California Supreme Court to Decide “Vesting” Issue Regarding Retiree Health Benefits

Retired Employees v. County of Orange (9th Cir. 09-56026 6/29/10)

Since approximately 1966, Orange County has provided health care benefits to its retired employees. In 1985, the County began “pooling” the retired employees with the active employees in the rate-setting process. Because retirees generally require more health services than active employees, who are generally younger and healthier, pooling the two groups allowed retirees to pay lower premiums and receive greater coverage than they otherwise would. As the cost of health care continued to rise over the years, the County found its employee health plans underfunded and needing adjustment. On September 12, 2006, the
Board of Supervisors approved a resolution to “split the pool,” which created different premium pools for active and retired employees and became effective on January 1, 2008. Retirees then faced significantly higher health insurance premiums.  A group of them brought a lawsuit against the County.

In federal court, the retirees – in essence – argued that the County’s past practice of “pooling” retirees with active employees created a “vested” right that the County could not now eliminate. The court quickly rejected the retirees’ argument, holding that:

“The law is clear: California courts have refused to find public entities contractually obligated to provide specified retirement benefits like those Plaintiff seeks in the absence of explicit legislative or statutory authority. This law also suggests that the requirement to provide lifetime health benefits does not establish a right to a specific method of rate-setting. Here, Plaintiff has failed to provide evidence of any explicit legislative or statutory authority requiring the County to continue providing retirees the pooling benefit in setting rates.”

The retirees then appealed to the Ninth Circuit Court of Appeal. Today, the Ninth Circuit certified to the California Supreme Court the following question:

“Whether, as a matter of California law, a California county and its employees can form an implied contract that confers vested rights to health benefits on retired county employees.

Defendant-Appellee in this case contends that decisions of the Supreme Court of California and the California Courts of Appeal support a conclusion that an implied contract to which a county is one party cannot confer such vested rights. Plaintiff-Appellant contends the contrary.

We understand that the Supreme Court of California may reformulate our question, and we agree to accept and follow the court’s decision. To aid the Supreme Court in deciding whether to accept the certification, we provide the following background.”

Having a question certified to the California Supreme Court is fairly rare. More important, how the Court answers this question may have a tremendous impact on the public sector. Everyone knows that there is a huge unfunded liability for future retiree health benefits in the public sector. Many public employers have begun to address this unfunded liability to cutting back on benefits going forward. If the Court rules that employees and/or retirees have a “vested” right to accrue health benefits at a certain level even absent explicit legislature action, that will greatly weaken the ability of public agencies to scale back benefits.

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