In a victory for the San Bernardino County Employees’ Retirement Association (“SBCERA”) and the nineteen other county retirement systems administered under the County Employees Retirement Law of 1937 (Gov. Code, § 31450 et seq., hereafter the “CERL”), on March 2, 2017, the California Supreme Court issued a unanimous decision upholding CERL retirement boards’ authority and discretion to make disability retirement determinations without the burden of prejudgment interest being applied to them for the period during which they reasonably exercise that quasi-judicial authority. (Flethez v. San Bernardino County Employees’ Retirement Association (Mar. 2, 2017, S226779) (“Flethez”).
The Court, through Chief Justice Cantil-Sakauye, commenced its discussion of the context of this case by reciting the “plenary authority regarding, and fiduciary responsibility for, the administration of the retirement system” provided to public retirement boards under the California Constitution. The Court then repeated and analyzed plaintiff Flethez’s claim that if he did not receive the Civil Code section 3287(a) prejudgment interest he demanded on the entire retroactive disability retirement award that SBCERA ultimately paid him, he would be “denied the benefit of the natural growth and productivity of the retroactive benefits withheld by the SBCERA and correspondingly, the remainder of the members of the SBCERA retirement system will be unjustly enriched by the use of his retirement allowance in the interim.” The Court rejected that analysis. Instead, it observed: “SBCERA emphasizes that its ‘fiduciary duty to safeguard its trust fund for all of its members’ requires it not to pay benefit prior to the time the applicant meets his or her eligibility burden of proof. SBCERA has the better argument.”
As background, CERL retirement systems provide both service retirements based on age and years of service and disability retirements based on an employee becoming permanently incapacitated for the performance of his or her work duties. A permanently incapacitated employee may apply for disability retirement prior to becoming age-eligible for service retirement, and upon proving “to the satisfaction of” the retirement board his or her entitlement, a disability retirement allowance will be paid for the member’s life. The CERL further provides that a retroactive lump sum payment may be made (if due) to the member from either the member’s application date, or the date immediately following the member’s last date of regular compensation. That latter alternative date applies under CERL “[w]hen it has been demonstrated to the satisfaction of the board that the filing of the member’s application was delayed by administrative oversight or by inability to ascertain the permanency of the member’s incapacity until after the date following the date for which the member last received regular compensation . . . .” The Supreme Court referred to this alterative retroactive payment provision under CERL as the “inability to ascertain permanency clause.”
The Court held that in analyzing both retroactive payment provisions of CERL, however, a member “was not wrongfully denied the use of the benefit moneys in any of the years prior to [the retirement board’s] decision on his request.” The member was only injured when the retirement board made a decision denying his or her application, which a court later overturned as an erroneous denial. The Court explains in Flethez, “[T]here were no damages stemming from an underlying monetary obligation ‘capable of being made certain’ and his right to an award of retroactive disability benefits under the inability to ascertain permanency clause did not vest.” The member “experienced a wrongful withholding of his benefits when the Board erroneously denied his application for a retroactive disability retirement allowance . . . thus necessitating this mandamus action. His entitlement to prejudgment interest under section 3287(a) commenced on the date of wrongful denial.”
In so holding, the Court disapproved a lower court of appeal decision in Austin v. Bd. of Retirement (1989) 209 Cal.App.3d 1528, which arguably had entitled a member to section 3287(a) prejudgment interest on retroactive disability retirement benefits under the CERL from the last day of the member’s service. As a result of Flethez, however, the rule is now clear that a member is entitled to section 3287(a) prejudgment interest on retroactive disability retirement benefits under the CERL covering only the period after which a CERL retirement board has wrongfully denied the benefit.
Significantly from an analytical standpoint, the Court distinguished its conclusion in Flethez from those involving wrongfully withheld employment type benefits such as salary, which would have been paid during the adjudicative proceeding but for a wrongful employment act. Instead, it relied on its own precedent in American Federation of Labor v. Unemployment Ins. Appeals Bd. (1996) 13 Cal.4th 1017, 1022, noting that “[o]nly if the Board wrongfully denies benefits . . . would the claimant be entitled to section 3287(a) interest as part of a court award of ‘compensation for the egregious delay in receiving benefits caused by the necessity of filing a mandamus action challenging the Board’s denial.’”
The Court also rejected Flethez’s argument that his entitlement to a disability retirement “vested” on the first date of his employment by the County of San Bernardino. Rather, the Court approved an argument made by eight amicus curiae CERL retirement boards that the “vested right” members possess with respect to the question of prejudgment interest on disability retirement benefits “is to have their CERL retirement board make an ‘eligibility-to-benefits determination.’” (Citing County of Alameda v. Bd. of Retirement (1988) 46 Cal.3d 902, 908.)
In his concurring opinion, Justice Cuéllar clarified for the trial court on remand when a “wrongful denial” occurs for purposes of awarding prejudgment interest, endorsing the standard articulated by SBCERA in its briefing and at oral argument: “A wrongful denial occurs on the date the retirement system’s governing board should have determined that the member was entitled to retroactive benefits.” (Emphasis added.)
This case is also important because of its recognition of the critical and complex fiduciary role that CERL retirement boards have as the gate-keeper to the provision of disability retirement benefits. While retirement boards should not unreasonably delay in granting disability retirement benefits when their members establish their statutory entitlement to them, the boards also carry out their critical fiduciary responsibilities when they “investigate applications and pay benefits only to those members who are eligible for them. [Citation omitted.].” In its recognition of these dual responsibilities of fiduciaries of public retirement system boards, the Supreme Court articulated a meaningful standard of conduct that may guide and assist retirement boards and their staff in considering their respective roles in the administration of the disability retirement plans they govern.