The fate of retiree health benefit costs in California may rest on a looming state Supreme Court decision over Orange County’s power to declare 6,000 existing retirees have no vested rights to subsidized coverage.
At issue in arguments before the seven justices Monday was the county’s 2006 effort to “restructure” its retiree medical benefits program to eliminate its retiree health care premium subsidy.
County retirees wanted to remain in the less expensive pool for medical benefit costs as current employees, who are younger and cheaper to cover. The county said no in 2006.Although the county negotiated with current employee unions to give up future rights to the health premium subsidy in exchange for immediate higher wages in 2006, retired workers were not part of the labor negotiations. They were not represented by unions.
The county unilaterally revoked this benefit to 6,000 retired workers and their dependents who relied on it for medical insurance coverage, according G. Scott Embladge, attorney for the retirees.By contrast, Orange County argues that the recognition of an implied contract with retirees that extends in perpetuity challenges the legislative discretion of the county to set retiree medical insurance rates annually.
At stake is a “staggering $400 million” in unfunded liability, according to Arthur Hartinger, attorney for Orange County.
The question before the state’s high court is whether California law allows a county and its employees to form an implied contract that confers vested rights to health benefits.Retiree groups and local governments have been closely watching the case, including the nation’s largest public employee retirement system, CalPERS, the California Public Employees’ Retirement System, covering 514,000 retirees with $214 billion in assets.
If the state’s high court “jeopardizes their health benefit rights by failing to recognize that they are vested, it will give license to public employers to unilaterally reduce or eliminate the health benefits of these retirees and their families and for all those other public employees who have been promised retiree health benefits during their careers after retirement,” said the state’s largest public employee pension plan.
The outcome of the case “will have a direct and profound impact on the public agencies… particularly with respect to their budgeting and employment practices,” wrote Jonathan Holtzman, attorney for the League of California Cities and California State Association of Counties, which sided with Orange County.
Justices peppered both sides with questions on the extent of county power to renegotiate benefit terms and whether employees are protected by an implied contract to provide them benefits forever.
Justice Kathryn Werdegar asked what are counties to do if health coverage is found to be an implied contract that extends “in perpetuity”.
“Vesting in perpetuity is not as scary as it sounds,” said Ernest Galvan, attorney for retirees. It only applies to people after they leave service, he said. The county may renegotiate terms for people who have not gained the right through retirement, he said.
The county’s attorney Arthur A. Hartinger, said the county saw the miscalculation of the costs of funding retiree health case was so significant it would “sink the plan.” If the county wanted to change the plan it had to give notice to employee organizations and consult with them, which it did, he said.
Justice Goodwin Lui asked whether the terms had to be express in the contract or “are there implied terms?”
Holtzman, responded that “for the benefit to vest it has to be clear and express. If the county adopts a permanent benefit, the public has a right to known when a public entity adopts a billion dollar liability.”
Orange County began offering retiree health benefits in 1966 and by 1985 pooled the costs with active employees who were younger and generally healthier, lowering the premium costs for retirees. When the county discovered it had underfunded projected health costs it chose to split the pool in 2006, increasing the cost to retirees and potentially spelling the end to coverage.The retirees originally sued in federal court in Los Angeles and lost.
U.S. District Judge Andrew J. Guilford wrote in 2009, “The law is clear: California courts have refused to find public entities contractually obligated to provide specified retirement benefits like those [the retirees] seeks in the absence of explicit legislative or statutory authority.”
The retirees appealed to the 9th U.S. Circuit Court of Appeals, which in turn said the case required interpretation of state law and asked the California Supreme Court to step in.The justices will issue a written opinion within 90 days.
Case: Retired Employees Assoc. of Orange Co. v. County of Orange, No. S184059