California Supreme Court Upholds Restrictions on Pensionable Leave Cashouts

As described in our prior eAlerts (see here: California Supreme Court Grants Review of First Post-Alameda Decision on Compensation Earnable Restrictions — Amicus Curiae Briefs Due August 2024), two years ago, the California Supreme Court granted review of Ventura County Employees’ Retirement Ass’n v. Criminal Justice Attorney’s Ass’n of Ventura County (2024) 98 Cal.App.5th 1119. On July 27, 2026, the Supreme Court unanimously ruled in favor of the Ventura County Employees’ Retirement Association (VCERA) in Ventura County Employees’ Retirement Ass’n v. Criminal Justice Attorney’s Ass’n of Ventura County (Cal. S. Ct. Case No. S283978) (VCERA).

VCERA is the Supreme Court’s first decision applying its own guidance in Alameda County Deputy Sheriff’s Ass’n v. Alameda County Employees’ Retirement Assn. (2020) 9 Cal.5th 1032 (referred to in VCERA as “Alameda County”), concerning legislative restrictions on compensation earnable addressed in that decision.

(For background on Alameda County, which upheld the constitutionality of changes to CERL that were adopted in connection with enactment of the California Public Employees’ Pension Reform Act of 2013, see here: California Courts Continue to Address Vested Rights Lawsuits.)

The topic of VCERA is the “straddling” issue — that is, the statutory restriction applicable since January 1, 2013, to “legacy” or “classic” members of systems governed by the County Employees Retirement Law of 1937 (CERL), on pensionability of leave cashouts. Government Code sections 31461(b)(2) & (4) of CERL limit the leave that may be included in “compensation earnable” to the maximum that those members are permitted to earn and receive in cash (i.e., “earned and payable”) “each 12 months” under applicable labor agreements, thus excluding from retirement allowance calculations any excess amounts that members may cash out over “straddled” calendar or fiscal years.

VCERA upheld both the trial court’s and court of appeal’s conclusions on that topic and expressly implemented language from Alameda County.

As an initial matter, the Supreme Court stated that it had granted review of the lower court decision “to clarify this issue of statewide importance on the proper calculation of retirement benefits for covered public employees.”

Key substantive conclusions of the unanimous Supreme Court, including the concurring opinion of Chief Justice Guerrero, were as follows:

• While Alameda County determined that section 31461’s new limits on the inclusion of certain amounts in “compensation earnable” were changes that did not impermissibly impair the contractual and constitutional pension rights of legacy employees, “we did not undertake a statutory analysis of section 31461(b)(2) to explain how the amendment prevented” retirement system members from enhancing their benefits through straddling. Thus, the Court concluded that such a statutory analysis was warranted here.
• Ultimately, the Court concluded, the language in section 31461(b)(2) “each 12-month period” “should be understood to incorporate applicable annual leave cashout limits pursuant to an employee’s terms of employment.” (Emphasis added.) The Court further noted, “These limits are typically based on a calendar year, as they are in this case, but they could also theoretically be based on the fiscal year or, for that matter, any other 12-month period the county employer might elect.”
• To reach this conclusion, the Court observed, “Because the statutory text does not unambiguously dictate either result proposed by the parties, we must consider PEPRA’s underlying purpose along with other extrinsic evidence to discern the statute’s meeting.” The Court held then, “Considerations of statutory purpose conclusively resolve the issue in favor of VCERA’s interpretation.”
• In particular, the Court held, “The Legislature’s primary motivation in enacting PEPRA was to close loopholes the Legislature perceived as permitting pension spiking by realigning the statute with the ‘underlying concept of compensation earnable, which is intended to reflect pay for work ordinarily performed during the course of a year.’”
• The Court also reiterated its conclusion in Alameda County, saying, “Because the ‘calculation required by section 31461 assumes that all employees have worked the same number of days,’ allowing employees to boost leave hours above the annual allowance restriction to increase compensation earnable ‘can be viewed as distorting the pension calculation and increasing pension benefits beyond the amount anticipated by the underlying theory of compensation earnable. [Citation.] The effect would be to permit employees to increase — sometimes considerably — their amount of compensation earnable, based not on the work they ordinarily perform during the course of a year, but based on the strategic timing of leave cashouts. This is, as we have previously explained, the type of ‘manipulation of an employee’s pattern of work and pay to produce inflated compensation earnable’ that PEPRA was designed to address.”
• The Court agreed with VCERA that “the Legislature that enacted section 31461(b)(2) was also concerned with the administrability and the ability of counties to anticipate and meet their funding obligations.” Citing the Department of Finance report in support of PEPRA, the Court noted, “‘Eliminating unanticipated spikes in final compensation could reduce the risk of unfunded liabilities for employers.’”
• The Court emphasized that when interpreting ambiguous provisions of retirement law, “our cases have been clear, ‘such construction must be consistent with the clear language and purpose of the statute.” (Citing Ventura County, italics added in VCERA decision.) The Court concluded, “While the Employee Associations understandably take the position that their members should be permitted to maximize their pension benefits, including increasing the allowable amount of cashed out leave calculated in the final compensation period, their position in this case cannot be squared with the Legislature’s overarching purpose in enacting PEPRA, which was to impose limits on these practices that would help to ‘maintain the integrity of the pension system” and to facilitate ‘its successful operation’ for the benefits of all its members.”
• Thus, the Court held, “In light of the statutory purposes underlying the passage of PEPRA, [VCERA’s] is unquestionably the reading that makes the most sense. Reading this statutory text in light of the Legislature’s purposes in enacting PEPRA, we confirm what we said in Alameda County: Section 31461(b)(2) prevents retiring employees who have designated a final compensation period that straddles calendar years from including in compensation earnable amounts of cashed out leave in excess of the applicable annual allowances for leave cashouts.”

VCERA confirms two basic principles of statutory interpretation in the context of public retirement law:

1. Where statutory language is not crystal clear, the legislative purpose in enacting the statute matters.
2. Courts may properly consider questions of administrability and funding predictability, as well as participating employer’s terms of employment, when assessing whether a retirement system correctly interpreted and applied statutory pensionability rules.

As post-Alameda County litigation continues to percolate through superior courts and courts of appeal across the state, these two principles should remain important to the ultimate determination of those disputes.

Nossaman represented VCERA through the superior and appellate court proceedings. Ashley Dunning, co-chair of the Pensions, Benefits & Investments (PB&I) Group, was lead trial and appellate counsel.