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The Critical Governance Question Before the California Supreme Court in LACERA v. County of Los Angeles
By: Anya Freedman and Lauren Cruz, Bernstein Litowitz Berger & Grossmann
A case now pending before the California Supreme Court, LACERA v. County of Los Angeles, could strengthen pension plan governance by empowering pension boards to make independent fiduciary decisions regarding professional staffing and compensation. This decision has far-reaching implications for public pension systems' ability to attract the next generation of top talent and presents an opportunity to align pension governance practices with the corporate governance standards pension funds uphold as institutional investors.
This is an excerpt from NCPERS Winter 2025 issue of PERSist.A case now pending before the California Supreme Court, LACERA v. County of Los Angeles, could strengthen pension plan governance by empowering pension boards to make independent fiduciary decisions regarding professional staffing and compensation. This decision has far-reaching implications for public pension systems' ability to attract the next generation of top talent and presents an opportunity to align pension governance practices with the corporate governance standards pension funds uphold as institutional investors.
California public pension boards face a governance dilemma. The law holds them to demanding fiduciary standards and tasks them with investing billions of dollars and administering complex benefit programs. Yet historically, courts have denied them autonomy to recruit the next generation of retirement system leaders to execute these responsibilities.
Experienced pension executives continue to retire and the complexity and stakes of managing a public pension system continue to grow. While resourceful boards have promoted internally and attracted lateral government professionals, their recruitment efforts are hamstrung by a lack of independence over staffing and compensation. Pension boards will need flexibility over positions and compensation to compete with the private sector to attract young professionals with specialized expertise in fields like alternative investments, cybersecurity, accounting, auditing, artificial intelligence, and law.
This governance dilemma lies at the heart of Los Angeles County Employees Retirement Association v. County of Los Angeles (LACERA), a case now pending before the California Supreme Court (S286264).
The Earl Warren Building – Headquarters of the California Supreme Court in San Francisco
The Constitutional Context: Proposition 162
Proposition 162, “The California Pension Protection Act of 1992,” amended the California Constitution to ensure that pension board decisions prioritize their beneficiaries' interests. As amended, the California Constitution gives retirement boards “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.” Cal. Const., art. XVI, § 17, subd. (a).
The promise of Proposition 162, however, was limited by the California Court of Appeal's interpretation of that language in Westly v. Board of Administration, 105 Cal. App. 4th 1095 (2003). That court ruled that a state pension board could not bypass state civil service rules for staffing and salary decisions. Since Westly, state and local pension boards have done their best to meet organizational needs within governmental civil service and budget frameworks.
The Stakes in LACERA
Within this context, the LACERA boards had navigated county rules to meet their staffing needs. But in 2018, the Los Angeles County Board of Supervisors began rejecting the LACERA boards' proposals, citing the desire for consistency between the pension system's structure and the county's general civil service system.
The LACERA boards sought relief in California court, seeking clarity on their constitutional autonomy over LACERA's staffing and compensation needs. Bound by Westly, the trial court ruled for the county; the California Court of Appeal reversed, and the California Supreme Court agreed to review the case.
The Need for Alignment with Corporate Governance Best Practices
Both pension and corporate boards are bound by fiduciary duties of care and loyalty. The pension governance principle at stake in LACERA mirrors the corporate governance best practice of independent fiduciary decision-making over executive compensation. See In re Walt Disney Co. Deriv. Litig., 907 A.2d 693, 749-751 (Del. Ch. 2005). Just as corporate boards must act in good faith and with undivided loyalty to the corporation to attract and incentivize executives who will implement strategy and drive shareholder value, pension boards should exercise unfettered fiduciary judgment to recruit professionals with the necessary expertise to achieve the pension system's mandate of delivering promised retirement benefits to beneficiaries.
Pension boards are well equipped to exercise this judgment. Their stewardship as responsible investors includes evaluating corporate board independence over executive pay through proxy voting, engagement, and litigation. Denying pension boards similar authority to uphold these standards of fiduciary independence in their own organizations risks misaligning pension systems' internal governance with the standards they promote in the market.
Opportunities for Stakeholder Advocacy
LACERA offers stakeholders -- peer pension boards, labor organizations, governance scholars, and institutional investors -- a chance to advocate for independent fiduciary governance. Friend of the court (amicus) briefs can provide critical context and emphasize how independent staffing authority strengthens operational performance and reflects good governance principles in other sectors. Stay informed using the Supreme Court of California's website (using the docket search function, search S286264: https://supreme.courts.ca.gov/case-information/docket-search). Stakeholders interested in filing amicus briefs should confer with expert legal counsel as soon as practicable.
Conclusion
The LACERA case could strengthen pension governance by (1) restoring the promise of Proposition 162 to empower California pension boards to exercise independent fiduciary judgment over how best to attract and retain the next generation of top talent, and (2) aligning pension board governance with the corporate governance best practices pension systems support as responsible shareholders. Finally, advocates for good governance in pension systems and corporations should consult counsel regarding how to share their insights as “friends of the court.”
Bios: Anya Freedman, a partner in BLB&G's Los Angeles office, advises institutional investors on fiduciary law and governance matters. Drawing on nearly a decade as the principal legal advisor to the City of Los Angeles public pension systems, she empowers leaders to build best-in-class policies and make sound decisions in securities and corporate governance litigation. Anya provides informed and innovative counsel so BLB&G's clients can protect the long-term value of their investments by investigating and taking legal action to remedy fraud, hold corporate insiders accountable for self-dealing and other misconduct, and level the playing field in financial markets.
Anya has extensive experience providing fiduciary advice, training, and education to pension funds on topics including, without limitation, strengthening compliance and risk management; engaging with public companies, regulators, and stakeholders; consulting on strategic and business plans; supporting succession planning and leadership transitions; and implementing operational changes in response to new legal requirements.
Lauren Cruz, a senior counsel in BLB&G's Los Angeles office, prosecutes securities fraud, corporate governance, and shareholder rights litigation on behalf of the firm's institutional investor clients. Since joining the firm in 2019, Lauren has helped to secure over $1.2 billion in recoveries for investors damaged by corporate fraud and malfeasance. She has been a key member of the BLB&G litigation teams that prosecuted the securities fraud actions against Wells Fargo (landmark $1 billion recovery), Mattel ($98 million recovery), Qualcomm ($75 million recovery), Mohawk Industries ($60 million recovery), Splunk ($30 million recovery), and Impinj ($20 million recovery), among many others.
Lauren serves as board president (and has been a board member since 2019) of Mental Health Advocacy Services, a non-profit organization that provides free legal services to people with mental health disabilities in Los Angeles. She is a member of the Women Lawyers Association of Los Angeles.
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