Explanation of California’s Supreme Court Decision in 2012 “Vested Rights” Lawsuit


On Thursday, the California Supreme Court published a decision in litigation that started in 2012 over changes to the state pension law affecting “legacy members” of ACERA and two other county retirement systems.

Legacy members generally are those who have entry dates into ACERA membership prior to January 1, 2013, which was the effective date of the California Public Employees’ Pension Reform Act (PEPRA). This case relates only to legacy members who retired on or after January 1, 2013.

The case is about the definition of “compensation earnable,” which is the salary component of the formula used for determining a member’s retirement allowance. In 2012, the California Legislature made changes to the definition of “compensation earnable.” Those changes, which were set to go into effect on January 1, 2013, excluded from “compensation earnable” some items of pay that ACERA had been including for many years, pursuant to a court-approved settlement agreement. 

The plaintiffs in this case sued to prevent ACERA from implementing the legislative changes that were set to go into effect on January 1, 2013. The plaintiffs argued that the changes violated the settlement agreement and the “California Rule,” which generally prevents reductions to members’ benefits after they start working. ACERA took a neutral position on the “California Rule,” but the State intervened to defend the legislative change. The trial court ordered ACERA not to implement the changes until July 12, 2014, at which time the trial court ordered ACERA to implement the changes, with some direction from the trial court regarding how to implement the changes. 

The plaintiffs appealed the trials court’s decision. After an appellate decision by the First District Court of Appeals, the California Supreme Court decided to review the case. The California Supreme Court issued its opinion on July 30, 2020.  The main point of the opinion is to affirm that ACERA must apply the original January 1, 2013 changes to the definition of “compensation earnable,” which is essentially how ACERA has been calculating “compensation earnable” for members who have retired since July 12, 2014.  The court concluded that neither ACERA’s settlement agreement nor the “California Rule” prevented the Legislature from making those changes. The opinion does not criticize ACERA or its Board in any way.

Because the trial court had required ACERA to not apply the legislative changes from January 1, 2013 to July 11, 2014, and thereafter gave some direction as to how to apply the changes for certain pay items, the trial court will now have to determine whether any adjustments need to be made to account for the California Supreme Court’s ruling. Further, the opinion identifies, without resolving, the question of whether some members might be due refunds of member contributions on pay items that are excluded from “compensation earnable” based on the changes to the definition of “compensation earnable.” Sorting out these remaining issues will take at least several months and possibly longer. ACERA will continue to post updates to our news page as the trial court makes these final decisions.

The bottom line for members:

  • Based on this decision, ACERA will continue its current practice regarding pay items and retirement allowance calculations.
  • The trial court will have to settle certain remaining issues:
    • The court-ordered treatment of how ACERA currently addresses some pay items, such as stand-by pay, will need to be examined and ruled as to whether it complies with the Supreme Court ruling.
    • Some Tier 1, 2, and 3 members may be due a limited refund of retirement contributions on disallowed pay items.

Full Supreme Court Decision In Vested Rights Case