Court Finds No Implied Promise of Continuing Retiree Medical Benefit

“A practice or policy extended over a period of time does not translate into an implied contract right [to a continued retiree medical benefit] without clear legislative intent to create that right – an intent that REAOC has not demonstrated here.” That was the holding of the federal Ninth Circuit Court of Appeals in the ongoing saga of Retired Employees Association of Orange County v. County of Orange. Recall this case was brought to the forefront in 2011 when the Ninth Circuit Court of Appeals certified a question to the California Supreme Court asking, “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.” The California Supreme Court responded in the affirmative holding that “vested retiree health benefits can be implied under certain circumstances from a county ordinance or resolution.” The Supreme Court cautioned that ordinances and resolutions are presumed not to create private contractual rights. Therefore, current and retired employees have a “heavy burden” of overcoming the presumption by establishing language of the ordinance or resolution is susceptible to an interpretation, with convincing extrinsic evidence, that a Constitutionally-protected implied vested right was created.

The California Supreme Court did not decide the case on the merits. Instead, the case was remanded back to the federal District Court of Central California where it originated to decide the case on its merits. The District Court granted summary judgment in favor of the County of Orange (“County”) finding that the Retired Employees Association of Orange County (“REAOC”) did not meet the heavy burden of establishing that the County’s ordinances, resolutions and applicable Memoranda of Understanding (“MOU”) created an implied vested right to a perpetual premium rate structure in setting retiree health insurance premiums.

The facts of the case are all too complex. During employment of the retirees represented by REAOC, the County and employee bargaining units entered into several MOUs. The relevant MOUs included an agreement that employees could enroll in the County’s health insurance plan as retirees, but must pay the full premium. The MOUs were silent as to an agreement on how premium rates would be established. Prior to 1984, the premium rate for employees and retirees was established separately. In 1984, the County began to “pool” retired and active employees in setting a single premium rate applying equally to retired and active employees. Because retirees are generally more costly to insure, active employees subsidized retiree premiums keeping rates lower for retirees.

Each year, the Board of Supervisors passed a resolution setting premium rates for employees and retirees. Many resolutions referred to the pooled rate as a “policy” or “practice.” In 2007, after extended negotiations with the County’s labor organizations, the pooling method of setting premium rates was discontinued. This resulted in a significant increase in premium rates for retirees.

At the District Court hearing, REAOC conceded that neither the MOUs nor the resolutions contained express language that the pooling of active and retired employees in setting premiums would continue beyond each yearly resolution. Yet, REAOC argued that extrinsic evidence supported an implied vested promise to use the pooling method for the life of retirees and employees hired prior to the County’s change. The extrinsic evidence submitted by REAOC to support its position included the length of time the Board used the pooling method (23 years), one MOU stating retirees could change their health care plans at retirement, a declaration from a County employee benefits director stating retirees are eligible for general health plans as a “lifetime benefit,” and a 2007 report from the County auditor-controller characterizing the pooled rate structure as part of the County’s overall compensation package. The District Court rejected all of this evidence as establishing an implied contractual, vested right to continuation of the pooled rate structure.

On appeal, the Ninth Circuit Court of Appeals agreed holding that REAOC presented no evidence that credibly supported its position. “To the contrary, resolutions such as Resolution 84-1460 refer only to a one-year contractual obligation.” The MOUs setting forth the terms of retiree medical benefits, but not the pooled method of setting rates, even if containing an implied contractual right, expired at the end of the MOU. Evidence of a presentation by the Board of Supervisors to the unions stating that rate pooling would continue at that time only reflected a policy decision for a specified period.

REAOC also asserted that it was involved in negotiations with the County when the County considered discontinuing the pooled method of setting rates. The Court held there was no specific language or documentation from those negotiations which suggested REAOC entered into the claimed bargained-for agreement with the County. REAOC’s other evidence of a slide presentation merely including the value of pooled premiums, a negotiation document created by the Board of Supervisors including an “assumption” that pooled premiums would continue in order to evaluate cost projections, and a slide presentation stating that retiree rates will continue to be pooled for that year all failed to create any implied vested right.

The Ninth Circuit upheld the District Court’s decision that REAOC had not met its heavy burden of proving the years of MOUs and annual resolutions of the Board of Supervisors created an implied Constitutionally-protected vested right to have their premium rates set by pooling retirees with active employees for any retired or active employee hired before 2008 when the County changed its method.

Whether or not active employees or retirees have Constitutionally-protected vested rights is a fact-intensive question that is not to be undertaken lightly. Each case turns on its own facts and merits. It is never a “one-size-fits-all.” The Court’s decision provides the much needed guidance of how to apply the case law to the facts of any employer’s retiree medical promises.