The unanimous ruling is expected to make it more difficult for state and local governments to shave costs by cutting health benefits to retirees if elected officials in previous years made it clear that those benefits would last a lifetime.
The state high court decided that retired Orange County employees may be able to show they had an implied contract that prevented the county from changing a healthcare plan in a way that caused the premiums of many retirees to skyrocket.
"Under California law, a vested right to health benefits for retired county employees can be implied under certain circumstances from a county ordinance or resolution," Justice Marvin R. Baxter wrote for the court.
Retirees sued Orange County in 2007 after it revamped the health benefit program to save money. A federal trial court sided with the county. An appeals court, which is now considering the case, asked the California Supreme Court to clarify state law in the case.
"This decision says that when you are in the process of doing public employee pension reform, you have to respect the rights of current retirees," said Ernest Galvan, a lawyer who represented more than 5,000 Orange County retirees and their family members.
"If you promised them a particular benefit when they were working and promised that would be part of their retirement, then that is a promise you have to keep."
But lawyers for cities and counties said they were pleased the court established a hurdle for showing that such promises were made.
"The good news for cities and counties is that the court made it clear that you need very strong evidence that the [elected officials] intended to create a lifetime benefit," said Jonathan V. Holtzman, who represented associations of California cities and counties.
Arthur A. Hartinger, who represented Orange County, said the county changed the health insurance plan to ensure it could survive.
Courts should be cautious and require strong evidence before finding an implicit promise to maintain health coverage, making sure that neither the supervisors nor the public "will be blindsided by unexpected obligations," said Justice Marvin Baxter in Monday's decision. But he rejected the county's attempt to bar all such lawsuits.
The court's cautionary language should help local governments defend against retiree suits, but the ruling still leaves them exposed to "extensive litigation," said Jonathan Holtzman, a lawyer for statewide associations of cities and counties.
"It's another hurdle that public agencies will have to address as they attempt to get their benefit costs under control," he said.
The court interpreted California law at the request of a federal appeals court that is considering a challenge by 5,400 Orange County retirees and survivors to an increase in their health insurance premiums in 2008.
County officials had approved the change while negotiating a pay raise with employee unions, who did not represent the retirees. Ernest Galvan, a lawyer for the former county workers, said county officials estimated the premium increase would cost each retiree or their family an average of $3,000 per year, a figure disputed by Arthur Hartinger, the county's lawyer.
Similar disputes are arising elsewhere in California as financially stressed local governments confront increasing pension and health care costs.
Jeffrey Lewis, a lawyer for nearly 1,400 retirees in Sonoma County, said the ruling should revive their lawsuit over county supervisors' decision to reduce its contribution to their health care premiums to $500 a month over a five-year period, starting in 2009.
The county had paid between 85 and 100 percent of the premiums since 1964, contributing $1,000 or more in some cases, Lewis said. In a November 2010 ruling, U.S. District Judge Claudia Wilken said the reduction would have a "devastating impact" on retirees with limited incomes but did not violate any express promise by the Board of Supervisors.
Lewis said he is also preparing a suit on behalf of retirees in Contra Costa County, where supervisors last year barred future increases in the county's contribution to former employees' health benefits.
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