Carman v. Alvord (1982) 31 Cal.3d 318. In Carman, a taxpayer argued that article XIII of the California Constitution (Proposition 13) prohibited a tax levied to meet a city’s annual payment obligation to PERS. In determining that the city’s 1978-1979 payment to PERS was “indebtedness as traditionally understood,” the Court emphasized: “‘The term “indebtedness” has no rigid or fixed meaning, but rather must be construed in every case in accord with its context.’ [Citations.] It can include all financial obligations arising from contract [citation], and it encompasses ‘obligations which are yet to become due as [well as] those which are already matured.’” (Id. at pp. 326–327.) This unexceptional statement does not control our case, which does not involve an annual payment to OCERS but rather a projection of what the past service portion of the enhanced benefit may cost the County, subject to all the variables inherent in projecting cost over time. In the context of this case, the actuarial projection is not “indebtedness as traditionally understood.” (Id. at p. 327.) An unfunded liability such as a UAAL is not created at the time of the award of enhanced benefits, but occurs over years “and may have been avoided entirely if, for example, the retirement fund experienced better than expected investment returns . . . .” (City of San Diego v. San Diego City Employees’ Retirement System (2010) 186 Cal.App.4th 69, 83.)
None of the other debt-limitation cases cited by the County involves a factual situation similar to this case. (See Chester v. Carmichael (1921) 187 Cal. 287 [installment contract to purchase land for a county park]; Mahoney v. City and County of San Francisco (1927) 201 Cal. 248 [same]; Garrett v. Swanton (1932) 216 Cal. 220 [installment contract to purchase a water pumping plant], overruled in City of Oxnard v. Dale (1955) 45 Cal.2d 729, 737; In re City and County of San Francisco (1925) 195 Cal. 426 [conditional purchase of land for city marina]; City of Saratoga v. Huff (1972) 24 Cal.App.3d 978 [$2 million in special assessment bonds payable over 10-year period].) In each case, the obligation to repay the indebtedness was spread over years, but the total amount owed was not in question. Here, the County committed to paying increased benefits over time when it approved the enhanced benefit for AOCDS members, but the UAAL is not a certain total for which the County is immediately liable.^[7]
The County also cites an Attorney General opinion from 2005, which states: “A retroactive improvement in retirement benefits not only requires an increase in the city’s future retirement contributions, but also creates a ‘past service liability,’ or debt to the retirement fund, which must be paid.” (88 Ops.Cal.Atty.Gen. 165, 167 (2005).) That may be true as far as it goes, but the 2005 opinion did not address the municipal debt limitation and is not inconsistent with the earlier 1982 Attorney General opinion. The Attorney General in 1982 approvingly quoted an article in the state retirement system newsletter, which explained: “‘[T]he “past service liability” and the “unfunded liability” are a function of the actuarial methods and assumptions used to fund a pension plan. . . . [¶] [T]he “liabilities” are not owed by the plan. They are primarily a function of the methods and assumptions used by the actuary to fund the plan.’” (65 Ops.Cal.Atty.Gen., supra, at pp. 572–573, fn. 2.)^[8]
Nor do existing accounting standards support a conclusion that the UAAL was a legally enforceable obligation when the board of supervisors voted to adopt the enhanced benefit formula in 2001. As the amicus brief in support of the County from the Accounting Professionals explains, the Government Accounting Standards Board (GASB) recognizes a pension “liability” as the difference between the government employer’s annual pension cost and the employer’s actual contributions to the pension plan. The GASB requires the “unfunded accrued benefit obligation” to be disclosed in notes to the financial statement, rather than reported on the balance sheet as a liability. (GASB, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, Statement No. 25 (1994) and GASB, Accounting for Pension by State and Local Governmental Employees, Statement No. 27 (1994).)^[9] While some pension liabilities must be reported on the balance sheet, the UAAL in this case is not one of them.
The County emphasizes its current difficult financial situation and the “ruinous fiscal irresponsibility” of the prior board of supervisors. Imprudence, however, is not unconstitutional. “Courts examining a potential violation of the Debt Limit are not directed to sit in post hoc judgment of the wisdom of a municipality’s income and revenue estimates.” (In re County of Orange, supra, 31 F.Supp.2d at p. 776.)
We affirm the trial court’s grant of judgment on the pleadings on the municipal debt limitation cause of action in the second amended complaint.














TO BE CONTINUED AS PART II….

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