BETTS v. BOARD OF ADMINISTRATION OF PUBLIC EMPLOYEES RETIREMENT SYSTEM (1978)

Petitioner, Bert A. Betts, was elected Treasurer of the State of California and served in that capacity from January 5, 1959, to January 2, 1967. During his term of office he elected to participate in the Legislators' Retirement Fund. During his office tenure the amount of any retirement allowance which he could reasonably expect to receive after leaving office was authorized by Government Code section 9359.1, subdivision (b). That section provided in pertinent part as follows: “The retirement allowance for a member all of whose credited service was rendered as an elective officer of the state whose office is provided for by the Constitution other than a judge (and other than a Member of the Senate or Assembly) is an annual amount equal to five percent (5%) of the compensation payable at the time payments of the allowance fall due, to the officer holding the office which the retired member last held prior to his retirement, . . . multiplied by the number of years of service with which the member is entitled to be credited at the time of his retirement, . . .” “. . . or five percent (5%) of the highest compensation fixed for such office during the member's last term or any subsequent term prior to his retirement, whichever is greater, multiplied by the number of years of service with which the member is entitled to be credited at the time of his retirement, . . .” (Emphasis added.)

At the time of petitioner's election, the salary provided for the office of treasurer was $19,500 per annum; during his first term of office the salary was raised to $21,499, and in 1964, during his second term of office, the salary for the office was raised to $25,000 per annum; however, because of a constitutional prohibition against an incumbent treasurer receiving a salary raise during his term of office (Cal.Const., art. V, s 12; Gov.Code, s 11567), petitioner did not receive the benefit of that salary increase. Petitioner's service as treasurer was voluntarily terminated in 1967, and in 1969, the Legislature once again raised the treasurer's salary to its present level of $35,000 per annum.

In 1963, the Legislature enacted Government Code section 9360.9 which provides that retirement pensions automatically are adjusted due to increases in the cost of living. (Gov.Code, s 9360.9.) That section has continued in force and is applicable to petitioner's present retirement rights.

In 1973, petitioner was advised by respondents that his retirement pension, if then applied for, would be computed on the basis of the salary ($35,000 per annum) currently applicable to the office of treasurer. In 1974, prior to petitioner's retirement, Government Code section 9359.1, subdivision (b), was amended to read in part as follows: “The retirement allowance for a member all of whose credited service was rendered as an elective officer of the state whose office is provided for by the Constitution other than a judge (and other than a Member of the Senate or Assembly) the sum of (1) is an annual amount equal to five percent (5%) of the highest compensation received by the officer while serving in such office, multiplied by the number of years of service with which the member is entitled to be credited at the time of his retirement, . . .

“. . .

“The amendments to this section during the 1973-74 Second Extraordinary Session shall not be applicable to members who are retired on the effective date of such amendments.” (Amendment was effective Oct. 7, 1974.) (Emphasis added.)

In 1976, petitioner applied for his retirement pension on the basis of total disability. At that time he was informed by respondents that his retirement pension would be computed on the basis of the highest salary he received, $21,499, plus cost of living increases as authorized by Government Code section 9360.9. Dissatisfied with the Board's interpretation of the 1974 amendment to section 9359.1 and its determination of his pension benefit, petitioner requested and received a hearing before an administrative law judge. Following submission of the matter, the administrative judge issued his decision holding that petitioner had a vested right to have his pension computed according to the statutory provisions in effect at the time he left office (1967) which would require computation of his retirement allowance on the basis of the present salary ($35,000) of the state treasurer.

The Board of Administration held a hearing upon the findings of the administrative law judge and determined contrary to his ruling that inasmuch as petitioner was not retired on the effective date of the 1974 amendment to section 9359.1, he was therefore subject to its provisions; accordingly, the Board denied petitioner's application to have his pension computed on the basis of a $35,000 salary.

Petitioner then filed this original petition for writ of mandate pursuant to Code of Civil Procedure sections 1094.5 and/or 1085 seeking to direct respondents Board of Administration of the Public Employees' Retirement System and Carl J. Blechinger, Chief Executive Officer, to compute his retirement benefits upon the basis of a salary $35,000 payable to the present incumbent rather than $21,499, the highest salary payable to petitioner during his term of office.

Distillation of the essence of petitioner's several contentions reveals them to be twofold, (1) that the 1974 amendment to section 9359.1 was not intended to apply to persons such as petitioner who had left office but had not retired; and (2) that failure to compute his retirement benefit pursuant to the prior statutory authority which provided him the option of having his pension computed either on the basis of the present officeholder's salary or the highest salary authorized for the office of treasurer during petitioner's tenure in office is a violation of the constitutional prohibition against interference with the obligation of contract and results in a denial of his right to equal protection of the laws. We conclude to the contrary in each instance.

I

During the second extraordinary session of the 1973-74 legislative session, Assembly Bill No. 7, amendatory of Government Code sections 9359.1, 9360.7, and 9360.9, was introduced, considered, and approved. The act, when passed by the Legislature and signed by the Governor, was designated an urgency measure. The legislative reason given for the urgency is relied upon by petitioner to support his contention that the 1974 amendment to section 9359.1 was not intended to apply to him or others in his employment and retirement status, i. e., out of office but not receiving a retirement benefit at that time. Section 10, the concluding section of Assembly Bill No. 7, reads as follows, “This act is an urgency statute necessary for the immediate preservation of the public peace, health, or safety within the meaning of Article IV of the Constitution and shall go into immediate effect. The facts constituting such necessity are: (P) In order that the provisions of this act will be applicable to members of the Legislators' Retirement System who leave office during 1974, this act must take effect immediately.” Petitioner's reliance upon the reason given for the urgency status of the amendments in support of his contentions that he is excluded from application of the amendment is misplaced. Petitioner ignores the express language of amended section 9359.1 dealing with its applicability. The 1974 amendment to the section contained the following pertinent language, “The amendments to this section during the 1973-74 Second Extraordinary Session shall not be applicable to members who are retired on the effective date of such amendments.” (Emphasis added.)

In undertaking a reconciliation of the two legislative statements, we recognize that just as every legislative enactment must be construed with reference to the whole system of law of which it is a part, in order that all parts may be harmonized (Committee of Rights of Disabled v. Swoap (1975) 48 Cal.App.3d 505, 511, 122 Cal.Rptr. 52), the reasons given for designating a legislative enactment as an urgency measure must be construed with the substance of the enactment in order to harmonize the statement of reasons with the essence of the measure.

The essential element of section 9359.1 and its applicability reveals an unambiguous legislative intent that only “members who are retired on the effective date of such amendments” be excluded from the ambit of the legislation. (Emphasis added.) Although petitioner in the documents presented to this court variously describes himself as either “retired” or having “left office,” he was not retired at the time of the 1974 enactment. Government Code section 9351.1 defines retired persons who may be excluded from the purview of section 9359.1 with an unquestioned clarity. That section provides, “ ‘Retirement’ means withdrawal from membership in this system with a retirement allowance granted under this chapter.”

At the time of the 1974 amendments to section 9359.1 and its effective date, petitioner had not retired. It is undisputed that he did not apply for retirement benefits until October 1976. Until that date he was still a member of the retirement system, although unemployed. The 1974 amendment to section 9359.1 was and is applicable to those members of the retirement system occupying petitioner's status, i. e., out of office and not retired on the effective date of the 1974 enactment.

II

It is legally unquestioned that by virtue of his employment as a public employee, petitioner had a vested contractual right to a retirement pension as authorized by statute. That right is protected by constitutional prohibitions against state interference with vested contractual obligations. However, such a right is not rigidly fixed by the terms of legislation in effect during the period in which the public employee serves. The pension regulating statutory language is subject to an implied qualification that the Legislature may make modifications and changes in its retirement system. “ ‘The employee does not have a right to any fixed or definite benefits, but only to a substantial or reasonable pension . . . (H)e has a vested right to a pension but . . . the amount, terms and conditions of the benefits may be altered.’ (Kern v. City of Long Beach, supra, 29 Cal.2d (848) at p. 855, 179 P.2d (799) at p. 803.)

“Reasonable modifications of benefits may be made prior to retirement in order to maintain the flexibility necessary to adjust to changing conditions while insuring the integrity of the system. . . . It is for the court to determine on the facts of each case what constitutes a reasonable and therefore permissible modification.” (Frank v. Board of Administration (1976) 56 Cal.App.3d 236, 243, 128 Cal.Rptr. 378, 383.) “To be sustained as reasonable, alterations of employees' pension rights must bear some material relation to the theory of a pension system and its successful operation, . . .” (Allen v. City of Long Beach (1955) 45 Cal.2d 128, 131, 287 P.2d 765, 767.)

In testing the reasonable relation of the 1974 modification to the purpose of the retirement system, a balancing test must be applied to determine whether any disadvantages to members of the system are offset by comparable new advantages. (Stork v. State of California (1976) 62 Cal.App.3d 465, 468, 133 Cal.Rptr. 207.) The underlying and fundamental basis for application of a balancing test is the necessity to ascertain the effect of the modification on the reasonable expectations of the public employee for a reasonable retirement pension benefit. Upon the facts presented, the basic and fundamental expectation which petitioner could indulge during his tenure in office was that a retirement benefit would be provided based upon either his highest salary received, $21,499 per annum, or upon the $25,000 salary authorized for the office of treasurer in 1964 which he was precluded from receiving by virtue of the constitutional prohibition against an incumbent receiving a salary raise during his then current term. (Cal.Const., art. V, s 12; Gov.Code, s 11567.) Petitioner also could reasonably expect that during the period of his retirement and receipt of pension benefits that he would receive annual cost of living increases if the cost of living did increase by more than one percent per annum (Gov.Code, s 9360.9). Those expectations were reasonable as they were predicated upon existing factors known to him, and the administrators of the legislators' retirement law.

The retirement law then and now requires members to contribute four percent of their salaries into the Legislators' Retirement Fund. (Gov.Code, ss 9354, 9357.) Annually, the Legislature makes appropriations sufficient financially to satisfy any expected excess of benefit expenditures over the cumulative contributions of the retirement beneficiaries, and in 1972, the Legislature added Government Code section 9358.5 which declared that on or after January 1, 2002, the Legislators' Retirement System shall be fully funded and actuarially sound.

Prior to leaving office in 1967, petitioner had paid the standard contribution of four percent on his annual salary of $19,500 and $21,499. From any perspective, the application of the pre-1974 contribution formula to petitioner and others of similar status, i. e., out of office but not receiving retirement benefits, raises questions of fundamental fairness as well as financial prudence. To provide petitioner with a retirement benefit predicated upon the new $35,000 salary provided for the office of treasurer would deliver to him a bonanza far outstripping any expectation for cost of living increases, dwarfing his relatively modest contribution to the retirement system; would demand an excessive appropriation of general tax funds to maintain the retirement system's solvency and would impede full funding and achievement of actuarial soundness by January 1, 2002 (Gov.Code, s 9358.5). The 1974 amendment to section 9359.1 preserved the basic character of the earned retirement benefit but withheld any windfalls unrelated to its true character. Petitioner's retirement benefit rights must be measured not by a rigid fulfillment of the contract under pre-1974 legislative provisions, but by its just and reasonable purport. The Legislature chose to confine retirement beneficiaries to gains reasonably expected from the employment contract and to withhold unforeseen or windfall advantages which have no relation to the fundamental theory and objective of the retirement system as protected by cost of living raise fluctuation provisions. Such an act by the Legislature is not a repudiation of a debt nor is it a constitutional impairment of the retirement contract expectancy. (Lyon v. Flournoy (1969) 271 Cal.App.2d 774, 787, 76 Cal.Rptr. 869; see also Home Building & Loan Assn. v. Blaisdell (1934) 290 U.S. 398, 429, 54 S.Ct. 231, 78 L.Ed. 413; El Paso v. Simmons (1965) 379 U.S. 497, 515, 85 S.Ct. 577, 13 L.Ed.2d 446.)

Petitioner also argues that denial of the retirement allowance calculated upon the $35,000 salary now provided for the office of treasurer denies him equal protection of the law. There is no constitutional requirement of uniform treatment, but only that there be a reasonable basis for each classification. The distinction between pre-1974 members of the Legislators' Retirement Fund and those serving thereafter is not arbitrary; the former made their contributions to the retirement system predicated upon a relatively low salary level preceding that date. Those in the latter category will pay contributions predicated upon the present $35,000 salary for the office of treasurer and any salary increases applicable as determined by the Legislature during subsequent and ensuing terms.

The California Supreme Court and the United States Supreme Court have tended to employ a two-level test in reviewing legislative classifications under the equal protection clause. In an area such as here presented involving economic regulation, i. e., retirement benefits, both courts have exercised restraint and have invested legislation dealing in economic areas with a presumption of constitutionality requiring merely that distinctions drawn by a challenged statute bear some rational relationship to a conceivable legitimate state purpose. (See Westbrook v. Mihaly (1970) 2 Cal.3d 765, 784, 87 Cal.Rptr. 839, 471 P.2d 487; McDonald v. Board of Election (1969) 394 U.S. 802, 809, 89 S.Ct. 1404, 22 L.Ed.2d 739.) At the time of enactment of the 1974 amendment to section 9359.1, the state considered and balanced its need to preserve the financial integrity of the Legislators' Retirement Fund by removing windfall provisions for persons occupying petitioner's status, while maintaining the integrity of pension benefits to which petitioner had a contractual and reasonable expectation. (Mathews v. Workmen's Comp. Appeals Bd. (1972) 6 Cal.3d 719, 738, 100 Cal.Rptr. 301, 493 P.2d 1165; Bilyeu v. State Employees' Retirement System (1962) 58 Cal.2d 618, 623, 25 Cal.Rptr. 562, 375 P.2d 442.)

At the time petitioner left office he remained a member of the Legislators' Retirement Fund; his only realistic pension expectancy was predicated upon then known salary factors and that he would receive a retirement pension computed on the basis of either the highest salary paid to him or the highest salary authorized for the office during his term plus any future pension benefit fluctuations caused by cost of living increases. Any expectation at the time of leaving office that he would receive a retirement benefit in excess of that which could be computed upon known and calculable factors was not a reasonable expectation.

We conclude that the present provisions of section 9359.1 must be construed in a manner that will provide petitioner a retirement benefit which is the sum calculated on an annual amount equal to five percent of the highest compensation provided for his office during his term of office ($25,000), multiplied by the number of years of service with which the member would have been entitled credit at the time of his retirement not to exceed eight years, subject to any cost of living increase fluctuations as provided by section 9360.9.

Our discussion and disposition of the constitutional arguments relating to impairment of contract and equal protection of the law adequately dispose of petitioner's ancillary contention that the State of California is estopped to amend section 9359.1 or any retirement provision. Such contention is without merit.

The cause is remanded to the Board of Administration of the Public Employees' Retirement System which is directed to recompute the retirement benefits for petitioner, Bert A. Betts, upon the basis of an annual salary of $25,000, and in accord with all other applicable provisions of Government Code section 9359.1 as amended in 1974. In all other respects the petition for writ of mandate is denied.

EVANS, Associate Justice.

PUGLIA, P. J., and REYNOSO, J., concur.