Citations
- 8 Cal. App. 5th 1184
Full opinion text
Opinion
DETJEN, J.—
OVERVIEW
Appellants, Michael R. O’Neal, Rhonda Biesemeier, and Dennis J. Nasrawi, appeal from the trial court’s grant of summary judgment against them, as well as several related evidentiary rulings. Appellants are members of the retirement system operated by respondent Stanislaus County Employees’ Retirement Association (StanCERA) through their retirement board (the board). The intervener in this case, County of Stanislaus (County), is one of several employers required to fund the StanCERA retirement system.
In the aftermath of the recent recession, StanCERA implemented several changes to the actuarial calculations used to determine how to amortize unfunded liabilities within the system and chose to utilize so-called nonvalu-ation funds, money not used to ensure the overall system was actuarially sound, to reduce or replace required employer contributions. Appellants filed suit, arguing these actions constituted a breach of the constitutional fiduciary duties placed on the board of a county retirement system. Specifically, appellants alleged the adoption of an amortization rate for unfunded liabilities which included a period of negative amortization violated state law and constitutional mandates. Appellants further argued the use of nonvaluation funds to reduce or replace required employer contributions did the same.
Upon cross-motions for summary judgment, the trial court concluded that none of the actions taken by the board were contrary to law and, finding no material issue of fact, determined summary judgment was properly granted to StanCERA and County. Appellants have appealed this ruling and the related denial of their cross-motion for summary judgment. Related to the summary judgment appeal, appellants raise several complaints with evidentiary rulings made by the trial court which led to the exclusion of appellants’ expert declarations and the introduction of evidence appellants contend should not have been considered on summary judgment.
For the following reasons we conclude the trial court correctly determined appellants were not entitled to summary judgment, but erred in determining no material issues of fact remained. We therefore reverse the grant of summary judgment to respondents and remand for proceedings consistent with this opinion. With respect to the evidentiary issues raised, we generally affirm the trial court, save for one issue, which has not been contested on appeal.
FACTUAL AND PROCEDURAL BACKGROUND
This case reaches us for the second time. Previously, we considered whether the trial court properly granted StanCERA’s demurrer. The case now returns following the grant of summary judgment to StanCERA and County. We provide a brief overview of the claims involved to frame our discussion of relevant facts and our legal analysis.
Although detailed more fully below, the claims in this case all consider whether StanCERA violated constitutional fiduciary duties when making decisions regarding the management of the retirement system. The claims break down into two general types. The first involves StanCERA’s management of certain excess-funds accounts. These accounts contained funds which are not considered when making actuarial calculations concerning the health of the retirement system. Normally, contributions and investment returns are included in the general retirement fund. However, over time, this fund can become overfunded if returns exceed expectations. These excess funds may then be separated from the general fund into special reserve funds to provide discretionary nonvested benefits to members. The first type of claim in this case questions whether money can be transferred from these funds and for what purposes such money may be used. The second type of claim involves how StanCERA accounts and corrects for investment losses and other failures to keep the overall system properly funded from an actuarial standpoint. When an actuarial accounting finds fund liabilities exceed fund assets, the difference is identified as an unfunded liability. To amortize any unfunded liability, StanCERA is obligated to increase employer contributions. It does so by adopting an amortization schedule designed to fund the unfunded liabilities within a specific period of time. The question is whether that amortization schedule can include periods of negative amortization.
StanCERA filed the initial motion for summary judgment in this case, attaching most of the evidence that was before the trial court. In explaining the history of how StanCERA managed excess funds and its unfunded liabilities, up through and including the currently contested transactions, StanCERA submitted the declaration of Kathleen Herman, operations manager for StanCERA since September 10, 2011, and supporting documents. Excepting certain facts concerning advice given to the board and the import of adopting a negative amortization rate, appellants generally conceded the facts identified by StanCERA were undisputed. Appellants, however, contested their relevance, legal meaning, or unstated implications.
I. Use and Management of Excess Funds Pre-2007.
Up through 2007, StanCERA appears to have had reasonably good returns on their investments. There were instances of returns exceeding expectations. As a result, a multitude of special reserve funds were created. These included reserves to pay a $5,000 death benefit, a legal contingency reserve, a tier 3 disability reserve, a contingency reserve, a reserve to make additional payments under Government Code section 31691 et seq. (the Health Insurance Reserve), and a reserve to pay supplemental cost of living increases authorized by section 31874.3 (the Special COL Reserve). These reserves totaled more than $169 million, with nearly $158 million in the Health Insurance Reserve and nearly $3 million in the Special COL Reserve. These fund reserves were generally used, as intended, to make additional health insurance payments and annually determined cost of living adjustments. In 2007, the general retirement fund showed an overall net increase of nearly $188 million.
II. Events From 2008 Through the Complaint.
In 2008, StanCERA began to experience investment losses from the global downturn. Compounding these losses, StanCERA learned that its prior actuary had made mistakes that had overinflated the actuarial calculations for the retirement fund. In 2008, the fund showed an overall net decrease of approximately $150 million. This caused the amount of unfunded liabilities to increase from around $41 million to around $232 million and the overall funding ratio to drop from 96.6 percent to 85 percent. As a result of these changes, County was faced with an actuarial accounting suggesting it increase its contributions from approximately $20 million (in 2006) to approximately $45 million (in 2008) to properly cover its employer obligations.
By the time StanCERA was working to set County’s contribution levels for the 2009-2010 fiscal year, the actuarially recommended contribution had risen to over $59 million; an increase of $22.7 million over the required contribution for the 2008-2009 fiscal year. At the same time, County was suffering from a substantial decrease in revenue. County informed StanCERA that it had experienced a $17 million decrease in its discretionary revenue and had been forced over the previous two years to issue layoffs, implement hiring freezes, and reduce services to balance its budget. County asked StanCERA to consider alternative ways to alleviate the burden substantially increasing its contributions would have on StanCERA members currently working for County and County itself.
StanCERA ultimately decided to modify certain accounting procedures and transfer various funds in order to work with County on its concerns. Thus, at the board’s April 28, 2009, meeting, the board voted to make three changes affecting the 2009-2010 contribution levels.
First, the board voted to change StanCERA’s amortization schedule for unfunded liabilities to a 30-year level percent of pay amortization rather than the 20-year level dollar amortization initially proposed. This effected two changes in the amortization schedule. Most obviously, it extended the amount of time to amortize the unfunded liability from 20 years to 30 years, thus lowering the payments required each year. It also changed how to calculate the payments owed each year. Under a level dollar amortization schedule, the same amount is paid each year such that the amount owed steadily decreases until eliminated. Under a level percent of pay schedule, the amount owed each year is tied to the size of County’s payroll and the schedule takes into account expected payroll growth over time. Under such a schedule, payments will increase over time and payments early in the schedule may be insufficient to pay down the principal. Indeed, under a level percent of pay schedule, if the amortization period is 17 years or longer, at least the first year’s payment will be less than the interest on the unfunded amount. If the amortization period is reset regularly, as it was set to do for a three-year period under the amendments, this could result in a schedule which could never repay the existing debt. By utilizing both a 30-year period and a level percent of pay schedule, StanCERA adopted a schedule ensuring that after 10 years the funding ratio for the overall plan would be 10 percent lower than it would have been under the level dollar schedule.
Second, the board transferred $50 million from the nonvaluation Health Insurance Reserve to valuation reserves. These funds were directly credited to the valuation assets of the overall fund. The increase in valuation assets reduced the overall unfunded liability such that, under the actuarial method adopted to amortize unfunded liabilities, County’s payments were reduced by approximately $2.9 million.
Third, the board transferred an additional $10 million from the nonvaluation Health Insurance Reserve to reduce the payments owed by County under the amortization schedule for unfunded liabilities. This transfer was a dollar for dollar reduction in the payments owed by County.
The board again faced employer budget concerns when it calculated employer contributions for both the 2010-2011 and 2011-2012 fiscal years. With respect to the 2010-2011 fiscal year, StanCERA received a letter from County noting a projected $15.5 million increase in its obligations, explaining that, despite its efforts, County’s budget projected a $20 million shortfall, and asking for additional relief with respect to County’s employer contribution payments. StanCERA also received a letter from the City of Ceres noting its revenues had decreased by 20 percent but the proposed employer contributions were projected to increase from 9.58 percent of payroll to 23.21 percent of payroll, and requesting relief. In response, the board voted to transfer $21.4 million (apparently divided as $20 million from the Health Insurance Reserve and $1.4 million from the Special COL Reserve) to reduce the employer payments owed under the amortization schedule for unfunded liabilities. This action was the same type of dollar for dollar reduction in payments authorized previously. At the same time, the board changed the amortization period for the unfunded liabilities to 25 years, although that still resulted in a payment which did not cover the interest accruing on the unfunded liability debt.
With respect to the 2011-2012 fiscal year, StanCERA received another letter from County. Noting it was facing another $28 million budget shortfall, County requested StanCERA authorize the use of $12.6 million remaining in the nonvested benefit reserve funds to again reduce County’s retirement costs. StanCERA also received a letter from the Stanislaus County Superior Court requesting the board’s consideration in offsetting significant proposed increases to the employer contributions and noting that ‘“[wjithout a onetime offset, the impact on the Court will be financially devastating.” The board again elected to make a transfer of nonvaluation reserve funds, this time in the amount of $14.3 million, to directly offset the employer payments owed to amortize unfunded liabilities. At the same time, the board again adopted a 25-year level percent of pay amortization schedule, resetting the amortization calculations.
Since 2012, the board has further reduced the amortization period for its unfunded liabilities, adopting a 24-year period in 2012 and a 23-year period in 2013, but continues to use a level percentage of pay system.
III. The Initial Operative Complaint.
Appellants filed a lawsuit over the board’s decisions. As the case reached us previously, appellants alleged four causes of action for various breaches of fiduciary duty. Three of these breaches allegedly occurred when StanCERA transferred funds from the nonvaluation reserves to either the valuation reserves or to cover employer contribution obligations for unfunded liabilities. The accused transfers were the $10 million (claim 1) and $50 million (claim 2) transfers in 2009, and the $21.4 million (claim 4) transfer in 2010. For each of these claims, appellants asserted the transfer breached both common law and constitutional fiduciary duties, resulting in lost assets, lost investment earnings, and reduced funding ratios. The fourth breach (claim 3) allegedly occurred when StanCERA adopted the 30-year level percentage of pay amortization schedule. Appellants alleged this decision violated both statutory and constitutional fiduciary duties as well as section 31453.5, resulting in the loss of trust assets and investment earnings, and reducing the plan’s funding ratio.
IV. O’Neal I.
Appellants’ complaint was initially dismissed on demurrer. (O’Neal v. Stanislaus County Employees’ Retirement Assn. (Apr. 4, 2012, F061439) [nonpub. opn.J (O’Neal I).) On appeal, we reversed. In our discussion, we made three observations relevant to this appeal. First, with respect to all four claims raised, we concluded the violation of a fiduciary duty resulting in harm to a trust’s corpus was a sufficient injury to support a cause of action. In reaching this conclusion, we noted appellants had alleged, but still needed to prove, the breach of certain fiduciary duties. Second, with respect to appellants’ three claims relating to the loss of supplemental benefits due to allegedly improper transfers of funds, we observed the breach of fiduciary duty claim raised in that context would turn on whether StanCERA’s discretionary decisions were consistent with the board’s constitutional duty to act at all times for the benefit of StanCERA’s members and not on the fact the benefits were not contractually required. The unproven allegation that StanCERA breached that fiduciary duty was sufficient to support a cause of action. Third, we recognized the continuing nature of StanCERA’s allegedly improper conduct and need for corrective action was sufficient to support an equitable claim for relief. In light of these narrow observations, we concluded the trial court incorrectly determined no cause of action for injunctive relief had been pled and remanded for further proceedings.
V. The Trial Court’s Summary Judgment and Evidentiary Rulings.
Following remand, appellants filed a second lawsuit asserting the 2011 transfer of funds violated common law and constitutional fiduciary duties and caused damages in the same manner as the 2009 and 2010 transfers. All parties then moved for summary judgment on all five claims. As part of these proceedings, several related issues were raised. Appellants moved to strike evidence submitted by StanCERA on the ground appellants had been prevented from seeking discovery on that same evidence. And StanCERA and County moved to strike portions of the expert declarations submitted by appellants on foundational and gatekeeping grounds.
The trial court granted summary judgment in favor of StanCERA and County and denied appellants’ motion. The court noted how “counsel all take the strong position that trial is not necessary and that the main facts are so well established that this matter should on motion be decided as a matter of law” and, upon its own review, reached “the opinion that there are no material disputed issues of fact which would prevent this court from” granting summary judgment. The trial court proceeded to recount appellants’ legal argument and took judicial notice of “the ‘true signification’ of the terms ‘amortization’ and ‘negative amortization’ ” before considering the legal implication of the facts asserted. With respect to this analysis, the trial court determined “that Stan[CERA] discharged its fiduciary duties in all respects and in no way abused its discretion” and “that the conduct of Stan[CERA] fully conformed to the requirements of the California Constitution, statutes, and controlling authorities.” In doing so, the court found unpersuasive the allegation StanCERA violated article XVI, section 17, subdivision (a) of the California Constitution; any provisions of the County Employees Retirement Law of 1937 (§ 31450 et seq.), including section 31453.5; and any allegation StanCERA violated its fiduciary duties by acting “ ‘imprudently.’ ” As the court explained, even if StanCERA’s decisions were not “quasi-legislative decisions of the board to which courts give great deference,” the evidence provided “no basis for determining that the board breached its fiduciary duties, abused its discretion, or violated a requirement of the California Conshtuhon, statutes, or applicable authorities.”
As part of its analysis, the trial court rejected appellants’ expert declaration from William Sheffier. The court found Sheffier failed to review the circumstances then prevailing when the board made its decisions, did not explain why he reached his conclusions, and failed to support his opinions through any established standards or any consensus in any relevant expert community. The court also noted Sheffier’s opinion had been contradicted by his own deposition testimony and contradictory case law. The court further rejected appellants’ argument seeking to exclude evidence from individual board members regarding the circumstances prevailing at the time the board made its decisions, finding exclusion of deliberative process evidence was unnecessary in light of the presumption the board intends the natural and reasonable effect of their enactments. Finally, the court concluded the board was legally permitted to consider the employment interests of StanCERA’s active members in reaching its decisions.
This appeal timely followed.
DISCUSSION
I. Standards of Review.
Appellants contend the trial court wrongly denied their motion for summary judgment and wrongly granted summary judgment in StanCERA’s favor. Summary judgment is appropriate only when “all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” (Code Civ. Proc., § 437c, subd. (c).) “ ‘To determine whether triable issues of fact do exist, we independently review the record that was before the trial court ....’” (Elk Hills Power, LLC v. Board of Equalization (2013) 57 Cal.4th 593, 606 [160 Cal.Rptr.3d 387, 304 P.3d 1052].) We review the evidence in the light most favorable to the losing party and resolve any evidentiary doubts and ambiguities in their favor. (Martinez v. Combs (2010) 49 Cal.4th 35, 68 [109 Cal.Rptr.3d 514, 231 P.3d 259].)
Appellants further contend the trial court improperly excluded expert testimony favoring appellants’ position while admitting inadmissible evidence favoring StanCERA. We review a ruling on evidentiary objections for abuse of discretion. (See, e.g., Great American Ins. Cos. v. Gordon Trucking, Inc. (2008) 165 Cal.App.4th 445, 449 [81 Cal.Rptr.3d 65]; Powell v. Kleinman (2007) 151 Cal.App.4th 112, 122 [59 Cal.Rptr.3d 618]; see also Howard Entertainment, Inc. v. Kudrow (2012) 208 Cal.App.4th 1102, 1122-1123 [146 Cal.Rptr.3d 154] (cone. opn. of Turner, P. J.) [evidentiary issues in summary judgment proceedings reviewed for abuse of discretion under the majority rule].) The party challenging the ruling has the burden to establish an abuse of discretion. (DiCola v. White Brothers Performance Products, Inc. (2008) 158 Cal.App.4th 666, 679 [69 Cal.Rptr.3d 888].) We interfere with the lower court’s judgment only if the party can show that no judge could reasonably have made the same judgment. (Ibid.; see Lockhart v. MVM, Inc. (2009) 175 Cal.App.4th 1452, 1456 [97 Cal.Rptr.3d 206]; Jennifer C. v. Los Angeles Unified School Dist. (2008) 168 Cal.App.4th 1320, 1332 [86 Cal.Rptr.3d 274] [under abuse of discretion standard, court’s decision left undisturbed unless it exceeds the bounds of reason].)
II. The Relevant Legal Principles.
This case is governed by several related legal principles. We begin by laying out these principles before applying them to the facts of the case.
A. CERL.
In O’Neal /, we provided a statutory background concerning the laws covering county retirement systems. We generally repeat that overview here for context, providing additional information regarding provisions and issues relevant to the disputes now before us.
StanCERA was formed and operates under the provisions of the County Employees Retirement Law of 1937 (CERL), section 31450 et seq. “Under CERL an employee’s pension is a combination of a retirement annuity based on the employee’s accumulated contributions supplemented by a pension established with county contributions sufficient to equal a specified fraction of the employee’s ‘final compensation.’ [Citations.]” (Ventura County Deputy Sheriffs’ Assn. v. Board of Retirement (1997) 16 Cal.4th 483, 490 [66 Cal.Rptr.2d 304, 940 P.2d 891].) Retirement benefits “are funded by employer contributions, employee contributions, and investment earnings on monies deposited in the fund.” (79 Ops.Cal.Atty.Gen. 95, 96 (1996).)
The persons who may qualify as annuitants or beneficiaries under the retirement system of a CERL county constitute that county’s retirement association. (§ 31474.) The association is governed by a board, usually (and apparently is in this case) called the board of retirement. (See § 31459, subd. (c).) The board is required to recommend to the county’s board of supervisors a rate of contribution by employees and by the county as employer, at regular intervals, after considering past and expected experience of the association in paying benefits. (See § 31453, subd. (a).) The board of supervisors is then required to establish an appropriation to pay the county’s contribution to the pension fund. (§§ 31581, 31584.)
The retirement board’s establishment of a contribution rate is to be based on the valuation of the “assets and liabilities of the retirement fund.” (§ 31453, subd. (a).) This valuation “shall be conducted under the supervision of an actuary” “at intervals not to exceed three years.” {Ibid.) The valuation “shall cover the mortality, service, and compensation experience of the members and beneficiaries, and shall evaluate the assets and liabilities of the retirement fund.” {Ibid.) The retirement board uses these actuarial evaluations of the system, as modified over time, to establish the county’s annual pension contribution rate, which is then funded by the county’s board of supervisors. (See § 31584.)
In determining the county’s contribution rate, a board of retirement may adopt, and StanCERA has adopted, a statutory “normal contribution rate.” That normal rate “shall be computed as a level percentage of compensation which, when applied to the future compensation of the average new member entering the system, together with the required member contributions, will be sufficient to provide for the payment of all prospective benefits of such member.” (§ 31453.5.)
Relevant to this case, these payments were and continue to be made in full by the relevant employers. However, various circumstances, including an actuarial error and insufficient investment returns, led to a situation where these payments were not sufficient to cover the actuarial liabilities for the fund. To the extent the normal rate does not cover the total liability determined by the actuaries, the board must recommend an additional assessment that will amortize “[t]he portion of liability not provided by the normal contribution rate . . . over a period not to exceed 30 years.” (§ 31453.5.)
As noted, one source of funds for the payment of retirement benefits is the income from investment of previous contributions to the retirement fund. When the board of retirement determines the liabilities and assets of the fund, it (guided by its actuary) makes certain assumptions about liabilities (including the age and final compensation of employees when they retire) and assets (including the interest or rate of return on existing assets as a source of funds to pay benefits). If the investment earnings during a particular year exceed the amount credited by the board to contributions and reserves for that year, these excess earnings “shall remain in the fund as a reserve against deficiencies in interest earnings in other years, losses on investments, and other contingencies, except that, when such surplus exceeds 1 percent of the total assets of the retirement system, the board may transfer all, or any part, of such surplus in excess of 1 percent... for the sole purpose of payment of the cost of the benefits described in this chapter.” (§ 31592.2, subd. (a).) Among the “benefits described in this chapter” {ibid.) for which excess earnings may be used is the payment of “all, or a portion, of the premiums, dues, or other charges for health benefits” for retirees {id., subd. (b)). Retirees have no vested interest in the payment of these supplemental benefits, which are provided at the option of the county. (70 Ops.Cal.Atty.Gen. 1, 4 (1987).) Another of these nonvested benefits is a potential annual increase in cost of living payments when the statutory amount is less than the calculated increase in cost of living for the year. (§ 31874.3, subd. (a).)
B. California’s Constitution: article XVI, section 17.
As a public pension or retirement system instituted under CERL, StanCERA is also subject to several provisions in the California Constitution guiding the operation of such funds. In relevant part, article XVI, section 17 of the California Constitution provides:
“Notwithstanding any other provisions of law or this Constitution to the contrary, the retirement board of a public pension or retirement system shall have plenary authority and fiduciary responsibility for investment of moneys and administration of the system, subject to all of the following:
“(a) The retirement board of a public pension or retirement system shall have the sole and exclusive fiduciary responsibility over the assets of the public pension or retirement system. The retirement board shall also have sole and exclusive responsibility to administer the system in a manner that will assure prompt delivery of benefits and related services to the participants and their beneficiaries. The assets of a public pension or retirement system are trust funds and shall be held for the exclusive purposes of providing benefits to participants in the pension or retirement system and their beneficiaries and defraying reasonable expenses of administering the system.
“(b) The members of the retirement board of a public pension or retirement system shall discharge their duties with respect to the system solely in the interest of, and for the exclusive purposes of providing benefits to, participants and their beneficiaries, minimizing employer contributions thereto, and defraying reasonable expenses of administering the system. A retirement board’s duty to its participants and their beneficiaries shall take precedence over any other duty.
“(c) The members of the retirement board of a public pension or retirement system shall discharge their duties with respect to the system with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with these matters would use in the conduct of an enterprise of a like character and with like aims.”
1. History of relevant amendments.
The relevant portions of California Constitution article XVI, section 17 reached their current form through two ballot initiatives. The first, Proposition 21, passed in 1984 in an apparent response to the emerging financial markets of the 1980’s. Proposition 21 introduced the principle that “assets of a public pension or retirement system are trust funds” that “shall be held for the exclusive purposes of providing benefits to participants in the pension or retirement system and their beneficiaries and defraying reasonable expenses of administering the system.” (Ballot Pamp., Primary Elec. (June 5, 1984) text of Prop. 21, p. 25, italics omitted.) In addition, it identified several ways in which the fiduciary of those trust funds must act. These included that the fiduciary shall discharge his or her duties with respect to the system “solely in the interest of, and for the exclusive purposes of providing benefits to, participants and their beneficiaries, minimizing employer contributions thereto, and defraying reasonable expenses of administering the system,” and “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with these matters would use in the conduct of an enterprise of a like character and with like aims.” {Ibid., italics omitted.)
In general, Proposition 21 was presented as an amendment which would “delete the specific constitutional restrictions and limitations on the purchase of corporate stock by public retirement systems” that was currently in place, and place within the Legislature authorization to make any desired investments “subject to specified standards of fiduciary responsibility” while also specifying retirement assets as trust funds “held for specified purposes.” (Ballot Pamp., Primary Elec., supra, analysis of Prop. 21 by Legis. Analyst, p. 24.) Indeed, the argument in favor of the amendment explained: “Proposition 21 was written to give public pension assets full constitutional protection as trust funds. It guarantees that neither the Governor nor future Legislatures will ever be able to use this money for other purposes.” {Id., argument in favor of Prop. 21, p. 26.) The argument then explained that the controlling rules, “designed in a different era, often defeat retiree interests today” due to “the recent major changes in the national financial markets: accelerated deregulation, an expanding financial services industry, and many new, special-purpose investment instruments.” {Ibid.) Proposition 21 was offered to correct this “unanticipated problem by making retiree and pension plan benefits the only proper investment criteria.” (Ballot Pamp., Primary Elec., supra, argument in favor of Prop. 21, p. 26.) It identified four principles to its goal: making assets trust funds such that ‘“apart from reasonable administrative costs, the only purpose for which these trust assets can be used is the delivery of retirement benefits”; enacting the ‘“sole and exclusive purpose rule,” which obligates trustees to perform their duties solely in the interest of plan beneficiaries; making trustees personally liable if they invest without exercising “the degree of care expected of a prudent person, who is knowledgeable in investment matters”; and retaining diversification requirements. (Ibid., italics omitted.)
The second major ballot initiative affecting California Constitution, article XVI, section 17, Proposition 162, passed in 1992 in an apparent response to fears that the Legislature was raiding pension funds to balance their budget. Proposition 162 moved control of pension funds and actuarial services from the Legislature to pension systems by ensuring retirement boards shall have “the sole and exclusive fiduciary responsibility over the assets of the public pension or retirement system” and the “sole and exclusive responsibility to administer the system in a manner that will assure prompt delivery of benefits and related services to the participants and their beneficiaries.” (Ballot Pamp., Gen. Elec., supra, text of Prop. 162, p. 70, italics omitted.) It also introduced the requirement that the board’s “duty to its participants and their beneficiaries shall take precedence over any other duty.” (Ibid., italics omitted.)
The analysis provided for Proposition 162 explained that the current constitutional requirements mandated retirement boards “use fund assets to: (1) provide benefits to members of the system and their beneficiaries, (2) minimize employer contributions, and (3) pay reasonable administrative costs.” (Ballot Pamp., Gen. Elec., supra, analysis of Prop. 162 by Legis. Analyst, p. 37.) The proposed amendment would require boards to continue to honor these three mandates, but would specify “that each board is to give highest priority to providing benefits to members and their beneficiaries,” potentially resulting in higher costs to employers “if board decisions increase benefits without equal consideration to the cost for those benefits.” (Ibid.) The arguments in favor of the proposition focused less on these issues and more on arguing the proposition would “STOP POLITICIANS FROM USING PUBLIC PENSION FUNDS TO BAIL THEM OUT WHEN THEY FAIL TO KEEP GOVERNMENT SPENDING UNDER CONTROL” (id., rebuttal to argument against Prop. 162, p. 39), claiming it was “morally wrong and unfair to take [the dignity and security of an earned pension] away from [retirees]” {id., argument in favor of Prop. 162, p. 38, boldface omitted).
2. Cases considering California Constitution, article XVI, section 17.
Prior to the enactment of Proposition 162, California Constitution, article XVI, section 17 was partially analyzed in two applicable cases: City of Sacramento v. Public Employees Retirement System (1991) 229 Cal.App.3d 1470 [280 Cal.Rptr. 847] (City of Sacramento) and Claypool v. Wilson (1992) 4 Cal.App.4th 646 [6 Cal.Rptr.2d 77] (Claypool).
In City of Sacramento the court considered whether conduct by the board of the Public Employees’ Retirement System (PERS) in classifying overtime pay owed under the Fair Labor Standards Act of 1938 (29 U.S.C. § 201 et seq.) as nonovertime compensation was permissible and in accord with California Constitution, article XVI, section 17’s duty to minimize employer contributions. (City of Sacramento, supra, 229 Cal.App.3d at pp. 1475-1476, 1493.) The court found the challenged classification did not violate section 17 despite increasing employer costs because, even if a duty to minimize employer contributions were found, it could not ‘“be construed to require PERS to manage the retirement system in a way which would favor an employer over the beneficiaries to whom it owes a fiduciary duty.” {City of Sacramento, supra, at p. 1493.) To reach this conclusion, the court relied on the designation of retirement funds as trust funds and the common law, ‘“well-established rules of the law of trusts,” which hold that ‘“a trustee’s primary duty of loyalty is to the beneficiaries of the trust” and must be exercised “ ‘to the exclusion of the interest of all other parties.’ ” {Id. at p. 1494.) In light of the controlling duty of loyalty, ‘“a ‘fiduciary cannot contend “that although he had conflicting interests, he served his masters equally well or that his primary loyalty was not weakened by the pull of his secondary one.” ’ ” {Ibid.) In other words, any duty the board may have to minimize employer contributions “may not take precedence over its duty to the beneficiaries of the system.” {Ibid.) Thus, while not holding the board was required to act in the manner it did, the court concluded no competing constitutional provision could require the board to act in a manner detrimental to its beneficiaries. {Ibid.)
Claypool involved a dispute arising when statutory modifications to PERS repealed three previously funded supplemental cost of living programs and directed the funds previously attributable to those programs be used to offset contributions otherwise due from PERS employers. (Claypool, supra, 4 Cal.App.4th at p. 652.) One of the arguments in that case claimed transferring funds previously designated for cost of living payments to cover employer contributions violated the constitutional mandate that “assets of a public pension or retirement system are trust funds.” (Ibid.; see id. at pp. 657-658, 673.)
In a lengthy historical recitation of changes to the PERS system, the court noted that the cost of living funds had been initially diverted from excess funds contained in a deficiency-reserve account before being redirected through multiple funds designed to assist pension payments with retaining their purchasing power over time. (Claypool, supra, 4 Cal.App.4th at pp. 653-658.) The court found the valid repeal of the statutes diverting these cost of living funds “created a unique fund” in which the “moneys were not previously counted toward the actuarial soundness of PERS, were not reserved to underwrite the actuarial soundness of the basic pension benefits, and are not now tied to the provision of any special benefits required to be paid.” (Id. at p. 671, fn. omitted.)
In light of this history, the court readily rejected the constitutional trust fund argument without delving heavily into the meaning of California Constitution, article XVI, section 17. According to the court, use of funds already held by the PERS trust to cover employer obligations could not be construed as a raid upon the trust itself, in violation of the mandate that trust funds be used solely for the delivery of retirement benefits, because “the money has not been diverted from the system and is to be used for the purposes authorized by the California Constitution.” (Claypool, supra, 4 Cal.App.4th at p. 673, fn. omitted.) In other words, the funds always remained available to pay retirement benefits. As the court explained, the “use of these funds to meet the employers’ continuing funding obligation is no more proscribed by California Constitution^] article XVI, section 17 . . . than is the use of earnings attributable to the employer accounts of the PERS fund for the same purpose.” (Id, at p. 674.) The court did not, however, consider whether such use of funds violated any fiduciary duties, noting such a claim was a digression given the case involved legislative limitations and not the actions of fiduciaries. (Id, at p. 673, fn. 9.)
Following enactment of Proposition 162, Bandt v. Board of Retirement (2006) 136 Cal.App.4th 140 [38 Cal.Rptr.3d 544] (Bandt) again looked at California Constitution, article XVI, section 17. The dispute in Bandt developed when the County of San Diego agreed to increase county pension benefits by an actuarial value of approximately $1.1 billion. {Bandt, supra, at p. 143.) To offset this rise in costs, the county decided to voluntarily reduce the unfunded liability in the pension fund through the issuance of $550 million in bonds. {Id. at p. 144.) There was a delay due to litigation in depositing these funds, causing the retirement fund’s annual valuation to not include that sum in its assets and resulting in an increase in the amount of the employer contribution necessary to support the fund. {Ibid.) In response, after the deposit was made, the county asked for an interim evaluation which would consider the deposited funds as assets and, relatedly, reduce the county’s employer contribution requirement. {Ibid.) The lawsuit was filed after this request was granted, on the premise that the retirement board had a constitutional duty to maximize the assets of the trust fund and, therefore, could not reduce the previously set employer contribution through an interim valuation. (Id. at p. 145.) In a bench trial on this claim, the trial court found the board had acted in the interest of its members in conducting the interim evaluation and setting a longer repayment period in light of the fact the county increased benefits, paid off half of the liability for that increase in one year, and faced the prospect of having to lay off employees due to financial difficulties. {Ibid.)
The appellate court affirmed this conclusion. Looking at California Constitution, article XVI, section 17, the court found subdivision (b)’s mandate that the retirement board’s “duty to its participants and their beneficiaries shall take precedence over any other duty” was ambiguous as to the manner in which that duty must be prioritized. (See Bandt, supra, 136 Cal.App.4th at p. 151.) Looking at the fact Proposition 162 had been proposed as a response to a bill permitting the Legislature to use reserve funds in a retirement system to help balance the budget and that the Legislative Analyst noted benefits were being placed as the duty of highest priority, the court readily found Proposition 162 “intended to provide that a retirement board’s duty to its participants and members was paramount, and thus must be placed above any purpose to minimize employer contributions.” (Bandt, supra, at p. 154.) However, the court found ambiguity regarding whether, under Proposition 162, a retirement board had “a secondary duty to minimize employer contributions” which must be subjugated to the primary duty. (Bandt, supra, at p. 155.) It also found ambiguity concerning the “constitutional standard by which this court should determine whether a retirement board has violated its constitutional mandate by acting in a manner contrary to the interest of its members,” analogizing the issue to corporate governance’s deferential business judgment rule before refusing to resolve the issue. {Id. at p. 156.)
Regardless of any ambiguities, the appellate court ultimately found the board did not violate their duty to act in the best interests of their members. The court’s conclusion turned on facts demonstrating the board’s actions caused no material harm to the retirement fund’s members under any applicable standard of review and, in fact, acted in a manner benefiting members. Although the plan’s unfunded liability increased due to the board’s actions, this was not a de facto demonstration of harm to the membership because the rise occurred due to an overall increase in benefits. (Banclt, supra, 136 Cal.App.4th at p. 157.) Likewise, utilizing an interim evaluation to recalculate payments did not create a material harm because the evidence demonstrated the 15-year timeline adopted for amortizing the recalculated unfunded liability “ ‘would allow for all current unfunded liabilities to be funded on average by the time needed to make payments to the current active employees,’ ” meaning no benefits would be reduced. (Ibid.) With respect to actual benefits to the membership, accepting the interim valuation would likely cause the county to trust that the board was considering its potential duty to minimize employer contributions when possible and would preserve up to 1,500 jobs held by members. (Id. at pp. 158-159.) This final consideration was permissibly considered because “a member’s interest as an employee is clearly related to his interest as a pension beneficiary” and ‘“job losses could also negatively impact the financial condition of the retirement fund.” (Id. at p. 159.) In light of these findings, there was no conduct taken which violated the board’s constitutionally defined fiduciary duties.
C. The law of trusts.
Under the Probate Code, the term “ ‘[tjrust’ ” excludes ‘“[tjrusts for the primary purpose of paying debts, dividends, interest, salaries, wages, profits, pensions, or employee benefits of any kind.” (Prob. Code, § 82, subd. (b)(13).) As an early version of this statute was added to the Probate Code by Statutes 1983, chapter 842, section 21, page 3024, the statutory definition excluded trusts for paying pension funds prior to enactment of Proposition 21 and its constitutional definition of public pensions as trust funds. (Cal. Law Revision Com. com., 52 West’s Ann. Prob. Code (2002 ed.) foil. § 82, pp. 78-79.) Despite this timing, no court has expressly concluded all provisions of the Probate Code governing trusts also govern retirement boards. Although several courts have cited statutory provisions for support of their analysis, at least one court has rejected the request to invoke certain statutory provisions regarding the removal of trustees. (See Meyers v. The Retirement Fund of Federated City Employees (2014) 223 Cal.App.4th 1201, 1210-1212 [167 Cal.Rptr.3d 725] [finding no statutory or common law reason to apply Prob. Code provisions for removal of trustees to retirement fund].) What appears consistent throughout the relevant case law, however, is that the designation of retirement funds as trust funds and the express recognition of fiduciary duties related to management of those funds adds weight to the authority of the common law and statutory doctrines concerning actions taken by those overseeing trust funds. (See 13 Witkin, Summary of Cal. Law (10th ed. 2005) Trusts, § 6, p. 572 [‘“A pension plan creates two relationships: (a) a contractual relationship between the employer and the employee, and (b) a trust relationship between the pensioner and the trustee administering the plan.”].)
We agree with this willingness to consider and apply well-settled principles governing trust fiduciaries. Application of such principles ensures the amendments made by Proposition 21 designating public pension and retirement funds as trust funds are given their full weight in light of the history leading to their adoption. At the same time, application of these principles in the context of the fiduciary duties identified in California Constitution, article XVI, section 17 comports with how the Probate Code itself views Probate Code section 82’s definitional exclusion of pension funds from the trust laws. (Prob. Code, §§ 15002 [‘“Except to the extent that the common law rules governing trusts are modified by statute, the common law as to trusts is the law of this state.”], 15003, subd. (c) [‘“Nothing in this division or [Probate Code s]ection 82 is intended to prevent the application of all or part of the principles or procedures of this division to an entity or relationship that is excluded from the definition of ‘trust’ provided by [Probate Code s]ection 82 where these principles or procedures are applied pursuant to statutory or common law principles, by court order or rule, or by contract.”].) To the extent section 17 directs fiduciaries to behave in a manner consistent with the common law or the Probate Code, the law of trusts is a valuable tool to consider.
While we need not identify every duty which may fall within this conclusion, it is clear from the text of California Constitution, article XVI, section 17 that, at a minimum, we must review the duties of trust fiduciaries to act for the benefit of and hold trust funds for their beneficiaries. (See Cal. Const., art. XVI, § 17, subds. (a), (b) [identifying the following fiduciary responsibilities: ‘“the sole and exclusive fiduciary responsibility over the assets of the public pension or retirement system”; ‘“sole and exclusive responsibility to administer the system in a manner that will assure prompt delivery of benefits and related services to the participants and their beneficiaries”; holding funds ‘“for the exclusive purposes of providing benefits to participants in the pension or retirement system and their beneficiaries and defraying reasonable expenses of administering the system”; discharging duties ‘“solely in the interest of, and for the exclusive purposes of providing benefits to, participants and their beneficiaries, minimizing employer contributions thereto, and defraying reasonable expenses of administering the system”; and determining the ‘“board’s duty to its participants and their beneficiaries shall take precedence over any other duty”].)
Duties constraining powers granted by the trust instrument.
As an initial guideline, a trustee “has a duty to administer the trust, diligently and in good faith, in accordance with the terms of the trust and applicable law.” (Rest.3d Trusts, § 76; accord, Prob. Code, § 16000 [providing the “trustee has a duty to administer the trust according to the trust instrument” and trust law].) “Because of this combination of duties, the fiduciary duties of trusteeship sometimes override or limit the effect of a trustee’s duty to comply with trust provisions; conversely, the normal standards of trustee conduct prescribed by trust fiduciary law may, at least to some extent, be modified by the terms of the trust.” (Rest.3d Trusts, § 76, com. b, p. 69.) In cases where a trustee is given discretionary powers, the trustee’s exercise of that discretion “is subject to supervision by a court only to prevent abuse of discretion.” (Rest.3d Trusts, § 87.) However, the “grant of a power to a trustee, whether by the trust instrument, by statute, or by the court, does not in itself require or permit the exercise of the power. The exercise of a power by a trustee is subject to the trustee’s fiduciary duties.” (Prob. Code, § 16202; accord, Rest.3d Trusts, § 87, com. a, pp. 242-243.) Indeed, the Restatement Third of Trusts comments that “an abuse of discretion occurs when a trustee acts from an improper even though not dishonest motive, such as when the act is undertaken in good faith but for a purpose other than to further the purposes of the trust or, more specifically, the purposes for which the power was granted.” (Rest.3d Trusts, § 87, com. c, p. 244.)
With this guidance in mind, we turn to the most stringent duty imposed by the law of trusts, the duty of loyalty. According to the Restatement Third of Trusts section 78, subdivision (1), “Except as otherwise provided in the terms of the trust, a trustee has a duty to administer the trust solely in the interest of the beneficiaries.” (Accord, Prob. Code, § 16002, subd. (a) [“The trustee has a duty to administer the trust solely in the interest of the beneficiaries.”].) Although this duty is frequently invoked as a protection against creating conflicts between a trustee’s fiduciary duties and personal interests, it is also understood to protect against improper influence generally. Thus, actions by a trustee may be considered improper if they are taken “either for the purpose of benefiting a third person (whether or not a party to the transaction) rather than the trust estate or for the purpose of advancing an objective other than the purposes of the trust.” (Rest.3d Trusts, § 78, com. f, p. 109; accord, Prob. Code, § 16004, subd. (a) [“The trustee has a duty not to use or deal with trust property for the trustee’s own profit or for any other purpose unconnected with the trust . . . .”].) This duty of loyalty strongly parallels provisions of California Constitution, article XVI, section 17 added by Proposition 21 and amended by Proposition 162. (Cal. Const., art. XVI, §17, subd. (b) [“The members of the retirement board of a public pension or retirement system shall discharge their duties with respect to the system solely in the interest of, and for the exclusive purposes of providing benefits to, participants and their beneficiaries, minimizing employer contributions thereto, and defraying reasonable expenses of administering the system. A retirement board’s duty to its participants and their beneficiaries shall take precedence over any other duty.”].)
Related to this duty, although less important to the purposes of this case, is the duty of prudence, which requires the trustee ‘“to administer the trust as a prudent person would, in light of the purposes, terms, and other circumstances of the trust.” (Rest.3d Trusts, § 77, subd. (1).) As an overall guideline for how trustees should act, both in investing and general administration of the trust, this duty dovetails with the general standard of care imposed upon trustees under the Probate Code to “administer the trust with reasonable care, skill, and caution under the circumstances then prevailing that a prudent person acting in a like capacity would use in the conduct of an enterprise of like character and with like aims to accomplish the purposes of the trust as determined from the trust instrument.” (Prob. Code, § 16040, subd. (a); but see id., subd. (c) [this standard does not apply to investments in California, which are governed by the Uniform Prudent Investor Act (Prob. Code, § 16045 et seq.)].) As with the duty of loyalty, this duty strongly parallels the text of section 17. (Cal. Const., art. XVI, § 17, subd. (c) [“The members of the retirement board of a public pension or retirement system shall discharge their duties with respect to the system with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with these matters would use in the conduct of an enterprise of a like character and with like aims.”].)
With these general legal principles considered, we turn to the arguments presented by the parties.
III. Appellants Were Not Entitled To Summary Judgment.
Appellants argue the trial court erred in failing to grant their motion for summary judgment. Tied to this argument is the assumption that there were no material facts in issue and the law required judgment in appellants’ favor. Thus, resolution of this issue will generally inform whether the trial court properly awarded summary judgment to StanCERA and County. For this reason, we frame the analysis in the context of appellants’ arguments while recognizing that StanCERA and County have raised additional points, which will be considered as needed.
A. O’Neal I does not resolve this case.
Appellants argue this case should have been resolved in their favor in light of our prior decision in O’Neal I. Under this argument, appellants contend proving the facts alleged in the operative complaints legally requires injunc-tive relief, absent proof of some affirmative defense. In support of this argument, appellants attempt to demonstrate the core conduct alleged in their complaints was undisputed (i.e., that StanCERA made the four contested transfers of nonvaluation funds to offset County’s employer contributions and adopted an amortization scheme which included negative amortization despite underfunding in the plan). Appellants then argue that proof of this conduct is sufficient to grant summary judgment in their favor because the conduct is undisputedly contrary to the law and therefore a de facto violation of StanCERA’s fiduciary duties. Although initially invoking the law of the case doctrine, appellants’ argument demonstrates an understanding this doctrine is not applicable. Indeed, appellants’ argument confirms that summary judgment would only be properly granted if the undisputed conduct in this case violated StanCERA’s fiduciary duties as a matter of law. This is consistent with our statement in O’Neal I that, while appellants’ allegation of a breach of fiduciary duty stated a valid claim, those allegations still needed to be proven. As further developed, post, that some underlying facts are undisputed does not mean the existence of a breach of duty is undisputed. We thus first consider whether appellants showed a breach of duty as a matter of law.
B. Appellants’ improper transfer claims.
Although spread across four claims for relief, appellants have identified two types of transfers, which appellants contend violate statutory restrictions. In the first, nonvaluation reserve funds are transferred to valuation reserve funds, thus taking money that was not previously included in the actuarial calculations and adding it to the asset column of the pension system. The transfer indirectly affects the employer’s obligations by reducing the amount of unfunded liabilities. In the second, nonvaluation reserve funds are removed from the reserves and utilized to directly pay employer obligations related to the amortization of unfunded liabilities. The funds replace employer funds that would have otherwise been required to be added to the actuarial assets. Although the impact of these actions is different, we find no distinction between the two in the context of the legal authority to conduct the transfer. In neither case has the transfer broken the law.
Appellants claim both CERL and an opinion from the Attorney General explicitly bar the transfers made in this case. We do not agree. The provisions of CERL covering excess earnings concern how excess earnings realized within a single year may be managed. When initially realized, excess earnings must be kept “as a reserve against deficiencies in interest earnings in other years, losses on investments and other contingencies.” (§ 31592.) However, once the excess earnings exceed a statutory minimum, they may be transferred out of the general reserve fund and into a county advance reserve fund. That separate fund, once established, shall be used “for the sole purpose of payment of the cost of the benefits” described by the CERL. (§ 31592.2, subd. (a).)
Consistent with this statutory mandate, when excess earnings above 1 percent of the retirement system’s assets are earned in any given year, the Attorney General has opined these funds cannot be transferred out of the general valuation reserve fund and into the county advance reserve fund to directly cover employer contribution payments. (79 Ops.Cal.Atty.Gen., supra, at p. 98.) However, the Attorney General believes such funds may be used to pay a portion of the pension system’s liabilities (the actual retirement benefits owed) and in that way both directly reduce the overall liability in the system and indirectly reduce employer payments calculated off of those liabilities. (Id. at p. 99 [“Looking first to the language of section 31592.2, we find that when earnings are in excess of 1 percent of the total assets of the retirement system, ‘the board may transfer all, or any part, of such surplus in excess of 1 percent of the said total assets into county advance reserves for the sole purpose of payment of the cost of the benefits described in this chapter.’ The ‘benefits described in this chapter’ are the benefits to which a system member is entitled at retirement. The cost of these benefits is incurred by the retirement system as an entity separate from the county and independently administered by the retirement board.”]; see id. at pp. 101-102.)
The statutory guidance and interpretation from the Attorney General do not explicitly cover the facts in this case. Here, funds which were diverted from the general reserves to County advance reserves in past years were removed from the separate funds they had been placed into and used to offset the effect of increasing plan liabilities either by increasing the plan’s assets or by substituting nonvaluation funds for payments required from employers. While there is ample statutory guidance on how to manage excess funds in a specific year, and on how to use funds when removed from the general reserves, these laws do not dictate whether those excess funds, once removed, must permanently remain within the county reserve funds or whether they may be returned to the retirement fund “as a reserve against deficiencies in interest earnings in other years, losses on investments^] and other contingencies.” (§ 31592; see § 31592.2, subd. (a).) Similarly, we have been pointed to no opinion from the Attorney General considering whether an advance county reserve fund can be closed, or have existing money transferred out of it, for uses not authorized by the statute allowing the initial