In Retired Employees Assn. of Orange County, Inc. v. County of Orange, 52 Cal. 4th 1171 (Cal. 2011), an employee association filed a lawsuit in the federal court contesting the validity of certain changes that Orange County California made to health benefits for retired employees. From 1985 through 2007, the County combined active and retired employees into a single unified pool for purposes of calculating health insurance premiums so that retires would pay lesser premiums then they otherwise would in a separate pool. But in 2007, the County passed a resolution splitting the pool of active and retired employees, effective January 1, 2008, which had the effect of increasing retired employee premiums. The association sought an injunction prohibiting the County from splitting the pool of active and retired employees.
The association alleged, among other things, that the County’s action constituted an impairment of contract in violation of the federal and state Constitutions. In support of its position, the Association claimed that the County’s long-standing and consistent practice of pooling active and retired employees, along with the County’s representations to employees regarding a unified pool, created an implied contractual right to continuation of the single unified pool for employees who retired before January 1, 2008. The district court granted summary judgment for the County on all claims, finding that the County cannot, as a matter of law, be liable for any obligation it did not undertake explicitly through a resolution. The association appealed and the Court of Appeals for the Ninth Circuit asked the California Supreme Court to determine “[w]hether 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.”
The California Supreme Court concluded that “under California law, a vested right to health benefits for retired county employees can be implied under certain circumstances from a county ordinance or resolution.” The Court addressed three arguments raised by the County: (1) that a county government and its employees cannot form an implied contract; (2) that even if implied contracts are cognizable in the public employment context, such contracts cannot create vested rights; and (3) that even if vested contractual rights for county employees may be implied, such rights cannot include health benefits.
The Court rejected all three arguments. As to the first argument, the Court found: “Where the relationship is governed by contract, a county may be bound by an implied contract (or by implied terms of a written contract), as long as there is no statutory prohibition against such an agreement.” As to the second argument, the Court found that implied contracts can create vested rights, but noted: “[A]s with any contractual obligation that would bind one party for a period extending far beyond the term of the contract of employment, implied rights to vested benefits should not be inferred without a clear basis in the contract or convincing extrinsic evidence.” As to the third argument, the County relied on the California Employees Retirement Law of 1937 (Gov. Code, § 31450 et seq.), and focused specifically on Government Code section 31692, which provides in relevant part that the adoption of an ordinance or resolution pursuant to Section 31691 shall give no vested right to any member or retired member. Section 31691 authorizes a county board of supervisors by ordinance to provide for the contribution by the county from its funds toward the payment of all or a portion of the premiums on a policy or certificate of life insurance or disability insurance, or toward the payment of all or part of the consideration for any hospital service or medical service corporation. The Court found that Government Code Section 31692 does not apply because the plaintiff association merely seeks health insurance premiums that are equal to active employees premiums, and does not argue that the County must continue to make any contributions toward the payment of active employee premiums.
This case is noteworthy because it holds that it is legally possible for a governmental retiree to have an implied vested contractual right to benefits which could add significant costs to already cash-strapped governmental agencies and underfunded retirement plans. Governmental agencies may be able to avoid creating implied vested contractual rights by carefully describing the limits of a retiree benefit, and by expressly stating that neither a benefit, nor a method of calculating that benefit, is vested, but instead can change from year to year.