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Court: City Cannot Ignore Council's Past Promises to Pay Benefits


by Stephan Mihalovits

Well the election is finally over. Californians can celebrate another victory for voting as a peaceful, lawful way to make decisions about our state. It makes voters feel we are in control, that the world obeys our will. Allow me to throw some cold water on this celebration of democracy.

This week, a newly published case reminds Californians we are sometimes powerless to fix problems that contribute to chronic budget deficits.

In International Brotherhood v. City of Redding, 2012, the California Court of Appeal held that a city may be forced to honor past promises the city council made to pay medical benefits, irrespective of whether or not the City can afford the fiscal consequences.

A promise stated in a Memorandum of Understanding (MOU) ratified by the city council, is an express legislative authorization that creates vested contract rights for present and future retirees.

Beginning in 1979, the city council of Redding made and approved promises to the city’s electrical workers promising to pay 50 percent of medical insurance premiums for retirees, future retirees, and their dependents. The promises were stated in a MOU that routinely expired and was readopted.

When talks broke down in 2010 over a new collective bargaining agreement, the city unilaterally adopted its own plan for payment of medical benefits, with a much less generous benefits package. The union balked and initiated litigation against the city for breaking its promise. The trial court originally granted the city’s request to throw out the union’s lawsuit, but the Court of Appeal instead found that the lawsuit should continue forward, because contractual rights may have vested through city council approval of its promises.


The Precedents That Bind


To be clear, we do not have a court overreaching its authority in this situation. The court based its decision on established state law and noted it was following the recent Supreme Court opinion, Retired Employees Assn. of Orange County, Inc. v. County of Orange, holding that a vested right to health benefits for retired employees can be implied from a county ordinance or resolution.

The Court reasoned that, if an implied promise is sufficient to bind a city, then surely an express promise approved by the city council can be a binding promise as well. The court dismissed the city’s defense of budgetary woe, stating, “the city provides no authority for the relevance of whether the city, in the future, can afford to keep such a promise.” 

While based on established case law, the decision fails to discuss the foreseeable, negative effects on third parties, namely saddling the public with debt it can’t afford and never agreed to.

The court did not contemplate whether the city council meetings where promises were adopted were heavily or sparsely attended by the public. Nor did the court consider whether council members believed the promises in the MOU, like the MOU itself, expired after a certain period of time.

The court focused solely on the binding nature of express legislative authorization by the city council when it approves promises to pay benefits.

Voters try their best to elect local officials who will be responsible financial stewards. But when those officials make decisions that later turn out to be infeasible and foolishly made, it is the taxpaying public who is bound, not city officials. Officials act in their own political self-interest by approving short-sighted compensation packages. Municipalities should be given a chance to discuss current budget constraints and flawed budgetary assumptions on which promises were based.


Fixing a City's Financial Crisis


The court may have left a light on for those worried about these potential consequences. As with many issues, the court here would rather not make decisions when the legislature is capable. As stated in Retired Employees, binding promises can be prevented if such promises are already prohibited by law. Thus, the court signaled a role for legislative bodies across the state to take preventative measures to prohibit municipalities from making excessive promises.

Options include an overt ban on municipalities making promises that stretch more than 10 or 20 years in the future. Another option is to include a trigger to reopen contract talks between municipalities and unions if budget numbers do not meet certain threshold levels to fund obligations.

The options are out there, and the courts are willing to guide us. It is up to elected leaders to take proactive steps.


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