High court ruling weakens retiree health rights

A U.S. Supreme Court ruling in January weakens the “vested rights” protection of retiree health care based on a labor contract, potentially making it easier for government employers to cut a growing cost.

The high court overturned an influential federal appeals court ruling that said retiree health care authorized by a short-term labor contract is presumed to be a lifetime benefit, unless the contract has clear language to the contrary.

Bargaining agreements must be evaluated under ordinary contract law, the Supreme Court said in a 9-to-0 decision. Lawyers called the overturned ruling the “Yard-Man inference” after a 1983 appeals court decision in a union suit against Yard-Man, Inc.

“Yard-Man violates ordinary contract principles by placing a thumb on the scale in favor of vested retiree benefits in all collective-bargaining agreements,” said the high court decision (M&G Polymers v. Tackett) written by Justice Clarence Thomas.

The new ruling is expected to have an impact in California, where retiree health care often lacks clear authorization, little money has been set aside to help pay future obligations, health costs are growing, benefits are generous, and retirees are living longer.

“This (new ruling) is important because in California we have a lot of litigation now where the allegation is that MOUs (bargaining agreements) that were entered into, some many years ago, gave rise to vested rights to retiree health care,” Linda Ross, a Meyers Nave lawyer, told clients in an internet briefing last week.

Linda Ross

Linda Ross

The rise in disputes over cutting retiree health care, as it becomes more of a financial burden for government employers and taxpayers, produced an important California Supreme Court decision in 2011 in an Orange County case.

The state Supreme Court unanimously said vested rights for retiree health care can result from an “implied” contract, even if ordinances and resolutions do not specifically say so, when an “intent” by officials to create rights can be shown, which is a “heavy burden.”

Since the 2011 ruling, retiree health rulings have been mixed. For example, a lower court ruled against retirees in the Orange County case. In Los Angeles, lower courts ruled for retirees in two separate suits by city attorneys and police and firefighters.

Ross said there has been no appeals court ruling since the 2011 ruling that found a vested right. She expects the new federal Supreme Court ruling to join the 2011 state Supreme court ruling as the “template” for determining vested rights.

“Right now we are really waiting for the courts on these vested rights issues,” Ross said, noting that some are clearly vested, some clearly not vested and some in the middle. “There is a lot of confusion about it.”

Whether the new U.S. Supreme Court ruling might affect pensions is not clear. A San Jose pension reform approved by voters in 2012 was expected to result in a high court review of California court rulings on pension vested rights.

Former San Jose Mayor Chuck Reed, a lawyer, and some legal scholars, notably Amy Monahan, argue that a misreading of contract law led to the “California rule” that pensions offered on the date of hire cannot be cut, even for future service.

(Reed, a Democrat, and former San Diego Councilman Carl DeMaio, a Republican, both leaders of successful local pension initiatives, are exploring the possibility of putting a pension reform initiative on the statewide ballot next year.)

The new high court ruling on retiree health rights issued Jan. 26 was mentioned a week later when a federal judge, approving Stockton’s exit from bankruptcy, ruled that CalPERS pensions can be cut in bankruptcy, even though the city chose not to do so.

Judge Christopher Klein cited three of the state Supreme Court cases that led to “unusually inflexible” vested rights in California public pensions, one issued in 1947 and the others in 1955 and 1978.

“In contrast, the U.S. Supreme Court takes a less rigid view of the extent of a ‘vested right’ in retiree benefits,” Klein said in his written ruling issued Feb. 4, citing the new retiree health care ruling, M&G Polymers v. Tackett.

Retiree health care paid by a former employer is rare in the private sector. Many government employers in California began promising retiree health care, sometimes instead of a pay raise, when health costs were low.

Money usually was not invested each year, as with pensions, to help pay for retiree health care promised in the future. The California Public Employees Retirement System expects investment earnings to pay about two-thirds of future pension costs.

Now the debt or “unfunded liability” for retiree health care promised state workers over the next 30 years is an estimated $72 billion, more than the $50 billion unfunded liability for state worker pensions reported by CalPERS last year.

State workers have a generous retiree health care plan that can pay 100 percent of the insurance premium for retirees and 90 percent for dependents. While state workers are on the job, the state pays 80 to 85 percent of the premium, depending on labor bargaining.

The subsidy (see CalPERS chart below) begins with 50 percent coverage after 10 years of service and increases in steps to 100 percent after 20 years. The maximum annual payment (monthly on chart) is single $7,860, two-party $14,952, and family $19,260.

When eligible for federal Medicare at age 65 state workers are supposed to switch to a health plan that reduces the state subsidy by about half. For most state workers, who are eligible to retire at age 50, the health care subsidy can be an early retirement incentive.

To contain growing state worker retiree health care costs, the new state budget Gov. Brown proposed in January calls for pension-like “prefunding,” investing money each year to help pay future costs.

The state would get the investment money by asking labor unions to agree to a 50-50 split between employer and employee of the “normal” cost, the actuarially determined value of retiree health care earned during the year, that does not include debt from previous years.

If there is doubt about whether state workers have a vested right, either to any retiree health care or a certain amount, a bargaining agreement approved by the Legislature might provide legal clarity.

One of several other parts of the governor’s plan would give state workers the option of a high-deductible health plan. The Senate and Assembly public retirement committees have scheduled a hearing on the plan Wednesday (March 18).

Local governments trying to cut retiree health care costs have to deal with a provision in state law (Public Employees Medical and Hospital Care Act) requiring the retiree subsidy to equal the subsidy for active workers.

Some local governments, after consulting with tax lawyers, are said to be paying unequal subsidies by using an alternative to provide health coverage for their active workers, such as a “cafeteria plan.”

And a number of local governments have begun prefunding retiree health care. About 455 government employers have investments worth a total of $4.3 billion last week in a retiree health care fund opened by CalPERS in 2007.


Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com. Posted 16 Mar 15

One Response to “High court ruling weakens retiree health rights”

  1. Bring Back the WPA Says:

    On March 9 I wrote in the comments: “I’d be willing to bet the courts will say the retiree 100% health benefit is vested…” thinking that the California court rulings like Orange County was the latest and greatest. I did not know about this recent “Yard-Man” Sup Ct ruling. I don’t mind being wrong, it’s how one learns, thanks Ed for the lesson… but geez this must leave some retirees feeling rather exposed right now….

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