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JOHN MICHAEL JENSEN, State Bar No. 176813LAW OFFICES OF JOHN MICHAEL JENSEN11500 West Olympic BM., Suite 550Los Angeles, CA 90064(310) 312-1100

Attorneys for Plaintiffs Robert Marzec,Rachel Healy and Benjamin Esparza,individually and on behalf of a class ofothers similarly situated

ORIGINAL FILED

APR 2 0 2012

LOS ANGELESSUPERIOR COURT

SUPERIOR COURT OF THE STATE OF CALIFORNIA

FOR THE COUNTY OF LOS ANGELES

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ROBERT MARZEC. an individual; RACHEL)HEAL'!, an individual; and BENJAMINESPARZA, an individual; and on behalf of aclass of others similarly situated,

Plaintiffs,

VS.

CALIFORNIA PUBLIC EMPLOYEES'RETIREMENT SYSTEM (CalPERS),BOARD OF ADMINISTRATION OFCALIFORNIA PUBLIC EMPLOYEES'RETIREMENT SYSTEM,

Case No.: BC 461887

CLASS ACTION

(Assigned to the Hon. Anthony J. Mohr,Department 309, for all purposes)

PLAINTIFFS' OPPOSITION TOCALPERS' DEMURRER TO FIRSTAMENDED COMPLAINT

[Request for Judicial Notice filedconcurrently]

Hearing Date:

May 17, 2012Hearing Time:

9:30 am

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Trial Date:Complaint Filed:

NoneMay 18, 2011Defendants.

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PLAINTIFFS OPPOSITION TO CALPERS' DEMURRER TO FIRST AMENDED COMPLAINT

3 TABLE OF

TABLE OF CONTENTS

AUTHORITIES

4 INTRODUCTION 1

5 LAW AND ARGUMENT 5

6 I. Statutory Interpretation, Standard for Pensions 5

7 II. Statutory Violations: Purchase of Military/Air Time 5

8 III. Statutory Violations: Industrial Disability Statutes 18

9 IV. Statutory Violations: 1DR and Labor Code Laws 19

10 V. Statutory Violations: Seizure without Statutory Support 20

II VI. Judicial Determination, No Deference to Agency 20

12 VII. Breach of Contract, Rescission and Restitution 21

13 VIII. Rescission/Restitution Claims 22

14 IX. Breach of Fiduciary Duties 26

IS X. Denial of Equal Protection 26

16 XI. Due Process Violations 27

17 XII. Unconstitutional Impairment of Contract Claims 27

Is XIII. Plaintiffs' Other Claims Withstand Demurrer 28

19 XIV. CalPERS' Demurrer to the Class Definition 28

CONCLUSION 30

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PLAINTIFFS' OPPOSITION TO CALPERS' DEMURRER TO FIRST AMENDED COMPLAINT

TABLE OF AUTHORITIES

California Cases:

Allen v. City of Long Beach (1955) 45 Ca1.2d 128 19

Bowen v. Board of Retirement (1986) 42 Cal.App.3d 392 5,7

Carman v. Alvord, 31 Ca1.3d 318 18

City and Cty of San Francisco v. Workmen's Comp App. Bd. (1968) 267 Cal.App.2d 771 21

City of Oakland v. Public Employees' Retirement System (2002) 95 Cal.App.4th 29 29

Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Ca1.4 th 797 29-30

Frank v. Board of Administration (1976) 56 Cal.App.3d 236 18,21

Healy v. Industrial Acc. Coin. (1953) 41 Ca1.2d 118 21

Lyon v. Flourney (1969) 271 Cal.App.2d 774 21

Lyons v. Hoover (1953) 41 Ca1.2d 145 21

In re Marriage of Sonne (2010) 185 Ca1.App.4 th 1564 17,21

McKelvey v. Boeing North American, Inc. (1999) 74 Cal.App.4 th 151 28

Moyer v. Workmen's Comp. Appeals Bd. (1973) 10 Ca1.3d. 222 5

Oden v. Board of Administration (1994) 23 Cal.App.4 th 194 5

Pasadena Police officers Assn. v. City of Pasadena (1983) 147 Cal.App.3d 695 18-19

Pearl v. W.C.A.B. (2001) 26 Ca1.4th 189 19

People v. Romo (1975) 14 Ca1.3d 189 27

Rodie v. Board of Administration (1981) 115 Cal.App.3d 559 25-26

Russell v. Bankers Life Co. (1975) 46 Cal.App.3d 405 23,25

Stafford v. LACERA (1953) 42 Ca1.2d 795 5, 19

State Farm Mut Auto Ins. Co. v. Johnston (1973) 9 Ca1.3d 270 24

Sylva v. Board of Supervisors (1989) 208 Cal.App.3d 648 5

Symington v. City of Albany (1971) 5 Ca1.3d 23 19,25

Thompson v. Occidental Life Ins. Co. (1973) 9 Ca1.3d 904 24

Valdes v. Cory (1983) 139 Cal.App.3d 773 7, 9, 19

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California Cases (continued):

Wheeler v. Board of Administration (1979) 25 Ca1.3d 600 4-5, 14

Willens v. Commission On (Judicial Qualifications (1973) 10 Ca1.3d 451 20

Federal Cases:

McQueary v. Blodgett (9th Cir. 1991) 924 F.2d 829 27

California Statutes:

Civil Code, §1641 21

Government Code, §1235 20


Government Code, §§20000, et seq. 1





Government Code, §20380.5 8




Government Code, §20808 15, 18, 21






Government Code, § 21013 6


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California Statutes (continued):








Government Code, §21037 17, 20-21

Government Code, §21050 4, 9, 11, 13, 17-18,20




Government Code, §21060 25-26

Government Code, §21151 17,21

Government Code, §21151(a) 17



Government Code, §21420 2, 8, 15-22, 27

Government Code, §21701 3, 11





Insurance Code, §10270.3 25

Labor Code, §3751 19

ivPLAINTIFFS' OPPOSITION TO CAL.PERS' DEMURRER TO FIRST AMENDED COMPLAINT

Federal Statutes:

26 U.S.C., §415 2-3, 8, 11-12, 14-15,23

26 U.S.C., §415(n) 2-3, 11-12

26 U.S.C., §415(n)(1) 3

26 U.S.C., §415(n)(1)-(2) 11

26 U.S.C., §415(n)(3) 5, 10-11

26 U.S.C, §415(n)(3)(A)(i) 3, 12

26 U.S.C., §415(n)(3)(A)(ii) 3, 12

26 U.S.C., §415(n)(3)(A)(iii) 3, 12

26 U.S.C., §415(n)(3)(B) 3, 11

29 U.S.C., §1053 13, 15

PLAINTIFFS OPPOSITION TO CAI ,PERS' DEMURRER TO FIRST AMENDED COMPLAINT

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INTRODUCTION

Frequently industrially disabled in their dangerous jobs, thousands of police officers,

firefighters, and other safety employees invested large amounts of their retirement funds to

purchase military/air time. CalPERS promised that the investment would increase Plaintiffs'

retirement allowance. CalPERS' Demurrer fails because of its many unsupported assumptions:

(I) Plaintiffs' Right to Benefits. CalPERS assumes that Plaintiffs are not fully entitled to

benefit from their (i) investments in military time, air time, and PVSC (hereinafter "military/air

time"), (ii) vested industrial disability retirement ("IDR"), and (iii) other vested rights.

(2) Plaintiffs' Full Payment for Full Value. CalPERS ignores that (i) the Public

Employees' Retirement Law ("PERU', Government Code, §§20000, et seq.) requires Plaintiffs

to pay the full cost of military/air time without subsidy to or from the employer or pension

system at any time, and (ii) federal tax law deems military/air time to be "permissive service

credit" that CalPERS must structure and price equivalent to the benefit to be received. Plaintiffs

are entitled to value for their money, even if their benefit is not based in added "service credit".

(3) Military/Air Time: Characterization As Contributions in Job Not Supported.

Instead of respecting the "corresponding" time that CalPERS required Plaintiffs to certify at the

time of contracting, CalPERS assumes it can transform Plaintiffs military/air time investment

into contributions in the job and with the employer where the Member worked at the time that he

or she invested. CalPERS cites no specific legal authority to support this accounting. The PERL

opposes it. The facts oppose it.

Under CalPERS' own reasoning and practice, Plaintiffs would be entitled to relief but for

this false and undisclosed assumption. For example, disabled safety2 Plaintiffs would be entitled

to a 50% IDR allowance and an additional annuity for their military/air time investments under

CalPERS' practice if CalPERS accounted for Plaintiffs' optional investments as contributions not

Unless otherwise indicated, all statutory citations are to the Government Code.Plaintiffs use "safety" and "safety jobs" to mean all positions where Members are

eligible to take Industrial Disability Retirement ("IDR") if injured on the job.


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in the employment where the Plaintiff bought the credit. 3 (§21420.)

(4) Military/Air Time: CalPERS Violates the IRC. A basic question is whether the

Internal Revenue Code (IRC) Section 26 U.S. §415(n) applies to limit CalPERS' treatment of

Plaintiffs investments in this case. CalPERS admits that military/air time are "permissive service

credits" that are governed by the IRC. Ignoring its specific statutory duties (see §§ 21750, 21762,

et seq) CalPERS argues the subparts of §415(n) do not apply because (i) Plaintiffs rolled over

457 funds to invest, and (ii) the dollar value of the purchased "permissive service credits" fell

within contribution limits. (Demurrer, p. 10.) Factually, not all purchases were roll-overs.

Plaintiff Rachel Healy bought air time with $58,000 rolled over from her 457 funds and $19,000

after-tax dollars from mortgaging her home. (FAC, Exh. 7.) Many others did not roll-over funds.

In all cases,the statutes, IRS publications, Private Letter Rulings 4 , and practice guides

indicate the "permissive service credit" definitions and 26 U.S. C. §415 apply to this case.

"A permissive service credit is credit for period of service recognized by a definedbenefit governmental plan, only if you voluntarily contribute to the plan anamount that does not exceed the amount necessary to fund the benefit attributableto the period of service and the amount contributed is in addition to the regularemployee contributions, if any, under the plan." (IRS Publ. 571, Ch. 8, p 13[Request for Judicial Notice ("RJN"), Exh. 6].)

Section 415(n) "limits participant contributions used to purchase permissive service

credit (H-5950.2)". (KIN, Exh. 7, p. 1.)

CalPERS argues that §415(n) does not limit how CalPERS can price and treat military/air

3 Because disabled Plaintiffs held the same job when they invested in military/air time asthe one where they were later industrially injured, CalPERS uses the disability funding sectionsof the PERL to justify seizing or failing to credit those investments.

4 The IRS Private Letter Rulings refer to a government retirement plan's administration of"permissive service credit" benefits in amounts below the limitation cap of Section 415. As 415includes a definition, the benefits must met the terms of subparts. For example, the IRS does notallow funding a vested benefit (e.g. IDR). (RJN, Exh 1, p. 13.) "Permissive service credit" relatesto an actual period of service for which the employee has not yet been credited with performingservice. (RJN, Exh. 2, p. Exh. 3, p. 7.) If the amount of the funds being transferred or rolledover purchases either more or less than the actuarial equivalent service credit, such purchase mayraise other qualification requirements. (R.IN, Exh. 4, p. 5.) Any transfers between plans mustprovide an additional benefit that is actuarially accurate. (WIN, Exh. 5, p. 7.) Except for roll-overs, contributions above the Section 415 cap are not authorized.

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time investments. 5 But 26 U.S.C. §415 is clear that both (i) the contributions limits and (ii) the

subparts of §415(n) apply to this case:

a) Service credit investments must be recognized for purposes of calculating a

benefit. (26 US.C. §415(n)(3)(A)(i).) However, for Plaintiffs retiring on an industrial

disability retirement (IDR), CalPERS does not recognize Plaintiffs service credit investment

for purposes of calculating their benefit, and provides little or no value for it.

b) The benefit must not be one that the participant has already received under the

plan. (26 U.S.0 §415(n)(3)(A)00.) Here, disabled Plaintiffs purchased "service credit" after

already fully vesting in IDR as part of their regular employed CalPERS service. As a result of

CalPERS' treating the military/air time as "normal contributions" in the job held at purchase,

CalPERS offsets or partially funds the already vested IDR with Plaintiffs' investment.

CalPERS only provides disabled Plaintiffs the already vested IDR.

c) The participant must make a voluntary contribution which does not exceed the

amount necessary to fund the benefit attributable to the service credit. (26 US. C.

§415(n)(3)(A)(iii).) Plaintiffs pay a great deal for the military/air time and do not get an

equivalent benefit. Instead of receiving an additional benefit equivalent to their money,

disabled Plaintiffs suffer a loss. Plaintiffs' contributions exceed the benefit they receive.

The intent of the tax law opposes CalPERS' actions. In an effort to expand and to protect

employee benefits, Congress intended the Pension Protection Act of 2006 to safeguard employee

retirement funds, to allow participants to buy permissive service credit and to encourage

portability of benefits for employees changing jobs from one government employer to another.

(RJN, Exh. 8, p. 2) Instead of safeguarding the investments, CalPERS puts the funds at risk.

Plaintiffs alleged violations of the IRC and the PERE. CalPERS does not oppose the

allegations that it violated the IRC. It argues that it did not violate the PERE. CalPERS has a

duty to follow the IRC, specifically IRC section 415. (§§21750, 21762, 21701.)

5 CalPERS apparently recognizes and accepts that the subparts of Section 415 apply to(i) limit who can buy service credit ("participant") (§415(n)(1)); (ii) limit the number of years ofnonqualified service credit that may be purchased; and (iii) require that a Member have five (5)years of service credit before buying air time (§415(n)(3)(B)).

3PLAINTIFFS' OPPOSITION TO CALPERS' DEMURRER TO FIRST AMENDED COMPLAINT

(5) Military/Air Time: Overcharging. Although not specifically disclosed, CalPERS

charges more for military/air time than necessary to fund Plaintiffs' future service (or annuity)

benefit. The legislative history requires that CalPERS price the military/air time investments so

that Plaintiffs pay only the full cost of the Member's expected future service (or annuity) benefit.

(§§21050-21052) However, Cain:RS includes unrelated employer costs (disability, unfunded

liability, etc.) and surcharges in the purchase price, and assumes the right to seize the investment

on IDR. Putting CalPERS on notice at the first filing of the claim at the Victim Compensation

and Government Claims Board ("VCGCB"), Plaintiffs always asserted that CalPERS is

overcharging Plaintiffs and that Plaintiffs are entitled to the benefit of all of their investment.6

(6) IDR Vesting. Plaintiffs vested in their right to a 50% IDR on the first day of the

safety job. CalPERS assumes that disabled Plaintiffs agreed to waive their statutory IDR rights

and to offset their 50% IDR with some or all of their military/air time investments, without

Plaintiffs' informed consent or waiver. CalPERS "directly or indirectly" charges disabled

Plaintiffs who purchased "service credits" higher costs for IDR.

(7) Failure To Harmonize the PERL. CalPERS ignores that IDR, military/air time

purchase programs, and service retirements are all integral parts of the PERL (i.e. the same plan)

CalPERS must harmonize them when initially pricing and structuring the military/air time

purchases for safety members. (Wheeler v. Board of Administration (1979) 25 Ca1.3d 600, 606.)

CalPERS is responsible for the IDR and purchase programs simultaneously, and clearly

anticipates that the sections may interrelate, but fails to harmonize the purchases and coverages.

(8) IDR and Military/Air Time Purchase Contracts Breached. CalPERS breaches the

purchase contracts and IDR policies, including by (i) "transforming" the certified corresponding

time into regular work for a specific employer, (ii) failing to properly account for or seizing the

investments, and (iii) failing to provide the "increased benefit" promised.

(9) Purchase Contract and 1DR Policy Disclosures Insufficient. The purchase contract

6 See VCGCB filing and attached Complaint for Damages, pp. 2:24-3:20, 8:2-5, 19:4-7,20:1-20, 21:16-23, 34:9-23, and 54:13-21, attached as Exhibit I to the Declaration of JohnMichael Jensen filed herein on September 23, 2011, in support of an unrelated motion.

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PLAINTIFFS' OPPOSITION TO CALPERS' DEMURRER .10 FIRST AMENDED COMPLAINT

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disclosures and IDR policies fail to sufficiently or meaningfully disclose (i) CalPERS'

"transformation" of certified corresponding time, (ii) the limitations, offset, and exclusions that

reduce already-vested IDR benefits, (iii) that the purchaser may lose his investment in addition to

not benefiting from the service credit; and (iv) the risk of loss of the military/air time investment.

(10) All Causes of Action Survive. Plaintiffs maintain all causes of action in the FAC.

For example, CalPERS violates equal protection in treating individuals who invested differently

than others. CalPERS violates due process. CalPERS' policy and practice violates core elements

of the PERL and IRS Code, especially 26 U.S.C. §415(n)(3).

Plaintiffs have timely alleged those violations. When CalPERS' foundational assumptions

are scrutinized, its Demurrer fails.

LAW AND ARGUMENT

I. STATUTORY INTERPRETATION, STANDARD FOR PENSIONS

"Pension legislation must be liberally construed and applied to the end that the beneficent

results of such legislation may be achieved." (Bowen v. Board of Retirement (1986) 42 Ca1.3d

572.) It protects Members against "economic insecurity" (Id)

With particular respect to both the disability and service retirement sections of the PERL,

the Supreme Court has ruled:

"[T]he various parts of a statutory enactment must be harmonized by consideringthe particular clause or section in the context of the statutory framework as awhole. [Citations.'" (Moyer v. Workmen's Comp. Appeals Bd. (1973) 10 Ca1.3d.222, 230-231 [110 Cal.Rptr.144, 149, 514 P.2d 1169, 1174], italics added;Stafford v. L.A. etc. Retirement Board (1954) 42 Ca1.2d 795, 799 [270 P.2d 12].)

(Wheeler v. Board of Administration, supra, at, 606.)

"Courts 'must consider the consequences that might flow from a particular construction

and should construe the statute so as to promote rather than defeat the statute's purpose and

policy.' (Sylva v. Board of Supervisors (1989) 208 Cal.App.3d 648, 654 [256 Cal.Rptr. 138].)"

(Oden v. Board of Administration (1994) 23 Cal.App.4 1h 194. 208-209.)

II. STATUTORY VIOLATIONS: PURCHASE OF MILITARY/AIR TIME

Military/Air Time: Authorizing Statutes in PERL. The military service (§§21024,

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PLAINTIFFS' OPPOSITION 10 CAI PERS DEMURRER TO FIRST AMENDED COMPLAINT

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20127 and 21029). air time (§20909) and PVSC (21006-21008, 21013, 21020.5, 21023.5,

21025.5 and 21030-21031) statutes allow Members to increase their personal retirement benefits

by investing in a specific retirement formula, e.g. 3% at 50 (PA Safety). Allowing a Member to

invest alongside CalPERS at CalPERS' 7.75% expected rate of return. Members pay the full cost

so that the benefits are "cost neutral" to the retirement system and the employer. To take

advantage of CalPERS' high guaranteed investment return. Members often roll over their

existing 457 retirement investments to fund the optional service credit purchase.

Military/Air Time: "Corresponding" Time Purchased. As part of the purchase

contract, CalPERS requires the Member to certify that the "corresponding" military/air time

purchased refers to service or time outside of (and often prior to) the job, employment, and

category that the Member held at the time of contracting. For military time, CalPERS requires

the Member to certify that he or she previously served in the armed forces and was honorably

discharged in order to buy a period of "corresponding" military time distinct from his/her current

job. (FAC, Exh. 21, pp. 31-33 and following form.)

Air time is defined as time that does not qualify as public service, military service, leave

of absence, or any other time recognized for service credit by the retirement system. (§20909(c).)

To roll over money to purchase airtime. CalPERS required each Member to certify that the

"corresponding" service associated with the "air time" period was for compensated employment

outside the then-current job and "has not been credited under CalPERS." (FAC, Exh. 7, RH 47,

emphasis in original.)

To purchase time off work (e.g., maternity/paternity leave or leave due to serious illness),

the Member must certify he/she was not working for the employer during the subject period.

(FAC, Exh. 21, pp.25-28 and following form.)

In short, "corresponding" means that the Members specifically contracted to buy related

periods of time outside the CalPERS job they held at the time of purchase. Since prior military

time can be bought after retirement, clearly the purchase is not related to a current or present

employer. (See, e.g., §21027.)

The PERL does not specifically determine what time, what category, what


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characterization, what employer, or what job classifications are associated with the military/air

time. Once purchased, the PERI, only requires that the investment funds be labeled "normal

contributions" of the employee (not the employer). (Valdes v. Gory (1983) 139 Cal.App.3d 773,

782.) As a fundamental premise of the military/air time purchase contract. CalPERS leads

Members to understand that the service will be credited as their investment in a retirement

formula related to the prior specific time period that they certified.

Military/Air Time: "Transformation" Into Credited CalPERS Service? Members

understood (i) that they were investing to increase their CalPERS benefits; and (ii) that the time

purchased "corresponded" to prior military/air time service.

The authorizing statutes, the certification, and legislative history support that Plaintiffs

invested in a specific retirement formula e.g., 3% at 50 (PA Safety)—with the understanding

1/ that the investments would increase their overall future income. It would be entirely appropriate

13 to credit the investment to the Member's accounts at the specific retirement formula (3% at 50

14 (PA Safety)) without designating it as contributions associated with a particular job classification

15 or employer. Plaintiffs did not and could not—buy additional years of service with a specific

16 employer or in a specific job classification.

17 However, CalPERS argues after the purchase that CalPERS can "transform" the

18 Plaintiffs' contracted expectation of an investment in a specific formula (and in a specific time

19 that corresponded to a prior period) into something quite different: additional years of service in

20 the job held by the Member at the time of purchase. CalPERS' transformation breaches or voids

21 the purchase contract as it materially changes the basic terms of the agreement.

22 The investments are not treated as "additional years of service" in the employment for

other purposes. The purchased years do not increase vesting, insurance, or other rights. Members

24 are not entitled to IDR for injuries associated with that prior time.' The employer does not

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' For example, a Gulf War veteran who bought his or her military time, went to work insafety position, and later developed cancer due to depleted uranium exposure during the warwould not be eligible for IDR because the cause of the disability lay outside the safetyemployment. (§20046; Bowen v. Board °J. Retirement, supra [qualifying for 1DR requiressubstantial evidence of connection betvveen the disability and the job].)

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PLAINTIFFS' OPPOSITION TO CALPERS DEMURRER TO FIRST AMENDED COMPLAINT

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actually add to years of service. For example, CalPERS did not require the City of Stockton

(named plaintiff Robert Marzec's employer) to issue payroll reports, pay taxes, or address other

ancillary issues associated with the additional four-year prior military service Marzec purchased.

What is the authority for CalPERS "transformation" practice? There is none. What is the

authority for the associated significant increase in risk of loss caused by this transformation?

CalPERS does not assert any affirmative authority to tie the contributions to the job or category

at the time of purchase. Ignoring the corresponding certifications and law, CalPERS simply says

that "Plaintiffs cannot tie their service credit purchases to any Membership category other than

that in which each took IDR." (Demurrer, p.

While simultaneously claiming the right to categorize the investments as additional

service in the job and with the employer where Plaintiffs worked at the time of purchase?

CalPERS asserts that Plaintiffs cannot qualify for a Section 21420 annuity for their military/air

time investment because it does not represent employed service l ° in a CalPERS category of

membership. (Demurrer, pp. 7:18-8:5.) There is no statutory authority for requiring work in a

category or other semantic "picking and choosing" by CalPERS, especially when CalPERS

chooses against its beneficiary, contrary to statute, to reach an unfair outcome.

One "tie" between the optional service credit and the membership category is CalPERS'

practice directing Plaintiffs to "Choose Your Formula" (i.e. buy service credit at the retirement

formula of the current job) at the time of purchase Likely, the reason for that is related to the

"cost neutrality" requirement." CalPERS calculated the cost of the investment based on the

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By analogy, CalPERS Members in the National Guard CalPERS' closest category tomilitary service—are classified as miscellaneous, not safety. (§20380.5.)

9 CalPERS argues that military/air time cannot be service outside CalPERS-coveredemployment because they purchased service with CalPERS. (Demurrer, p. 8, fn. 8.) But that isprecisely the point of "permissive service credit"—it is credit for time not already credited underthe retirement plan but which the Member can purchase to enhance plan benefits.

Congress retroactively amended IRC Section 415 to allow "participants" (not justemployees) to purchase any kind of "permissive service credit" since 1997. (RJN, Exh 9, pp. 3-4.) In other words, you do not need to be employed in a current position to purchase "permissiveservice credit".

I I CalPERS' online Service Credit Cost Estimator says, "The cost is based on yourcurrent pay rate, the amount of service credit you are eligible to purchase and the amount needed

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Member's pension formula, CalPERS' high expected rate of return (7.75%), other actuarial

values arid the salary earned in a particular job.' 2 Plaintiffs were not expecting to buy additional

years of service in the job (that could be lost on IDR). They simply expected to pay the full cost

of their future benefit, not place their retirement savings at risk. (§§21050-21052).

More broadly, CalPERS holds the investments in trust as a fiduciary and is not allowed to

commingle, transform, or v]Tongly account for them. (§§ 20684, 20131; Valdes v. Cory, supra.)

Military/Air Time: Legislative History. Military and air time were authorized only to

increase the Member's benefit. "[The] additional time allows an employee to increase his or her

retirement benefits regardless of the number of years the employee actually worked." (RJN, Exh

10, p. 7.) Air time was passed specifically to provide public employees an alternative to

investments that could lose money. (RJN, Exh 10, pp. 6-7.) The PERE requires that an employee

pay the full cost because "the employer does not directly benefit from the Member's service".

(Id.) The PERL's framework and legislative history differentiate between (i) contributions where

an employer does benefit and (ii) the employees' "full cost" investment in military/air time

(where the employer was not intended to benefit).

Military/Air Time: Purchase Price "Cost Neutral", Not Higher. Military/air time is

mandated to be "cost neutral" to the employers and pension system. The Members pay both

employee and employer costs associated with the present value of the future service retirement

income stream as increased by the system's expected investment returns. (§§21050-21052.)

Nothing in the PERT grants CalPERS the authority to charge Members for unrelated

employer costs including IDR expenses, unfunded employer liability, disability experience, or

to fund your future retirement benefits. Determining the increase to your future benefits involvesa number of actuarial assumptions including the projected age at retirement, life expectancy,salary inflation, and the assumed rate of return on investments. These assumptions are the sameas those used to ensure all our benefits are adequately funded." (RJN, Exh. 11, p. 4.)

12 CalPERS seems to require that Members can only purchase military/air time in thepension formula they are in at the time of purchase. The PERE requires that the investment be"cost neutral" to the employers and CalPERS (§§21050-21052). But the cost would be identicalfor Members working for any safety employer offering that pension formula. CalPERS' "ServiceCredit Cost Calculator" never asks for a Member's employer, only for the safety formula he orshe is working in.


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actuarial factors unrelated to the increase in Member's future service pension allowance. (See

FAC,If12.) Any transfers, offsets or subsidies to the employer or the retirement system violates

(i) the "cost neutrality" intent and (ii) IRC §415(n)(3)'s requirement that the participant's

contribution does not exceed the amount necessary to fund the benefit.

Notice to CalPERS of Claim of Overcharging. Putting CalPERS on notice at the first

filing of the claim at the VCGCB. Plaintiffs have always asserted that CalPERS is overcharging

them and that Plaintiffs are entitled to the benefit of all of their investment. 13 Although the exact

mechanism and terms that CalPERS uses to overcharge or include unrelated employer costs is

still unknown, Plaintiffs have sufficiently notified CalPERS at the threshold of this action.

No Increased IDR Liability Related to Military/Air Time. CalPERS demurs to

Plaintiffs' overcharging allegation simply by quoting the language in Section 21052 that

purchase cost shall include "an amount equal to the increase in employer liability, using the

payrate and other [actuarial] factors affecting liability". (Demurrer, p. 10, fn. 9.)

The question is which "employer liability costs" are properly included? CalPERS argues

that military/air time investments add additional years of service to increase the benefit payable

at the time of a service retirement (or to provide an annuity), e.g., at age 50. As a corollary of

that, only the employer liability or costs relating to the increased service retirement should be

included in the Plaintiffs' purchase price.

The system's and the employers' liability for IDR should not change as a result of

Plaintiffs buying military/air time because (i) IDR fully vests on first employment and (ii) there

is no age or service requirements for 1DR. The employers' full IDR liability was established at

the employees' first hiring, prior to the military/air time purchase. CalPERS cannot offset

Plaintiffs' already vested IDR, or seize the investment. CalPERS should not charge Plaintiffs a

share of the employers' unfunded liability or other unrelated costs. CalPERS can only charge

Members for costs related to the increased service and annuity benefit being purchased.

Plaintiffs who purchased on installment were also overcharged as part of the one-half

13 See fn. 6, above.

10PLAINTIFFS' OPPOSITION To CALPERS' DEMURRER To FIRST AMENDED COMPLAINT

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percent surcharge, even though generally authorized by Section 21050. Without a showing that

the surcharge is solely based on costs attributable to the increased benefits being purchased,

CalPERS has not established its statutory authority for including unrelated charges.

Military/Air Time: PERL Allegations Sufficient for Judgment, Plaintiffs Can

Succeed Independent of IRC. Plaintiffs allege CalPERS violated the IRC, but Plaintiffs can

proceed solely on the arguments based on the PERL and succeed in this action. However, the

references to the Internal Revenue Code add an extra layer of depth and context to this case. But

if the Court were to find that CalPERS satisfied the 1RC, the Court can still find in favor of the

Plaintiffs on the PERE issues and render a decision in their favor independent of the IRC.

Military/Air Time: IRC. The issue is not whether CalPERS is allowed to accept the

purchase of airtime and military time. It obviously can. The issue concerning the IRC is the

applicability of §415(n). CalPERS says it is inapplicable. (Demurrer, p. 10.)14 CalPERS has a

duty to follow the 1RC, specifically IRC section 415. (§§ 21750. 21762, 21701.) Plaintiffs argue

that CalPERS must follow 26 US.C. §4I5(n) as it characterizes and values the Plaintiffs'

investment.

The qualification and contribution section is described in Section 415(n)(1)-(2). Once the

contribution has qualified, the Code defines how CalPERS may treat permissive service credit.

26 U.S.C. 015(03) Permissive service credit.--For purposes of thissubsection--(A) In general.--The term "permissive service credit" means service credit--(i) recognized by the governmental plan for purposes of calculating a participant'sbenefit under the plan,(ii) which such participant has not received under such governmental plan, and(iii) which such participant may receive only by making a voluntary additionalcontribution, in an amount determined under such governmental plan, which does

If CalPERS did not have to abide by Section 415's subparts on amounts beneath thecontribution limits, then CalPERS could offer anyone the right to buy permissive service credit,offer more than 5 years of service credit, or take into account non-qualified service withemployees of less than 5 years. See 26 0154C. §415(n)(3)(B): "Limitation on nonqualifiedservice credit.--A plan shall fail to meet the requirements of this section if--(i) more than 5 yearsof nonqualified service credit are taken into account for purposes of this subsection, or (ii) anynonqualified service credit is taken into account under this subsection before the employee has atleast 5 years of participation under the plan."


not exceed the amount necessary to fund the benefit attributable to such servicecredit.

(1) For Plaintiffs retiring on IDR. CalPERS fails to recognize the purchased service

credit investment "for purposes of calculating a participant's benefit under the plan."

(§415(n)(3)(A)(0.) Disabled Plaintiffs only receive the same IDR that they would have received

if they had not bought the military/air time. CalPERS not only fails to consider the investment

when calculating the participant's benefit, CalPERS does not recognize it all.

(2) CalPERS violates Section 415 when the purchased service credit is transformed

into "normal contributions" in the job and with the employer at the time of the Plaintiffs

purchase. The characterization as "normal contributions" in the job/employer at purchase starts

the illicit transformation. If the Plaintiff suffers an IDR, the "permissive service credit", now

"normal contributions" in the safety job. is transferred to the employer to fund an additional

share of the IDR benefit that the participant has already vested in. Plaintiff previously became

fully entitled to IDR as part of his or her regular employed service. (§415(n)(3)(A)(ii).)

The tax law does not support the loss. Under the 2006 Pension Act is , "permissive service

credit" can increase a benefit that a participant is already receiving (e.g. pay the difference to

convert a lower formula (2% at 60) into to a higher benefit formula (3% at 50%). (Section

415(n)(3)(A)(ii) as amended by 2006 Act Section 821(a)(2).) (RJN, Exh. 9, p. 3.) But the IRC

does not allow the use of permissive service credits to charge more for already vested benefits,

such as IDR allowances.

(3) CalPERS violates Section 415(n) when the purchase price of the military/air time

investments "exceeds the amount necessary to fund the benefit attributable to the service credit."

(§415(n)(3)(A)(iii).) Plaintiffs are charged a high value, but receive much less. It is often

worthless under CalPERS' practice. For example, Healy paid $77,000 and received $0 benefit.

457 Rollovers. Many Plaintiffs rolled over lump sums from their 457 retirement accounts

to purchase service credit. CalPERS must separately account for any 457 rollover it receives.

15 Under the 2006 Pension Protection Act, "permissive service credit" relates to benefitsthat a participant is not otherwise entitled to, rather than service credit that the participant has notreceived under the plan. (26 U.S.0 , §415(n)(3)A)(ii).)

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(RJN, Exh. 12, p. 8.) CalPERS must hold in trust for the exclusive benefit of participants and

their beneficiaries all assets and rights I6 purchased with such deferred compensation amounts17.

(RJN, Exh. 12, p. 9; see also RBI, Exh. 13, p. 4.)

CalPERS fails to hold the assets that it receives from 457 rollovers in trust for the

exclusive benefit of Members, and transfers them to the employer or itself.

Military/Air Time: Insurance in .05% Premium for Installments, Section 21050. In

the alternative, Plaintiffs argue that the Legislature did price an insurance cost to protect

Plaintiffs from loss of value. Section 20150 provides for insurance at a premium of up to .5% of

the cost of permissive service credit paid in installments, such that the remaining 99.5% of the

investment had to give Plaintiffs value, including by way of annuity. (§20150.) In furtherance of

that concept, lump sum payments to purchase option credits must be given value or returned.

Military/Air Time: No Statutory Authority To Buy Additional Service Credit In

One's Job. Outside of actual prior uncredited service, the PERL does not authorize a Member to

purchase additional service credit with the CalPERS employer where a Member works.I8

Further, CalPERS cannot grant more than one year of service credit in any one fiscal year.I9

(§20961.)

As evidence of the PERT's distinctions and fairness, Members purchasing actual prior

uncredited service 29 with a particular employer typically only pay the Member's share (not the

employer's share). In the case of "cost neutral" military/air time, however, Members pay the full

16 In 457 roll-overs, the transferee plan must still satisfy the limits on providingpermissive service credit as a result of the transfer.

' 7 If the Plaintiffs used money from their 401(k) accounts, the accrued benefit derivedfrom the employee's own contributions must be non-forfeitable. 29 U.S.C.A. § 1053 (West).

18 Separate PERI, sections allow a Member who previously worked for an employer topurchase that prior service credit with that employer (see, e.g.. §§20934, 21051). Prior servicetypically covers prior part-time service to the entity, or time with the employer before theemployer contracted with CalPERS to provide benefits. Nothing authorizes purchasingadditional current or future time with that employer.

19 CalPERS cannot grant the Member the one year of service credit for actual work in thejob classification plus another one to five years of purchased credit.

20 In buying prior service, the PETRI, requires the employer to pay the employer's share ofnormal contributions. The employee only pays the employee's "normal contributions". (§21051.)

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PLAINTIFFS' OPPOSITION 10 CALPERS' DEMURRER TO FIRST AMENDED COMPLAINT

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cost, including the applicable employer share. In military/air time, it is as if the employee is

buying time working for a different employer entirely.

Duty To Harmonize the PERL's Disability and Service Credit Sections; Risk and

Disclaimer. CalPERS ignores that IDR, service credit purchases, and service retirements are

integral parts of the PERL that must be harmonized before CalPERS initially priced and

structured the military/air time purchases for safety members, such that Plaintiffs do not suffer

from its disharmony. (Wheeler v. Board of Administration, supra, at 606.)

Timing is important. Although CalPERS specifically anticipates that the disability,

purchase, and service sections of the PERE could interrelate, CalPERS did not harmonize them

before CalPERS priced, structured, and offered the military/air time investments. Instead, after

the fact, CalPERS argues that it followed specific PERL sections, piecemeal and narrowly.

In its Demurrer, CalPERS says that it followed specific sections of the PERL when it

offered Plaintiffs the credits under one section of the PERE (however neglecting that it

characterized them as in the job at the time of purchase without authority, etc.). CalPERS may

argue that it initially charged Plaintiffs the correct amount for the service credit under the plan

considering the future service retirement (although wrongly including unrelated employer costs,

etc.). CalPERS may obliquely say that it disclosed in the purchase contract that "service credit

may not benefit you" (but did not fully and adequately disclose, etc.). CalPERS may argue that

the disclosure itself provided sufficient contractual authority to justify the loss or the seizure (yet

it provides an absurd, anomalous result, violates the PERL, etc.).

When circumstance changed, CalPERS argues that it followed specific, different sections

of the PERL. CalPERS argues that it correctly applied the disability section of the PERL that

required the "normal contributions" to be transferred to the employer to fund the IDR. With

blinders on. CalPERS argues that the result of hopscotching across and narrowly following

specific sections of the PERI, is that Plaintiffs lost their investments.

As a fiduciary and under the PERL and IRC 415, CalPERS has a duty to harmonize the

PERL so that Plaintiffs' "cost neutral" service credit investment did not "exceeds the amount

necessary to fund the benefit attributable to the service credit" under all of the sections of the

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PERL (including the disability sections which provides an additional annuity).

Instead of honoring its legal and fiduciary duties, CalPERS tries to disclaim them.

CalPERS argues that (i) it does not have to price or structure the military/air time in harmony

with all the sections of the PERL (including the cost neutral requirement); (ii) it can make

incomplete misleading disclosures that equate the loss of service credit with the loss of the entire

investment, and (iii) it can then shift the hidden or poorly disclosed risk of loss onto Plaintiffs.

CalPERS' premise that "Plaintiffs took a risk of getting disabled and losing their service

credit investments" presupposes that the PERL and Section 415 allow CalPERS to price and to

structure the "permissive service credit" in such a (non-cost neutral) manner that the Plaintiffs

could bear the risk of loss if they suffered IDR. Instead, the actuarial risk of the service credit

anticipated is the risk after service retirement (how long you will live after retirement, etc.), not

whether you could lose the investment because of a threshold bar or seizure.

Military/Air Time: Annuities and IDR, IDR Funding, CalPERS' Practice. CalPERS

funds IDR with certain "normal contributions". All remaining IDR costs are paid by the

employer where the injury occurred. (§§20808, 21418.)

CalPERS says that because the PERI., states that a Member's IDR allowance "shall be

derived from his or her accumulated normal contributions and the contributions of his or her

employer" (quoting from section 21418), this automatically includes the military/air time

investments since CalPERS deems them "normal contributions" under Section 21053 (Demurrer,

p. 12:22-28) and CalPERS considers the military/air time investment to be contributions in the

job at time of purchase.

Fundamentally, CalPERS ignores that not all "normal contributions" are used to fund

IDR. Section 21420 requires CalPERS to augment the 50% IDR allowance with an annuity

derived from all "normal contributions" related to the Member's service or time outside the

employer and job where disabled. Section 21420 modifies Section 21418 to make clear that IDR

allowances are drawn only from a Member's "normal contributions" made in the job where

IsPLAINTIFFS' OPPOSITION To CALPERS' DEMURRER TO FIRST AMENDED COMPLAINT

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1 disabled. All other "normal contributions" shall fund the added §21420 annuity.2I

CalPERS fails to mention it has also established a practice where IDR is funded with

3 "normal contributions" only in the specific employment22 where the injury occurred. CalPERS'

4 practice provides the employee with an annuity above the IDR for the employee's "normal

5 contributions" made in a prior employment, even if the "normal contributions" were made in the

6 same safety category.

7 For example, Rachel Healy receives a 50% IDR allowance based on her Stockton Police

8 Department employment and disability, plus a small annuity based on the "normal contributions"

9 she made while previously employed at both Angels Camp (a safety position) and Tuolumne

10 County (a non-safety position). (KIN, 14.)

11 Under CalPERS' current practice, disabled Plaintiffs are entitled to an annuity for their

12 military/air time investments if the contributions were made in an identical safety formula, but

13 not in the specific job where injured. If Healy's approximately $77.360 airtime purchase was not

14 deemed contributions in her Stockton PD job, she would receive an annuity for her $77,360, just

15 as she does for her Angels Camp contributions also made in a 3% at 50 (PA Safety) formula.

16 In order to achieve seizure. CalPERS has to account for the investment as contributions

17 not only in the safety category, but also in the specific job when purchased and injured.

18 Military/Air Time and IDR: Employee's Contributions, Industrial Disability, and

19 the Concept Behind Section 21420's Annuities. The PERL distinguishes between an "annuity"

2() which "means payments for life derived from contributions made by a Member" (§200l8) and a

21

CalPERS asserts that "Plaintiffs insist ... that IDR must be paid for only bytaxpayers." (Demurrer, p. 13:8-9.) This is not true; Plaintiffs have never contended that CalPERShas no authority to apply any "normal contributions" to a Member's IDR allowance. Rather,Plaintiffs contend that CalPERS exceeds its authority by reaching beyond the "normalcontributions" made in the job where the Member was disabled to illegally seize the military/airtime investments which were not made in connection with the Member's job and employer.

Although sometimes participating in risk pools, employers bear the costs ofemployees' IDRs. The terms "category" or "category of membership" are not defined in thePERL. To determine characterization, the Court looks at the scope of the duties described in thespecific positions. (Grumpier v. Board of Administration (1973) 32 Cal.App.3d 567, 576.)


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"pension" which "means payments for life derived from contributions made from employer

controlled funds" (§20054). Together these constitute a retirement allowance. (In re Marriage of

Sonne (2010) 185 Cal.App.4 th 1564, 1568.) Members are entitled to the benefit of their

contributions, whether paid out as the annuity portion of a service retirement allowance, IDR or

regular (non-industrial) disability allowance or a withdrawal of Member contributions.23

Prior to 1952, the legislative history of Section 21420 indicates that the PERL initially

authorized CalPERS to use all Member contributions to help fund an individual's 1DR, whether

made in the job where the Member was injured or not. In 1953. however, the Legislature

mandated that contributions made outside the job where disabled would fund a separate annuity

in addition to the DR allovvance. 24 As the Deputy Attorney General's June 11, 1953, memo to

the Governor explained, "[t]his section thus enables a Member who has served in more than one

category of Membership to receive the benefit of his annuity contributions." (See FAC, Exh. 20,

last page of exhibit, top paragraph.)

The military/air time statutes took effect long after the 1953 legislation but the intent of

the Section 21420 change is clear while contributions made working in the actual employment

where injured shall help fund the IDR, the Member shall receive the benefit (via annuity) of all

other contributions made to the pension system. CalPERS also provides annuities for

contributions made in the same safety category (but with a different employer) as shown by its

annuity payment to Healy for her Angels Camp safety employment. (FAC Exh 11: RJN, Exh 14.

No Conflict between Sections 21037 and 21420. When properly construed, Sections

21037 and 21420 are meaningfully harmonized. (See FAC.

Prorated Credit, Risk Premiums in Section 21050. Section 21050 provides for

23 CalPERS quotes §21151(a) that Members under retirement age shall receive IDRbenefits "regardless of their age or amount of service" (Demurrer, p. 3:19-21) to imply that the50% IDR allowance exhausts all possible benefits, including a Section 21420 annuity. Thisdistorts the point of *21151: that eligible Members "shall be retired for disability ... regardless oage or amount of service", i.e., that Members can receive IDR even if they are under age 50 (theminimum service retirement age), and they receive IDR no matter how much time they havebeen on the job (compare to non-industrial disability which requires 5 years of service).

24 Assembly Bill 1720, enacted as Section 21294.2 (since renumbered as §21420).

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PLAINTIFFS' OPPOSITION TO CALPERS DEMURRER TO FIRST AMENDED COMPLAINT

prorated credit and does not support a forfeiture or a bar to an annuity. The one half percent fee

in Section 21050 can be seen as insuring against other loss, allowing the return of or value for

lump sum contributions and the 99.5% of installment investments. (RAC, '1318-326.)

III. STATUTORY VIOLATIONS: INDUSTRIAL DISABILITY STATUTES

IDR: Purpose of Disability Statutes in the PERL. "Besides affording subsistence, a

disability allowance ...provides a means to replace incapacitated employees 'without hardship or

prejudice' to them. (§ 20001.)" (Frank v Board ofAdministration (1976) 56 Cal.App.3d 236,

245.) The responsibility and liability of the employer to pay contributions to fund the IDR

payment is undisputed. (§20808.)

IDR: Vesting, Terms of [DR Vesting Substantial Equivalent. " 'By entering public

service, an employee obtains a vested contractual right to earn a pension on terms substantially

equivalent to those then offered by the employer. [Citations.] On the employee's retirement after

he has fulfilled pension conditions an immediate obligation arises to pay benefits earned.'

[Citation omitted.] (Pasadena Police officers Assn. v. City of Pasadena (1983) 147 Cal.App.3d

695, 701.) Plaintiffs vested in their 50% [DR entitlement on the first day of the safety job.

In respect to retirement benefits, the Supreme Court notes that employers' contributions

to CalPERS "are in the nature of insurance premiums (§ 20456) [now 204681; during the contrac

term they represent the employer's ongoing share of the actuarial equivalent of amounts

necessary to fund current and future benefits due covered employees. (See, e.g., §§ 20564,

20750, et seq.) [now 205771" (Carman v. Alvan!, 31 Ca1.3d 318, 325.) Employers had a duty to

fully fund the IDR during each period of employment. Employers and CalPERS had no

reasonable expectation that Plaintiffs would fund any portion of their IDR with their permissive

service credit investments.

IDR: No Waiver of IDR Benefit. Plaintiffs never waived their vested right to 50% IDR,

especially by consenting to CalPERS' seizure of the military/air time investments. In essence,

CalPERS assumes that Plaintiffs agreed to waive their statutory rights and then agreed to offset

their 50% 1DR with their investments, even though there was no informed waiver. As a practical

matter, CalPERS seeks "directly or indirectly" to charge the Member a higher cost for disability

18


and/or seize his/her military/air time investment. See generally Symington v. City of Albany

(1971) 5 Ca1.3d 23. Rather than double dipping, Plaintiffs are being doubled charged.

IDR: Not Offsetting Advantage to Employee for Increased IDR Cost. Raising a

current employee's contribution to IDR without any corresponding increase in benefits is an

unconstitutional impairment of his/her vested contract rights. (Valdes v. Cory, supra, at 784,

citing to Allen v. City of Long Beach (1955) 45 Ca1.2d 128, 131.) "[C]hanges detrimental to the

employee must be offset by comparable new advantages." (Pasadena Police officers Assn.,

supra, at 703.) Here Plaintiffs received no advantage.

IV. STATUTORY VIOLATIONS: IDR AND LABOR CODE LAWS

CalPERS recognizes that the Internal Revenue Service has determined that IDR qualifies

as being in the nature of a worker's compensation award. Although "workers compensation" laws

are separate from the PERL and courts do not apply Labor Code sections to the PERL absent

clear legislative intent25 , CaiPERS is adopting the treatment of IDR funds as in the nature of

workers' compensation. The Legislature has consented to this approach. "lhe natural implication

of adoption is to apply the related policy of Section 3751 forbidding employers and others from

charging the employee a share of his/her workers' compensation costs. IDR is the only benefit

that CalPERS adopts as worker's compensation. The adoption should be given full legal effect.

In Labor Code section 3751's prohibition on offsetting an employee's workers'

compensation benefits with his or her pension contributions, the Legislature sought to prevent

workers from being compelled to pay their own disability benefits as a result of an on-the-job

injury. The Legislature had a similar intention when it passed Section 21420. As applied to these

facts, CalPERS should not be permitted to seize Member contributions which are separate from

that safety employment to pay a share of the cost of IDR.

CalPERS' citation to Stafford v. LACERA (1953) 42 Ca1.2d 795 to argue that the

mandates of the more specific and later-adopted PERL should govern over the Labor Code is

misplaced because the two Code sections do not produce contradictory results.

Pearl v. W.C.A.B. (2001) 26 Ca1.4th 189, 197.

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V. STATUTORY VIOLATIONS: SEIZURE WITHOUT STATUTORY SUPPORT

The presumption is against forfeiture. (*21259.) In the absence of a valid provision

enacted prior to eligibility for retirement which provides for forfeiture, once a person who has

undertaken public employment becomes eligible for retirement, his right to a pension is not

destroyed. (iViliens v. Commission On Judicial Qualifications (1973) 10 Ca1.3d 451.) Seizure or

forfeiture requires specific statutory authorization. The Government Code provides for forfeiture

in specific cases not relevant here. (§§1235, 20343, 31563, 45310.2 [referring to §1243].)

Section 21037 does not authorize seizure or forfeiture of the lump sum or the installment

payments. No language forbids paying an annuity based on contributions already made. Section

21050 authorizes prorated credit when installments payments are stopped. A bar against

receiving a refund of a Member's installment contributions is not a ruling that CalPERS cannot

provide value for the monies retained. Outside the PERL, rescission and restitution allow for

refunds. Rescission voids the contract. Restitution provides for the return of the consideration.

If the Legislature had wanted to seize the money, it would have said that no annuity and

no benefit shall be paid for the monies received and satisfied basic due process. It did not.

VI. JUDICIAL DETERMINATION , NO DEFERNCE TO AGENCY

CalPERS' unreasonable administrative construction of the PERL must fail. CalPERS is

not harmonizing the PERL. It is violating the IRC. It is producing absurd results. For example,

§§21037 and 21420 are cumulative and answer different questions 26. §21037 first stops the

installment payment, but does not forfeit the funds to the state. §21420 requires the payment of

an annuity in addition to the IDR payment. CalPERS wrongly assumes that the §21420

additional annuity is the same annuity that would be also included within the IDR "allowance".

The §21420 additional annuity is not incorporated into the "allowance" (since it is in addition

26 Sections 21037 and 21040 must be applied in logical sequence. First, is the allowanceincreased by the service credit? If the allowance is not increased above the 50% IDR, theninstallments payments can be stopped under 21037. Secondly, does 21420 apply? Section 21420would not apply if 21037 did not stop the installments. Section 21420 provides for an annuity inaddition to (as opposed to incorporated into) the IDR allowance.

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thereto) but it will increase the total benefit received (IDR plus additional annuity) 27 . CalPERS

(i) misdirects the Court about the §21037 test, and (ii) then double counts the annuity (as

included in and then separately) to defeat the purpose of both §§21037 and 21240.

CalPERS' interpretation of §§20808 and 21418 about which "normal contributions" fund

IDR allowances also fails. For contracting agencies, industrial disability costs are "separate from

and independent of the contribution required for other benefits under their contracts". (20808)28

VII. BREACH OF CONTRACT, RESCISSION AND RESTITUTION

CalPERS' policy and practice frustrates the reasonable expectations of the parties to the

contract of employment. (Lyon v Flourney (1969) 271 Cal.App.2d 774, 782; Frank v. Board of

Administration, supra.) Civil Code section 1641 provides: "The whole of a contract is to be taken

together, so as to give effect to every part, if reasonably practicable, each clause helping to

interpret the other."

IDR, Employment, and Purchase Contract Breaches. All safety Members vest in IDR

upon first employment. (§21151; Frank v. Board of Administration, supra.) IDR is an integral

part of their contract of employment. (§20122.) CalPERS breaches by materially changing the

contract terms of the IDR policies, employment contracts and purchase contracts without notice

to or consent from Plaintiffs by offsetting or funding a part of the IDR with monies associated

with the military/air time investments. By unilaterally transforming and then seizing the

investments. CalPERS forces the disabled Plaintiffs to pay more for already vested IDR benefits.

Military/Air Time Contract Breaches. CalPERS materially breaches the military/air

time purchase contracts, including as it fails to provide the promised increased benefit, fails to

27 The IDR allowance with the additional annuity will often be less than a similarhypothetical service pension including the promised "years of service" benefit, because theallowance associated with the "years of service" increase includes the "pension" amount paid bythe employer (i.e. always greater than the annuity.) (In re Marriage of Sonne,supra.)

28 With respect to disability pensions, offset is not allowed against or using Member'scontributions. (Healy v. Industrial Ace. Corn. (1953) 41 Ca1.2d 118; City and County of SanFrancisco v. Workmen's Compensation Appeals Bd (1968) 267 Cal.App.2d 771.) Only theamount contributed by the public entity may be so credited, because a person cannot be requireddirectly or indirectly to pay part of the cost of his or her workers' compensation. (Lyons v.

Hoover (1953) 41 Ca1.2d 145.)

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disclose the risk of loss, transforms the certified corresponding time or service into contributions

in the job at the time of purchase, and seizes the investment. CalPERS never disclosed or

3 obtained Plaintiffs' consent io these materially different and essential contract terms.

4 CalPERS induced Plaintiffs to purchase military/air time with the promise that it would

5 result in "increased" retirement benefits. By failing to provide the increased benefits, CalPERS

6 breached the contracts. By failing to meaningfully disclose and failing to sufficiently warn

7 Plaintiffs of the potential loss of the investments, CalPERS breached material terms of the

8 contract. By denying the value of the investments to Plaintiffs who have retired on IDR,

9 including in violation of Section 21420, CalPERS has breached the purchase contracts.

10 Plaintiffs who purchased military/air time did so based on CalPERS' assurances and

11 representations that Plaintiffs paid only the employer costs associated with the increase in

12 benefits they purchased and no subsidy or amount would be transferred to the employer or to the

13 retirement system. (See, e. g ., FAC. Exh. 21. "What's the Cost?" on pp. 9-10, 32.) By including

14 additional surcharges, costs, or premiums that are attributable to an employer's unrelated costs,

15 including for IDR, unfunded liability, disability experience or other costs separate from funding

16 the cost of the Member's future service retirement, CalPERS breaches material terms of the

17 Election contracts. The contracts can be rescinded with restitution.

18 VIII. RECISSION/RESTITUTION CLAIMS

19 CalPERS defends against rescission by asserting that Plaintiffs were adequately warned

of CalPERS' potential future seizure of those monies. CalPERS' disclosures (such as they are) ar

1 1 inadequate and insufficient. They do not adequately put Plaintiffs' on notice.

12 CalPERS Text vs. Notice Required, Fiduciary Standards. CalPERS acknowledges

23 that it has the fiduciary duty to adequately and "fully inform" a Member (Demurrer. p. 14:22),

/4 but then says that it only must disclose text "which would make a reasonably prudent person

25 suspicious". After CalPERS provides text, then the Member has "a duty to investigate further,

26 and [is] charged with knowledge of matters which would have been revealed by such

27 investigation." (Demurrer, p. 15:1-3.) But what did CalPERS disclose? Was the text sufficient to

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• No notice was provided to Members that CalPERS would "transform" the service

credit certified as something other than service in the job (e.g. prior military service

or "air time") into service in the job where Plaintiffs worked at the time of purchase.

• No notice was provided to Members that CalPERS was altering vested disability

benefits of Plaintiffs who purchased military/air time and would require disabled

Plaintiffs to fund a greater portion of their IDR.

• No notice was provided to Members that CAPERS not only intended to ignore the

military/air time service credit purchased by Members who took IDR, but would also

refuse to grant them annuity benefits for the contributions they made.

The Notice Provided by CalPERS. The actual notice says the "service credit may not

benefit you." CalPERS has not provided Plaintiffs with text that warned Plaintiffs that they migh

lose the value of the money invested. At most, the text alerts the Member that he or she may get

no benefit from the service credit. But service credit is not equivalent to money.

For example, Rachel Healy made contributions in her prior Angels Camp and Tuolumne

employment. On IDR. Healy lost the value of those service credits, yet Healy is still entitled to

the value of the contributions made in Angels Camp and Tuolumne. CalPERS is paying her an

annuity for her contributions in both Angels Camp and Tuolumne even though she "lost" the

service credit associated with both.

CalPERS highlights the text that "[t]here are scenarios where some members may derive

little or no increased benefit from additional service credit." (Demurrer, p. 17:4-5.) Again,

service credit is not equivalent to value. Warning of the possibility that CalPERS may not utilize

service credit is far different than warnin g that CalPERS will seize the investment monies.

Breach of Contract & Rescission: CalPERS' Disclosures Are Inadequate and

Insufficient. Cal PERS' purchase contracts and 1DR policies are misleading, ambiguous at best,

and fail to disclose material terms. Since the limited disclosures in the military/air time purchase

contracts and the IDR policies are susceptible to two reasonable constructions, we must adopt the

one more favorable to the Member. (Russell v. Bankers Life Co. (1975) 46 Cal.App.3d 405, 415.)

Breach of Contract & Rescission: Insufficient and Misleading Disclosure in IDR

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1 Policies and Purchase Contracts; No Disclosure of Limitations, Exclusions or Offsets. In the

2 material related to IDR policies and coverage. CalPERS provided no information at the time of

3 IDR vesting, at the time of purchasing the optional service credits, or afterward that Plaintiffs'

4 50% IDR might be reduced or offset if they bought military/air time service credit. CalPERS did

5 not disclose that the limitations and exclusions caused Plaintiffs to pay more.

6 CalPERS' limited text in the military/air time purchase contracts is insufficient to indicate

7 that Plaintiffs understood, consented, waived, or agreed to modify their existing IDR benefits an

8 pay a greater share because they have purchased service credits.

9 Breach of Contract & Rescission: Disclosure Arguments. CalPERS argues that it

10 disclosed an inherent risk to Plaintiffs at the time they purchased military/air time, but CalPERS

11 has misled Plaintiffs. It fails to disclose that CalPERS "transforms" the service credit into service

12 with Plaintiffs employer, in opposition to CalPERS' requirement that Members certify that

13 military/air time is something other than service in the job. If CalPERS simply accepted that the

14 military/air time and service was outside the safety job but credited it as an investment at the

15 contracted formula, e.g. 3% at 50 (PA Safety), Plaintiffs would not lose their investment. At best,

16 CalPERS' disclosures are at odds with each other.

17 Purchase Contracts for Military/Air Time. CalPERS was promoting the investment in

18 purchased service credits especially because (i) the amount of money invested was high, (ii)

19 individuals could have waited until after age 50 and after they had earned sufficient service

/0 credit through employment before transferring their 457 funds to CalPERS and not suffered a

risk of loss, (iii) only CalPERS knew this information, and (iv) CalPERS was the acknowledged

sole provider of service retirement benefits and IDR benefits to Members.

23 CalPERS' IDR Policies. Fundamentally, CalPERS IDR program is disability insurance.

Ambiguity or uncertainty in an insurance policy is to be construed strictly against the insurer,

and most liberally in favor of the insured, particularly where the policy purports to exclude

coverage or substantially limit liability. (State Farm Mut. Auto Ins. Co. v Johnston (1973) 9

Ca1.3d 270, 274.) Exclusions and limitations must be written in plain, clear, and conspicuous

language. (Thompson v. Occidental Life Ins. (7o. (1973) 9 Ca1.3d 904, 921.) The standard is the

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understanding of the ordinary reasonable person. (Russell Y Bankers We Co., supra.) "The

essential features of any such plan [...] shall be disclosed to the insured, [.4 prior to enrollment

in any such plan. All such disclosures shall state whether or not the benefits payable under such

blanket insurance policy are subject to reduction,.... (Insurance Code, §10270.3.) The same rule

should apply here, even if to statutes (due process), IDR policies, or purchase contracts.

CalPERS failed to provide Plaintiffs with clear and plain notice of the limitations of the

coordination provision or the risk of loss. (Russell v. Bankers Life Co., supra.)"[Th take even a

partial credit the city must put the employee on notice by means of the contract of employment

or charter...." (Symington v. City of Albany, supra, at 33.)

Refund of Investments on Breach, Violation of PERL, Rescission, Restitution .

CalPERS argues that the PERE statutorily forbids refund of military/air time contributions while

continuing to pay disabled Plaintiffs' IDR allowance. (Demurrer, pp. 8:14-9:4.) This ignores that

the purchase contracts are voidable by CalPERS breach. They misstate Plaintiffs' argument.

Staying within the confines of the PERL. Plaintiffs are entitled to full value for their

investments, and no money should flow to the benefit of the employers or the pension system.

For disabled Plaintiffs, this may mean paying them the value of their contributions (by annuity or

otherwise). Outside and inside the confines of the PERE, if the purchase contracts are voidable

or invalid and rescinded, refunding their investment with interest to restore them to their original

position is proper. For all safety Plaintiffs, all unrelated employer costs included in the purchase

contracts are invalid and must be refunded, just as CalPERS would refund overpayments if it

charged a Member too much to purchase service prior to membership without in any way

impacting the Member's accrued service credits or valid contributions.

Rescission, Refund of Investments, Duty to Correct Errors not To Select. CalPERS'

duty to correct errors or omissions is mandatory.

In Rodie v. Board of, Idmintsvation (1981) 115 Cal.App.3d 559, the appellate court

interpreted Section 20180 [since renumbered as §21060] as broadly available for the correction

of errors or omissions made by employees, their employers, members or beneficiaries, or the

system, and resulting from inadvertence, oversi ght, mistake of fact, mistake of law, or other

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cause. A safety employee's inadvertent or mistaken election to buy military/air time is embraced

by the statute, even after retirement. There is no reason for treating an employee's mistaken

choice selecting a benefit (especially at an age before 50 or qualifying for a service retirement)

differently from any other mistake depriving him of benefits to which he is fairly entitled.

An employee's late recognition that he should have elected not to purchase military/air

time may thus be viewed as a failure to wait to purchase it until after qualifying for service

retirement. The Rodie court held that [§21060] is available to correct an employee's election

where such election results from "inadvertence, oversight, mistake of fact, mistake of law, or

other cause." (Rodie„s• upra, at 567.)

IX. BREACH OF FIDUCIARY DUTIES

CalPERS admits that "Iplublic pension systems owe their members a fiduciary duty of

good faith and fair dealing" (Demurrer, p. 14:18-22), but seeks to escape such duty by claiming

it informed Plaintiffs of the risks involved in their military/air time purchases. The discussion

above shows that CalPERS is breaching its fiduciary duties.

X. DENIAL OF EQUAL PROTECTION

Although CalPERS argues that the disabled firefighter and police officers (many of

whom served in the military) are greedily reaching for a windfall, (Demurrer, p. 17:23-26.), in

actuality, disabled Plaintiffs have been discriminated against and suffer a loss. They end up in a

worse position than "their counterparts". Disabled Plaintiffs receive the same IDR benefits as

other disabled Members, but lose the tens of thousands of dollars.

CalPERS asserts that Plaintiffs do not allege an equal protection violation because the

only genuinely "similarly situated" Members to whom disabled Plaintiffs can compare

themselves are those with identical amounts of service credit who earned all of it through their

labor, rather than purchasing a portion. (Demurrer, p. 17:22-18:2.) This sidesteps the issue.

As IDR is not based on age or service credit, an accurate comparison looks at the

treatment of all safety Members on IDR retirement who earned the same amount of service credi

through their jobs. but some of whom also purchased military/air time while others did not.

Suppose twin brothers start as firefighters on the same date, earn the same pay and promotions,


and make identical Member contributions. Both are disabled at age 45 in the same fire and both

retire on IDR. Suppose further that one bought 4 years of prior military time for $80,000 before

being disabled while the other did not. Each will receive an identical IDR allowance of 50% of

their final compensation. But the brother who purchased the $80,000 in military time in addition

to his employment-based contributions will be discriminated against by receiving nothing for

that additional investment (or the corollary, will be forced to fund his own IDR at a higher rate

than his twin does).

Purpose and Application of Section 21420. As discussed supra. Section 21420 was

enacted to remedy this situation and shows CalPERS' legal interpretation of Sections 21418 and

21420 is wrong. CalPERS fails to harmonize the PERI_ and see that an equal protection claim

lies for benefits denied, including under Section 21420 or the other policies that provide an

annuity for contributions made in different jobs.

"The equal protection clause also requires that the law be evenhanded as actually applied.

(McQueary v Blodgett (9 th Cir. 1991) 924 F.2d 829, 835.) While "a state may provide for

differences [in treatment] as long as the result does not amount to invidious discrimination"

(CalPERS' citation to People v Ramo (1975) 14 Ca1.3d 189, 196 in its Demurrer, p. 18:21-22),

CalPERS' actions seize tens of thousands of dollars of retirement funds from disabled Plaintiffs

without notice or compensation and clearly rise to the level of "invidious".

XI. DUE PROCESS VIOLATIONS

CalPERS simply claims that is interpreting the PERL—"Plaintiffs are seeking benefits

they do not have under the express terms of the PERU, therefore ipso facto no due process claim

may lie. (Demurrer, p. 19:5-6.). There are two alternatives: If CalPERS is right, the statutes are

unconstitutional as they fail to provide sufficient due process to support the seizure. On the other

hand, if CalPERS' interpretations are wrong, it violates due process.

XII. UNCONSTITUTIONAL IMPAIRMENT OF CONTRACT CLAIMS

CalPERS argues "there can be no constitutional impairment of contract where a vested

pension right has not matured or where a condition subsequent causes its loss." (Demurrer, p.

19:8-9.) Plaintiffs vested IDR rights have been unconstitutionally impaired by CalPERS quiet

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practice of accounting for the military/air time investments as contributions in the job that leads

to transferring them to the employer upon IDR.

XIII. PLAINTIFFS OTHER CLAIMS WITHSTAND DEMURRER

CalPERS demurs to Plaintiffs constructive trust, declaratory relief, accounting, award of

attorneys' fees and other relief causes of action on grounds they all depend on what CalPERS

contends are Plaintiffs' meritless statutory, contractual, rescission and constitutional causes of

action. If the Court finds that Plaintiffs have adequately rebutted CalPERS' Demurrer to those

foundational causes of action. its Demurrer must also fail as to the remaining causes.

XIV. CALPERS' DEMURRER TO THE CLASS DEFINITION

CalPERS demurs to the class definition also fails:

Marzec Is Not the Same As Yost. Marzec satisfied the GCA prior to filing this action.

The Court ruled on October 28. 2011, that Marzec's and Healy's claims were timely filed with

the VCGCB and before the Court. Yost was dismissed for GCA compliance issues. The Court's

ruling in Yost did not decide any of the other issues that are presented in the instant case.

Court Has Not Ruled On Delayed Accrual. CalPERS implies that the Court decided

the "delayed accrual" issue in Yost, but a careful reading shows that the Court never ruled on

"delayed accrual" in the Yost demurrer order, which would likely require an evidentiary hearing.

Facts In Complaint Assumed to Be True on Demurrer, Pled Delayed Accrual.

Plaintiffs pled facts which established that the discovery of tht, harm, the fact, and the cause of

action were only recently discovered and were subject to delayed accrual Plaintiffs have met the

requirement to plead their "delayed discovery" arguments. (McKelvey v. Boeing North American,

Inc. (1999) 74 Cal.App.4 th 151.) Because the pled facts are presumed to be true on demurrer, it

would not be appropriate to rule as a matter of law on delayed accrual at the Demurrer hearing.

Plaintiffs Request an Evidentiary Hearing on Delayed Accrual, Since a determination

of delayed accrual can have factual implication, it is not appropriate to resolve the issue of

delayed accrual on demurrer. Plaintiffs request an evidentiary hearing, at a later date, after the

legal issues have been resolved.

Background: Delayed Discovery of Harm, Cause of Harm Delays Accrual. CalPERS

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has been misapplying the relevant statutes, while at the same time representing its accounting to

Plaintiffs and all Members as accurate and lawful. It was impossible for Plaintiffs or anyone else

to discover the cause, reasons, and mechanisms behind CalPERS 1 failure to provide the correct

benefits, the transformation of the corresponding service, the resulting failure to credit or seizure

of Plaintiffs' optional service credit investments, CalPERS' refusal to pay or to refund the

investment funds, and CalPERS inclusion of unrelated employer costs in the purchase price.

Marzec has asserted that the accrual of his claims and the claims of the class were

delayed because the harm and the cause of the harm was not discovered and could not have been

discovered. He shows that CalPERS' faulty accounting, its illegal conduct, and related matters

remained hidden until at least CalPERS' initial Demurrer filing in Yost on October 15, 2010.

In Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Ca1.4 th 797 , the discovery of the product

defect was delayed and undiscoverable. delaying accrual of that cause of action. The discovery

rule postponed accrual of the statute of limitations on the newly discovered claim. They are

based on two distinct types of wrongdoing and should be treated separately in that regard. (Fox v.

Ethicon, supra, at 813-815.)

Delayed Accrual of Plaintiffs' Causes of Action. As a fiduciary and otherwise,

CalPERS has a special relationship with its Members. It actively encourages its Members to rely

on information that it provides. Because it is often the only source of information about their

pension rights and benefits, public sector workers such as Plaintiffs repose great trust and

confidence in CalPERS. CalPERS' has "a fiduciary duty to provide timely and accurate

information to its Members" on matters related to their vested pension rights. (City olDakland v.

Public Employees' Retirement System (2002) 95 Cal.App.4 th 29, 40; emphasis in original.)

Delayed Accrual Extends "Reach" of the Class. No disabled Plaintiff could have

learned of the cause of his or her harm—CalPERS faulty account, illegal conduct, etc.—until

CalPERS itself disclosed this in Yost. CalPERS never addresses these factual issues, instead

simply arguing that IDR Plaintiffs "would have known" the cause of their losses when they

received their first IDR checks. The Plaintiffs are unaware they bear added unrelated costs. The

cause and fact were not discovered until afterward, as in Fox and other delayed accrual cases.

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PLAINTIFFS' OPPOSITION TO CALPFRS' DEMURRER TO FIRST AMENDED COMPLAINT

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No Plaintiff who bought military/air time, whether later disabled or not, could know

about CalPERS' improper inclusion of unrelated employer costs in the purchase price until

CalPERS beginning discovery responses herein. CalPERS claim that their cause of action

accrued at the point of purchase is like saying Brandi Fox should have known of her impending

medical disaster as soon as she contracted to have the surgery.

Claims of Esparza and All Putative "IDR Class" Members Are Timely. As Marzec's

VCGCB claim was filed within a year of discovery of CalPERS' illegal and hidden practice, the

claims of all potential class members are timely. At the time. the GCA is satisfied. Class

certification is an appropriate time to determine the nature of the class or other class members.

On demurrer, CalPERS fails to establish that the putative "IDR class" should be limited to

Members who received their first IDR check on or after March 24, 2010. Plaintiffs asserted facts

that delayed accrual applies and individuals did not learn of their harm earlier. The extent of the

class is not a legal issue to resolve on demurrer, especially the claims of others who received

their first IDR check before March 24, 2010.

Plaintiffs Included Overpayment Claims In Their VCGCB Claims; Delayed

Discovery Makes Those Claims Timely. Plaintiffs timley put CalPERS on notice in Marzec's

pre-filing VCGCB claim and draft Complaint that CalPERS is overcharging and that Plaintiffs

are entitled to the benefit of all of their investment. See fn. 6. above. CalPERS has not refuted

this. Instead, it has simply asserts "facts", not law, that (i) that Plaintiffs knew or could have

known about the hidden overcharging at time of purchase and (ii) that text in CalPERS' purchase

contracts about "actuarial assumptions" notifies them of the overcharges. The claims are timely.

CONCLUSION

As CalPERS violates the Constitution, statutes and law (and breaches the contract) as

described in the First Amended Complaint, CalPERS' Demurrer fails.

By: ..it A. Air/de

eyh ael Jensen,

A for Plaintiffs

Dated: April 20, 2012

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superior court - john jensenjohnmjensen.com/pdf/marzec - plaintiffs' opposition to...

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