HomeMy WebLinkAboutCC Resolution 13967 (Grand Jury Response; Pension Enhancements)RESOLUTION NO. 13967
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SAN
RAFAEL APPROVING AND AUTHORIZING THE MAYOR TO
EXECUTE THE CITY'S RESPONSE TO THE 2014-2015 MARIN COUNTY
GRAND JURY REPORT ENTITLED "PENSION ENHANCEMENTS: A
CASE OF GOVERNMENT CODE VIOLATIONS AND A LACK OF
TRANSPARENCY"
WHEREAS, pursuant to Penal Code section 933, a public agency which receives a Grand
Jury Report addressing aspects of the public agency's operations must, within ninety (90) days,
provide a written response to the Presiding Judge of the Superior Court with a copy to the
Foreperson of the Grand Jury, responding to the Report's findings and recommendations; and
WHEREAS, Penal Code section 933 specifically requires that the "governing body" of the
public agency provide said response and, in order to lawfully comply, the governing body must
consider and adopt the response at a noticed public meeting pursuant to the Brown Act; and
WHEREAS, the City Council of the City of San Rafael has received and reviewed the
2014-2015 Marin County Grand Jury Report, dated April 9, 2015, entitled "Pension Enhancements:
A Case of Government Code Violations and a Lack of Transparency", and has agendized it at this
meeting for a response.
NOW, THEREFORE, BE IT RESOLVED, that the City Council of the City of San
Rafael hereby:
1. Approves and authorizes the Mayor to execute the City's response to the Marin
County Grand Jury's April 9, 2015 Report entitled "Pension Enhancements: A Case of Government
Code Violations and a Lack of Transparency," a copy of which response is attached hereto and
incorporated herein by reference.
2. Directs the City Clerk to forward the City's response forthwith to the Presiding
Judge of the Marin County Superior Court and to the Foreperson of the Marin County Grand Jury.
I, Esther Beirne, Clerk of the City of San Rafael, hereby certify that the foregoing
Resolution was duly and regularly introduced and adopted at a regular meeting of the San Rafael
City Council held on the 6`h day of July, 2015, by the following vote to wit:
AYES: Councilmembers: Bushey, McCullough & Mayor Phillips
NOES: Councilmembers: Gamblin
ABSENT: Councilmembers: Colin
G-nt- - - • )2—o -e R... -C .
ESTHER C. BEIRNE, City Clerk
RESPONSE TO GRAND JURY REPORT FORM
(CITY OF SAN RAFAEL)
Report Title:
Report Date:
Public Release Date:
Response By:
FINDINGS:
Pension Enhancements: A Case of Government Code
Violations and a Lack of Transparency
April 9, 2015
April 16, 2015
July 15, 2015
• We agree with the findings numbered N/A
• We disagree wholly or partially with the findings numbered F1, F5, F6
(See Attachment A incorporated herein by reference.)
RECOMMENDATIONS:
• Recommendations numbered R1, R2, R3 have been implemented.
(See Attachment A incorporated herein by reference.)
• Recommendation numbered N/A has not yet been implemented, but will be
implemented in the future.
(Attach a timeframe for the implementation.)
• Recommendations numbered N/A requires further analysis.
• Recommendations numbered N/A will not be implemented because they are not
warranted or are not reasonable. 1
DATED: Signed:
\OjARY,
HILLIPS, Mayor
ATTEST:
Esther Beirne, City Clerk
Number of paces attached: 16
ATTACHMENT "A"
RESPONSE OF THE CITY OF SAN RAFAEL TO GRAND JURY REPORT
"PENSION ENHANCEMENTS: A CASE OF GOVERNMENT CODE
VIOLATIONS AND A LACK OF TRANSPARENCY"
FINDINGS:
F1: The Employers appear to have repeatedly violated Cal. Gov't Code §7507 by
using the same actuarial evaluation report for many different pension increases
and by failing to publicly disclose those increased costs before adopting them.
The evaluations did not review the proposed increases for each bargaining unit;
the Employers continued using the evaluation after years had passed. These
factors appear to have contributed to the current u i ended liabilities of MCERA.
Response: Disagree.
The City disagrees with Finding F1 for the reasons summarized below and
explained in more detail in the attached Memorandum dated June 19, 2015 from
the City's outside legal counsel in this matter, Michael G. Colantuono and
Matthew T. Summers of the law firm of Colantuono, Highsmith, Whatley, PC,
which forms part of the City's response.
The City approved two, not nine, different pension enhancements in the actions
referenced by the Grand Jury --a single, uniform pension enhancement for all
safety employees (the "3% at 55" formula) and a single, uniform pension
enhancement for all non -safety employees (the "2.7% at 55" formula) --although
the City Council approved them bargaining unit by bargaining unit over the
course of four public meetings in 2002 and 2006. This sequential implementation
did not violation Section 7507.
The employee pension enhancements were approved in strict compliance with
Government Code Section 7507's requirement that the City first engage the
services of an enrolled actuary to provide an estimate of the "future annual costs"
of the proposed enhancements. The City obtained estimates of the "future annual
costs" of providing the proposed pension enhancements to all of the City's
employees, both safety and non -safety; therefore ' the City Council had the
actuarial information required by Section 7507 and could make educated,
informed decisions as to the proposed pension enhancements. Nothing in Section
7507 required that the "future annual costs" be separated among the bargaining
units as suggested in the report.
As discussed in the attached memorandum, the City also complied substantially
with the statute's requirement for making the actuary's cost estimates available to
the public at a public meeting, although the City did not strictly comply in some
cases with the statute's requirement that the meeting occur at least two weeks
prior to approval of the pension enhancement.
F5. If the pension increases were not made in accordance with the California
Government Code, the citizens of Marin County were never given proper notice
about pension increases that are now costing them millions of dollars. These
increases and associated liabilities are a contributing factor to why MCERA has a
collective unfunded liability of approximately $536.8 million.
Response: Disagree.
The City disagrees with Finding F5 for the reasons summarized above and
explained in more detail in the attached Memorandum dated June 19, 2015 from
the City's outside legal counsel. The City's compliance with Government Code
Section 7507 had the defects noted in the attached Memorandum; however, the
City is advised by independent counsel that these defects do not allow the City to
revise its contractual commitments to its employees and retirees.
F6. Because there appear to have been statutory violations, the future pension benefits
provided for by the enhancements may or may not have vested as rights of the
public employees under California law.
Response: Disagree.
As set forth in the attached Memorandum dated June 19, 2015, the City's outside
legal counsel has thoroughly reviewed the facts and legal issues surrounding the
City actions highlighted by the Grand Jury. Outside counsel has concluded that
the City was in substantial compliance with the statutory requirements, and that to
the extent the City failed to strictly comply with the statute, under applicable law
such a deficiency would not result in invalidation of the pension enhancements
granted by the City. Further, the City's counsel has concluded that under
applicable law, the City's pensioners and employees have obtained vested rights
in the subject pension benefits.
RECOMMENDATIONS:
R1. The Employers develop, adopt and implement a policy and procedures (including
staff training) to prevent future violations of the California Government Code
when increases in pension benefits are proposed. The Employers should consider
making their legal counsel responsible for insuring compliance with the
Government Code.
Response: Has been implemented.
The economic downturn in the past decade has dramatically increased the focus of
the City Council, City staff, and the public on the City's commitments and
liabilities in connection with employee pensions and other post -employment
benefits. In 2012, the San Rafael City Council created a Pension and Other'Post-
Employment Benefits (OPEB) Subcommittee, presently consisting of Mayor Gary
Phillips and Councilmember Andrew McCullough. The City Council has
approved numerous recommendations made by this subcommittee, including
enactment of a pension reform resolution calling for reform actions at the City
and State level; establishment of an irrevocable trust for retiree health assets;
creation of a City webpage specifically focused on pension and OPEB
information; and adoption of a pension funding policy to ensure that the costs of
the benefits are funded in an equitable and sustainable manner, and that annual
reports are prepared and issued through the budget process.
This increased scrutiny of all aspects of the City's employee pension and retiree
health care obligations will help ensure strict observance of all applicable
procedural requirements should the City at some future time be in a position to
consider additional changes to these employee benefits. The City also will work
with MCERA staff and outside counsel when appropriate to ensure compliance
with legal requirements in such cases. The City Attorney's office is under a
general charge to review and monitor City actions for compliance with all
applicable laws.
R2. The Employers develop, adopt and implement a policy for "reporting out" to the
public regarding the employment and pension costs in terms of the amount and
the Employer's ability to pay on a current cash flow basis.
Response: Has been Implemented.
As noted above, among the City Council's actions in 2013 were the adoption of a
pension funding policy to ensure that the City Council obtains complete financial
information and analysis on pension funding during its yearly budget process, and
the establishment of a dedicated City webpage on pensions and retiree health care,
to make all information about the City's actions and financial condition as to
these obligations easily available to the public. That webpage is located at
http://www.citvofsaivafael.or2/pensions/. and may be accessed by a link from the
homepage of the City's website, http://www.citvofsanrafael.or2.
The City's pension webpage contains "plain English" explanations of past and
proposed City actions, including efforts towards pension and retiree health care
reform, and convenient links to hundreds of pages of financial data, information,
and analysis regarding the City's financial assets and liabilities. The webpage
also confirms the City's commitment to financial transparency, and will provide
K
an important and easily accessible means of noticing public meetings and
communicating information to the public as required by Government Code
section 7507 and any other applicable laws.
R3. Each Employer establish a Citizens' Pension Oversight Committee comprised of
resident tax payers who would: 1.) review pension funding levels in light of the
Employer's ability to pay; 2.) review proposed pension changes before final
Employer approval of any collective bargaining agreement; 3.) review the
Employer's compliance with Government Codes related to pensions; 4.) develop
written quarterly reports for the public as to the financial security of the pension
fund.
Response: Has Been Implemented.
Another action of the Pension and OPEB Subcommittee in late 2013 was to create
an ad hoc "Citizens' Group on Pension Reform" which studied pension and OPEB
issues in San Rafael over a period of several months. The Citizens' Group issued a
report of their findings in March 2014, which may be viewed on the City's
website at:
htti):Hdocs.citvofsanrafael. orR/citymRr/Citizen%20Committee%20Pension%20Re
port.pdf
While this citizens' committee is no longer active, the City intends to keep active
its City Council Pension/OPEB Subcommittee, and will again call upon an ad hoc
advisory Citizens' Committee when any pension changes are being considered
through the bargaining process. The City will rely on its pension webpage to
make available to all citizens the information needed for review of pension
funding levels, compliance with the Government Codes and the financial security
of the pension fund. The status of pension funding is only measured and
analyzed once per year, typically in March or April, when an actuarial valuation
as of the end of each fiscal year is prepared for and presented to the MCERA
Retirement Board for acceptance. Thus, while regular quarterly reporting does
not appear to be called for, the City does update the webpage whenever pertinent
new information is available.
The City is proud of the above measures to promote an open and transparent
process and will continue, in the fashion described above, to address the Grand
Jury's suggestions.
M
11364 Pleasant Valley Road
Penn Valley, CA 9.59161-9000
Voice (530):1-32-7357
Fax (530) 132-7356
TO:
FROM:
CC:
I=
COLANTUONO
HIGHSMITH
WHATLEY,PC
MEMORANDUM
Honorable Mayor Phillips and
Members of the City Council
City of San Rafael
1400 Fifth Avenue
San Rafael, CA 94901
Michael G. Colantuono, Esq.
Matthew T. Summers, Esq.
Robert F. Epstein, City Attorney
Lisa Goldfien, Assistant City Attorney
Michael G. Colanluono
(530) ;132-7357
MColanLuonoC 61damus
FILE NO: 49067.0002
DATE: June 19, 2015
Grand Jury Report Regarding Pension Benefit Enhancements
INTRODUCTION AND SUMMARY. On April 16, 2015, the Marin County Civil Grand
Jury released a report finding that the City failed to comply with Government Code
section 7507 ("Section 7507") when it adopted pension enhancements in 2002 and 2006,
and questioning whether those approvals conferred vested pension rights. Section 7507
requires the City to receive an actuarial report estimating the costs of proposed pension
enhancements and to make that estimate publically available. Based on our review of
the materials noted below, we conclude the City strictly complied with the former
requirement, as it secured a series of actuarial reports that estimated the costs of the
pension enhancements at issue. We also conclude the City substantially complied with
the public notice requirement.
We further conclude that any imperfection in the City's compliance with Section
7507 does not invalidate the pension enhancements because Section 7507 is directory
rather than mandatory in that it imposes no consequence for violations. Moreover, the
employees and retirees have vested rights to these pension benefits. Finally, we
conclude the City is estopped to deny its obligation to honor these pension benefits.
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I. Background and Facts
This opinion is based on the following facts. Please let us know if these are
incorrect or materially incomplete, as different facts might require us to alter our advice
to you. We have reviewed the Grand Jury's report, the actuarial reports described
below, and the agenda, minutes, and staff reports for the City Council meetings listed
below.
a. Grand Jury Report
On April 16, 2015, the Marin County Civil Grand Jury released a report
considering pension changes approved by Marin County, Novato Fire Protection
District, Southern Marin Fire Protection District, and the City from 2001 through 2006.
All four agencies participate in the Marin County Employees Retirement System, a
multi-employer retirement system governed by the County Employees Retirement Law
of 1937, Government Code section 31450, et seq. ("1937 Act"). The report requests
responses from these agencies.
b. Grand Jury Findings
Finding F1 asserts the four agencies violated Government Code section 7507 by
using the same actuarial report evaluating the increased costs of various pension
enhancements for multiple labor agreements, and by failing to publically disclose those
costs before adopting the pension enhancements. Finding F5 asserts that if the four
public entities did not comply with statutory requirements, then the residents of Marin
County did not receive notice to which the law entitled them of increased costs and the
unfunded liability of the Marin County Employees Retirement System. Finding F6
states there appears to be an open question whether the pension benefits arising from
these actions are vested rights of the affected employees and retirees.
c. City's Consideration of Potential Pension Enhancements
In the late 1990s, in the midst of a strong statewide economy, the State and many
local governments considered enhanced pension benefits for their employees. SB 400 of
1999 increased pensions for state employees, including California Highway Patrol
officers. (Stats. 1999, ch. 555.) AB 1937, approved in 2000, allowed employer participants
in 1937 Act systems to offer comparably enhanced pension benefits to safety employees.
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(Stats. 2000, ch. 237.) AB 616 of 2001 allowed 1937 Act employers to offer such benefits
to non -safety employees. (Stats. 2001, ch. 782.)
The City negotiated with its unions and sought the assistance of an actuary to
analyze the newly available pension options and their costs. Andy Yeung, an enrolled
actuary with the William M. Mercer firm, prepared a series of actuarial reports
analyzing several options for enhanced pensions for City safety and miscellaneous
employees dated March 1, 2001, April 30, 2001, January 11, 2002, and March 13, 2002.
d. City's Approval of Pension Enhancements
The City Council approved the pension enhancements at four meetings in 2002
and 2006. The pension enhancements were uniform for all safety employees (the "3% at
55" formula) and for all miscellaneous employees (the "2.7% at 55" formula), but were
approved bargaining unit by bargaining unit. The following table identifies the relevant
bargaining units and meeting dates.
Meeting Date &
Agenda Item
October 21, 2002 -
Item 16
October 21, 2002 -
Item 8
October 21, 2002 -
Item 9
November 18, 2002 -
Item 7
December 2, 2002 -
Item 6
September 5, 2006 -
Item 7
152380.4
Employee Association & Bargaining Unit
Marin Association of Public Employees/SEIU Local 949,
Supervisory and Miscellaneous Units
San Rafael Police Mid -Management Association - Safety and
Miscellaneous Units
San Rafael Fire Chief Officers' Association
San Rafael Police Association - Safety and Miscellaneous Units
Marin Association of Public Employees/SEIU Local 949,
Supervisory and Miscellaneous Units
San Rafael Firefighters' Association - Safety and Miscellaneous
Units
Honorable Mayor Phillips and City Council
City of San Rafael
June 19, 2015
Page 4
2. Government Code Section 7507's Requirements
Government Code section 7507, prior to a 2008 amendment, stated:
The Legislature and local legislative bodies shall secure the services of an
enrolled actuary to provide a statement of the actuarial impact upon
future annual costs before authorizing increases in public retirement plan
benefits. An "enrolled actuary" means an actuary enrolled under subtitle
C of Title III of the federal Employee Retirement Income Security Act of
1974, and "future annual costs" shall include, but not be limited to, annual
dollar increases or the total dollar increases involved when available.
The future annual costs as determined by the actuary shall be made
public at a public meeting at least two weeks prior to the adoption of
any increases in public retirement plan benefits. (Emphasis added.)
Section 7507 thus imposed four requirements for pension enhancements:
• The City must retain an enrolled actuary.
• The City must obtain an actuary's statement of the "future annual costs"
of a proposed pension enhancement.
• The City must make the estimated "future annual costs" public at a public
meeting.
• That meeting must occur at least two weeks before the City Council
approves a pension enhancement.
The statute does not require that the actuary's entire report be made public.
Finding F1 reads additional requirements into Section 7507. It faults the four
agencies for using the same actuarial report for several different labor contracts and for
using a report several years after it was written. This assumes an employer must secure
a new actuarial report for each proposed pension enhancement and that a report expires
at some unstated time. These assumptions are unfounded. The statute requires the City
to secure an actuarial report of the "future annual costs" of a proposed pension
enhancement, but does not require a separate report for each action or for each
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bargaining unit. Nor does the statute impose any expiration date on an actuary's cost
estimate.
3. The City Secured Actuarial Reports in Full Compliance with Government
Code Section 7507
The City engaged Andy Yeung, an enrolled actuary with the William M. Mercer
firm, to provide these estimates. The City also received his estimate of the "future
annual costs" of the proposed pension enhancements before adopting any of them. Mr.
Yeung's January 11, 2002 report estimated the annual costs of the "2.7% at 55" formula
at an additional $1,309,000 per year for all miscellaneous employees, assuming that
employees' normal and cost -of -living contributions remained the same. This report
predated the City Council's first adoption of enhanced pensions for miscellaneous
employees — that for the Marin Association of Public Employees/SEIU Local 949 on
October 21, 2002 — by 10 months. This same is true for the enhanced pensions provided
to safety employees. The April 30, 2001 actuarial report estimated annual costs of the
"3% at 55" formula at an additional $1,155,000 per year, assuming employees' normal
and cost -of -living contributions remained the same. This predated the City Council's
first adoption of enhanced pensions for safety employees — that for the San Rafael
Police Mid -Management Association on October 21, 2002 — by nearly six months. The
City thus fully complied with Section 7507's requirement to secure an actuary's estimate
of the "future annual costs" of each pension enhancement.
Finding F1 asserts the City's actuarial reports did not comply with Section 7507
because the reports did not subdivide the estimated "future annual costs" of the
pension enhancements by bargaining unit. This assertion is unsupported by the statute.
Section 7507 requires the City to secure an estimate of the "future annual costs" of
proposed pension enhancements before adopting them. In 2001 and 2002, the City
considered the "2.7% at 55" and "3% at 55" formulas, among other potential pension
levels, as to all its employees. The City secured an actuary's estimate of the costs of
these pension benefits, along with less and more costly alternatives. The City then
adopted a series of resolutions, each approving a different bargaining unit's contract,
that together afforded these pension levels as to all employees. The City thus had an
estimate of the entire pension enhancement before approving it.
The Grand Jury asserts that reliance on the 2001 and 2002 reports for the 2006
adoption of the pension enhancements for the San Rafael Firefighters' Association was
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improper. Again, the assertion is without statutory support. Section 7507 does not
require an actuary's report be written within a particular time before action. Rather, the
actuary's report need only be written at least two weeks before adopting the pension
enhancements. The City met this requirement for the San Rafael Firefighters'
Association's 2006 contract, along with all other pension enhancements at issue.
Moreover, we are unaware of any significant changes in the value of pension assets or
the demographics or size of the City workforce that would make reliance on the 2001
and 2002 reports in 2006 unreasonable.
4. The City Substantially Complied with Government Code Section 7507's
Public Notification Requirements
The City substantially, but apparently not strictly, complied with Section 7507's
public notice requirement. The statute requires the City to make the actuary's estimate
of "future annual costs" public at a meeting at least two weeks before adopting a
pension enhancement. The agenda report for Item 16 on the October 21, 2002 agenda
discussed the status of negotiations with the Marin Association of Public
Employees/SEN Local 949, Supervisory and Miscellaneous Units and included the
actuary's estimate of the "future annual costs" of three different pension levels for all
miscellaneous employees, including the "2.7% at 55" formula. This report was made
publically available before that City Council meeting, but apparently not two weeks
earlier. The City thus did not strictly comply with the public notice requirement for the
adoption of the pension enhancements for the miscellaneous unit of the San Rafael
Police Mid -Management Association. However, by providing the actuary's cost
estimate on or before October 21, 2002 for all miscellaneous employees, the City did
strictly comply with this requirement for agreements with non -safety groups approved
at subsequent meetings.
For safety employees, the City Council also substantially complied with the
public notice requirement as the staff report for each proposed contract estimated total
costs of the contract, inclusive of the costs of pension enhancements. However, this is
substantial, not strict compliance, as the estimated increased costs made public did not
separately state the increased costs of the pension enhancements. These cost estimates
were also apparently not made public at least two weeks before the Council adopted
the various safety bargaining unit contracts.
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June 19, 2015
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S. Less than Strict Compliance with Government Code Section 7507 Does Not
Invalidate Approved Pension Benefits
Even had the City failed to comply with Section 7507 for each of the pension
enhancements at issue, that would not invalidate the approved pension enhancements
for the reasons detailed below.
a. Government Code Section 7507 is Directory, Not Mandatory; Lack of
Strict Compliance Imposes No Consequence
A statute that commands a public entity to take an action, using the word
"shall," may be either directory or mandatory. (See City of Santa Monica v. Gonzalez
(2008) 43 Ca1.4th 905, 923-934.) The distinction turns on the Legislature's intent, and not
merely on whether the statute uses "shall." "Shall" can be either mandatory or
directory, but is always obligatory. (Rutledge v. City of Eureka (1925) 195 Cal. 404, 424
["The use of the word "must" is not necessarily determinative of its mandatory import.
The words "shall" and "must" are frequently construed as directory terms"].) A
statutory requirement is directory if the statute does not contain a stated or implied
consequence for its violation. (City of Santa Monica, supra, 43 CalAth at pp. 923-924.) By
contrast, a'mandatory requirement is one for which the statute specifies or implies a
consequence for its violation. (Ibid.)
In the mandatory -directory context, however, the "mandatory" or
"directory" designation does not refer to whether a particular statutory
requirement is obligatory or permissive, but instead denotes whether the
failure to comply with a particular procedural step will or will not have
the effect of invalidating the governmental action to which the procedural
requirement relates.
(Ibid. [citations omitted].)
No case has determined whether Section 7507 is directory or mandatory.
California Statewide Law Enforcement Association v. California Department of Personnel
Administration (2011) 192 Cal.AppAth 1 cited Section 7507 as one of several
requirements the Legislature must satisfy before approving a labor contract. The
decision reversed an arbitrator's award giving retroactive effect to a contract as to
which the Legislature had not received an actuary's cost estimate and which violated
several other approval requirements. The decision does not analyze Section 7507
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separately from the other, state -specific requirements at issue or discuss the obligations
of local governments. The only other case that cites Section 7507 concluded that it did
not apply to a county employees retirement association and its Board of Directors.
(Howard Jarvis Taxpayers Association v. Board of Supervisors (1996) 41 Cal.AppAth 1363,
1375.)
We read Section 7507 as directory rather than mandatory. The statute states no
consequence should the City fail to fulfill its requirements. Nor did the Legislature
provide any stated consequences for a Section 7507 violation when it amended the
statute in 2008. As the statute has no stated or even implied consequences for violation,
it is directory. (Coastside Fishing Clitb v. Cal. Fish and Game Commission (2013) 215
Cal.AppAth 425 ["When a statute does not provide any consequence for
noncompliance, the language should be considered directory rather than mandatory."].)
The Legislature intended Section 7507 to be a notification requirement, to ensure
that both the City Council and other legislative bodies and the public are aware of the
costs of proposed pension benefits before granting them. Legislative history reflects that
intent. Before the adoption of section 7507, no law required analysis of the costs of
proposed pension benefits. (Legis. Summary Dig., Ch. 941 (SB 439) (1977-1978).) A
senator urging the Governor to sign the bill stated "these [pension increase] costs
should be ascertained and made prior to the benefit increases being granted, and this
bill will accomplish that." (Senator Newton R. Russell, letter to Gov. Edmund G. Brown,
Jr., Sept. 12, 1977.) The bill's summary added that it was intended to require "the
actuarial cost of a proposed or increase be obtained by an enrolled actuary PRIOR to
adopting the relief in a Public retirement plan." (Cal. Dept. of Finance, Enrolled Bill
Report of Sen. Bill No. 439, Sept. 15, 1977 (Russell) (1977-1978 Reg. Sess.) [Emphasis in
original].) The Legislature intended that this statute would ensure informed decision-
making. Nothing in the statute indicates that the Legislature intended a failure of public
notice to invalidate vested pension benefits, particularly more than nine years later.
Moreover, invalidating vested pension benefits for a failure of notice would
undermine the basic purpose of the retirement system, which is to ensure a reasonable
and secure retirement for public employees. (See Hittle v. Santa Barbara County
Employees Retirement Association (1985) 39 Cal.3d 374, 390 ["Pension provisions in our
law are founded upon sound public policy and with the objects of protecting, in a
proper case, the pensioner and his dependents against economic insecurity"].)
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Section 7507's notification requirement, while important, is not essential to the statute's
operation and its requirements are therefore directory. (See City of Santa Monica, supra,
43 CalAth at p. 924 ["If the procedure is essential to promote the statutory design, it is
'mandatory' and noncompliance has an invalidating effect. If not, it is directory."].) Had
the Legislature intended the essential goal of retirement security to arise only upon
strict compliance with Section 7507, it can be expected to have said so. Statutes that seek
certainty do not do so by implication. This reflects another element of analysis of the
directory vs. mandatory distinction — that a statute that serves a public purpose, raises
no issues of private prejudice, and relates to a public duty, "may be held directory or
mandatory as will best accomplish that purpose." (Coastside Fishing Club, supra, 215
Cal.AppAth at p. 427.) The purposes of the public retirement statutes are served only if
Section 7507 is directory.
Additionally, there is no evidence of any prejudice arising by the slight noticing
failures that occurred here. The City Council had a fully compliant actuarial report
before it when it granted the pension benefits at issue at a series of public meetings over
several years during which no public controversy about the benefits arose. The
apparent lack of strict public notice compliance did not prevent the City Council from
understanding the cost of the proposed pension enhancements. (Coastside Fishing Club,
supra, 215 Cal.AppAth at p. 425 ["[I]in the absence of prejudice, lack of strict compliance
with a statute does not render subsequent proceedings void."].)
b. Pensioners and Employees Have Vested Rights to the Pension
Enhancements
Public employment gives rise to certain obligations, including pension rights,
protected by the contracts clauses of the federal and California Constitutions. (Cal. Ass'n
of Professional Scientists v. Schwarzenegger (2006)137 Cal.AppAth 371, 375-376 ("CAPS").)
The power to alter such rights once earned is "quite limited[.]" (In re Retirement Cases
(2003)110 Cal.AppAth 426, 447.)
After an employee retires and all conditions precedent to a pension award are
fulfilled, pension payments may not be changed to the retiree's detriment. (See Allen v.
Board of Administration (1983) 34 Cal.3d 114, 120 ["As to retired employees, the scope of
continuing governmental power may be more restricted, the retiree being entitled to
the fulfillment without detrimental modification of the contract which he has already
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performed," emphasis added]; see also CAPS, supra, 137 Cal.AppAth at p. 376 ["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"].) Thus, there
can be no detrimental modification of a vested pension right. This is true even though
the City failed to strictly comply with a directory statute in granting that pension.
Further, any pension modification to the disadvantage of active employees must
be reasonable. The modification must bear some relation to the theory and successful
operation of a pension system and changes that disadvantage employees must be offset
by comparable new advantages. (See Allen, supra, 34 Ca1.3d at p. 120 ["With respect to
active employees, we have held that any modification of vested pension rights must be
reasonable, must bear a material relation to the theory and successful operation of a
pension system, and, when resulting in disadvantage to employees, must be
accompanied by comparable new advantages."]; Teachers' Retirement Bd. v. Genest (2007)
154 Cal.AppAth 1012, 1036-1037 [finding statute unconstitutional which increased risk
of nonpayment of pensions without comparable new advantage].) A public body may
no more adopt an unreasonable pension amendment than an insurer may change an
annuity policy. (Wallace v. City of Fresno (1954) 42 Ca1.2d 180, 185 [statute terminating
pension rights upon post-retirement felony conviction void as "condition subsequent to
terminate a pension which he had fully earned"].) A reviewing court is unlikely to
conclude that the pension system's proper operation is aided by invalidating pensions
granted years previously due to asserted noncompliance with a directory statute
intended to ensure the City Council and public know the costs of the pension benefits.
This is particularly true here, as the City Council was aware of the pension benefit's
costs and the public had meaningful notice of those costs, too.
c. Promissory and Equitable Estoppel Protect the Pension Benefits
The doctrines of promissory and equitable estoppel also bar the City from
revisiting these pension awards. Promissory estoppel "employs equitable principles to
satisfy the requirement that consideration must be given in exchange for the promise
sought to be enforced." (Poway Royal Mobilehome Owners Ass'n v. City of Poway (2007)
149 Cal.App.4th 1460, 1470-1471.) Promissory estoppel is established by: "(1) a clear
promise, (2) reliance, (3) substantial detriment, and (4) damages measured by the extent
of the obligation assumed and not performed." (Toscano v. Greene Music (2004) 124
Cal.AppAth 685, 296 [citations omitted].) City employees and retirees were promised,
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Honorable Mayor Phillips and City Council
City of San Rafael
June 19, 2015
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and have received in the case of retirees, enhanced pension benefits. The employees and
retirees have relied on these benefits and would suffer substantial detriment should
those benefits be lost. Current employees have maintained their employment in
reliance, in part, on these benefits, forsaking other positions and early retirement.
Current retirees retired and planned their finances on the assurance of these benefits.
We conclude the elements for promissory estoppel are met, and bind the City to these
pension benefits.
Equitable estoppel applies if (1) the party to be estopped is apprised of the facts;
(2) he intends that his conduct is relied upon; (3) the other party must be ignorant of the
true state of facts; and (4) the other party must rely upon the conduct to his injury.
(Driscoll v. City of Los Angeles (1967) 67 Cal. 2d 297, 305.) Applied here, we conclude the
contention that the City is not bound by its pension obligations because it failed to
strictly comply with Section 7507 is barred by equitable estoppel. The City is the party
that would be estopped: it was aware of the facts regarding Section 7507 compliance
and it granted pension benefits with the understanding that employees would continue
working for the City in reliance on those benefits. We have seen no evidence that rank
and file employees knew of any failure of notice under Section 7507, and they have
relied on the pension benefits for the reasons noted above.
Further, while the general rule is that estoppel against a public entity is
disfavored; pension benefits are within an exception. (See City of Goleta v. Superior Court
(2006) 40 CalAth 270, 279 ["Equitable estoppel will not apply against a government
body except in unusual instances when necessary to avoid grave injustice and when the
result will not defeat a strong public policy"] [internal quotations and citations
omitted].) Here, a strong public policy favors protecting vested pensions, particularly
for retirees, but also for current employees. The public policy considerations supporting
undermining the pension enhancements is weaker as the City substantially complied
with Section 7507 as detailed above. Accordingly, we conclude that a court would find
the City equitably estopped to deny its employees and retirees the benefit of the
pension enhancements due to any failure of notice under Section 7507.
6. Conclusion
We conclude that, while the City may not have strictly complied with Section
7507's notice requirement, it substantially complied with that statute. Accordingly, we
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Honorable Mayor Phillips and City Council
City of San Rafael
June 19, 2015
Page 12
conclude City retirees and employees have vested rights to the pension enhancements
approved in 2002 and 2006.
Thank you for the opportunity to assist on this matter. If we can provide further
assistance, please contact Michael Colantuono at MColantuono@chwlaw.us or (530) 432-
7357 or Matthew Summers at MSummers@chwlaw.us or (213) 542-5719.
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