California Supreme Court Limits Leave Cash-Outs in Legacy County Pension Calculations
A July 27 ruling limits how much unused leave legacy members of California county pension plans can count toward final compensation when a calculation period crosses calendar years.
The California Supreme Court ruled July 27 that legacy members of county retirement plans governed by the County Employees Retirement Law of 1937 cannot count leave cash-outs above the annual limit allowed by their employment terms, even when the final compensation period crosses two calendar years.
The ruling applies to covered county retirement systems, not to all California public employees, all county workers or every public pension system. The court said the decision clarifies how the applicable pension law limits the amount of unused leave that can be included in final compensation calculations.
What the court decided
The case involved Leroy Smith, a retired Ventura County counsel. His employment terms allowed him to cash out 200 hours of leave each calendar year. For retirement purposes, Smith selected October 10, 2019, through October 10, 2020, as his final compensation period.
During that period, Smith cashed out 240 hours of leave: 40 hours on December 14, 2019, and 200 hours on February 14, 2020. The Ventura County Employees’ Retirement Association excluded the additional 40 hours from the pension calculation.
Smith argued that all 240 hours should count because the payments fell within his selected 12-month final compensation period. The Supreme Court rejected that interpretation and affirmed the Court of Appeal, which had upheld the retirement association’s decision.
Justice Goodwin Kruger authored the majority opinion. The court held that Government Code section 31461(b)(2) limits pensionable leave cash-outs to the amount that may be earned and payable under the employee’s terms of employment in each applicable 12-month period. The limit applies even when the final compensation period straddles two or more calendar years.
Why the ruling matters
Under the County Employees Retirement Law of 1937, or CERL, a retiring employee’s benefit is calculated using age, years of service and final compensation. Final compensation is a key factor in determining the monthly pension amount.
The court said allowing an employee to combine separate annual leave allowances simply because a final compensation period crosses calendar years could permit pension spiking. In this context, pension spiking means increasing compensation during the final calculation period in a way that raises the resulting pension obligation.
CERL is an optional county pension system used by about 20 of California’s 58 counties. The Supreme Court described the case as involving a question of statewide importance for covered public employees, giving those county retirement systems a controlling interpretation of the leave-cashout provision.
The ruling may guide county retirement systems and public agencies as they calculate final compensation, evaluate disputed calculations or review how leave cash-outs should be treated. It does not change the annual leave limits established by employment terms and does not itself order a benefit reduction or adjustment for every affected retiree.
Who is covered—and who is not
The decision concerns legacy members of CERL county plans. In the opinion, legacy members generally are employees hired before PEPRA took effect on January 1, 2013. For those members, leave cash-outs may be included only within the limits described by the statute and the employee’s terms of employment.
Employees hired after PEPRA’s effective date are generally subject to separate statutory provisions. The court said those provisions exclude payments for unused vacation, annual leave, personal leave, sick leave and compensatory time from pensionable compensation.
The ruling also does not decide how leave cash-outs are treated under CalPERS or CalSTRS. Counties that do not operate a CERL plan may use an independent retirement system or contract with CalPERS, while CalSTRS covers a separate group of public employees, including eligible educators, under different statutes.
Employees and retirees should identify their retirement system, membership tier, employment terms and final compensation period before assuming the decision changes their benefits.
What happens next
The Supreme Court’s judgment resolves the legal question presented in the Ventura County case and confirms the Court of Appeal’s interpretation. The opinion does not resolve every possible dispute over leave cash-outs or other forms of pensionable compensation.
Covered county retirement systems and public agencies will determine how to apply the ruling in future calculations and in any disputed reviews. Case-specific questions may include the governing employment terms, the applicable membership tier and whether a particular payment qualifies as a leave cash-out covered by the statute.
The California Supreme Court opinion was filed July 27, 2026. A KPBS/CalMatters report published July 28 provided additional context on the decision’s practical implications.
Sources
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