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California Supreme Court Issues its Highly Anticipated Decision on Health Benefits of Current Retirees

Legal Alerts

Court Rules that Health Benefits of Current Retirees Can be Vested

NOVEMBER 22, 2011

In a unanimous opinion, the California Supreme Court held yesterday that public employees’ right to health benefits may be based on the implied terms of an agreement, including a collective bargaining agreement, approved by a county ordinance or resolution so long as the benefits are not expressly prohibited by statute, ordinance or other legislative act.

The ruling was issued in response to a certified question by the Ninth Circuit Court of Appeals in the pending case of Retired Employees Association of Orange County, Inc. v. County of Orange. The case was initiated by the Retired Employees Association of Orange County, Inc. (REAOC) in response to certain changes made by the County of Orange to the health benefits of existing retirees. In order to calculate health insurance premiums, the County had combined both active and retired employees in a single pool from 1985 through 2007. In 2007, the County passed a resolution to divide the pool beginning on January 1, 2008 thus increasing the premiums for retired employees. REAOC filed suit in federal court seeking an injunction to prevent the division of the pool, claiming that the use of a single pool was an implied contractual right for those who retired prior to January 1, 2008. The district court granted summary judgment for the County and REAOC appealed to the Ninth Circuit.

Since the existence of a contract is based on state law, the Ninth Circuit asked the California Supreme Court to determine 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.” In response, the court concluded that “a vested right to health benefits for retired county employees can be implied under certain circumstances from a county ordinance or resolution.” The court emphasizes that a governing body’s intent to create an enforceable right must be evident whether from the express terms of the contract or the circumstances surrounding its adoption.

While the decision addressed whether a county may be bound by the implied terms of an agreement approved by its governing board, the decision is applicable to all public employers. The ruling also clarifies that vested rights may be created by an implied contract and that such rights, under certain circumstances, may include health benefits. Nonetheless, the court cautions that implied rights to vested benefits should not be inferred unless there is a clear basis in the contract or convincing extrinsic evidence. Also significant is that the decision is limited to the implied terms of a contract as it affects existing retirees.

Whether a contractual right for the continued use of a single unified pool to set the premiums of retired Orange County employees could be implied was not addressed by the court. Therefore, whether a contractual right was impaired when the County of Orange eliminated the pooling, now returns to the Ninth Circuit for further proceedings.

For more information on the decision, or to discuss available options to change the retirement benefits offered by your agency, please contact your Best Best & Krieger attorney, or John Wahlin, Isabel Safie or Allison De Tal in the firm’s Employee Benefits practice.

Disclaimer: BB&K Legal Alerts are not intended as legal advice. Additional facts or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information in this communiqué.

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