EDMON, J.
Petitioner City of Los Angeles (City) negotiated a Letter of Agreement (LOA) with a number of its employee unions. The LOA provided for an increase in the amount of City employees' pension contributions, which would fund an early retirement program intended to reduce the workforce in an effort to avoid mandatory layoffs or furloughs. The LOA was approved by the City and the unions, and the increased pension contribution provision was put into effect. Plaintiffs and real parties in interest Ann Rosenthal, Paul Castro, Richard A. Schmidt, and Marsha C. Berkowitz brought a putative class action against the City, on behalf of all employee members of the unions which had approved the LOA, challenging the increase in their pension contributions as violative of the federal and state constitutional prohibitions on interference with contracts (contracts clauses). The City demurred to the operative complaint, arguing that, as the increase in the pension contributions was, in fact, agreed to by the unions, any contractual modification was consensual and did not violate the constitutional contracts clauses. The trial court overruled the demurrer, and the City sought relief by petition for writ of mandate. We issued an order to show cause and will now grant the writ petition. Any prior existing contractual rights to a lesser pension contribution amount were properly modified by the bilateral LOA. There is no contracts clause violation as a matter of law.
Before we turn to the challenged modification to the pension system, a brief explanation of the City's pension system is helpful. The City is a charter city. The pension system at issue is the Los Angeles City Employees' Retirement System, known as LACERS. (L.A. Admin. Code, § 4.1000.) LACERS is subject to several provisions of the City Charter (L.A. Charter, § 1102), as well as more specific provisions of the Administrative Code.
LACERS is governed by a board of administration (Board). (L.A. Charter, § 1102(c).) The Board is granted sole and exclusive responsibility to administer LACERS, with the goals of providing benefits to system participants, minimizing City contributions, and defraying the reasonable expenses of administering the system. (L.A. Charter, § 1106(a).) The Board also has sole and exclusive fiduciary responsibility "over the assets of its system which are held in trust" for the purposes of providing benefits and defraying the reasonable expenses of the system. (L.A. Charter, § 1106(b).)
The LACERS trust fund, known as the retirement fund, is kept separate and apart from the other money of the City. (L.A. Charter, § 1152(f).) The retirement fund is used for the "payment of administration expense[s], retirement allowances and other benefits of the [s]ystem, which fund shall consist of all money paid into the fund . . . and earnings from investments." (L.A. Charter, § 1154.) The "money in [the LACERS retirement fund] shall be invested at the sole and exclusive direction" of the Board. (L.A. Charter, § 1110(d).)
Both employees and the City are required to make contributions to the retirement system. Employees (also known as plan members) contribute by salary deduction. (L.A. Charter, § 1162.) The City must also contribute to the fund, in both a sum equal to a percentage of the members' salaries, and amounts sufficient to liquidate, over time, accrued unfunded liabilities of the system. (L.A. Charter, § 1160.)
By charter provision, the Board is required to "maintain an individual account of the contributions made by or for each [m]ember." (L.A. Charter, § 1162(b).) All of a member's contributions are required to be deposited in the member's individual account. (L.A. Admin. Code, § 4.1003(d).) "Regular interest shall be credited to the individual accounts as of the last day of each month equal to the yield of the five year Treasury note. . . ." (L.A. Charter, § 1162(b).) The total of the amounts paid by a member into the fund and the interest credited to the member's account is called the member's accumulated contributions. (L.A. Charter, § 1152(a); L.A. Admin. Code, § 4.1001(a).) Should the law governing LACERS be repealed, the members have a vested property right to the return of their accumulated contributions. (L.A. Charter, § 1162(d).)
A member who retires, after reaching a certain age and/or having sufficient years of service, is entitled to benefits calculated by a particular formula, discussed below.
We now turn to the formula for the calculation of a retirement allowance. (L.A. Admin. Code, § 4.1007.) The formula is a factor (0.0216) multiplied by the employee's number of years of service, multiplied by the employee's final compensation as of the time of retirement, with a possible reduction for the employee's age at the time of retirement. (Ibid.) Once the retirement allowance is calculated, it is allocated between two components: (1) an "annuity" which is the actuarial equivalent of the employee's accumulated contributions; and (2) a "pension" in the amount of the remaining balance. (L.A. Admin. Code, § 4.1007(a).) Thus, the higher an employee's accumulated contributions, the lower the obligation of the fund to make up the difference by means of a pension. In this case, we are concerned with a mandatory increase in the amount of the employees' contributions. This will have the effect of increasing the balance of the employees' accumulated contributions, and therefore reducing the amount of the pension the fund will be required to pay in order to make up the entirety of each employee's benefits upon retirement.
We consider the facts as alleged in the operative complaint. Prior to 1983, member contributions to LACERS were calculated according to a table based on the age of the employee at the time the employee entered City employment. Thereafter, a new provision was enacted providing that any City employee who became a member after January 1, 1983 would be required to contribute a fixed rate of 6% of the member's salary to LACERS.
In 2007, six City employee labor unions formed a coalition for the purposes of collective bargaining. All named plaintiffs, and the class they seek to represent, were members of unions either directly in, or affiliated with unions in, the coalition. As a result of collective bargaining, the City reached memoranda of understanding (MOUs) with the unions.
On July 1, 2011, pursuant to the terms of the LOA, the City began withholding the additional 1% from plaintiffs' pay. Plaintiffs take the position that this constituted an impermissible unilateral increase in their pension contribution rate, in violation of their vested pension rights.
Plaintiffs brought the instant action against the City, challenging the collection of the additional 1% pension contribution. They allege five causes of action: (1) violation of the contracts clause of the California Constitution; (2) violation of the contracts clause of the U.S. Constitution; (3) injunctive relief; (4) declaratory relief; and (5) peremptory writ of mandate. Plaintiffs concede that the latter three causes of action are derivative of the first two. Therefore, we are concerned solely with whether plaintiffs have stated causes of action for violation of the contracts clauses in the state and/or federal constitutions.
Although the operative complaint is the fourth amended complaint, we briefly discuss the allegations of the third amended complaint. In that complaint, plaintiffs alleged a contracts clause violation on the basis that the ordinance enacting the ERIP violated their vested contractual rights to a pension contribution rate of 6%. Plaintiffs did not allege the contractual right to such a pension contribution rate vested because of its inclusion in the MOUs.
The City demurred, arguing that there was no vested contractual right to the 6% contribution rate. While the City acknowledged the existence of the provisions of the Administrative Code setting forth the 6% contribution rate, the City brought to the trial court's attention a provision of the City Charter, providing that each member "shall contribute to the [s]ystem by salary deduction at the rate of contribution established by ordinance." (L.A. Charter, § 1162(a), italics added.) The City therefore argued that the employees could have no vested right to a particular contribution rate, as the Charter provided for modification of the contribution rate by ordinance.
Faced with this argument, plaintiffs then argued that a provision of the prior charter (superseded on July 1, 2000 (L.A. Charter, § 109)) provided employees
The demurrer was sustained with leave to amend. The plaintiffs then filed their fourth amended complaint, basing their contracts clause arguments exclusively on the provision of the former charter, and also arguing that the LOA was invalid as it provided for the assignment of unassignable benefits.
The City demurred to the fourth amended complaint, arguing, among other things, that plaintiffs could not challenge as violative of the contracts clauses a bilateral mutually agreed-upon contract. Plaintiffs opposed the demurrer, arguing that the case was not ripe for demurrer, in that numerous disputed issues of fact existed, including whether the increased contribution effectively decreased plaintiffs' pension rights and whether the method of the ERIP rollout effectuated an improper diversion of funds.
The trial court overruled the demurrer without prejudice to the City pursuing a motion for summary judgment. The City challenged this ruling by petition for writ of mandate. We issued an order to show cause.
The sole issues before the court surround whether plaintiffs' fourth amended complaint states a cause of action for violation of the contracts clauses of the state and/or federal constitution. While it is undisputed that public employees enjoy some level of vested contractual pension rights, protected by the contracts clauses, the parties dispute whether plaintiffs' vested rights include the right to have the employees' contribution limited to 6% of their salaries, in the absence of an actuarial study. We conclude that we need not reach the issue, as there is a more fundamental bar to plaintiffs' causes of action: there can be no violation of the contracts clauses by a bilateral, mutually agreed-upon contract, as long as the contract is otherwise enforceable. To the extent plaintiffs argue that the LOA in this case is not enforceable as its provisions were otherwise illegal, we disagree.
"In reviewing the sufficiency of a complaint against a general demurrer, we are guided by long-settled rules. `We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. [Citation.] We also consider matters which may be judicially noticed.' [Citation.] Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.] When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action. [Citation.]" (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)
"We review questions of law de novo." (Board of Administration v. Wilson (1997) 52 Cal.App.4th 1109, 1127.) The construction of a statute presents a question of law subject to independent review. (Teachers' Retirement Bd. v. Genest (2007) 154 Cal.App.4th 1012, 1028.)
"Under the California Constitution, a `law impairing the obligation of contracts may not be passed.' (Cal. Const., art. I, § 9.) Similarly, under the federal Constitution, `No state shall . . . pass any . . . law impairing the obligation of contracts. . . .' (U.S. Const., art I, § 10, cl. 1.)" (San Bernardino Public Employees Assn. v. City of Fontana (1998) 67 Cal.App.4th 1215, 1222.) Thus, the contracts clauses limit the power of public entities to, by enacting a law, unilaterally modify their own contracts with other parties.
Preliminarily, we note that plaintiffs' contracts clause theory is not the traditional contracts clause cause of action. A contracts clause cause of action requires a preexisting contract which is allegedly interfered with by a subsequent legislative enactment. Plaintiffs allege the preexisting contract is the provision of the prior charter which purportedly became an implied part of their contracts of employment, and the subsequent legislative enactment is the ERIP ordinance which enacted the provisions of the LOA. In the absence of the contracts clause, plaintiffs would, in effect, be arguing that a contract (the LOA) and the ordinance enacting its terms (the ERIP ordinance) violated a provision of the prior charter. Obviously, such a claim would have no merit. Plaintiffs therefore can only succeed if they can properly recharacterize their claim to fit under the rubric of the contracts clauses. As we shall discuss, they may be able to find vested contract rights in the prior charter provision, but they cannot find an interfering legislative enactment in an ordinance putting into effect a valid, mutually-agreed upon contract.
The terms and conditions of public employment are generally established by statute or ordinance, rather than contract. However, "with regard to at least certain terms or conditions of employment that are created by statute, an employee who performs services while such a statutory provision is in effect obtains a right, protected by the contract[s] clause, to require the public employer to comply with the prescribed condition." (White v. Davis (2003) 30 Cal.4th 528, 564-565.) California law treats a pension as an element of compensation which is a vested contractual right. (Valdes v. Cory (1983) 139 Cal.App.3d 773, 783.) "`By entering public service an employee obtains a vested contractual right to earn a pension on terms substantially equivalent to those then offered by the employer.' [Citation.]" (California Assn. of Professional Scientists v. Schwarzenegger, supra, 137 Cal.App.4th at p. 383.)
That, upon accepting public employment, an employee obtains a vested contractual right to earn a pension does not mean that all terms governing the pension system then in effect become vested contractual rights of the employee. "[A]n employee may acquire a vested contractual right to a pension but . . . this right is not rigidly fixed by the specific terms of the legislation in effect during any particular period in which he serves. The statutory language is subject to the implied qualification that the governing body may make modifications and changes in the system. The employee does not have a right to any fixed or definite benefits, but only to a substantial or reasonable pension. There is no inconsistency therefore in holding that he has a vested right to a pension but that the amount, terms and conditions of the benefits may be altered."
Plaintiffs' theory of the case is that the prior City charter established vested contractual rights to an employee pension contribution that would not be increased unless based on a prior actuarial study, which was not done in this case. (L.A. Charter, fmr. § 505.) We need not consider, however, whether there was, in fact, a vested contractual right to a pension contribution which would not be increased except as provided in the prior charter provision.
The contracts clauses are, by their terms, directed at the evil of a governmental body passing a law which impairs existing contracts. In this case, plaintiffs charge that the purported impairing law is the ordinance which enacted the ERIP, pursuant to the terms of the LOA. They fail to recognize, however, that they are, in effect, arguing that the current contract (the LOA) impaired the terms of the prior contract. But there is no constitutional prohibition against bilateral modification of existing government contracts.
Plaintiffs take the position that this is incorrect, and that even a mutually agreed-upon MOU "is still subject to the `constitutional constraints on impairment of contracts.' [Citation.]" Plaintiffs rely on Valencia v. County of Sonoma (2007) 158 Cal.App.4th 644, 649 for this proposition. Plaintiffs' interpretation of the Valencia case is mistaken. That case held that once an MOU is signed, it "cannot be abrogated by public referendum [citation] and is subject to the constitutional constraints on impairment of contracts. [Citation.]" (Ibid.) In other words, the case did not hold that an MOU cannot impair a prior contract, it held that an MOU is a contract which is itself protected against subsequent legislative impairment.
It is well-established that approved MOUs are binding on all parties. The Meyers-Milias-Brown Act (MMBA), which provides for collective bargaining and the creation of MOUs, provides that its purpose is "to promote full communication between public employers and their employees by providing a reasonable method of resolving disputes regarding wages, hours, and other terms and conditions of employment between public employers and public employee organizations."
Thus, the LOA, having been approved by the coalition unions and the City, was an enforceable contract. It was a consensual modification of a prior contract (even one impliedly arising from a prior charter provision) governing pension terms, and, therefore, did not violate the contracts clauses.
Plaintiffs argue, however, that the LOA is not enforceable because its provisions are illegal. To be sure, if the agreement is itself illegal, it is not enforceable. Parties cannot include in their MOUs provisions which contravene constitutional provisions.
Plaintiffs argue the LOA is illegal, and therefore unenforceable, in two respects. First, they again argue that it violates the prior charter's purported limitation on the City's right to increase the members' contributions. Second, they argue that it provides for an improper diversion of pension benefits.
To the extent plaintiffs argue that the right to an employee contribution which cannot be raised unless based on a five-year actuarial study (L.A. Charter, fmr. § 505) is a fundamental, unwaivable right, we disagree. Such a purported right does not find its origin in the federal or state constitutions, a federal statute, or even a state statute — it was instead found in a prior, superseded, charter provision. Nor does such a right arise from extraordinarily strong and explicit state policy; if the right existed at all, it was simply a charter provision governing the precise details of retirement plan administration. As such, it was clearly waivable.
Plaintiffs next argue that the LOA was illegal as it effectuated an improper diversion of pension funds, in violation of a current charter provision. That provision provides, "[t]he right of every [m]ember and of every [b]eneficiary to receive and be paid any money under any of the provisions of the LACERS is a right personal to the [m]ember or [b]eneficiary which cannot be assigned to any other person, in any manner or for any purpose, the intent being that payments in all cases be made directly to the [m]ember or [b]eneficiary." (L.A. Charter, § 1170.) Plaintiffs argue that the additional 1% pension contribution they are required to make under the ERIP is being diverted in violation of this provision. Regardless of whether this charter provision establishes a non-waivable right, plaintiffs' argument fails because the ERIP does not, as a matter of law, violate this provision.
Under the ERIP, as established pursuant to the LOA, employees' pension contributions are increased from 6% to 7%. The additional 1% is credited to the employees' individual accounts, and is considered part of the employees' accumulated contributions. Interest will be credited to the accumulated contributions on the extra 1%, just as it is on all other contributions. If the employee is ultimately entitled to return of his or her accumulated contributions (or the employee's beneficiary is entitled to that return, in the event of the employee's death before retirement), the employee (or beneficiary) will receive the entirety of the accumulated contributions, including the additional 1%. If the employee retires, the employee's retirement allowance is calculated by the same formula based on the employee's years of service and age. In short, there is no adverse impact on the right of any employee or beneficiary "to receive and be paid any money under any of the provisions of the LACERS" — the right to the return of accumulated contributions and the right to a full retirement allowance are wholly unaffected by the ERIP.
Plaintiffs' argument to the contrary is based on the premise that their additional 1% contributions are being diverted to pay the early retirement benefits under the ERIP. This is an oversimplification. In fact, their additional contributions are made to the retirement fund, and invested by the Board, as are all contributions. Moreover, the City is making all ERIP payments. The arrangement is financially neutral to the City only in the fact that, by increasing the employees' monthly contributions, without increasing the employees' retirement allowances, additional funds will pour into the retirement fund, enabling the fund to recoup the costs of the ERIP. To be sure, this does mean that the City employees are contributing additional funds but will not receive increased retirement allowances. However, this is not, in any way, a diversion of the right to benefits. An increase in the cost of a benefit does not constitute an assignment of the right to receive it. Thus, the LOA does not violate the charter provision against assignability of benefits. It is therefore not unenforceable.
We reject plaintiffs' arguments that the ordinance enacting the ERIP constitutes a violation of the contracts clauses, given that the ERIP was enacted pursuant to an agreement reached between the City and its employee unions. We further reject plaintiffs' arguments that the LOA itself contained unenforceable provisions.
There have been many cases in which a governmental entity attempted to modify pension terms without the consent of the affected employees. (E.g., Kern v. City of Long Beach, supra, 29 Cal.2d at p. 850; Betts v. Board of Administration, supra, 21 Cal.3d at p. 862; San Diego City Firefighters, Local 145 v. Board of Administration etc. (2012) 206 Cal.App.4th 594, 599-600; Board of Administration v. Wilson, supra, 52 Cal.App.4th at p. 1117; Valdes v. Cory, supra, 139 Cal.App.3d at p. 776.) In this case, the City chose, in accordance with the policy set forth in the MMBA, to negotiate with its employee unions and obtain agreement to the pension plan modifications. That the City obtained agreement to the modifications (and the modifications are not otherwise unenforceable) shields it from a contracts clause lawsuit.
The City's petition for writ of mandate is granted. Let a writ of mandate issue directing the trial court to: (1) vacate its order overruling City's demurrer to plaintiffs' fourth amended complaint; and (2) enter a new and different order sustaining the demurrer without leave to amend. The City shall recover its costs in connection with this writ proceeding.
KITCHING, Acting P. J. and ALDRICH, J., concurs.
